Corporate law aims to intervene in the relationship between corporations and external elements to support economic activity. Business activity, also entails the potential for conflicts of interest, involving creditors and shareholders, shareholders and managers, etc.
The concept of corporate law is a key route to resolve conflict of interests through a set of rules, and the main rule is the principle of freedom of contracts. The purpose of such regulation is to promote stability and ethical business practices.
Corporate law particularly covers the area of big business, it deals with entities which bear separate legal personality, and come with limited or unlimited liability for members or shareholders.
Corporate law dealing with the contractual approach is at the base of the expropriation of contractual theory whereby the corporation is a legal fiction. Ideally, the role of corporate law is to concentrate on contractual relationships among various parties.
The law forms part of a much more comprehensive companies law, and it is the law of the most prominent commercial enterprises. In essence, the corporation is a corporate body with an independent legal entity separate from its shareholders or owners.
The corporation assumes a legal liability same as an individual even though, it constitutes a fictional existence. This is because the legal realm is a world of principles and values not only of tangible objects. In the physical world the legal term person is a fiction just like the legal term corporation, and so are the legal interests of the corporation regarding rights and legal obligations.
Historical experience has shown that the laws of contracts are unable to regulate the structural problems and conflicts of interest sufficiently. The purpose of corporate law is to extract the structural problems stemming from the conflicts of fundamental interests between counter-parties.
Representative problems such as the problem relating to the principal agent are major problems which corporate law tries to solve through regulation. One common aspect is the conflict of interests between shareholders and management. Whenever, the management takes decisions which can potentially harm the interests of the shareholders, this leads to conflict of interest.
For instance, if a company accumulates decent profits, shareholders may expect dividends, and the management may decides to invest in something else.
Another scenario capable of raising the ire of some parties within a corporation, involves majority shareholders assuming control of the company. And as they do so may choose to nominate themselves for powerful positions in management, which are accompanied by obscene salaries and benefits, instead of equitable scales. This naturally rears discontent from the other shareholders who may feel hard done by.
In the early days, firms were strictly commercially orientated enterprises, in contrast with the modern day concept of holding joint stock. Which enables the company’s stock to stay separate from the liability of any individual member.