Corporate Law and Insolvency Quiz

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).