International Business: Legal Arbitrage and Contract Law

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

• 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.
• 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.
• 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.