Introduction to corporate law
Lecture 1: introduction
Corporation
- Legal business entity that’s separate from its business owners
- Legal entity that is separate and distinct from its owners
Corporate law
- Corporate law= consist of legal norms relating to certain types of business organisations. It provides the legal
structure of a business enterprise
- A company= is an association of people who combine for the purpose of joint activity. Every corporation is a
company, but not every company is a corporation
- Types of business organisations
• Natural person= sole trader/proprietor (<> a business organisation)
• Business organisation= any form that involves two or more persons
o Partnerships
o Private companies
o Public companies
o Hybrid legal forms
Partnerships
- Coordination of the economic activity of two or more persons (two or more people in business decide to work
together, typically: builders, lawyers, medical practises and accountants)
• In general: unlimited liability for debt, each has management rights
o BE: maatschap
o UK: General partnership (GP)
• Limited: partners with limited liability have restricted management rights
o BE: commanditaire vennootschap: liability of certain partners is limited
o UK: limited partnerships (LP): silent investors liability is limited
o UK: limited liability partnership (LLP): liability of the partners is limited to the capital they’ve
brought into the business
Private company
- Designed for small and medium sized companies that require limited liability and legal personality, but that do
not require access to public funding through general capital markets
• Germany: Gesellschaft mit beschrankter Haftung (GmbH)
• Netherlands: Besloten Vennootschap (BV)
• Belgium: Besloten Vennootschap (BV) – Société à responsabilité limitée (SRL)
• France: Société à responsabilité limitée (SARL)
• UK: The private limited company (Ltd.)
• Italy: Società a responsabilità limitata (srl)
Public company
- Designed for larger enterprises of bigger economic importance, which have access to the capital markets for
raising finance. The owners are shareholders about they do not manage the company
• Germany: Aktiengesellschaft (Ag)
• Netherlands: Naamloze Vennootschap (NV)
• Belgium: Naamloze Vennootschap (NV) – Société Anonyme (SA)
• France: Société Anonyme (SA)
• UK: Public limited company (Plc)
• Italy: Società per Azioni (S.p.A.)
Example
- Private
• Ferrari
• Dyson
• Michelin Antwerpen
- Public
• Bosch
• L’oreal Paris
,The main legal characteristics of a corporation
- What is the common structure of corporate law across different jurisdictions
1. Legal personality
2. Limited liability
3. Transferable shared
4. Delegated management with a board structure
5. Investor ownership
1. Legal personality
- Nexus contracts
• Firms seen as a nexus of contract= they exist though contractual relationships
• Firms act as the common counterparty in numerous contracts with suppliers, employees, coordinating the
actions of these multiple persons through exercise its contractual rights
• The firm is a separate legal entity= contracting party differs from the individuals h=who own or manage the
firm
- Separate patrimony (pool of assets)
• Firms’ assets are separate from those of its owners (shareholders), forming a distinct patrimony
• And of which the firm itself is viewed in law as being the owner
o Firm has the right to use the assets, to sell them and to make them available for attachment by its
creditors
o But assets are unavailable for attachment by the owner’s personal creditors
§ Attachment by its creditors= the firms’ creditors can claim the firms assets if the firm
owes them money (case of bankruptcy)
§ Attachment by the owners’ personal creditors= the personal creditors of a shareholder
cannot claim the firm’s assets to recover debts owed by the individual owner
§ This legal separation protects business assets from the financial issues of individual
shareholders.
- Entity shielding
• The core function of separate patrimony
• Entity shielding= the assets the cooperation form the creditors of the corporation’s owners
• Two rules of law
1. Priority rule= creditors of the firm have a claim (as a security for the firms’ debts) on the firm’s assets
that is prior to the claims of the personal creditors of the firms’ owners
(Creditors of firm have higher claim to firms assets than personal creditors of its owners
2. Liquidation protection rule
§ Shareholders cannot withdraw their share of firm assets at will
§ Personal creditors of an individual owner
- Rules for firms as contracting party
• Authority rule= defining to third parties who has the authority to buy and sell assets in the name of the firm
and to enter into contracts that are bonded by those assets
• Procedure rule= defining the procedures by which both the firm and counterparty cam enforce contract
through legal action
2. Limited liability
- Limited liability
• The creditors of a firms are limited to making claims against assets that are held in the name of the firm itself
• AND have no claim against assets that the firms shareholders own in their own names
- = owner shielding (converse of entity shielding)
• Entity shielding protects the assets of the firm from the creditors of the firms owners
• Limited liability protects the assets of the firm’s owners from the claims of the firms creditors
3. Transferable shares
- Distinguishes the cooperation from the partnership and other standard-form legal entities
- Permits the form to conduct business uninterruptedly identity of its owners changes
- Flipside of the liquidation protection
- Transferable shares ≠ freely tradable shares
• Shares can be transferred, but not always freely on public markets.
• Some shares can only be transferred among a limited group or with shareholder/corporation approval.
o All jurisdictions have at least one type of corporation with freely tradable shares.
o All jurisdictions: mechanisms exist to restrict share transferability, either through:
§ A separate statute
§ An option under a general corporate statute
, • Types of Corporations by Share Tradability
o Public (open) corporations -> Shares are freely tradable.
o Private (closed) corporations -> shares have transfer restrictions.
• Stock Exchange classification
o Listed/Publicly traded corporations -> shares are traded on stock exchanges.
o Unlisted corporations -> shares are not publicly traded
- Closely held vs widely held
• Closely held corporation= shares are held by a small group of individuals where interpersonal relationships
play a key role in firm management
• Widely held corporation= shares are distributed among many shareholders -> reducing reliance on personal
relationships
• Transferability
o Connected to liquidation protection and limited liability
o The identity of shareholder has no direct impact on creditworthiness of the corporation
4. Delegated management with a board structure
- Standard legal forms for enterprise organization differ in their allocation of control
• Authority to bind the firm to contracts
• Authority to exercise the contractual powers of the firm
• Authority to direct the uses made of assets owned by the firm
- Board of directors= the governing body of a company, elected by shareholders in case of public companies to set
strategy and oversee management
- Board of directors
• The board is separate from the operational management of the corporation
o Board= monitoring and ratification of decisions, hiring of officers
o Hired officers= initiation and execution of business decisions
• The board of directors is elected by the firms stakeholders
• The board is formally distinct from the firms shareholders
• The board ordinarily has multiple members
5. Investor ownership
- Ownership has 2 elements
1. The right to control the firm
2. The right to receive the firms net earnings
- Investor-owned firm = firm in which both elements of ownership are tied to investment of equity capital in the
firm (typically proportional to the amount of capital contributed)
- Other corporate ownership structures
• ≠ Partnerships
o Ownership is not necessarily linked to capital contributions.
o Can involve labor or other production factors (e.g., law firms).
• Public Benefit or community interest corporations
o Operate with a social mission rather than profit maximization.
• State-owned enterprises (SOEs)
o Governments partially or fully own the firm, sometimes in partnership with private investors.
• Nonprofit Firms
o Operate without profit distribution to owners (e.g., U.S. civil law foundations, U.K. companies
limited by guarantee).
Lecture 2: agency problems and legal strategies
Recap
- Partnership, private company, public company
- The main legal characteristics of a corporation
1. Legal personality (entity shielding (priority rule, liquidation protection rule), authority rule, procedure rule)
2. Limited liability (owner shielding)
3. Transferable shares
4. Delegated management with a board structure
5. Investor ownership
, Chapter 1
1.1. Sources of corporate law: national corporate code: core status
- At leads on core statute that defines the basic corporate form with the five characteristics
• Germany AG, Netherlands NV, Belgium NV, France SA, UK Public Limited Company, Italy S.p.A
- These legal forms share the corporate features
• Legal personality, limited liability, transferable shares, investor ownership
1.2. Special and partial corporate forms in the national corporate codes
- Major jurisdictions have at least one distinct statutory (separate legal) forms specialized for the formation of
closed corporations or limited liability companies
• France: SARL, Germany: GmbH, Italy: Srl, USA: limited liability company, UK: private company, Netherlands:
BV, Belgium: BV
- Their shares are presumed not to trade freely in a public market (<> public companies) although they are
generally transferable in principle
- Quasi-corporate forms= have some of the 5 characteristics: missing parts must be added by contract
1.3. Other bodies of law
- There are laws that are sperate from the core corporate statutes and the special and quasi-corporate statutes,
but that are instrumental to the functioning of the five characteristics of the corporate form or to the addressing
of the agency problems.
• GE: Konzernrecht: limits control when firms are part of a group (prevents misuse by parent companies)
o corporations closely related trough common ownership -> limitations to the discretion of
board of directors), law of codetermination (employee representation)
o codetermination law= gives employees board seats
• Securities laws= rules mandating to disclose info, sometimes regulating sale, resale of corporate securities,
etc.)
• Stock exchange rules= extra rules for firms
• Bankruptcy law (insolvency law) = shift of ownership from shareholder to creditor when company in distress
• Tax law
• Labor law= employees or unions in decision making process -> workers’ organs should be consulted prior to
taking specified types of actions (e.g. BE ondernemingsraad)
2. Law vs contract: corporations charter
- Relationships among participants in corporate are, to an important degree, contractual -> corporation’s charter
- The charter
• sets out the basic terms of the relationship among the firm’s shareholders, between the shareholders and
the firm’s directors and managers
o who has control, voting rights, board structure
• can become a part of the contract between the firm and its employees or creditors
o those who rely on the company’s governance
- Addition: shareholders agreements
2.1. mandatory laws vs default provisions
- Corporations are subject of large body of law -> relationship between corporate charter and corporate statute
• Default rules= only applicable if parties do not explicitly provide for something different
o Provide a standard contract that parties can adopt in part or as a whole (saves costs, negotiations)
o Common form is statutory provision that will govern unless the parties explicitly provide alternativ
o These give flexibility but also serve as a legal safety net
• Mandatory rules= parties must adhere to them
o Germany: large corporations: representatives of the employees get half of the supervisory board
seats.
o U.S.: provide regular detailed financial disclosure in a closely prescribed format
• Either-or provisions= corporate law provides the rule that will be applicable if the default provision is not
chosen
o France, Belgium SA – NV: two tier-board structure v. default single-tier board structure
- Contracting failure
• Parties exploited because they are not well informed
• Interests of third parties might be affected
Lecture 1: introduction
Corporation
- Legal business entity that’s separate from its business owners
- Legal entity that is separate and distinct from its owners
Corporate law
- Corporate law= consist of legal norms relating to certain types of business organisations. It provides the legal
structure of a business enterprise
- A company= is an association of people who combine for the purpose of joint activity. Every corporation is a
company, but not every company is a corporation
- Types of business organisations
• Natural person= sole trader/proprietor (<> a business organisation)
• Business organisation= any form that involves two or more persons
o Partnerships
o Private companies
o Public companies
o Hybrid legal forms
Partnerships
- Coordination of the economic activity of two or more persons (two or more people in business decide to work
together, typically: builders, lawyers, medical practises and accountants)
• In general: unlimited liability for debt, each has management rights
o BE: maatschap
o UK: General partnership (GP)
• Limited: partners with limited liability have restricted management rights
o BE: commanditaire vennootschap: liability of certain partners is limited
o UK: limited partnerships (LP): silent investors liability is limited
o UK: limited liability partnership (LLP): liability of the partners is limited to the capital they’ve
brought into the business
Private company
- Designed for small and medium sized companies that require limited liability and legal personality, but that do
not require access to public funding through general capital markets
• Germany: Gesellschaft mit beschrankter Haftung (GmbH)
• Netherlands: Besloten Vennootschap (BV)
• Belgium: Besloten Vennootschap (BV) – Société à responsabilité limitée (SRL)
• France: Société à responsabilité limitée (SARL)
• UK: The private limited company (Ltd.)
• Italy: Società a responsabilità limitata (srl)
Public company
- Designed for larger enterprises of bigger economic importance, which have access to the capital markets for
raising finance. The owners are shareholders about they do not manage the company
• Germany: Aktiengesellschaft (Ag)
• Netherlands: Naamloze Vennootschap (NV)
• Belgium: Naamloze Vennootschap (NV) – Société Anonyme (SA)
• France: Société Anonyme (SA)
• UK: Public limited company (Plc)
• Italy: Società per Azioni (S.p.A.)
Example
- Private
• Ferrari
• Dyson
• Michelin Antwerpen
- Public
• Bosch
• L’oreal Paris
,The main legal characteristics of a corporation
- What is the common structure of corporate law across different jurisdictions
1. Legal personality
2. Limited liability
3. Transferable shared
4. Delegated management with a board structure
5. Investor ownership
1. Legal personality
- Nexus contracts
• Firms seen as a nexus of contract= they exist though contractual relationships
• Firms act as the common counterparty in numerous contracts with suppliers, employees, coordinating the
actions of these multiple persons through exercise its contractual rights
• The firm is a separate legal entity= contracting party differs from the individuals h=who own or manage the
firm
- Separate patrimony (pool of assets)
• Firms’ assets are separate from those of its owners (shareholders), forming a distinct patrimony
• And of which the firm itself is viewed in law as being the owner
o Firm has the right to use the assets, to sell them and to make them available for attachment by its
creditors
o But assets are unavailable for attachment by the owner’s personal creditors
§ Attachment by its creditors= the firms’ creditors can claim the firms assets if the firm
owes them money (case of bankruptcy)
§ Attachment by the owners’ personal creditors= the personal creditors of a shareholder
cannot claim the firm’s assets to recover debts owed by the individual owner
§ This legal separation protects business assets from the financial issues of individual
shareholders.
- Entity shielding
• The core function of separate patrimony
• Entity shielding= the assets the cooperation form the creditors of the corporation’s owners
• Two rules of law
1. Priority rule= creditors of the firm have a claim (as a security for the firms’ debts) on the firm’s assets
that is prior to the claims of the personal creditors of the firms’ owners
(Creditors of firm have higher claim to firms assets than personal creditors of its owners
2. Liquidation protection rule
§ Shareholders cannot withdraw their share of firm assets at will
§ Personal creditors of an individual owner
- Rules for firms as contracting party
• Authority rule= defining to third parties who has the authority to buy and sell assets in the name of the firm
and to enter into contracts that are bonded by those assets
• Procedure rule= defining the procedures by which both the firm and counterparty cam enforce contract
through legal action
2. Limited liability
- Limited liability
• The creditors of a firms are limited to making claims against assets that are held in the name of the firm itself
• AND have no claim against assets that the firms shareholders own in their own names
- = owner shielding (converse of entity shielding)
• Entity shielding protects the assets of the firm from the creditors of the firms owners
• Limited liability protects the assets of the firm’s owners from the claims of the firms creditors
3. Transferable shares
- Distinguishes the cooperation from the partnership and other standard-form legal entities
- Permits the form to conduct business uninterruptedly identity of its owners changes
- Flipside of the liquidation protection
- Transferable shares ≠ freely tradable shares
• Shares can be transferred, but not always freely on public markets.
• Some shares can only be transferred among a limited group or with shareholder/corporation approval.
o All jurisdictions have at least one type of corporation with freely tradable shares.
o All jurisdictions: mechanisms exist to restrict share transferability, either through:
§ A separate statute
§ An option under a general corporate statute
, • Types of Corporations by Share Tradability
o Public (open) corporations -> Shares are freely tradable.
o Private (closed) corporations -> shares have transfer restrictions.
• Stock Exchange classification
o Listed/Publicly traded corporations -> shares are traded on stock exchanges.
o Unlisted corporations -> shares are not publicly traded
- Closely held vs widely held
• Closely held corporation= shares are held by a small group of individuals where interpersonal relationships
play a key role in firm management
• Widely held corporation= shares are distributed among many shareholders -> reducing reliance on personal
relationships
• Transferability
o Connected to liquidation protection and limited liability
o The identity of shareholder has no direct impact on creditworthiness of the corporation
4. Delegated management with a board structure
- Standard legal forms for enterprise organization differ in their allocation of control
• Authority to bind the firm to contracts
• Authority to exercise the contractual powers of the firm
• Authority to direct the uses made of assets owned by the firm
- Board of directors= the governing body of a company, elected by shareholders in case of public companies to set
strategy and oversee management
- Board of directors
• The board is separate from the operational management of the corporation
o Board= monitoring and ratification of decisions, hiring of officers
o Hired officers= initiation and execution of business decisions
• The board of directors is elected by the firms stakeholders
• The board is formally distinct from the firms shareholders
• The board ordinarily has multiple members
5. Investor ownership
- Ownership has 2 elements
1. The right to control the firm
2. The right to receive the firms net earnings
- Investor-owned firm = firm in which both elements of ownership are tied to investment of equity capital in the
firm (typically proportional to the amount of capital contributed)
- Other corporate ownership structures
• ≠ Partnerships
o Ownership is not necessarily linked to capital contributions.
o Can involve labor or other production factors (e.g., law firms).
• Public Benefit or community interest corporations
o Operate with a social mission rather than profit maximization.
• State-owned enterprises (SOEs)
o Governments partially or fully own the firm, sometimes in partnership with private investors.
• Nonprofit Firms
o Operate without profit distribution to owners (e.g., U.S. civil law foundations, U.K. companies
limited by guarantee).
Lecture 2: agency problems and legal strategies
Recap
- Partnership, private company, public company
- The main legal characteristics of a corporation
1. Legal personality (entity shielding (priority rule, liquidation protection rule), authority rule, procedure rule)
2. Limited liability (owner shielding)
3. Transferable shares
4. Delegated management with a board structure
5. Investor ownership
, Chapter 1
1.1. Sources of corporate law: national corporate code: core status
- At leads on core statute that defines the basic corporate form with the five characteristics
• Germany AG, Netherlands NV, Belgium NV, France SA, UK Public Limited Company, Italy S.p.A
- These legal forms share the corporate features
• Legal personality, limited liability, transferable shares, investor ownership
1.2. Special and partial corporate forms in the national corporate codes
- Major jurisdictions have at least one distinct statutory (separate legal) forms specialized for the formation of
closed corporations or limited liability companies
• France: SARL, Germany: GmbH, Italy: Srl, USA: limited liability company, UK: private company, Netherlands:
BV, Belgium: BV
- Their shares are presumed not to trade freely in a public market (<> public companies) although they are
generally transferable in principle
- Quasi-corporate forms= have some of the 5 characteristics: missing parts must be added by contract
1.3. Other bodies of law
- There are laws that are sperate from the core corporate statutes and the special and quasi-corporate statutes,
but that are instrumental to the functioning of the five characteristics of the corporate form or to the addressing
of the agency problems.
• GE: Konzernrecht: limits control when firms are part of a group (prevents misuse by parent companies)
o corporations closely related trough common ownership -> limitations to the discretion of
board of directors), law of codetermination (employee representation)
o codetermination law= gives employees board seats
• Securities laws= rules mandating to disclose info, sometimes regulating sale, resale of corporate securities,
etc.)
• Stock exchange rules= extra rules for firms
• Bankruptcy law (insolvency law) = shift of ownership from shareholder to creditor when company in distress
• Tax law
• Labor law= employees or unions in decision making process -> workers’ organs should be consulted prior to
taking specified types of actions (e.g. BE ondernemingsraad)
2. Law vs contract: corporations charter
- Relationships among participants in corporate are, to an important degree, contractual -> corporation’s charter
- The charter
• sets out the basic terms of the relationship among the firm’s shareholders, between the shareholders and
the firm’s directors and managers
o who has control, voting rights, board structure
• can become a part of the contract between the firm and its employees or creditors
o those who rely on the company’s governance
- Addition: shareholders agreements
2.1. mandatory laws vs default provisions
- Corporations are subject of large body of law -> relationship between corporate charter and corporate statute
• Default rules= only applicable if parties do not explicitly provide for something different
o Provide a standard contract that parties can adopt in part or as a whole (saves costs, negotiations)
o Common form is statutory provision that will govern unless the parties explicitly provide alternativ
o These give flexibility but also serve as a legal safety net
• Mandatory rules= parties must adhere to them
o Germany: large corporations: representatives of the employees get half of the supervisory board
seats.
o U.S.: provide regular detailed financial disclosure in a closely prescribed format
• Either-or provisions= corporate law provides the rule that will be applicable if the default provision is not
chosen
o France, Belgium SA – NV: two tier-board structure v. default single-tier board structure
- Contracting failure
• Parties exploited because they are not well informed
• Interests of third parties might be affected
