Corporate Law Notes
Statements: 12 minutes per question
Case: 15 minutes per question
Week 1 Module Bundle
Business forms
- Partnerships: more than one participant, some require formal action, and some don’t
o General partnership: agreement between partners, unlimited liability for debt
o Limited partnership: at least one possesses unlimited liability, all others limited liability
o Limited liability partnership (LLP): law firms, all partners involved in management and
limited liability
- Sole proprietorship: one person, no formal action needed, need to obtain licenses and permits + tax
laws
- Hybrid: LLC (limited liability corporations): corporations + partnership, not personally liable for debt
or liability, taxed as partnership
- Corporations: same as company in this course
- A firm with special legal attributes that can make it capable of owning property, entering into
contracts independently of its owners (legal personality)
- Capital owned by firm, divided into shares, shared capital, owned by shareholders
o Investor ownership
o Appointment rights, and other decision-making rights
o Residual claims: only liable up to their committed investments (owner shielding)
- Only when it is correctly established limited liability and legal personality can be used
- Formulate the articles of association, between founders, public, important to establish
- Corporate board: directs and supervises the company, representative
- 2 board models: one tier and two tier
- Different types of board managers
o Executives or management board members: direct the company (e.g. CEO, CFO, COO)
determine the corporate strategy
o Nonexecutives, supervisory board members:
o Duties to the company, duty of loyalty and duty of care, held for both
- Third parties:
o Creditors: contractual claim on corporate assets, priority claim compared to residual claims
of shareholders, fixed claim, consisting of the face value of the debt and some interest
Banks + suppliers
Employees
Tax authorities, etc.
o Involuntary creditors: cannot argue their terms ex ante
Tort victims
Corporate Law
- 5 fundamental characteristics
o Legal Personality
o Limited Liability
o Transferability of shares
o Delegated management under a board structure
o Investor ownership
1
, - Different per jurisdiction
- UK & US as well as continental European countries
- US has
o Federal government
o State governments
- Companies are governed by the states
- Rules on which company shares are exchanged, etc.
- Federal courts take on federal disputes as well as inter-state disputes, security frauds are an
exception among others
- State courts are generally about everything else, including corporate law
- Companies are free to incorporate in any state regardless of whether they are doing business there
or have any contact with this state
o Most in Delaware
Political consensus to keep the Delaware Corporation law modern and up to date
Example: virtual shareholders’ meeting
Low administrative burden, large flexibility for corporations
Experienced judges
(Tax policy)
o Delaware General Corporation Law (DGCL)
http://delcode.delaware.gov/title8/c001/
o Other important statute:
Model Business Corporation Act (MBCA)
Considered more conservative than Delaware laws
o Also Federal laws, for example:
Sarbanes-Oxley Act (2002) for public companies
Listing Rules, including NYSE and NASDAQ.
Act of 2010 – art 951
- State laws are independently established
- Free to incorporate in any state regardless if they’re doing business there
- Fierce regulatory competition: winner right now, Delaware
- Europe has
- Member States have national statutory company law but are also subject to European law
- Regulations – a binding legislative act. It must be applied in its entirety across the EU.
- Directives - set out a goal that all EU countries must achieve. However, it is up to the member
states to devise their own laws on how to reach these goals.
- Recommendations - not binding. A recommendation allows the institutions to make their views
known and to suggest a line of action without imposing any legal obligation on those to whom it is
addressed.
- Less regulatory competition than in the US
o Why?
o Reputational aspects
o 2 conflicting doctrines
Doctrine of incorporation: company law applicable to the legal entity or those of the
jurisdiction in which the legal entity has been incorporated irrespective of the ‘real
seat’
Same as US just with member states
2
, Doctrine of the real seat: company laws applicable to legal entities if the place of
incorporation is exactly the same as the place where the company is effectively
managed or operated
Hence, a company cannot simply adopt the legal structure of a French
company, or a French company cannot simply move its business elsewhere!
More of a ‘gliding’ seat in real life
Combatted in case law and powers are reduced
European company: can be used in all member states
Contained in regulation and directive
o Another source: soft law
o Contained in corporate governance codes
o Best practices on the internal structure of companies
o Non-binding
o Normally companies have to comply or explain in their yearly report why they do not
comply
o Comply or explain statue: listing rules UK or corporate law statutes in Europe
- Articles of association: corporate charter, the constitution of a company
- Outlines rules and regulations
- Mandatory
- Required in the incorporation process of a company (formation)
- Mandatory rules
o Cannot be modified by contracts
o Protecting the weaker parties
- Default rules
o Only applicable when articles of association or another contract does not state otherwise
o E.g. Article 2:195(1) DCC, France: default rule is a one tier board structure
- The goals of corporate law
o Provides a structure of the corporate form and ‘housekeeping rules’ to support this
structure;
o Control conflicts between corporate ‘insiders’ and ‘outsiders. (agency problems)
- Terminology:
o Harmonization: an intentional merging
o Convergence: process leading to the approximation of law, no planning
o Transplantation: different bodies of law interacting overtime and becoming more similar
- Kamer van Koophandel v. Inspire Art Ltd.
- Main points to address
o 1. Procedural History (what court, which instance, what year)
o 2. Facts of the case (the relevant facts!)
o 4. What is the legal question (there is probably more than one…)
o 5. What is the holding (the holding is the answer to the legal question(s))
o 6. The reasoning (why did the Court answer in this way)
o 7. The remedy
- UK company operating in the Netherlands mostly was allowed to continue
Week 2 Module Bundle
The 5 Characteristics (page 14 of the book)
3
, 1. Legal personality
- Corporation is a legal person
- Enables the corporation to operate as a single contracting party with a perpetual life that is distinct
from corporate actors such as the corporate board, and the shareholders
- An example of contracts: with suppliers
- Corporations is the legal owner of the corporate assets, different from shareholders: owners of
shares not the assets
- Creditors of the shareholders cannot claim the firm’s assets
- Corporation still needs representatives to act on its behalf
- Separate patrimony (demarcation of a pool of assets)
- Entity shielding: priority rule and liquidation protection
o Priority rule: the creditors of the corporation have a first claim on the assets of the
corporation, the assets are automatically available for the enforcement of contractual
obligations for the corporation by its creditors
o Liquidation protection: includes that the shareholders (often referred to as the owners of
the corporation) or the creditors of the shareholders cannot withdraw their share of
corporate assets at will
2. Limited liability
- Provides protection to the shareholders as the corporate owners
- Creditors of the corporation are limited to making claims against the corporate assets and have no
claims against those assets that are owned by the shareholders
- Owner shielding: shareholders are only liable up to their committed investment
- S. 102(b)(6) DCGL
- 3 advantages
o The creation of new businesses is stimulated as founders will be limitedly liable when
choosing for the corporate form
o Shareholders do not have to monitor every step of the business and their co-investors
o Enables portfolio diversification (investing in a large number of stocks or an entire market
index), which is nowadays used by many investors
Portfolio diversification makes it possible to eliminate firms’ specific risks
Quality of corporate management, strategic position of the company for
example
Asset partitioning
A. Entity shielding (liquidation protection)
4
Statements: 12 minutes per question
Case: 15 minutes per question
Week 1 Module Bundle
Business forms
- Partnerships: more than one participant, some require formal action, and some don’t
o General partnership: agreement between partners, unlimited liability for debt
o Limited partnership: at least one possesses unlimited liability, all others limited liability
o Limited liability partnership (LLP): law firms, all partners involved in management and
limited liability
- Sole proprietorship: one person, no formal action needed, need to obtain licenses and permits + tax
laws
- Hybrid: LLC (limited liability corporations): corporations + partnership, not personally liable for debt
or liability, taxed as partnership
- Corporations: same as company in this course
- A firm with special legal attributes that can make it capable of owning property, entering into
contracts independently of its owners (legal personality)
- Capital owned by firm, divided into shares, shared capital, owned by shareholders
o Investor ownership
o Appointment rights, and other decision-making rights
o Residual claims: only liable up to their committed investments (owner shielding)
- Only when it is correctly established limited liability and legal personality can be used
- Formulate the articles of association, between founders, public, important to establish
- Corporate board: directs and supervises the company, representative
- 2 board models: one tier and two tier
- Different types of board managers
o Executives or management board members: direct the company (e.g. CEO, CFO, COO)
determine the corporate strategy
o Nonexecutives, supervisory board members:
o Duties to the company, duty of loyalty and duty of care, held for both
- Third parties:
o Creditors: contractual claim on corporate assets, priority claim compared to residual claims
of shareholders, fixed claim, consisting of the face value of the debt and some interest
Banks + suppliers
Employees
Tax authorities, etc.
o Involuntary creditors: cannot argue their terms ex ante
Tort victims
Corporate Law
- 5 fundamental characteristics
o Legal Personality
o Limited Liability
o Transferability of shares
o Delegated management under a board structure
o Investor ownership
1
, - Different per jurisdiction
- UK & US as well as continental European countries
- US has
o Federal government
o State governments
- Companies are governed by the states
- Rules on which company shares are exchanged, etc.
- Federal courts take on federal disputes as well as inter-state disputes, security frauds are an
exception among others
- State courts are generally about everything else, including corporate law
- Companies are free to incorporate in any state regardless of whether they are doing business there
or have any contact with this state
o Most in Delaware
Political consensus to keep the Delaware Corporation law modern and up to date
Example: virtual shareholders’ meeting
Low administrative burden, large flexibility for corporations
Experienced judges
(Tax policy)
o Delaware General Corporation Law (DGCL)
http://delcode.delaware.gov/title8/c001/
o Other important statute:
Model Business Corporation Act (MBCA)
Considered more conservative than Delaware laws
o Also Federal laws, for example:
Sarbanes-Oxley Act (2002) for public companies
Listing Rules, including NYSE and NASDAQ.
Act of 2010 – art 951
- State laws are independently established
- Free to incorporate in any state regardless if they’re doing business there
- Fierce regulatory competition: winner right now, Delaware
- Europe has
- Member States have national statutory company law but are also subject to European law
- Regulations – a binding legislative act. It must be applied in its entirety across the EU.
- Directives - set out a goal that all EU countries must achieve. However, it is up to the member
states to devise their own laws on how to reach these goals.
- Recommendations - not binding. A recommendation allows the institutions to make their views
known and to suggest a line of action without imposing any legal obligation on those to whom it is
addressed.
- Less regulatory competition than in the US
o Why?
o Reputational aspects
o 2 conflicting doctrines
Doctrine of incorporation: company law applicable to the legal entity or those of the
jurisdiction in which the legal entity has been incorporated irrespective of the ‘real
seat’
Same as US just with member states
2
, Doctrine of the real seat: company laws applicable to legal entities if the place of
incorporation is exactly the same as the place where the company is effectively
managed or operated
Hence, a company cannot simply adopt the legal structure of a French
company, or a French company cannot simply move its business elsewhere!
More of a ‘gliding’ seat in real life
Combatted in case law and powers are reduced
European company: can be used in all member states
Contained in regulation and directive
o Another source: soft law
o Contained in corporate governance codes
o Best practices on the internal structure of companies
o Non-binding
o Normally companies have to comply or explain in their yearly report why they do not
comply
o Comply or explain statue: listing rules UK or corporate law statutes in Europe
- Articles of association: corporate charter, the constitution of a company
- Outlines rules and regulations
- Mandatory
- Required in the incorporation process of a company (formation)
- Mandatory rules
o Cannot be modified by contracts
o Protecting the weaker parties
- Default rules
o Only applicable when articles of association or another contract does not state otherwise
o E.g. Article 2:195(1) DCC, France: default rule is a one tier board structure
- The goals of corporate law
o Provides a structure of the corporate form and ‘housekeeping rules’ to support this
structure;
o Control conflicts between corporate ‘insiders’ and ‘outsiders. (agency problems)
- Terminology:
o Harmonization: an intentional merging
o Convergence: process leading to the approximation of law, no planning
o Transplantation: different bodies of law interacting overtime and becoming more similar
- Kamer van Koophandel v. Inspire Art Ltd.
- Main points to address
o 1. Procedural History (what court, which instance, what year)
o 2. Facts of the case (the relevant facts!)
o 4. What is the legal question (there is probably more than one…)
o 5. What is the holding (the holding is the answer to the legal question(s))
o 6. The reasoning (why did the Court answer in this way)
o 7. The remedy
- UK company operating in the Netherlands mostly was allowed to continue
Week 2 Module Bundle
The 5 Characteristics (page 14 of the book)
3
, 1. Legal personality
- Corporation is a legal person
- Enables the corporation to operate as a single contracting party with a perpetual life that is distinct
from corporate actors such as the corporate board, and the shareholders
- An example of contracts: with suppliers
- Corporations is the legal owner of the corporate assets, different from shareholders: owners of
shares not the assets
- Creditors of the shareholders cannot claim the firm’s assets
- Corporation still needs representatives to act on its behalf
- Separate patrimony (demarcation of a pool of assets)
- Entity shielding: priority rule and liquidation protection
o Priority rule: the creditors of the corporation have a first claim on the assets of the
corporation, the assets are automatically available for the enforcement of contractual
obligations for the corporation by its creditors
o Liquidation protection: includes that the shareholders (often referred to as the owners of
the corporation) or the creditors of the shareholders cannot withdraw their share of
corporate assets at will
2. Limited liability
- Provides protection to the shareholders as the corporate owners
- Creditors of the corporation are limited to making claims against the corporate assets and have no
claims against those assets that are owned by the shareholders
- Owner shielding: shareholders are only liable up to their committed investment
- S. 102(b)(6) DCGL
- 3 advantages
o The creation of new businesses is stimulated as founders will be limitedly liable when
choosing for the corporate form
o Shareholders do not have to monitor every step of the business and their co-investors
o Enables portfolio diversification (investing in a large number of stocks or an entire market
index), which is nowadays used by many investors
Portfolio diversification makes it possible to eliminate firms’ specific risks
Quality of corporate management, strategic position of the company for
example
Asset partitioning
A. Entity shielding (liquidation protection)
4
