Business Conflicts and Corporate Management

Study Notes

Entrepreneurs may face opposition from banks when deciding to sell part of their firm.
Majority partners may prefer reinvesting annual gains while others may push for profit distribution.
Board of directors might want to pursue risky ventures, conflicting with shareholders' conservative preferences.

Corporations help manage various conflicting interests among stakeholders, including owners, creditors, employees, investors, managers, consumers, and public authorities.
Key attributes of corporations include:
- Legal Personality: Corporations are recognized as separate legal entities.
- Limited Liability: Owners are not personally liable for corporate debts.
- Transferable Shares: Ownership can be easily transferred through shares.
- Delegated Management: Management is carried out by a board of directors, separating control from ownership.
- Investor Ownership: Investors have rights linked to their share ownership.

Corporate structures exhibit common traits across different countries, tracing back to the development of East Indian Companies.
Corporations:
- Facilitate coordination among business participants.
- Contain risks associated with opportunistic behavior.
- Reduce costs linked with organizing business activities.
National differences exist, such as Germany's requirement for worker co-participation (Mitbestimmung).

Conflicts can occur among:
- Majority vs. Minority Shareholders
- Shareholders vs. Creditors
- Shareholders vs. Employees
- Shareholders vs. Managers

Corporations possess separate patrimony, meaning assets belong to the corporation itself rather than individual shareholders.
Entity Shielding: Protects corporate assets from individual shareholders' creditors and preserves business operations.

Priority for Business Creditors: Business creditors have a legal claim to corporate assets before claims from shareholders' creditors.
Protects corporate creditors' rights, ensuring assets are accessible to meet business liabilities.

Shareholders cannot arbitrarily withdraw their share of corporate assets; they can only divest by selling shares.
This rule safeguards corporate value by preventing asset depletion from individual shareholder actions.

Creditor priority and liquidation protection work together to assure counterparties of the firm's generated value from contracts and assets.
Supports the concept of the firm as a nexus of contracts, facilitating smoother asset and contract transfers.

Legal personality grants firms autonomous rights and duties as though they were natural persons.
Firm ownership is legally distinct from its debts, shielding owners from personal liability.

Under this rule, creditors are entitled only to the assets owned by the firm, protecting personal assets of owners from corporate creditors.
Distinction allows business assets to be used as security for business debts while personal assets remain available to owners' personal creditors.