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Summary of all lectures Comparative Corporate Law
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This summary provides an overview of all lectures of the subject Comparative Corporate Law. It contains all the important information for the exam.
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COMPARATIVE CORPORATE LAW — summaryWeek 1
Corporate Governance I: introduction
What is a corporation
In a corporation there is hierarchy and control. There is no competition within the corporation,
because everyone is working together towards the same goal. There is a nexus of contracts. The
workers have exclusive knowledge and information. There are independent activities and corporate
culture.
A corporation consists of the following aspects:
● Legal personality
● Limited liability
● Transferable shares
● Investor ownership
● Delegated management with a board structure
Legal personality
Legal personality of the corporation is that it is a construction of law. A company, as a separate legal
entity, continues to exist irrespective of changes to its membership. It owns its assets and is
responsible for its own liabilities. A company's separate legal personality exists for so long as it is
registered.
Limited liability
Limited liability is a form of legal protection for shareholders and owners that prevents individuals
from being held personally responsible for their company's debts or financial losses.
Shareholders invest. They can only lose investmen, they are not liable for debts of the corporation.
Directors act on behalf of the company, they are not liable for the debts of the company.
Facilitates economic risk taking, but also creates risks (moral hazard).
Transferable shares
Transfer of shares is when the current shareholder passes the ownership of shares on to another
member or non-member of the company. A share transfer can occur due to a variety of reasons.
Usually, the shares of a corporation are transferable freely.
The exit out of a company is possible without transfer of the company's assets.
Economic efficiency. It facilitates business transfer (aquisition of companies) and facilitates
stock exchange trade of shares (market for shares).
Investor ownership
This entails the right to control the firm:
● Voting in elections of directors
● Voting to improve transactions
And entails the right to receive the firm’s net receivings
,COMPARATIVE CORPORATE LAW — summary
● profit (usually proportional to the amount of capital contributed to the firm)
Delegated management with a board structure
Delegated management causes the separation of the ownership of the company and the control of
the company. In principle, the shareholders are supposed to monitor the directors to ensure that the
directors are indeed acting in the best interests of the shareholders.
Board structures
In a corporation there can be different kinds of board structures. A two-tier structure or a one-tier
structure:
Directors: there can be two types of directors in a board structure:
● Executive directors (uitvoerende bestuurders)
○ Salaried managerial employees of the company, who also serve on the BoD.
● Non-executive directors (niet uitvoerende bestuurders)
○ Directors who are separate from management. Nowadays also have to meet
independence requirements, e.g. not work for the company for a certain number of
years, no close family ties, no business relationships.
Shareholders: have important rights common across jurisdictions:
, COMPARATIVE CORPORATE LAW — summary
- Balance Sheet profit right
- Attend GM
- Table Shareholder Resolutions (EU: Directive 2007/36/EC, Arts. 6(1), (2)
- Receive Info
- Vote at GMs
- Typically one-share, one-vote but it is possible to vary:
- UK: see e.g. CA 2006, s.550: possible to issue more than one class of shares (incl.
preference non-voting shares, shares with multiple voting rights). Listing rules
require the appointment of an independent director if a listed company has a
controlling shareholder.
- Germany: AktG, s. 12(2): shares with multiple voting rights prohibited but can have
ordinary shares and preference shares. Also possible to have voting caps.
- France: French Comm. ode, Art. L228-11: dual class shares possible (just a cap on the
percentage of non-voting preference shares). Also loyalty shares is possible (ibid, L.
225-123).
Directors can be removed when they disappoint or do not comply with the rules or expectations of
the corporation and the shareholders.
Agency theory
Function of corporate law under agency theory is to generate optimal mechanisms to ensure that
agents act in the interests of principals
● Control rights principals (appointment, dismissal, key decisions)
● Remuneration of directors (alignment of interests)
● Takeover bids (disciplining)
Division of powers
In the UK: board authority derived from articles of association.
Agency problems
There can be three types of agency problems:
1) Conflicts between shareholders and managers (vertical)
Legal strategies relating to vertical agency problem:
● Regulatory strategies
○ Rules - ex ante
○ Standards - ex post
○ Entry
○ Exit
● Regulatory and governance strategy (dispersed ownership structure)
○ Incentives
● Governance strategies (controlled ownership structure)
○ Appointments rights
○ Decision rights
2) Conflicts between minority shareholders and controlling shareholder (horizontal)
3) Conflict between stakeholders and the firm (society)
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