Professional Documents
Culture Documents
M 10
M 10
CORPORATE LAW
Governance structure of the companies
Q1: E-Text
MODULE ID 11: Corporate Governance Structure of a Company
Module Overview: The present module on Corporate Governance structure of a company
introduces the principles behind the concept of corporate governance, roles played by the
board of directors of a company along with the role of shareholders of a company.
Subject Name: Law
Module: 11
Objectives: After reading the module the reader should be able to understand-
Learning outcomes: The reader should be able to understand the principles and reasons
underlying the Corporate Governance Structure and the basics of the structure itself.
Introduction:
In seeking to understand the Corporate Governance structure of a Company, we have to take
into account two basic factors which would be at work to create the structure. The first factor
which would be there is that wherever there is a divergence between ownership of an asset
and control over it, certain duties will be imputed by law upon the person who is in control of
the asset. Further new duties may be added or the implied duties may be diluted by contract,
but there has to be a certainty as to who is bound and to what extent. Law of trust is a perfect
example of this situation where there is distinction drawn between the legal owner (the person
in control) and the beneficial owners (real owners i.e. property exists to their benefit). Further
examples of it may be drawn from law of agency and the law of partnership. The second
factor which works in determining the contours of corporate governance structure is the fact
that whenever the state imparts legal personality upon an entity which is not natural, it will
generally provide for rules of ascription. The statute which will grant recognition to the legal
personality of an artificial person will be the primary source of ascription of action upon the
artificial person, in order to ensure that its own decisions and acts should bind it and there
should be minimal source of discord in future as to the binding nature of the action upon the
artificial person. Statutes or charters which created local bodies, universities etc, follow this
principle in laying down the broad norms for decision making process by which decisions
could be ascribed to the body, while giving it enough discretion to formulate its own bye
laws, regulations rules etc. There would not be much of a difference where the statute instead
of creating an artificial person, allows an artificial person to come into existence provided
norms laid in it are followed. Only it may provide for a greater scope for experimentation and
provide for an authority to oversee that the norms for recognition of personality are followed.
Examples of this approach are the cooperatives and companies. If the entity is for a single
purpose; the degree of flexibility allowed will be lower, which we witness in cooperatives.
The rules are there not just for the ascription of decisions but also in doing so, how to
reconcile the different interests which may interact, taking into account the purpose of the
entity.
1. Divergence between
ownership of an asset and
control over it.
2. Legal personality to an
artificial entity.
DUOMATIC PRINCIPLES
While the shareholders’ will is reflected in the resolutions passed by them, insistence on it
may be unjust to the third parties, especially in cases of private companies where the conduct
of parties may show an informal and unanimous agreement among shareholders. However,
there has to be a conduct of the shareholders which does evidence of unanimous agreement
among themselves. This recognition of informal agreement, though not provided by stature,
had to be inferred by the courts as tan amounting to a resolution passed by the shareholders
provided it was intra vires.
Summary:
In order to understand the Corporate Governance structure of a Company, two basic factors
have been taken into account. The first factor is that wherever there is a divergence between
ownership of an asset and control over it, certain duties will be imputed by law upon the
person who is in control of the asset. Further new duties may be added or the implied duties
may be diluted by contract, but there has to be a certainty as to who is bound and to what
extent. The second factor which works in determining the contours of corporate governance
structure is the fact that whenever the state imparts legal personality upon an entity which is
not natural, it will generally provide for rules of ascription. The module has included brief
discussion on role of board of directors and shareholders of a company. The rights of
shareholders, specially their voting rights, value of their votes, meetings for exercising these
rights have been discussed. Distinction between voting rights of equity and preference
shareholders have been included in the module.