Company Law: A Real Entity Theory

Citation

Micheler, E. (2021). Company Law: A Real Entity Theory. Oxford University Press.

Chapter Summary

Context and Argument

This monograph advances a single theory of company law. It holds that organisations or firms are a social phenomenon outside the law and autonomous actors in their own right: when people act as members of a group, habits, routines, processes and procedures form and take on a life of their own, so that the organisation acts independently of the views and interests of its participants. Company law, on this account, finds this phenomenon and supplies it with a structure, namely legal personality and procedures that support autonomous organisational decision-making. The theory is offered as an explanation of company law as it stands (a positive claim) and as a basis for normative recommendations, and it is applied in turn to personality, capacity, limited liability, attribution of actions, the roles of directors and shareholders, enforcement and stakeholders. The book has eleven chapters in about 270 pages, with a foreword.

Chapter 1: A Real Entity Theory of Company Law

The chapter presents three main theories of the company: the company as a contract, which underlies agency theory; the company as a concession of the state; and the company as a real entity. It then sets out a modern version of real entity theory and its application to company law.

Chapter 2: Corporate Personality

Separate legal personality is explained as a solution to the problem that organisations are social rather than brute facts. Registration gives an organisation a public legal manifestation and supplies information for third parties. The chapter notes that the Companies Act does not limit the corporate form to organisational action, so organisational boundaries do not always align with legal personality.

Chapter 3: Corporate Capacity

The chapter examines the ultra vires doctrine, which once limited capacity by the objects clause in a company's memorandum, and why it proved unsuitable for commercial organisations, so that non-charitable companies now have unlimited capacity. It then assesses the recent recommendation that companies set a purpose beyond financial return, concluding that such programmatic statements are likely to bring cosmetic change unless wider aims are institutionalised, for example through a board member representing them.

Chapter 4: Limited Liability

The chapter analyses the rules that remove limited liability for shareholders and directors as well as for companies. It stresses that separate personality is robust whereas limited liability is more nuanced, that veil piercing is permitted only in very rare "evasion" cases, and that abuse is dealt with by modifying limited liability rather than by disregarding personality.

Chapter 5: Corporate Actions

The rules that attribute the acts of human actors to the company are evaluated as evidence that company law is designed for organisations. Conceiving companies as real entities, the chapter argues, also helps to explain corporate criminal liability: companies act through habits and procedures that make them independent of individuals and can lead to blameworthy conduct.

Chapter 6: The Organizational Framework

The chapter assesses how the Companies Act creates roles for directors, shareholders, auditors and the company secretary, assigns constitutional matters to shareholders, and imposes mandatory shareholder-meeting procedures that the common law allows an informal unanimous decision to override. It also covers the UK Corporate Governance Code's structuring of board decisions.

Chapter 7: The Role of the Directors

Directors' duties are owed to the company; shareholders are the main indirect beneficiaries, but the law also integrates the interests of creditors and wider society. The chapter treats the Company Directors Disqualification Act 1986, the Corporate Governance Code, the flaws in designing remuneration to align directors with shareholders or the company, and duties on accounting records and financial reports.

Chapter 8: The Role of the Shareholders

Shareholders appoint and can remove directors and auditors and approve certain transactions, so UK company law is shareholder-centred, yet shareholders are not the principals of the directors or company, and their rights are constrained for the benefit of minority shareholders and creditors. The chapter also examines the Stewardship Code and the reflective loss principle.

Chapter 9: Enforcement

The chapter distinguishes private and public enforcement of directors' duties. Because the duties are owed to the company, the company decides on litigation through its normal process and courts intervene only when that process cannot work independently of the wrongdoers; derivative claims against an independent majority rarely succeed. Public-law sanctions attach most to duties protecting third parties.

Chapter 10: Stakeholders

The chapter draws normative conclusions: financial incentives cannot be made to serve interests other than the directors', statements of purpose or a duty to consider stakeholders are unlikely to achieve much, and integrating non-shareholder interests is best done through the company's decision-making process, for example a director appointed from the workforce, as recommended by the Corporate Governance Code.

Chapter 11: Conclusions

The final chapter summarises how real entity theory explains company law: the law finds organisations rather than creating them, individual agency can modify social structure, and company law supports autonomous organisational action and allocates roles, while recognising that not all organisations are companies.

Key Concepts

Chapters 1–4: Theory, Personality and Liability

• Real entity theory: the view that organisations are social phenomena and autonomous actors that company law structures.
• Concession and contract theories: the two rival accounts the book sets against its own.
• Separate personality and limited liability: personality as a solution to the organisation problem; limited liability as a more nuanced rule that is modified, not pierced.
• Ultra vires and purpose: capacity as once limited and now unlimited, and the debate over a corporate purpose.

Chapters 5–9: Action, Roles and Enforcement

• Attribution: how human acts become company acts, including in crime.
• Organisational framework: statutory roles and procedures for directors, shareholders, auditors and the secretary.
• Directors' duties and shareholder powers: duties owed to the company and the constrained but substantial role of shareholders.
• Private and public enforcement: derivative claims and public-law sanctions.

Chapters 10–11: Stakeholders and Conclusions

• Integration of interests: bringing stakeholders into decision-making, not into directors' duties.

Critical Analysis

Strengths

• A single, consistent theory. Every chapter applies the real entity idea to a different area, which gives the book unusual coherence for a work on company law.
• Positive and normative. It claims to explain the law as it stands and also uses the theory to evaluate proposals on purpose, remuneration and stakeholders.
• Engagement with current regimes. It discusses the Corporate Governance Code, the Stewardship Code and the Disqualification Act alongside the Companies Act and case law.
• Compact. Eleven chapters in about 270 pages, with the theory introduced in the opening chapter.

Limitations

• A thesis book, not a textbook. It does not provide a systematic treatment of all company law topics and assumes the reader knows the basic rules.
• A contested theory. The theory is set against contractual and concession accounts, and readers who prefer those will need to weigh the argument.
• Some topics receive little space. Chapter 3 on capacity and Chapter 10 on stakeholders are only a few pages.
• A 2021 snapshot. Later reforms are outside the book.

Where It Fits in the Course

This is the advanced theoretical work on the company law list. Dignam and Lowry's Company Law and Smith & Keenan's Company Law are textbooks that set out the rules of the Companies Act 2006; Finch's Corporate Insolvency Law treats insolvency; and Goode and McKendrick's On Commercial Law covers commercial transactions. Micheler's book explains why the rules take their shape.

Read it after a textbook, when the rules are familiar, as a second reading that organises them under one theory and a source for essays on corporate personality and governance.

How to Use This Book

It is for students who know basic company law, such as advanced undergraduates or postgraduates. A familiarity with the Companies Act 2006 and the main cases on personality and directors' duties is assumed.

Read Chapter 1 and Chapter 11 first and last, because they hold the argument. In between, take the chapters in order; Chapters 2 to 5 concern the company itself, 6 to 9 its internal organisation and enforcement, and 10 the normative upshot. Read it with a textbook open, and test the theory against the contract-based accounts it criticises.