This article is adapted from Corporate Law and Law Firm Theory: Reconstruction of Corporations, Shareholders, Directors, Owners and Investors, part of the Routledge Series on the Economics of Legal Relationships, ISBN 9780367895532.
For decades, even centuries, whether in legal, accounting, or economics, we have believed that shareholders own companies, that shareholders are beneficial owners of the company, that shareholders are remaining beneficiaries, that directors are the representatives of shareholders, and that directors are trustees of Are shareholders. But where is the evidence or legal arguments to support these beliefs? There is nothing there. The evidence and legal arguments actually prove otherwise. Shareholders do not own any companies. Shareholders are not beneficial owners. Shareholders are not residual plaintiffs. Directors are not representatives of shareholders. And directors are not trustees of shareholders.
Shareholders are considered to be the owners of the company. However, the most important aspects of private property are the exclusive and exclusive rights of use. So if I own land or a car and you enter the land I own without my permission or drive away in my car, you could be arrested and detained or incarcerated for abuse or theft. Unless otherwise agreed, a partner can enter the partnership property without permission, since the partners are co-owners and can use the partnership property for the partnership business.
An act is proof that someone owns land. A title for a car is proof that someone owns the car. However, a stock stake is not evidence that someone owns the company. If a shareholder of a company enters the company’s property without their permission or attempts to use the company’s property, they may be arrested for not owning the company and having no exclusive or exclusive right to use the company or its property. A shareholder only owns (x / n) percent of the shares issued, not (x / n) percent of the company. Otherwise a violation of the property right applies. There is no legal argument to suggest that shareholders own companies that do not violate property law.
Shareholders are deemed to be the remaining beneficiaries, that is, beneficiaries based on claims from creditors. A company’s balance sheet shows that assets are equal to liabilities plus equity, or that assets minus liabilities are equal to equity. So equity is simply net worth. The equity remains after the claims of the creditors have been met.
It is undeniable that the company owns all of its assets. It is also undisputed that the company owes the liabilities and is solely responsible for paying them. Therefore, it is undeniable that the company owns the net worth as well as the total assets. However, net worth is simply equity.
In the areas of law, economics and especially accounting, equity is referred to as equity. But how is it possible to convert the company’s net assets into shareholders’ equity? Even Voldemort could not achieve such a transformation. The correct accounting equation is: assets are liabilities plus corporate capital, not equity. It is the company that owns the equity, not the shareholders. Shareholders have no residual claim against the equity, ie the net assets of the company.
Buying shares from the company through an initial public offering (IPO) is a contract, just as buying a bond from the company is a contract. Buyers of bonds (and other creditors) have interest and capital claims against the company, which can be asserted in court. If the company fails to pay the interest or principal, the creditors can sue the company and obtain a judgment against them.
Unlike buyers of bonds (or other creditors), buyers of stocks have no claims against the company. Not since Dodge v. Ford allows shareholders to bring a claim against the company, and that was an anomaly. Shareholders are not remaining or otherwise entitled to claim against the Company as they have no claims against the Company, its total assets, its net assets or its income. Otherwise there is a breach of contract law. No legal argument can be made that shareholders are entitled, residual or otherwise.
Directors are considered to be representatives of shareholders. In order for directors to be agents, there must be a principal-agent relationship, which means there must be principles. If there is a principal-agent relationship between shareholders and directors, and directors are the agents, then shareholders are necessarily the principles.
Several legal obstacles prevent directors from being agents. First, appoint or hire contracting agents; Agents do not appoint clients. When a company is incorporated, directors are either named in the articles of association or elected by the founders before shares are issued and before there are shareholders. Thus, directors exist before shareholders exist. Directors issue shares, which would mean that directors, acting as representatives, appoint shareholders as principals. This is not permitted under agency law.
Second, basic agency law requires clients to be liable for the actions of their agents, be it for tort or contractual reasons. When directors are representatives of shareholders, shareholders as principals are liable for the actions of the directors. However, it is a fundamental company right that shareholders not be liable for the actions of directors, as is mistakenly referred to as “limited liability” of shareholders. (Shareholders have no limited liability. They have no liability. They can lose no more than the market value of their shares, none of which will be used to settle corporate liabilities.) If shareholders are not liable for the actions of directors, then shareholders are not principals. Hence, directors are not agents. Because directors are not representatives of shareholders, directors cannot owe any fiduciary duty to shareholders. Claiming directors to represent shareholders is against agency law. There is no legal argument that directors are shareholders’ representatives.
Directors are considered trustees of shareholders and shareholders are the beneficial owners. However, the basic law of trust prohibits this. In order for directors to be trustees, a trust must be created. To create a trust, the trustor must transfer ownership to the trustee, who then takes legal ownership of the property and manages the property for the benefit of the beneficiary who is the beneficial owner. However, this is not the case between shareholders, companies and directors.
Shareholders transfer property (cash) to the company in an IPO. It is the company, not the directors, that legally owns the property. There is no relationship of trust between directors and shareholders as directors do not and cannot take legal ownership of the property. Therefore, directors cannot be trustees of shareholders. If there is no trust or a relationship of trust between shareholders and directors, shareholders cannot be beneficiaries and therefore cannot be beneficial owners. Since the Directors are not trustees of the Shareholders, the Directors cannot owe any fiduciary duty to the Shareholders. Claiming that directors are trustees and that shareholders are beneficial owners is against trust law. There is no legal argument that directors are trustees of shareholders or that shareholders are beneficial owners.
It’s the end of corporate law as we know it and I’m fine.
* With apologies to REM