Lezioni, International Law

Incorporation effect

A corporation is a particular set of rules for the organization of economic entities. Corporate assets are separated from shareholders and stockholders, who have the power of voting stock, and directors, who are elected by shareholders to supervise and guide the business activity on behalf of shareholders.

Definition and legal form

A corporation is defined as an important legal form that was more than a mere contractual aggregation but could not truly be equated with a natural person. This point is explained in cass. 8 Nov 1984 and 24 Oct 1995.

Only after registration does the corporation come into existence in the legal system (art. 2331 SPA, 2462 SRL).

European Union and freedom of establishment

Each national LoBO of an EU member state must comply with the Freedom of Establishment (FE) because this is one of the four fundamental economic freedoms within the EU Internal Market (art. 49, TFEU). Restrictions on the FE are forbidden; it allows the exercise of any economic or professional activities first established in one member state to be transferred to another. Different between natural and legal entities: a natural entity has the freedom to access and exercise an economic business activity in the second member state, while a legal entity should be treated like a natural person national of any of the EU member states if it was formed according to the LoBO of any EU member and it has its formal “seat”, its headquarters, or its center of activity in the EU.

The European Court of Justice specified that the alternative criteria of the “formal seat”, the central administrative office, and the center of business operation will respectively determine the connecting link with the legal system of a member state. In Italy, we use art. 25 of 218/1995.

Nationality and corporate seat transfer

If and when a company decides to move into another member state, according to the FE, they are deemed to have also transferred their nationality. This is due to the different connecting links and transfer of corporate seat requirements and procedures, which may cause the nationality to change. If the company moves its real seat into another member state, the state of origin might no longer recognize the company as a national company, simply because it transferred its real seat abroad.

Corporate structure and equity investment

The corporation acts as a center of interest separate from its owners and/or managers. An alternative idea of a firm is that it is a nexus of contracts, because within the corporation, the legal entity character concurs in creating a single and direct counterpart for a different set of relationships (employees, banks, customers, etc.).

Equity investment has two goals: administrative rights (voting) versus economic rights (dividends). The investment is represented in the value of the stock or share received in exchange for money or proprietary consideration.

Limited liability

Limited liability is a default rule provided by LoBOs around the world, whereby the single shareholder’s risk on the incorporated business is limited to the equity interest invested in the corporation. This means that the corporate creditors can only have recourse against the assets of the company for the company’s debt. Creditors of the corporation have no recourse against the managers’ or shareholders’ assets for company debts.

The rule of the limitation of liability may be regarded as the reverse rule of the entity shielding doctrine. The entity shielding rule (legal personality) protects the corporate assets from the aggression by the personal creditors of the shareholders, so that the corporate assets may serve as a general security against the contractual liabilities. The owner shielding rule (limited liability) protects owners against corporate creditors: an individual shareholder’s creditors will also benefit from this protection.