By Dr AbdelGadir Warsama, Legal Counsel
This important issue has been discussed many times and in different occasions with the aim of understanding the reasons for corporate failures and the ways and means of stopping such failures.
Reasons for corporate failures could include issues related to ownership, management, structure of the corporation … etc. Ownership of companies as a matter of fact and law takes different ways, such as, family ownership or partnership or equity shareholding ownership. Each of the mentioned categories has got, if we could say, it’s pros and cons.
Regarding family ownership, we have to mention that, many companies diminish after the 1ST or 2ND generation. Failures could occur in family business due to lack of capital, business information, lack of vision, conflict of interest or other reasons.
With reference to partnerships, being simple or general, failure could happen to differences between partners regarding the business or future activities, lack of industry or good market or business. The partners or one of them, also, may face some financial or logistical problems that affect his role in the company.
Equity shareholding companies are not free from such instances and they face difficulties regarding ownership. This is obvious from the fact that we seldom notice the involvement of most shareholders in the affairs of the company. Many shareholders are completely ignorant about what is happening in their company and this attitude, in certain cases, led to the failure. In some instances, with reference to this type of companies, the board of directors or the senior management of the company could be the direct cause for the failure of the company. This happens when they are not performing their duties properly and there is no body or authority to question them.
Management requires leadership with vision and mission. This should be maintained in all cases, being family companies or equity shareholding companies. The proper management includes, planning for present and future operations in a satisfactory way and the business adds real and material value for its stakeholders.
The company law, includes certain specific provisions that should be followed all through the life span of the corporation. These provisions, we believe, will safeguard the interests of the companies and could help in escaping corporate failures. There are provisions regarding the rights of shareholders to follow the affairs of the company during the annual meetings. The required mandatory disclosure by the management to the shareholders and the competent authorities is a legal requirement that should be implemented. Disclosure enables the shareholders or the required party to take the appropriate steps in the appropriate time.
The are many other legal duties, such as, the duties of the external auditors and their mandatory role in safeguarding the interests of the company, the shareholders and the community. The external auditors are required by the law to inform the competent authorities in certain cases where there are clear unattended serious violations by the management.
The law gives the competent authorities the right to intervene to and take required appropriate actions to safeguard the interests of the company or the shareholders. We believe that, the legislator gave such legal authority to the external auditors and or the competent authorities so as to enable them to take corrective actions to escape or avoid corporate failures.
In certain cases, we notice that, governments took drastic measures and steps to avoid failures of certain corporations that represent the national image. Governments, of course, take such measures based on legal authorization and this authorization can be used in all cases. The law includes many ways and means to help proper governance of corporations. Such measures could help in avoiding corporate failures. However, we believe, the shareholders should take more positive actions to improve the affairs of their companies and this could lead to positive progress and keep companies away from failures.