Pooled capital and limited liability

A company is a person in law, separate from its owners: it owns property, signs contracts, sues and is sued in its own name, and outlives any shareholder.

Let anyone form one by filing with a public registrar, kept like the land register:

• the name, ending in Limited or its equivalent;
• the registered office, where legal papers are served;
• the articles of association, the company's own rules;
• the directors and the shareholders, with their shares.

Before 1844, a British company needed a royal charter or a private Act of Parliament; the Joint Stock Companies Act of that year created the first registrar (National Archives).

A shareholder can lose what they paid for their shares and no more. That makes it safe to invest in an enterprise one does not run, and lets capital be pooled from thousands of small holders.

The creditors bear the risk that moves off the shareholders, so the law gives them protections in return:

• the word Limited in the name, on every letter and invoice;
• accounts filed at the registrar every year, open to anyone;
• dividends paid only out of profits, never out of the capital the creditors lent against;
• in a winding-up, creditors paid before shareholders.

The G20/OECD Principles (II.A) list the basic rights of every shareholder:

1. secure registration of ownership;
2. to transfer shares;
3. to timely, regular information on the company;
4. to take part and vote in general meetings;
5. to elect and remove board members;
6. to share in the profits;
7. to elect, appoint or approve the external auditor.

All shareholders of the same class are treated equally (II.E), and a change to a class's rights needs the consent of that class. Hold a general meeting every year, with the accounts sent out beforehand.

Directors owe the company two duties (OECD V.A):

• care: to act on a fully informed basis, in good faith, with due diligence;
• loyalty: to act in the interest of the company and all its shareholders, not their own.

The rules that enforce them:

• Related-party transactions — deals between the company and a director, a large shareholder or their families — are disclosed and approved by people with no interest in them (II.F).
• Directors declare their conflicts of interest to the board.
• The board includes independent members able to judge the managers (V.E).
• A court can make directors repay what a breach of duty cost the company.

An annual external audit by an independent, competent and qualified auditor gives reasonable assurance that the accounts are fairly stated (OECD IV.C). The auditor is answerable to the shareholders and is best recommended by an independent audit committee, not by the managers whose figures are audited (IV.D).

Publish at least (IV.A): the financial results; the capital and group structure; major shareholdings, including the beneficial owners; board members and their pay; related-party transactions; and the foreseeable risks. Keep the books by double entry.

A company can hide its owner behind nominees, other companies and trusts. Require every company to record, and report to the registrar, the beneficial owners — the people who ultimately own or control it — and keep that record accurate and current.

Without it, companies become vehicles for moving and hiding money, and creditors, tax authorities and courts cannot find who is responsible.

Shares are only worth buying if they can be sold at a fair price. Insider trading and market manipulation are prohibited and the rules enforced (OECD III.E): no one may trade on information the market does not yet have, and listed companies publish material news to everyone at the same time (IV.E).