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According to Butler, the contractual theory of the corporation is in contrast to which legal concept?
According to Butler, the contractual theory of the corporation is in contrast to which legal concept?
Companies, while maintaining their position within the legal system, are considered as a set of default contract clauses.
Companies, while maintaining their position within the legal system, are considered as a set of default contract clauses.
True
What is the principal-agent relationship in business organizations based on?
What is the principal-agent relationship in business organizations based on?
consensual and contractual connection
The agency relationship involves a consensual understanding between agents and principals, emphasizing trust and the pursuit of the principal's best _____.
The agency relationship involves a consensual understanding between agents and principals, emphasizing trust and the pursuit of the principal's best _____.
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Match the following problems with agency relationships:
Match the following problems with agency relationships:
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In which doctrine does the Real seat doctrine focus on the actual location where the company is managed?
In which doctrine does the Real seat doctrine focus on the actual location where the company is managed?
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What is the term for selecting a jurisdiction based on economic reasons?
What is the term for selecting a jurisdiction based on economic reasons?
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Italian international company law typically applies ______ corporate law as if the company were incorporated in Italy.
Italian international company law typically applies ______ corporate law as if the company were incorporated in Italy.
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California laws would apply if a person is poisoned in California under the internal affairs doctrine.
California laws would apply if a person is poisoned in California under the internal affairs doctrine.
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Match the legal doctrines with their primary focus:
Match the legal doctrines with their primary focus:
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What does 'legal arbitrage' refer to?
What does 'legal arbitrage' refer to?
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What is one consequence of the standardization of the legal system and globalization?
What is one consequence of the standardization of the legal system and globalization?
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Contracts are legally enforceable agreements between two or more parties.
Contracts are legally enforceable agreements between two or more parties.
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According to the Italian Civil Code, an entrepreneur is someone who exercises an economic activity organized to produce or exchange goods or services on a __________ basis.
According to the Italian Civil Code, an entrepreneur is someone who exercises an economic activity organized to produce or exchange goods or services on a __________ basis.
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Match the following common legal features with their descriptions:
Match the following common legal features with their descriptions:
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According to the Theory of the Firm from 1976, what is the main concern in any agency relationship?
According to the Theory of the Firm from 1976, what is the main concern in any agency relationship?
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Conflict of interests arises when managers act in the stockholders' exclusive interests.
Conflict of interests arises when managers act in the stockholders' exclusive interests.
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Who authored the fundamental book 'The Modern Corporation and Private Property' in 1932?
Who authored the fundamental book 'The Modern Corporation and Private Property' in 1932?
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The costs that are faced to create benefits by monitoring the managers result in ________.
The costs that are faced to create benefits by monitoring the managers result in ________.
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Match the situations of conflicts with the respective parties involved:
Match the situations of conflicts with the respective parties involved:
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Why is Delaware known to be highly attractive to American companies?
Why is Delaware known to be highly attractive to American companies?
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What is the role of the Court of Chancery in Delaware?
What is the role of the Court of Chancery in Delaware?
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Delaware offers a tax-friendly regime for companies.
Delaware offers a tax-friendly regime for companies.
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California law provides for 2 sets of voting shares: __________ and common shares.
California law provides for 2 sets of voting shares: __________ and common shares.
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Match the following attributes of Delaware's attractiveness for companies:
Match the following attributes of Delaware's attractiveness for companies:
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What is the purpose of Limited Liability in corporations?
What is the purpose of Limited Liability in corporations?
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What legal concept applies to limited liability companies where a court may hold shareholders personally liable under certain circumstances?
What legal concept applies to limited liability companies where a court may hold shareholders personally liable under certain circumstances?
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Piercing the corporate veil is a remedy that courts apply frequently.
Piercing the corporate veil is a remedy that courts apply frequently.
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What is the concept that is crucial for a sustainable corporation, essentially meaning 'keeping one's word'?
What is the concept that is crucial for a sustainable corporation, essentially meaning 'keeping one's word'?
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Excessive regulation can turn individuals into irresponsible automatons.
Excessive regulation can turn individuals into irresponsible automatons.
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What are the three elements required for effective corporate governance?
What are the three elements required for effective corporate governance?
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What is the maximum timeframe mandated by Directive 2019/1151/EU for the formation process of companies?
What is the maximum timeframe mandated by Directive 2019/1151/EU for the formation process of companies?
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Notaries continue to play a crucial role in ensuring honesty and integrity in company formation, even after the implementation of Directive 2019/1151/EU.
Notaries continue to play a crucial role in ensuring honesty and integrity in company formation, even after the implementation of Directive 2019/1151/EU.
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The online submission of documents is particularly relevant for companies in a cross-border situation as far as their management is concerned, providing higher __________ on the company.
The online submission of documents is particularly relevant for companies in a cross-border situation as far as their management is concerned, providing higher __________ on the company.
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What is the role of notaries in various EU countries?
What is the role of notaries in various EU countries?
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Match the following aspects of US corporate law with their descriptions:
Match the following aspects of US corporate law with their descriptions:
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In the context of corporate liability under CERCLA, why is direct liability not dependent on the parent-subsidiary relationship?
In the context of corporate liability under CERCLA, why is direct liability not dependent on the parent-subsidiary relationship?
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The Court in the text criticizes the 'actual control' test used by some lower courts as it blurs the distinction between direct and derivative liability.
The Court in the text criticizes the 'actual control' test used by some lower courts as it blurs the distinction between direct and derivative liability.
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Who was the Harvard law professor that, along with Reinier Kraakman, proposed pro rata shareholder liability for corporate torts in the 1990s?
Who was the Harvard law professor that, along with Reinier Kraakman, proposed pro rata shareholder liability for corporate torts in the 1990s?
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Corporate criminal liability in the United States primarily imposes penalties on corporations when individuals within them commit ______ acts.
Corporate criminal liability in the United States primarily imposes penalties on corporations when individuals within them commit ______ acts.
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Match the following entities with their strategies to circumvent mass tort liability:
Match the following entities with their strategies to circumvent mass tort liability:
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Study Notes
International Business and Contract Law
- Legal Arbitrage: taking advantage of differences in laws or regulations between jurisdictions to gain a competitive advantage or exploit profit opportunities.
The Concept of "Law as a Product"
- Law as a Product: treating legal services or expertise as a commodity that can be packaged, marketed, and sold to clients like other products or services.
The Standardization of the Legal System and Globalization
- Race to the Bottom: legal service providers seek to cut costs and maximize efficiency through standardization, leading to downward pressure on fees, reduced profitability, and an erosion of professional standards.
Corporate Laws
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3 main legal rules:
- Formation of a company
- Equity financing
- Corporate governance (shareholders' rights, management)
The Economic Institution of Capitalism
- Contracts: legally enforceable agreements between two or more parties that specify the terms and conditions of a transaction or exchange.
- Firm: an organization alternative to the market, defined by the Italian Civil Code as an entity that exercises an economic activity organized to produce or exchange goods or services.
Company: "Nexus of Contracts"
- Nexus of Contracts: a theoretical framework for understanding the complex and multifaceted nature of corporate relationships and governance.
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5 Common legal features:
- Legal personality
- Centralized/decentralized management
- Investor ownership
- Free transferability of shares
- Limited liability of companies' stakeholders
Types of Business Organizations
-
In Europe:
- Partnerships (Unlimited Business Partnership, General Partnership, Limited Business Partnership)
- Companies (Public Limited Liability, Private companies)
-
In the USA:
- Incorporated Business Associations (C or S corporations)
- Unincorporated Business Associations (General Partnership, Limited Partnership, Limited Liability Partnership)
- Limited Liability Companies (Member-Managed, Manager-Managed)
The Sources of Company Law
- At Law: mandatory provisions and default/residual provisions.
- At Contract: fill the gaps left open by the law, complementary to law.
Contracts and Company Law
- Article of Incorporation and By-law: special types of contracts that enable an organization to organize from a legal point of view to carry out market products and services.
- Network of relationships: a further level of complexity in the nexus of contracts.
The Contractual Theory of The Corporation
- Contractarian theory: companies, while maintaining their formal hierarchical position within the legal system, can be intended as a set of default contract clauses commonly offered to the market by the legal system of incorporation.
The Agency Problem
- Agency law: a consensual and contractual connection, established when a principal authorizes another party (the agent) to act on their behalf and operate under their general control.
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4 main problems:
- Formation and termination of an agency relationship
- The scope of the agent's power to act/transact on behalf of the principal
- Principal's relationship to 3rd parties with whom the agent did or may have acted/transacted
- What are the duties owed by the agent to the principal and vice versa?### Principal-Agent Relationship
- The principal should not be bound to third parties if the agent acts outside the scope of express and implied authority, unless:
- The principal authorizes a specific action
- The authorization was granted after the binding act
- The third party reasonably understands the agent's authority
- Apparent authority refers to a situation where a person or entity appears to have authority to act on behalf of another, even if they do not have actual authority
- Apparent authority arises when a principal creates a reasonable belief in a third party that an agent has authority to act on their behalf
- Apparent authority is a matter of good faith and reasonableness, judged by the circumstances
Agency Law
- The principal-agent relationship creates mutual duties:
- Duty of loyalty (agents cannot compete with the principal)
- Duty of care (fiduciary duties)
- Agent relationships generate long-term and cooperative commitments that are difficult to regulate completely
- Agency costs arise from the asymmetry of information between the principal and agent
- Agency relationships can be better characterized by the discrete contracting model or the long-term relational contracting model
The Economic Approach
- The agency relationship is a modular model for understanding business relationships within legal boundaries
- Scholars use this model to re-qualify the relationship between shareholders and the firm's top management
- The agency is a cooperative type of contractual relationship rather than an "arm's length" or adversarial relationship
Conflicts Linked to Opportunistic Behaviors
- Situations of conflicts between shareholders, as a group, and directors of the public company
- Situations of conflicts among shareholders (majority vs. minority shareholders)
- Situations of conflicts between shareholders and other stakeholders (like creditors and communities)
The Origin of the Main "Agency Problem"
- The fundamental book: "The Modern Corporation and Private Property" by Adolf A. Berle and Gardiner C. Means (1932)
- The corporate system emerges when the transition occurs from a private or closely-held corporation to a publicly held corporation
- The separation of ownership and control leads to a "free-riding" problem, where shareholders do not have a sufficient economic incentive to monitor the company's management
Managerial Capitalism
- The company contract is a multi-party, associatory, long-term, and relational contract
- The contract is intended to regulate the processes that may come in the execution of the company
- Legal instruments for the company's contract include:
- Legal rules, including mandatory rules (fiduciary duties)
- Highly standardized contractual rules in publicly-held companies
- Specific contractual rules, tailored to the circumstances and the members' specific needs
Legal Personality and Choice of Corporate Law
- In the globalized economy, companies are created under specific national Company Laws but often conduct business across multiple states
- Determining the appropriate jurisdiction for incorporation involves considering international private law (conflict of laws rules)
- The legal framework of the jurisdiction where the company conducts its business operations or where significant and prolonged interactions with the company occur may question the corporate status or corporate law regulations established in a different jurisdiction
Freedom of Incorporation
- Business freedom, also referred to as freedom of enterprise, entails the ability to operate a business without the necessity of a license in most cases
- This principle is frequently enshrined and safeguarded in various legal documents such as national constitutions
- Freedom of incorporation is intricately linked with individual liberty, as individuals have the autonomy to establish companies independently### Directors' Power and Shareholders
- McDermott International directors exercised power over the company despite owning only 10% of the shares, as the rest (90%) were owned by public investors who did not care about the company.
- This is an example of self-perpetuation of management, where managers reappoint themselves to maintain their positions.
Delaware Law and Corporate Governance
- Delaware law states that shares of a corporation's capital stock or those of another corporation in which it holds a majority voting interest cannot be entitled to vote or counted for quorum purposes.
- This rule emphasizes the principle that voting rights issues are primarily within the purview of the jurisdiction where the company is incorporated.
- Delaware Supreme Court consistently applies the law of the state of incorporation to international affairs.
Examen Inc. v. VantagePoint Venture Partners
- The case involved a merger between Examen Inc. (a Delaware corporation) and Reed Elsevier, Inc. (a Massachusetts-based company).
- VantagePoint Venture Partners, owning 83% of Examen's preferred shares, argued that California law should govern the merger resolution.
- The issue revolved around how to count shareholder votes when different classes of shares were involved.
- Delaware Corporation law would have governed the merger, but California law would have given VantagePoint Venture Partners a potential veto on the merger.
Conflict of Laws Principles
- Delaware's conflict of laws principles state that the law of the state of incorporation applies to internal affairs.
- California's conflict of laws rules are different, with Section 2115 of the California Code stating that California law prevails if the company has significant ties to California.
- This led to the question of which jurisdiction's law should apply to the merger.
Pseudo-Foreign Corporations
- California Code, Corporations Code - CORP § 2115, imposes California corporate law rules on internal affairs of corporations incorporated outside California (foreign corporations) if they have significant ties to California.
- This is despite the incorporation theory, which states that internal affairs should be regulated by the laws of the incorporation state.
Delaware Attractiveness
- Delaware is attractive to American companies due to:
- Favorable corporate laws
- Specialized commercial courts (e.g., Court of Chancery)
- Favorable taxation (no tax on profits generated outside Delaware)
- Privacy and confidentiality (no requirement for public disclosure of shareholders)
- Legal and professional infrastructure (wide range of legal, accounting, and consulting services)
- Economy is strongly reliant on franchising taxes
EU Company Law and Digital Incorporation
- The EU has been focusing on digitalization of company law, aiming to facilitate online registration and incorporation of companies.
- Directive 2019/1151/EU of 20 June 2019 amends Directive 2017/1132/EU as regards the use of digital tools and processes in company law.
- The directive requires a 2-year implementation period and eliminates the need for physical presence of involved persons with authorities and/or notaries.
Note: I've reorganized the text to create separate sections for each topic, and used bullet points to break down the key facts and concepts.
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Learn about legal arbitrage, the practice of taking advantage of differences in laws or regulations between jurisdictions to gain a competitive advantage or exploit profit opportunities. Understand how firms can decide where to locate activities by picking the best jurisdiction.
