This article is written by Prithika Vajpeyi, an intern under Legal Vidhiya
Abstract:
In this article, we will look at the provisions concerning regulation of various kinds of corporations in the Constitution of India and the American Bill of Rights. Both India and the Unites States of America have been former British colonies and their Constitutions were largely inspired by that of Britain. In this article, we analyse how the constitutions of these countries is different from one another and how they have incorporated changes and amendments in order to keep pace with the changing political, social and economic environment in the two countries. We also take a look at the extent of strictness as regards regulation of business and how the laws hamper or promote business interests.
Keywords: provisions, Constitution, Bill of Rights, colonies, inspired, British Constitution, amendments, economic environment, promotion of business interests
Introduction:
Business law or corporate or commercial law regulates the transactions and dealings among persons in, as the name suggests, commercial or business matters. It varies according to the economic environment of a country which includes various factors like risk taking capacity of individuals which largely depends on their wealth, the kinds of businesses that need to be promoted keeping in mind the needs of citizens like the type of jobs they need to earn their living among others. In order to understand the kind of provisions in the American Bill of Rights and the Indian Constitution, it is imperative that we take a look at the kind of situation that necessitated their framing in the first place.
Three delegates to the Constitutional Convention in the United States of America refused to give their assent to the Constitution that was drafted as it lacked a Bill of Rights. The people of America highly value individual rights as is evident in India’s borrowing of the concept of Fundamental Rights from the Constitution of the United States of America. This is how the Bill of Rights which is based on the Magna Carta, the English Bill of Rights came into being.[1]
The Indian Constitution, too, is inspired by the British Constitution. However, the framers of the Constitution tried to incorporate provisions keeping in mind the nature of colonial rule and its impact that varied across British colonies and thus necessitated provisions unique to their constitution. When the British left, the Indian economy was in a dire state and strict regulations on imports had to be introduced in order to promote the interests of Indian businesses that include small-scale businesses and also industries that were not mechanized enough to compete with industrialised nations in the West. Thus, we see that even today, Indian corporate law sets out stricter regulations as compared to many Western countries.
Bill of Rights:
The Bill of Rights refers to the first 10 amendments to the United States Constitution grouped together and accepted as a single unit. These amendments guarantee a set of rights to individuals and also place certain restrictions on federal and state action that help protect individual rights.[2]
One of the basic features of the Bill is that only state and federal actions are regulated by the Bill. Acts carried out in private capacity cannot be interfered with.
We now look at those amendments that talk about business law:
1) First Amendment:
It states that no law can be made that abridges the freedom of speech or press. To bring an action for defamation, a public figure must not only prove the statements to be false but also that they were said with malice.
Similarly, there are some restrictions on corporates as regards contributions to political campaigns. The Michigan Campaign Finance Act forbade companies from using treasury funds for independent expenditures to support or oppose candidates in elections for state positions in Austin v. Michigan Chamber of Commerce (1990). However, a business may make such payments if it established a separate fund with no other use than politics.[3]
Austin was overturned in Citizens United v. Federal Election Commission: it said that corporations will be treated as ‘persons’ whose rights of free political speech cannot be interfered with by the Congress without any justifiable reason.
Thus, the rights conferred by this Amendment are not absolute.
2) Fourth Amendment:
The Fourth Amendment says, “all persons shall be secure in their persons, houses, papers, and effects from unreasonable searches and seizures, and no warrants shall issue, but upon probable cause, before a magistrate and upon Oath, specifically describing the persons to be searched and places to be seized.”
The question one needs to answer is what ‘unreasonable’ means. Searches conducted in industries that are “closely regulated” without a warrant can be “reasonable”.
In 1980s in the US, a company named Dow Chemical objected to an aerial mapping of pipes and machineries that were not covered by roof by Environmental Protection Agency. The court, however, held that the mapping was not violative of the Constitution as it was a search conducted in ‘an open field’.
3) Fifth Amendment:
The Fifth Amendment states, “No person shall be…deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
It contains 3 main points: Takings clause, procedural due process and substantive due process.
The takings clause states that the government cannot take private property without giving adequate compensation.
While substantive due process is the principle employed by the judiciary as it seeks to prevent government interference with fundamental rights, procedural due process means that no person shall be deprived of his life, liberty or property without following certain rules like giving the person a chance to be heard, issuing him a notice and taking decision in a just manner by one who is not biased.
Substantive due process claims are subject to two levels of court review. The first layer of courts only moderately regulates legislation that deals with financial issues, labour relations, and other business difficulties. A statute can only be declared invalid if it accomplishes no legitimate governmental goal, according to this. The second layer stipulates that legislation affecting fundamental rights is subject to “heightened judicial scrutiny,” which suggests that such legislation is unlikely to pass unless it is “narrowly tailored to serve a significant government purpose.”
4) Fourteenth Amendment:
“Equal protection of the laws” first appears in the Fourteenth Amendment, which was approved in 1868. It is against the law for any state to “deny to any person within its jurisdiction the equal protection of the laws.” This is the equal protection clause, which demands that everyone receives equitable treatment from the government. States are required to treat citizens of other states fairly. This could be a problem with substantive due process or procedural due process.
Governments regularly create classifications and not every classification may be deemed illegal under the equal protection guarantee. Higher earners often pay taxes as a proportion of their income. People who have received the appropriate training in a particular profession can obtain a license to practise that profession, for instance law while those who lack that training are not eligible for a licence and would be breaking the law if they did. Whether or not the classification is accurate depends on the thing being classed. The court has defined three categories, and by knowing which category the case will probably fall into, the result of any equal protection case can usually be predicted:
• The connections between the economy and society are barely touched. A government decision is often upheld if there is a good justification for it.
• Intermediate scrutiny is given to gender. Classifications set by the government are occasionally upheld.
• Investigations into racial and ethnic disparities as well as fundamental rights are ongoing. A classification based on any of these is almost never upheld. Laws that regulate economic or social issues are presumptively lawful and upheld if they are rationally related to the legitimate aims of government and are subject to the least amount of scrutiny
In United States v. Virginia, 518 US 515 (1996), due to Virginia’s policy of refusing to accept women to publicly supported universities, the US filed a lawsuit against Virginia alleging that it had violated the Equal Protection Clause of the U.S. Constitution, amendment XIV. the state must prove at least that the challenged classification served significant governmental objectives and that the discriminatory means employed were substantially related to the achievement of those objectives. The state must also show that the justification was genuine and not just an attempt to justify. Virginia failed to meet its burden of proof in establishing either the significance of its sex-based admissions policy to achieving those goals or its legality of it.[4]
The Indian Constitution:
In India, like in many former British colonies, the Constitutional provisions draw heavily from the British Constitution. Yet, there exist various differences between the two constitutions, some of which we will analyse.
English law draws a clear distinction between regulations for private and public companies. On the other hand, under Indian law, there is no such clear demarcation between the two. The Companies Act of 2013 states that a private company that is a subsidiary of a public company is treated as a public company. This not only takes away the right of incorporators to decide the type of corporate form, which is usually available in Western countries, but also increases regulations on such corporations that are subsidiaries of public companies as compared to the regulations that would be applicable to private companies. This clearly indicates that Indian corporate law is more stringent as compared to most Western countries. But this also results in greater transparency as regards companies which benefits shareholders.[5]
Companies are required by Indian law, a holdover from the colonial era, to list the purposes for which they are incorporated in their memorandum of association. The doctrine of extra vires, which states that a business action carried out by a company that goes beyond its stated objectives is void because it exceeds the company’s ability, emerged out of this. In nations that have incorporated English law, this theory has occasionally raised considerable concern throughout the years. Because of this, the necessity that firms have objects sections in their memorandum of association has been abolished in both England and certain of its former colonies. As a result, in these countries the supra vires theory has been essentially abandoned. India has maintained its unshakable adherence to the ultra vires rule in spite of the regulation’s liberalisation in light of its evolving business climate. Even the 2013 Firms Act stipulates that Indian firms must include purposes sections describing the kinds of economic activities they are allowed to engage in in their memorandums of association. In light of this, and in spite of revisions made in other “common law” countries, India has opted to exhibit some degree of rigidity on this particular issue.
Other laws that have gradually crept into Indian law contrast the market-oriented attitude of the colonial era with the Indian state’s more interventionist approach. For instance, despite the fact that business groups are extremely widespread in India, Indian corporate law sets unwarranted restrictions on their creation and management. [6]The Government is granted authority under the Companies Act of 2013 to specify the maximum number of subsidiaries that a given class of company can have. Additionally, no more than two layers of investment companies may be used by a single company to make investments.
Therefore, despite the mother nation and other former colonies having done away with the ultra vires doctrine along the way, Indian corporate law has kept a firm grip on some colonial remnants relating to corporate personality and structure. India has taken a much more conservative stance on various issues, like group structures, than it did during the colonial era and in comparison to developments in the U.K. and other Western jurisdictions, which have evolved in the opposite i.e more liberal direction.
Thus, India has come a long way and has tried to free itself from the clutches of colonial rule by trying to do away with colonial-era legislations that are redundant in the present scenario.
[1] https://www.britannica.com/topic/Bill-of-Rights-United-States-Constitution visited on 02/04/23
[2] https://www.britannica.com/topic/Bill-of-Rights-United-States-Constitution visited on 02/04/23
[3] https://2012books.lardbucket.org/books/legal-aspects-of-property-estate-planning-and-insurance/s07-05-business-and-the-bill-of-right.html visited on 02/04/23
[4] https://2012books.lardbucket.org/books/legal-aspects-of-property-estate-planning-and-insurance/s07-05-business-and-the-bill-of-right.html visited on 02/04/23
[5] Umakanth Varottil, The Evolution Of Corporate Law In Post‐Colonial India: From Transplant To Autochthony, Working Paper Series index: http://law.nus.edu.sg/wps/, 46, Working Paper 2015/001, National University of Singapore(2015)
[6] Umakanth Varottil, The Evolution Of Corporate Law In Post‐Colonial India: From Transplant To Autochthony, Working Paper Series index: http://law.nus.edu.sg/wps/, 47, Working Paper 2015/001, National University of Singapore(2015)
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