It is common knowledge that a company have its own legal personality separate from its shareholders. In law, a company is a persona ficta, which means it is treated as if it is a person capable of acquiring and holding legal rights and obligations on its own independent from its founder and shareholders.
A company acquire its own legal personality upon incorporation with the relevant authorities whereas a natural person like us acquires legal personality upon birth. Our legal personality is terminated upon our death whereas a company’s legal personality can exist forever until it is dissolved or wind up with the help of a corporate secretary or liquidator in accordance to the laws of the country.
Why Do Company Have Its Own Legal Personality?
The raison d’être of a company’s separate legal personality is for practical purpose. A business venture may take years and decades. If a company’s legal personality is dependent on its shareholders, then inconvenience may follow upon the occurrence of any fortuitous event for example, the death of a single shareholder, which may then hinder the said business venture.
If a company’s legal personality can only be terminated in accordance to the written laws, then all parties dealing with the company would have the opportunity to obtain due notice about the dissolution of the company and makes the necessary arrangement.
Separate Legal Personality
As stated earlier, a company’s legal personality is separate from its founder and shareholders. The following are, amongst others, the consequences of the company having its own legal personality:-
- A company’s assets belong to the company and not the shareholders. If the shareholders misuse the company’s assets, the company can sue the shareholders for misusing the company’s assets;
- Shareholders’ decision is not binding on the company unless if it is made in accordance to the company’s Articles of Association. Shareholders also cannot act on behalf of the company unless he is authorised to do so by the company itself; and
- Shareholders are only liable for the company’s debt to the extent of his/her unpaid shares. If they had fully paid the value of the shares to the company, they are no longer liable for the company’s debt.
Having said the above, what then is the relationship between the company and its shareholders? Generally, the relationship between the company and its shareholders can be summarised as follows:-
- Shareholders contribute capital to the company to conduct its business;
- Shareholders can take remedial action to ensure the company’s business is conducted in accordance to the MOA and AOA or not in general meetings;
- To obtain profits from the company’s business in the form of dividends.
From the above, it is clear that the concept of separate legal personality between a company and its shareholders was developed for practical purpose.
However, as a result of the company having a separate legal personality, shareholders no longer possess the right to manage the company’s business directly. It is common for the founder of the company to lose his/her right to influence the management of the company as the company grows bigger.
Therefore, if you intend to incorporate a company and want to ensure that you remain influential in the decision-making process of the company as it grows bigger, it would be advisable for you to obtain professional advice to devise a scheme to achieve such objective. Otherwise, it is possible that the company that you intended to be your legacy will fall into the hand of other businessmen who had taken over the management of your company through creative corporate manoeuvre.