Definition of the Company and its Legal Concept

Definition of the Company and its Legal Concept
5. Definition of the Company:
The Egyptian legislator defines the company in Articles (505) of the Civil Codification as “A contract under which two or more persons agree to start a financial project and present the necessary quotas (whether money or work) with aim of sharing its profit or loss”.
This definition shows that the company is a contract like any other specific contract governed by the second book of the Civil Code. It is a consensual contract which is subject to the principle of contractual freedom and power of will. It is also regarded as a formal contract since Article (507) of the Civil Code, stipulates that the company’s contract must be written, otherwise it is said to be null.

The Legal Nature of the Company

The company has a legal personality independent from that of its partners and the legal basis of this legal personality aroused a lot of debate To settle this debate, Jurisprudence referred to three theories: the contractual theory, the theory of legal system and theory of legal framework of the economic project .

 Firstly, the Contractual Theory

This theory, which goes back to the Roman legal system, regards the company as a contract between two or more person. These persons agree to start a financial; economic or industrial project with aim of sharing its profit or loss. All Companies (commercial. Civil; persons; associations of capital or companies with mixed nature) have such contractual origin.
The idea of the company as a contract dominated jurisprudence, especially in the nineteenth century. This century witnessed the spread of the principle of the power of will as well as the appearance of the capitalist system. The proponents of this theory believed that the criterion of determining the company’s nature lies in the willful act behind its formation. This idea appears clearly in the French and Egyptian legislation which define the company as a contract .
In the late 19th century, the capitalist system faced many economic crises, As a result, the legislator had to put some legal provisions to solve these difficulties and most of these provisions were directed to companies since they are regarded the pillar of the capitalist system This aroused a hot debate over this Theory. Jurisprudence criticized the contractual theory on the following bases :
(1) The contracts is based on some sort of conflict of interests. For instance, there is a conflict between interests of the seller and those of purchaser. As for the company, It is unlikely to accept such conflict of interests as partners should cooperate to achieve their common goal.
(2) Unlike other contracts, the effect of the company’s contract is not limited to establishing rights or obligations. On the other hand, its effect extends to bring to existence a new legal entity, which is the company. This company is regarded as a moral person that has rights and obligation and that can carry out the actions related to these rights and obligations.
(3) Amending any provision of the contract requires the consensus of all its parties, Yet, amending the company’s contract requires no consensus as it is enough to have the majority’s agreement
(4) The contractual theory gives no satisfactory legal explanation for some issues, like the kind of the legal relation between partners and directors. In addition, it remains silent with regard to the wide powers these directors enjoy, especially in shareholder companies and in limited liability companies. Moreover, it doesn’t provide the legal basis for the worker’s participation in companies management.
(5) In most cases the shareholder in shareholder Companies, which present their shares to public subscription, is not interested in taking part in the company’s management. On the other hand, he is interested in taking a percentage of the profits the company’s makes every year or these resulting from the increase in the value of his shares in the stock market Thus, they are more of creditors or bondholders than partners.
(6) The decline of this theory appears clearly in shareholder companies with shares and limited liability companies. The contract of these companies has certain legal form which is determined by a resolution of the competent minister.
(7) The contractual theory is incompatible with modern legislative trends that accept the one- man company and the individual projects with limited liability .

Despite these criticisms, the contractual theory can be defended on the following bases. As for the idea of conflict of interests, it is well-known that parties of some kinds of contracts have a common goal they seek to realize, in addition, the legal personality of the company is necessary in case it has any dispute with third parties, In Addition, the formation of shareholder companies, which best reflect the weakness of this theory, begins with a willful act on part of the founders and this takes us back to the contractual Idea .
So we can say that the contractual theory has not lost all its effects as the Egyptian and French legislations define the company as a contract. Moreover, many of the provisions governing companies are to be interpreted with reference to the Idea of contracts, like defining the company’s purpose, its relation with the directors and auditors and the rules regulating the company’s conversion, merger and partition

The Theory of System

„ Due to the weakness of the contractual theory, especially with regard to associations of capital, some jurists borrowed the theory of system from the public law and applied it to the company . This system is said to exist if these requirements are met:
(1) A business or an project that creates a social relation.
(2) Human Cooperation which is necessary for carrying out this business or project
(3) The existence of some sort of organization and the necessary instruments necessary for achieving the goal.

(4) Understanding and cooperation between partners and directors .
This theory denies the contractual naturel of the company and regards it as a “legal system” which is based on a business is to be carried out through the legislative framework prescribed by law. So we can say that the company is a moral person that is completely independent from the persons of partners.
However, this theory was criticized on the ground that it has a psycho-social essence and that it fails to present a material criterion to identify what is meant by the term “system”. In addition, many legal entities can be described as “a system” though they do not have the legal personality. Finally, applying the idea of “system” to the company may cause confusion systems”. Other decision assures that “Shareholder Company is a company whose members have specialize roles to play. For instance, the general assembly selects the members of the board of directors which manage the company’s affairs. The assembly cannot enjoy the powers of this board .
(10) Thirdly, the Theory of Legal Structure.
Some Jurists tried to harmonize these contradicting theories. This trend regards the company as a legal structure and as an instrument which a group of individuals use to carry out an Economic project. In this case, the company in its dynamic activity as a legal system is completely different from the contract Yet, such dynamic activity needs a willful act by one or more persons .
According to this theory, the company is not to be separated from the project. It is rather the legal Framework of the economic project and this legal framework guarantees that the project has the legal entity necessary for its existence and continuation.
So we can say that this theory combines the other two theories since the willful elements and legislative requirements are harmonized to from the legal system necessary for the project’s foundation management and organization.
To sum up, this theory presents the most reasonable interpretation of the company’s entity especially since many legislation allowed for what is known as the one-man limited liability company which has one partner only. These legislations no longer regard the company as a mere contract nor a group of persons seeking one common goal.
In fact, this theory helps a great deal with defining the objectives the legislature, jurisprudence and judicature should try to realize. It also establishes the interests that should be protected in case of enacting companies’ regulation or proposing the practical solution that should harmonize the legal rules and the social and economic condition in order to assure the project’s independence and guarantee its continuation and ability to realize its purpose .