7. Agency and Representation

Question 1

1 - Explain the concept of legal personhood in the context of natural persons’ rights and duties after death.

Answer 1

Natural Persons:
- Rights (property ownership) and duties (debts) can be passed on to others
- Certain rights, however, die with the person. Ex: personality, alimonies

Legal Persons:
- Outlive the natural persons who founded them
- Can continue living forever

Question 2

2 - Discuss the Salomon v A Salomon & Co Ltd case and its significance in corporate law, particularly in terms of legal personality and limited liability.

Answer 2

Facts:
- Aaron Salomon, leather merchant, incorporated business as Salomon & Co Ltd
- Sole proprietorship –> limited liability company with wife, daughter and four sons as shareholders
- Salomon owned the vast majority of the shares and was the main creditor and chosen as the managing director

Problem:
- Company went into bankruptcy and then liquidation
- Salomon demanded the credit he invested be returned to him
- Creditors and liquidator argued Salomon Ltd being a debtor of Salomon was invalid due to fraud
- Argued fraud because Salomon (argued) created company to transfer his business into it, making the company his agent

Rulings:
Court of Appeals: Against Salomon
- Abused privileges of incorporation and limited liability
- Company was a “myth” created by Salomon to have limited liability

House of Lords: Overturn of Court of Appeals
- Company was separate from its shareholders and made under provisions of Companies Act 1862
- No requirements in Act about independence of shareholders from majority shareholders

Significance:
- Established principle that company has different personality from shareholders (doctrine of corporate veil)
- Shareholders are not liable for company’s debts beyond their investments (limited liability)

Question 3

3 - What are the conditions under which the corporate veil can be pierced, making shareholders personally liable?

Answer 3

1. Fraud or Sham Entity: If corporation is used as a mask (sham) for criminal activities. Criminals (shareholders) need to be held personally liable
2. Ultra Vires Act: If acts beyond the scope of powers of corporation are conducted in bad faith, personal liability is possible. Especially if third parties are harmed
3. Company and Partnership Law: If you deviate from the provisions of acts like Companies Act, could be grounds for personal liability
4. Company’s Constitutional Documents (Memorandum and Articles of Association): Acting against company’s role (as stated in const. documents) can be grounds for personal liability
5. Capital Markets Law: For publicly traded companies, compliance with capital market law is key. Insider trading and personal liability is grounds for personal liability

Question 4

4 - Compare and contrast for-profit and non-profit legal persons, especially in terms of their purposes and legal structures.

Answer 4

Purpose:
For-Profit
- Earn profit and distribute to owners in dividends
- Obliges shareholders to be present, gives them the right to receive profits
- Generate financial returns for shareholders
- Ex: Company

Non-Profit
- Common purpose unrelated to profit
- Personal pleasure (sports, culture, etc.) or charitable
- Prohibited from distributing financial returns to owners
- Enjoy tax exemptions
- Ex: Foundations (charitable, hard to register) or Associations (combine efforts, quick registration)

Structure:
- Both can be incorporated (separate entity) or unincorporated (unseparated)

Question 5

5 - Describe the principal-agent conflict in corporate governance. How does this conflict arise and what are its potential effects?

Answer 5

Arises when:
- Separation between ownership and management of corporations
- Often seen in Public Limited Companies (PLCs) which have shareholders (owners/funders) and directors (managers/legal representatives)

Problem:
- Directors may prioritize own gain instead of the owners who are the reason their job exists in the first place
- Essentially, a misalignment of interests
- Adam Smith: managers of other people’s money will not be as careful as they would with their own

Potential Effects:
- Inefficient corporate governance (mismanagement of resources)
- Unethical, selfish decisions by managment misaligned with best interests of owners
- To mitigate, rules of corporate governance need to be established

Question 6

6 - Examine the different models of internal governance for corporations. How do these models address the principal-agent conflict?

Answer 6

Dualistic:
- Manages separation by creating two boards (management board, supervisory board)
- Management runs, supervisory evaluates
- Shareholders appoint supervisory, supervisory appoints management
- Prevalent in Europe

Monistic:
- Management and control is in one board
- Within board there are executive directors (day-to-day company management) and non-executive directors (provide oversight and control)

Question 7

7 - Gilford Motor Co Ltd v Horne [1933] Ch 935.
Had Horne violated his non-compete clause by setting up his competing company?

Answer 7

Facts:
- Horne, former managing director of GMC
- Prohibited by employment contract (even if fired) of soliciting company’s customers if he left
- After Horne fired, he made a competing company, Horne was not doing it, the new juridical person was

Problem:
- GMC argued Horne was circumventing non-solictation obligation by setting up company

Ruling:
English Court of Appeal
- Horne’s company was indeed device to evade his duties, injunction granted compelling Horne to stay away from GMC clients

Significance:
- Principle giving courts ability to pierce corporate veil
- Able to treat company and controllers as one if company used as a façade (like Horne with his new one) to avoid obligations
- Equity principle in common law prevents fraud from happening due to corporate veil

Question 8

8 - Lee v Lee Air Farming Ltd.
Can Mr. Lee be considered an employee of his own company?

Answer 8

Facts:
- Lee, governing director and principal shareholder of LAF
- Died during work-related aircraft accident

Problem:
- Could Lee, as both director and employee (with insurance), be considered a “worker” under New Zealand’s Worker’s Compensation Act?

Ruling:
Privy Council of U.K
- Lee could be considered an employee of his own company
- Died acting as employee
- Company’s separate legal personality allowed Lee to engage in a contract of employment with them
- Allowed compensation to be given to his estate

Significance:
- Reinforced principle of corporate legal personality
- Individuals can assume multiple roles within company