Corporate Law and Insolvency Quiz

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Questions and Answers

What does a bank typically require from a member of a single member private limited company when advancing a loan?

Public listing of the company

Additional shareholders

Equity in the company

A personal guarantee for the loan debt (correct)

Which of the following represents a method by which creditors can limit their risk involving debts?

Offering additional loans at lower interest

Core business expansion

Increasing product prices

Requesting collateral from the company or member (correct)

What action can a bank take if a contractual covenant is broken by a company?

Increase the loan amount

Convert the loan to equity

Negotiate a lower interest rate

Accelerate the loan repayment (correct)

In which situation might a court decide to 'pierce the corporate veil'?

In cases of shockingly illegal or unfair actions by the company Signup and view all the answers

What is the minimum legal capital required for a private limited company in Austria?

35,000 Euros with at least 17,500 Euros in cash Signup and view all the answers

What is one of the main purposes of insolvency law?

To provide a mechanism to save fundamentally sound businesses. Signup and view all the answers

Which test determines if a company can pay its debts as they become due?

Cash-flow test Signup and view all the answers

What happens when a company is wound up?

The company's assets are liquidated to satisfy creditors. Signup and view all the answers

What is a characteristic of balance sheet insolvency?

It compares a company's assets against all its debts. Signup and view all the answers

In a 'pre-packaged' insolvency, what is essential for the process to proceed?

All creditors must agree to a debt forgoing quota. Signup and view all the answers

What happens to losses when equity is depleted?

Shareholders bear the losses first before creditors. Signup and view all the answers

What is a critical perspective on the value of legal capital?

The amount required for legal capital has not changed in years. Signup and view all the answers

What is NOT a purpose of legal capital?

To guarantee the company’s trustworthiness. Signup and view all the answers

Which statement about legal capital is accurate regarding its application in businesses?

It is a fixed requirement regardless of business size. Signup and view all the answers

What is a differentiating factor concerning legal capital rules in the EU?

There are vast differences in legal capital requirements among member states. Signup and view all the answers

What action is necessary to address the legal capital issues?

Establishing rules for raising capital to ensure payment. Signup and view all the answers

What might be a reaction to the current legal capital system by investors?

Investors may be discouraged due to inadequate legal capital protections. Signup and view all the answers

Which legal capital amount is specifically mentioned as the EU rule for public limited companies (plc)?

€70,000 Signup and view all the answers

What must a shareholder do if the director's declaration about the availability of funds is found to be false under cash consideration rules?

Pay an additional 35,000 Euros Signup and view all the answers

What is the main challenge with consideration in kind?

Difficulty in valuing the assets Signup and view all the answers

For a public limited company (plc) in Europe, how can potential issues with asset valuation be avoided?

By an independent, court-appointed expert checking the valuation Signup and view all the answers

What liability do shareholders have if incorrect valuation occurs in a private limited company (ltd)?

They have proportional liability to cover the missing amount. Signup and view all the answers

What is required for paying dividends according to capital maintenance rules?

Company must have assets greater than liabilities and legal capital Signup and view all the answers

What happens if a plc doesn't have enough legal capital when trying to pay dividends?

The legal capital must be replenished before paying dividends. Signup and view all the answers

What is the maximum percentage of legal capital that can be brought up as consideration in kind for an ltd in Austria without needing an independent court expert?

50% Signup and view all the answers

What could happen if a shareholder's cash consideration is used incorrectly, such as being earmarked for a specific investment?

Shareholder may have to pay again due to misuse of funds. Signup and view all the answers

What is the primary factor that determines the share exchange ratio in a merger?

Relative value of the two businesses Signup and view all the answers

What can shareholders who oppose a merger do if they believe the share exchange ratio was evaluated incorrectly?

Ask for reevaluation of the share exchange ratio Signup and view all the answers

What is a potential danger for shareholders in a division?

They become the sole owners of one entity without assets Signup and view all the answers

What is one of the mechanisms used to address the risk that business activity changes between the signing and closing of a deal?

Locked box agreement Signup and view all the answers

Which of the following best describes the purpose of representations and warranties in a business sale?

They ensure the buyer receives accurate information about the business. Signup and view all the answers

What type of acquisitions require approval from public authorities due to compliance issues?

Acquisitions in regulated industries and strategic sectors Signup and view all the answers

What risk is associated with an earn-out mechanism?

The seller might inflate future earnings. Signup and view all the answers

Which issue is referred to as 'leakage' in the context of business deals?

Withdrawal of funds by the seller before closing Signup and view all the answers

Who appoints the directors of a board in a private limited company (GmbH)?

The members/shareholders in the general meeting Signup and view all the answers

What is required for the removal of a director?

Sufficient cause or loss of trust by shareholders Signup and view all the answers

What is a characteristic of the service contracts for directors?

They regulate rights, duties, and remuneration Signup and view all the answers

What does the term 'double majority' refer to in director appointments?

Approval needed from both supervisory board and shareholders Signup and view all the answers

What limits the removal of directors from operational control of a private limited company?

The members' voting rights Signup and view all the answers

How long is the typical appointment period for directors?

Five years Signup and view all the answers

What option exists if a director's free service contract is prematurely ended?

A compensation package may be negotiated Signup and view all the answers

What typically protects directors from removal in a GmbH?

Statutes providing appointment rights Signup and view all the answers

Study Notes

Governance and Legal Environment

Purpose of this Unit: Companies and company law, reasons for incorporation, matching skills and resources (IT and business, money and operation), increasing equity finance.
Equity and Debt: Debt is fixed interest, independent of profit/loss of company. Equity (dividends) depend on company profits and have no fixed remuneration.
Business Integration: Expansion strategies through company ownership shares.
Company Law Types: Mandatory and default rules (protecting and enabling) apply to businesses.
Shareholder vs. Stakeholder Value: Traditional view maximizes long-term shareholder value. A competing view focuses on stakeholder value (such as employees) to achieve long-term shareholder value.
Social Objectives: Should a company assume broader social goals for greater equality and efficiency? A current trend shows sustainability reporting in listed companies.
Gender Representation: Women are underrepresented in corporate boards; should company law aim for more gender equality?
Company Law vs. Gesellschaftsrecht: Company law covers companies, while Gesellschaftsrecht covers companies and partnerships.
Numerus Clausus: There is a fixed number of available business entities (you cannot invent your own type).
Business Register Information: Third parties can rely on the information for transactions.
Representation Power: Third parties can still assume representation validity even if the represented company has revoked the power of representation but not registered it in the register.
Types of Partnerships:
- General Partnerships (Offene Gesellschaft, OG): Joint and several liability, all partners manage the company, no share transfer.
- Limited Partnerships: Limited liability (only for invested capital), limited partners are passive, not managing the company.
- Silent Partnerships: Silent partners are not disclosed, their contributions become the entrepreneur's property, no liability for entrepreneur.
Companies:
- Public Limited Companies (Aktiengesellschaften, AG): Widely held companies listed on stock exchanges, more regulations.
- Private Limited Companies (Gesellschaften mit beschränkter Haftung, GmbH): Fewer members, less regulations, cannot be listed on stock exchanges.
Company Law and European Law: Company law is primarily national law, but European law influences national company law through the Treaty on the Functioning of the European Union.
Corporate Governance Codes: Non-binding guidelines for companies regarding compliance, including the comply or explain mechanism.
Company Law and Taxation: Companies and partnerships are taxed in different ways. Companies are taxed as legal entities.
Golden Shares: Golden shares give shareholders veto power over changes in the company.

Principal-Agent Conflicts

Introduction: Principal (e.g., shareholders) delegates management (agent, e.g. managers) to make decisions and manage assets. A potential conflict arises when agents act in their own best interest instead of the principal's.
Information Asymmetry: Information is not equally available to the principal and agent.
Control, Issues, and Measurements: Principals need to control whether agents are acting in their best interest. Principals need to measure if agents are not acting correctly and fix the actions if possible
Shareholder & Management Relationships: Managers are often third parties; agency costs arise from controlling managers. Freeriding is a scenario where other shareholders do not pay their part of the controlling costs.
Majority and Minority Shareholders: Large issues in corporate groups.
Shareholder and Creditors: Conflicts between creditors and shareholders, particularly in times of crisis.
Shareholders and Employees: Employees who invest human capital are principals, shareholders are agents; this creates labor law issues that can affect company law.

Limited Liability and Creditors

Limited Liability: Risks for shareholders are limited to their investment.
Dangers to Creditors: Mismatch between control and liability, and potential ex-ante and ex-post opportunism.
Information Ex Ante: Accounting rules provide transparency by standardizing how businesses present their financials (balance sheets, P&L statements).
Accounting Rules: Harmonized rules standardize accounting practices, increase transparency, and protect creditors.
Creditor Self-Help, Limits, and Measures: Creditor self-help, including collateral, contractual covenants, and opting out of limited liability, are available depending on the specific circumstances. However, courts have limits to creditor self-help.
Legal Capital: Legal capital is a cushion (protection) for creditors in case of losses or insolvency; legal capital is typically fixed for each type of entity (plc or ltd) regardless of the situation.
Capital Maintenance: Rules ensure that the company's capital remains within the company.

Management Structure

Board Structures: One-tier structure combines management and supervision responsibilities; two-tier structures separate them (supervisory board oversees management board).
Directors (Managers) and Supervisory Boards: Responsibilities and composition of boards vary across international jurisdictions
Shareholder vs. Management Relationships: How do shareholders influence management actions? The relationship, authority, and conflict of interests are different, for example, across countries.
Shareholder Influence: In certain countries, shareholders exert more influence than in others; certain decision-making powers are reserved for shareholders.
Minority Shareholder Rights: Minority shareholder interests are sometimes protected more than in others. Legal provisions (e.g., resolutions) to deal with tunneling are available as well.
Board Membership and Removal: Appointment, qualifications, and procedures for removing board members are typically governed by statutes, shareholder agreements, and supervisory boards.

Mergers and Acquisitions (M&A)

Asset Deals: Acquisition of company assets without taking over the ownership; the target company usually still retains its liabilities.
Share Deals: Transfer of ownership of the company's shares, similar to the asset transfer, but ownership (share rights) of the company is transferred instead of the assets and obligations of the company.
Mergers: Two legal entities combine into one; in mergers, one company ceases to exist.
Divisions: A single legal entity split into more than one legal entities.

Common Issues

Risk-Passing: Transfer of risk of business during an M&A process; is it passed after acquisition or when the documents are signed? In general, risk usually passes after the complete business acquisition.
Representations & Warranties: Legal assurances and promises made by sellers during an M&A process.
Autorisation: approvals for acquisitions through public authorities (e.g., competition law, regulation of specific industries).

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Description

Test your knowledge on corporate law and insolvency principles with this quiz. It covers topics such as loan requirements, creditor risk management, and legal capital in private limited companies. Perfect for law students or anyone interested in business regulations.