Business Law Course 2024-2025 PDF

“Alexandru I. Cuza” University of Iasi, Faculty of Economics and Business Administration Business Law [Business Administration, 1] Ada-Iuliana Popescu [Parts of this material are adaptations of John Head’s – General Principles of Business and Economic Law, Carolina Acad. Press, Durham, NC, 2008] Chapter 1. Introduction to Legal Heritage 1.1. What is Law? Any society enacts and enforces laws that govern the conduct of the individuals, businesses and other organizations that function within it. In other words, “without law we cannot live”. The law consists of rules that regulate the conduct of individuals, businesses and other organizations within society. It is intended to protect persons and their property against unwanted interference from others. In other words, the law forbids persons from engaging in certain undesirable activities. Definition of Law The concept of law is broad. Although it is difficult to state a precise definition, it can be said that: law, in its generic sense, is a body of rules of action or conduct prescribed by controlling authority and having binding legal force. That which must be obeyed and followed by citizens subject to sanctions or legal consequences is a law. The difference between moral rules of conduct and the rules of law consists in the presence of a well-established sanction that comes when breaking the later. Social conduct rules are governing our existence giving meaning to it through order. Thus, our society functions in a just, fair way, the right way. Also, the word right has also another meaning in English. It refers to the prerogatives of every individual: the right to freedom, education, work, private enterprise etc. These prerogatives are best known as human rights or individual freedoms and their respect should be guaranteed by state authorities in any society that calls itself democratic. Functions of the Law The law is often described by the function it serves within a society. The primary functions served by the law in any democratic country are: 1. keeping the social peace (example: laws that make certain activities crimes); 2 2. shaping moral standards (example: laws that discourage drug and alcohol abuse); 3. promoting social justice (example: laws that prohibit discrimination in employment); 4. maintaining the status quo (example: laws that prevent the forceful overthrow of the government); 5. facilitating orderly change (example: laws enacted only after considerable study, debate and public input); 6. facilitating planning (example: well-designed commercial laws that allow businesses to plan their activities, allocate their productive resources and assess the risks they take). Some scholars believe that other function of the law is the maximization of individual freedom as long as the Constitution of a state is granting the freedom of speech, religion and association. Fairness of the Law On the whole, any legal system has to be comprehensive, fair and democratic. Nevertheless, some misuses and over-sights of any legal system, including abuses of discretion, mistakes by judges, unequal applications of law and procedural mishaps allow some guilty parties to go unpunished. However, these situations have to exist as exceptions, as mistakes that can be corrected. Flexibility of the Law The rules of law evolve and change along with the norms of society, technology and the growth and expansion of different activities in the world and in a particular country. “The law always has been, is now and will ever be largely vague and variable. And how this could be otherwise? The law deals with human relations and their most complicated aspects”1. 1 Jerome Frank, The Law and the Modern Mind, Brentano’s Publ. House, New York, 1930. 3 Schools of Jurisprudential Thought The philosophy or science of the law is referred to as jurisprudence. There are several different philosophies about how the law developed, ranging from classical natural theory to modern theories of law and economics and critical legal studies. Classical legal philosophies are discussed in the following paragraphs. Natural Law School The Natural Law School of jurisprudence postulates that the law is based on what is “correct”. Natural law philosophers emphasize a moral theory of law – that is, law should be based on morality and ethics. Natural law is “discovered” by human thought, the use of reason and choosing between good and evil. Historical School The Historical School of jurisprudence believes that the law is an aggregate of social traditions and customs that have developed over centuries. It believes that changes in the norms of society will gradually be reflected in the law. To these legal philosophers, the law is an evolutionary process. Historical legal scholars look to past legal decisions (precedents) to solve contemporary problems. Analytical School The Analytical School of jurisprudence maintains that the law is shaped by logic. Analytical philosophers believe that results are reached by applying principles of logic to specific facts of the case. The emphasis is on the logic of the result rather than on how the result is reached. Sociological School The Sociological School of jurisprudence asserts that the law is a means of achieving and advancing certain social goals. The followers of this philosophy, known as realists, believe that the purpose of law is to shape social behavior. Sociological philosophers are unlikely to adhere to past law as precedent. Command School The philosopher of Command School of jurisprudence believe that the law is a set of rules developed, communicated and enforced by the ruling party rather than a reflection of the society’s morality, history, logic or sociology. This school maintains that the law changes when the ruling class changes. 4 Critical Legal Studies School The Critical Legal Studies School proposes that legal rules are unnecessary and are used as an obstacle by the powerful to maintain the status quo. Critical legal theorists argue that legal disputes should be solved by applying arbitrary rules that are based on broad notions of what is “fair” in each circumstances. Under this theory, subjective decision making by judges should be permitted. Law and Economics School The Law and Economics School or the Chicago School believes that promoting market efficiency should be the central goal of legal decision making. For example, proponents of law and economics theory believe that a prisoner cannot find a lawyer who will take the case on a contingency-free basis (pro bono), the case is probably not worth bringing to justice. 1.2. Sources of Law In most countries, the sources of modern law have a certain hierarchy according to the authority that enacts them. Also, the sources of law can vary due to the existence of two major legal systems: civil law system or common law system. The Romano-Germanic civil law system, commonly called civil law dates of 450 B.C. when Rome adopted the Twelve Tables, a code of laws applicable to the Romans. A compilation of Roman Law called Corpus Juris Civilis (Body of Civil Law) was completed in 534 A.D. Later, two national codes – The French Civil Code of 1804 (The Napoleonic Code) and the German Civil Code of 1896 – became models for countries that adopted civil codes. In contrast to the Anglo-Saxon common law system, in which the laws are created by the judicial system as well as by the legislative power, the Civil Code and parliamentary statutes that expand and interpret it are the sole sources of the law in most civil law countries. Thus, the adjudication of a case is simply the application of the code or the statutes to particular set of facts. In some civil law countries, court decisions (jurisprudence) do not have the force of law. Most European countries follow the civil law system. 5 Anglo-Saxon common law or English common law is the other major legal system developed by the judges who issued their opinions when deciding cases. The principles announced in these cases became precedent for later judges deciding similar cases. The common law system has been developed in United Kingdom after 1066. The system is used today in some countries around the word, usually countries that were influenced by the British colonial empire: United States of America, Australia, New Zeeland, Malaysia, Thailand etc. In spite of the differences, similarities exist between the two legal systems. These similarities are mirrored by the principles of law that are animating the two systems, including the sources of law. The main sources of law are the following: A. Constitution Most countries have Constitutions as the supreme law of the land. This means that any other law, whether national or local, that conflicts with the Constitution is unconstitutional and, therefore, unenforceable. The principles enumerated in the constitution are very broad because it is usually intended for them to be applied to evolving social, technological, economic conditions. The Constitution established the structure of state governance, usually creating three branches of government and giving them the following powers:  The legislative branch (Parliament) has the power to make (enact) the law.  The executive branch (Government, President or both) has the power to enforce the law.  The judicial branch (courts and other judicial authorities) has the power to interpret and determine the validity of the law. B. Statutes or Laws Statutes are written laws that establish a certain courses of conduct that must be adhered to by the covered parties. The statutes are enacted by Parliaments or by similar bodies. Sometimes, when a statute comprises an extensive set of rules it is organized as a Code (Civil Code, Criminal Code, Civil Procedure Code etc.). 6 C. Government (executive branch) ordinances, decisions and executive orders State legislative is sometimes delegating lawmaking to the Government (executive branch). Thus, the Government enacts ordinances that are considered sources of law. Also, the Government is making decisions while enforcing the law. These decisions can sometimes be considered sources of law as well. Executive orders are issued by a member of the Government and they can also be considered, in certain cases, sources of law. D. Presidential executive orders In some countries, including Romania, the President can issue an executive order that can sometimes be considered a source of law. E. Regulations and Orders of Administrative Agencies In some countries, like the United States of America, the legislative and executive branch of federal and state governments are empowered to establish administrative agencies to enforce and interpret statutes enacted by the legislative branch. Many of these agencies regulate commercial activities. Thus, these agencies are empowered to adopt administrative rules and regulations, which have the force of law. F. Treaties and other international sources of law In most countries, including Romania, treaties are usually signed by the President of a country with the advice of the Government and with the consent of the legislative branch (Parliament). Thus, treaties are given the force of law becoming a national source of law for a particular country or countries. With increasing international economic relations among nations, treaties are becoming an even more important source of law that will affect business in the future. G. Judicial decisions Based on the common law tradition, in certain countries, past court decisions become precedent for deciding future cases. Lower courts must follow the precedent established by the higher courts. Both types of courts will have to follow the precedents of country’s supreme court decisions. Thus, judicial decisions are considered sources of law in common law countries, stare decisis doctrine promoting the uniformity of law and the efficiency of the court system. 7 However, in civil law countries, court decisions are not considered sources of law. Court decisions can only be used as a basis for interpretation of the law but cannot be referred as sources of law. 1.3. What is Business Law? All social, economic, political and cultural activities are governed by law. Thus, there is also an obvious and strong relationship between law and economic activity. Any country’s economic development – and, on an individual level, the economic well-being of a particular individual or family or business entity – takes place within the context of laws. Some of these laws provide the means by which individuals can carry out a business on their own or they can join together into companies for the same reason. Some laws establish a system by which a business can get access to banking services, such as financing for the purchase and sale of goods. Other laws set forth rules regarding the existence of different contracts or minimum requirements as to how a company should treat its employees, refraining from damaging the environment or conduct its business fairly. This complicated web of legal rules is often referred as “economic law” or “business law”. The first of these two terms, “economic law” is maybe more accurate and descriptive of the two because it casts a “wider net” of meaning and the relationship between law and economic activity encompasses many subjects. The term “business law”, however, is more familiar in some countries, for example USA or UK. Most law is national law. That is, the rules that govern behavior, including economic activity, exist at the level of a particular country. Only a relatively few such rules are international in scope or source. This fact reflects the importance of the nation- state in today’s world. There are just under 200 nation-states in the world and most of the laws in each are different from those in all the rest. Therefore, law practitioners must look mainly to his or her own country rules for the specific legal rules that apply in a particular case. Despite the diversity in specific legal rules, certain basic concepts do hold true in most countries. That is, some general principles of law are global in applicability and 8 underlie the specific rules in most countries. Thus, there are also some general principles specifically in the area of business and economic law and some rules that have been explicitly agreed to at the international level; these include rules on international business transactions and international economic relations. Also, in order to determine how best to structure a particular transaction or how much tax to pay on business profits or how to handle similar detailed matters, the applicable rules of the local and national jurisdiction must be applied. In these particular situations one has to know exactly what are the specific national rules in order to avoid mistakes that can easily lead to serious and costly conflicts. 9 Chapter 2. Business Entities A large proportion of economic activity at all levels (international, national and local) involves business entities. These business entities may be involved in the manufacturing of goods, the sale of goods, the transport of goods, the provision services, the hiring of employees and countless other activities that affect everyone in society. Thus, it is absolutely necessary to know that legal rules that bear directly on how such business entities are structured, what their attributes are, how they get the financial resources they need to carry out their operations, what measures they need to take in order to account for those financial resources and how they are to be treated when they enter into serious financial difficulties. 2.1. Types of business entities The organization of business is a matter of national law. Various countries have developed a wide range of business forms – that is, types of business organizations. The purpose of business organizations is to make a profit from commercial activities. This distinguishes business organization from other groups formed for charitable, social or other non-business purposes. Depending on the country and its national legal rules, business can be done by a single person, natural person, or by a group of people organized as legal associations of person. A legal person can be defined through its three distinct elements:  it is a group of individuals;  it has a patrimony of its own, separate from the ones of its founders;  it is organized based on a common agreement (memorandum) of its promoters. National law can impose certain conditions when it comes to consider a natural person a merchant (tradesman). There are two jurisprudential rules that have been developed on the matter: the objectivity rule and the subjectivity rule. 10 The objectivity rule states that it is a trader the person who is engaged in activities (instruments) that are considered commercial by law. The subjectivity rule states that it is a trader the person who make from business activity their usual profession. Some national law (Romania, Italy, France etc.) use both rules to define the capacity of a trader. Thus, traders are those who carry out commercial instruments and who make this their usual profession. The individuals that want to become traders are required by law to be 18 (21) years old, having full legal capacity since business activities generate rights and obligations that can only be personally exercised or assumed and for which a certain life experience is necessary. Thus, minors are not allowed by law to be traders. Taking into account these various legal rules, we can distinguish between diverse types of business organization. Four issues should be borne in mind: Creation – how it is formed? Liability – when can third parties sue the owners? Duties – what do the participants owe each other? Termination – when does it end? 2.1.1. Sole proprietorship; partnership; limited partnership A sole proprietorship or single owner business is the simplest type of business entity to organize and operate. It has been described as “one person that has all management authority, so decision can be reached quickly. That feature may be a plus or a minus, depending on the ability of the sole owner. It may also be more difficult to raise capital, since only one person is responsible for the debts of the business.”2 Because only one person is involved in a sole proprietorship, the other issues raised above are easy to address. First, there is no separate creation process because there is no separate “business” as such. There might, however, be registration requirements, as the government authorities responsible for regulating business activities will need to 2 George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ., 1994, p.274. 11 know what business are subject to legal rules – such as the rules of taxation, health and safety, insurance etc. Second, the owner of a sole proprietorship has full, unlimited personal liability for all debts and liabilities of the business. Thus, a failure of the business can lead to the loss not only of the business assets but the personal assets of the owner. Third, there are no duties among owners because there is only one owner. Lastly, termination of a sole proprietorship takes place when the sole owner decides to terminate it or when it is terminated by reason of bankruptcy or the death of the owner. A partnership is a combination of two or more persons organized to carry on a business as co-owners and co-managers. It is also called a general partnership (“GP”). In most cases, each member of a partnership is personally liable for the entire obligations of the partnership. 1. A partnership can usually be created with little or no formality and typically with no government approval being required, although registration with the appropriate government agency or agencies will almost always be necessary (Mercantile Register, Registrar Office). 2. Each partner is fully liable for the obligation of the partnership (solidarity of the partners), subject to certain exceptions that some countries provide for (the largest exception being the limited liability partnership arrangements). 3. Because so much is at stake for each partner, the relevant law usually demands that each partner fulfill duties of fair dealing, honesty and fiduciary responsibility toward the other partners and that no partner can make personal use of the business property without the consent of the other partners. 4. Termination of business is triggered by several circumstances, including: a). the bankruptcy of the business; b). the voluntary winding-up of the partnership’s operations; c). usually, a change in the number or identity of the partners, unless a partnership agreement establishes a method for determining how to pay off a departing partner (or the estate of a deceased partner) and how much to charge an incoming new partner. A limited partnership (“LP”) is designed to overcome one of the major disadvantages of a partnership – the unlimited personal liability of each partner for the obligation of the business. The limited partnership form of business organization does this by permitting some of the owner-partners to enjoy limited personal liability as long 12 as they comply with all legal requirements. It is this feature that characterizes the limited partnership and makes it attractive. As an example, assume that one person, Mr. Smith, wants to open a grocery business but does not have enough capital of his own to do so. He might ask two or three other people to join him in a limited partnership, under an arrangement by which: 1. those other people will provide the beginning capital; 2. Mr. Smith would run the business; 3. they would all split the profits or losses equally among them. Once such a limited partnership is created, Mr. Smith would be the “general manager” and would have unlimited liability and the “limited partners” would have liability only to the extent of their contribution of capital. The duties among partners in a limited partnership vary depending on the status of the partner involved. A general partner owes the same duties of honesty and competence as in a regular partnership. Limited partners typically are not involved in the management of the business and their duties are correspondingly less. In fact, they risk losing their limitation of liability of they do participate in the management. In general, a limited partnership is more durable than a regular partnership. That is, the number and identity of the limited partners can change rather easily without affecting the continuity of the business organization itself. Indeed, it is the fact of limited liability and ease of entry and exit that makes a limited partnership an attractive way of investing in a business and therefore an important method of financing a business undertaking. In some countries yet another type of partnership has been established: the limited liability partnership (“LLP”). Typically such a business organization is almost identical to the general partnership for a business organization, except that all partners have limited liability. 2.1.2. Limited Liability Company; Stock Company; Cooperative The term limited liability company (“LLC”) is subject to various meanings. In most civil law systems, a limited liability company is a separate legal entity whose ownership interests (held by persons sometimes called “associates”) are not traded 13 publicly and whose financial statements do not need to be disclosed to the public. The term “limited liability company” carries a different meaning in most common law systems. In these systems a different type of entity, the “close corporation” resembles the civil law limited liability company. The four issue identified above (creation, liability, duties and termination) apply as follows in the case of a typical (civil law) limited liability company. First, it is created by means of a series of steps that usually include: a). the preparation and submission of a set of articles of association (articles of incorporation) that identify the company’s name, the location of its offices, its purpose and the capital invested; b). the pledging of the required minimum amount of capital; c). the issuance of an approval by the responsible government agency and public notification of the fact. Second, the successful creation of such an entity results in limited liability for all participants. Thus, formalities and legal requirements have to be followed very carefully in the creation of such a company. A member of the public is generally not permitted to make a claim against the personal assets of its owners except in cases where defects occur in establishing the company or where other unusual or illegal circumstances make it necessary to “pierce the corporate veil”, that is to impose personal liability on the owners. It is worth pointing out that the liability of the company itself is not limited but that of its individual owners. Third, the main duties among persons involved in a limited liability company typically fall on the officers and directors, that is on the persons responsible for the management of the company. They owe to the company a fiduciary duty (a especially demanding legal duty to handle the affairs of the company with care and for the benefit of the company and its owners, rather than for their own personal benefit). The functions of the owners of the company include electing the company’s directors, enacting the bylaws or other internal rules of procedure, approving annual reports on operations and declaring dividends (amounts to be paid proportionally to the owners out of the company’s annual profits). However, the paying of such dividends, as well as many other financial actions taken by the company and its managers and owners, is usually subject to legal restrictions designed to guard against an impairment of the company’s capital. 14 Because the ownership interests in a limited liability company are not publicly traded, the transfer of those ownership rights can sometimes be difficult and subject to restrictions. As for the issue of termination: limited liability companies typically have perpetual existence but can be wound up voluntarily or in case of bankruptcy. A stock company, like a limited liability company, constitutes a separate legal entity in which each owner’s liability is limited to the amount of his or her ownership interests. Typically, the distinguishing marks of a stock company are: the fact that its shares3 are freely traded among the public and the requirements that its financial statements be disclosed to the public. The corresponding form of business organization in many common law countries is the public corporation. Of all the various forms of business organizations, the stock company (or its common law relative, the publicly-traded corporation) has drawn the most attention in recent years because its growing importance in the economic life of many countries. This form of business organization has been called “the steaming engine of capitalism” featuring the structure of a limited liability company and the ease of movement in and out of ownership. Thus, it permits the accumulation of individual savings for a common business purpose in an amount greater than almost any individual investor can dream of, but at the same time allows any individual investor the freedom of removing his or her ownership interest at will. Many of the attributes of a stock company are similar to those of a limited liability company as described above. A stock company is usually created when the responsible government agency approves it. The officers and directors owe important fiduciary duties to the company and its shareholders. The company normally has perpetual existence, subject to voluntary winding-up or liquidation through bankruptcy proceedings. Termination of a stock company can also come by way of merger into or with another stock company. A key difference between the stock company and the limited liability company is its public nature. Partly because its shares are traded publicly, the stock company has 3 A share is a certificate representing one unit of ownership issued by a stock company. 15 heavy responsibilities of fair disclosure (to the public) of its financial condition and operations. Potential investors require accurate and understandable financial information about the company before they will be willing to invest in it. Another form of business organization that shares some features of limited liability companies and stock companies is the cooperative. The details regarding this type of entity vary greatly from one legal system to another. This type of business organization is used extremely in some countries but very little used in others. For example, in the USA, cooperatives are used mainly in the food and agriculture industries and not so much used in other segments of the economy. In general, a cooperative is a business that is owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. The user-owners, often called members, benefit in two ways from the cooperative, in proportion to the use they make of it. First, the more they use the cooperative, the more services they receive. Second, earnings from the cooperative are allocated to members based on the amount of business they do with the cooperative. Other features of the cooperatives are depending on specific national laws. 2.1.3. Government Enterprises A government enterprise is one that is owned mainly or exclusively by the state. Such entities appear in most legal systems, although their number and influence vary greatly from one country to another. Their operations can be in the area of finance, trade, industry, agriculture, mining, health, transportation and other sectors of the economy, including electric, water and sanitation services. In some cases they are designed to maximize profits but in most cases their dominant aim is public service – that is, benefiting the country as a whole. The methods of creating such government enterprises vary widely but typically the most important such enterprises are specifically established by legislation. Such legislation will define the character of the enterprise, its aims, financial status, methods of 16 operations, management and so forth. Accompanying such legislation will be legislative or executive action to provide the funding for capitalizing and operating the enterprise. An example of a government enterprise is the country’s central bank. In most countries, the central bank is established as a separate legal entity with a degree of financial and operational independence from the short-term political pressures of government. Directors are appointed by government and their powers and functions are chartered by legislation. 2.1.4. Multinational Enterprises An increasing number of business entities carry out operations internationally. Such business entities are often referred as multinational enterprises. These are the definitions that describe various structures and relationship within multinational enterprises4. type of multinational enterprise Definition national multinational enterprise an enterprise organized around a parent firm incorporated in one country that operates through branches and subsidiaries in other countries international multinational enterprise an enterprise that operates through branches and subsidiaries and that has parent companies in two or more countries parent company a company that acts as the head office for a multi-national enterprise and which owns and controls the enterprise’s subsidiary entities Branch a unit part of a company, not separately 4 Ray August, International Business Law, Ed. Prentice Hall, 2000, p. 159. 17 incorporated Agent an independent person or company with authority to act on behalf of the enterprise representative office an office that interested parties can contact to obtain information about the company but that is not empowered to conduct business for the company holding company a company owned by a parent company to supervise and coordinate the operations of subsidiary companies subsidiary a company that is owned by a parent or a parent’s holding company but which, unlike a branch, is separately incorporated as a legal entity joint venture an association of persons or companies collaborating in a business venture for more than a short or transitory time period These various types of entities are subject to the law of any state in whose territory they operate. To a very limited extent multinational enterprises are also subject to few guidelines of conduct issued by international bodies, but these rules are not legally binding in character. The real people who form business associations have choices as to the business association they may use. How do we select the best business association for a particular business? Factual and legal considerations and also, basic attributes of the business associations are to be taken into account. Factual considerations could be:  nature of the business – what is the nature of the proposed business? Is it a business that is capital intensive, labor intensive etc? 18  name – what will be the name of the business? Does the name has any special meaning to the business? Are there any legal rules that impose certain condition when choosing a name for the business?  participants – is there unanimity of interest among the participants as in the case of a “family” business? Or are their interests diverse as in the case of a money/talent deal? What will be the functions of the various participants? Who will contribute to what to the deal – money, services, property, patent rights etc.?  management – who will manage the business? Who will actively participate? What salaries are to be paid to any of the participants?  funding – how much money will be needed to get the business started? What are the sources of funding? How much money will the business make during its first year of operation? How long will it take for the business to begin showing a profit?  dividing the attributes of ownership – how will be profits divided among participants? If the business fails how will the assets of the business be divided among the participants in the even of liquidation?  exit strategy – how do the participants expect to make money from the business (through salaries, distributions, sale of all or part of their business interest in the business? Is it a selling/buying agreement necessary? Are there plans to go public sometime in the future?5 Historically, selecting the best form of a business association for a particular business involves consideration of relatively clear-cut legal issues. Legal considerations usually are:  limited liability;  taxation (double-taxation – the business association itself pays taxes on the income it earns and the owners of the business pay taxes on the income they receive as dividends, or pass-through taxation – no tax is payable at the business structure level but only at the personal level on dividends); 5 Joseph Shade, Business Associations in a Nutshell, Ed. Thomson West, St. Paul, MN, 2003, pp.26-27. 19  management (centralized/ by representatives or direct management where each owner participates in management);  capitalization and financing – capitalization more flexible in corporations than in partnerships or LLCs;  exit rules – owner’s freedom to transfer interests in the business, the duration of the existence of the business association (at will, for a term, perpetual) and the means by which the owners expect to get their money out of the business (sale, dissolution, dissociation)6. 6 Joseph Shade, Business Associations in a Nutshell, Ed. Thomson West, St. Paul, MN, 2003, pp.28-31. 20 Chapter 3. Business Financing & Accounting Rules 3.1. Business Financing Business entities need financing resources to exist and to function. Routinely, money are needed for purchasing supplies and equipment, paying for office accommodations, paying salaries for employees, taxes, dividends to shareholders, etc. The allocation of financial resources depends on multiple factors such as: the type of business entity, its purpose, the volume and complexity of business operations, etc. However, no matter how “small” or “big” the business is, money is needed in order to finance its activity and make a profit. Financial resources can be obtained using different means that are commonly used such as: bank loans, issuance of stock, bonds, the selling or pledging of accounts receivable, the creation of security interests in movable property, the use of commercial papers, etc. 3.1.1. Stocks and bonds Additional financing for a business can be obtained using equity financing or debt financing. Equity financing is possible when having new investors that want to become owners of a company and they pay for it. The disadvantage of equity financing is that the ownership interest of the original owners is diluted and the company’s identity and goals might suffer, the business becoming somewhat “impersonal” and harder to manage. Stock companies are the ones that could choose equity financing since such companies can issue additional ownership shares quite easily. Thus, additional funds can be raised and used by the company but without any pressure to make payments towards the new owners of stock, since dividends can be paid only if the board of directors decides to. However, there are strict rules applied to issuing additional ownership shares that impose an accurate disclosure of the financial situation of the company in order to attract new investors and raise capital. This is also the reason why standard accounting rules exist. 21 Usually, for large companies, the issuance of ownership shares and the trading of shares take place in stock markets. The activity of stock markets is usually regulated by governmental agencies that impose standard rules and procedures for stock market participants. On the other hand, debt financing resumes at borrowing money that imposes the payment of interest and the repayment of the loan on time in order to maintain a good business and financial reputation. Debt instruments are documents that include written promises to repay money at some future date. They can be short-term, medium-term or long-term in maturity, according to the period at the end of which the money borrowed need to be repaid. The long-term debt instruments (over three years or so) are called bonds. Large companies use bonds for financing their operations. Government agencies are supervising the issuance of the bonds. There are two types of bonds: the ones that are issued nominally, meaning that a particular person’s name appears on the bond (“registered form” bonds), or the ones that can pass from one person to another without any formality, thus, the bearer of the bond owns it (“bearer form” bonds). At the same time, bonds can be “secured”, goods such as land, buildings, machinery being offered as collaterals in case the company does not repay the debt; and “unsecured”, for which collateral is not pledged. Also, bonds can exist in electronic format or in hard format (paper document). The company that issues the bonds can decide on their maturity and interest rate but in such a manner that the bonds will be attractive enough for investors to buy them. 3.1.2. Accounts receivable and security interests A. Compared to large companies that can afford to raise money by using stock and bonds, small companies are not able to do so. Thus, small companies can use accounts receivable to short-term finance their operations. Accounts receivable are amounts of money owed to the company that are not yet paid to it by persons or other 22 business entities that were the beneficiaries of goods or services provided by the company. There two ways in which a company can use its accounts receivable. One is to use the accounts receivables as collateral for getting a bank loan. The company will collect on the accounts receivable to pay the bank. However, the bank will not match the loan with the exact value of the accounts receivable used as collateral since the bank is taking on a risk as well in case that the accounts receivable are not payed. In case the company uses accounts receivable in order to secure a bank loan, then it usually has to notify the public that it will do so, avoiding that other creditors could provide loans for the already pledged accounts receivable. The second method to use accounts receivable in order to obtain money is to sell them. The company can sell the accounts receivable to the bank for cash. Thus, the bank will have the right to collect on the accounts as they come due. In this case, the company will have to notify those who own it money that they have to pay the money to the bank and not to the company any more B. Security interests can also be used to short-term finance business operations. Some of the property of the company, usually movable, is used as collateral for securing a bank loan. In this case, the law is ensuring that these “secured transactions” (or secured lending) provide the debtor with the right to enjoy the use of its movable property, keeping it into productive use and also provide the creditor with effective and efficient means of taking control of that property if the debtor defaults on the loan. Today, the law dealing with the securitized lending usually focus on the concept of “security interest” or “charge” created on movable property by the debtor in favor of the lender (the secured party) to secure payment of the debt. The security interest is registered at a central registry that is available to the public, allowing potential creditors to know who has higher-priority claims over a debtor’s movable property. The priority of any interest depends on the time of registration, the earliest one having the highest priority over the other creditors. Other means of short-term financing are also available according to the law of many countries. For example, “factoring” (“forfaiting”) refers to a transaction in which a 23 bank guarantees a promissory note7 issued by a buyer. This type of financing is used in international sale of goods when the buyer and the seller do not know each other and the seller wants to reduce the risk of non-payment from the buyer. If the buyer fails to pay then the bank will pay. However, because of the potential risk involved, the bank will buy the promissory note issued by the buyer from the seller at a discount. Also, “acceptances” can be used for short-term financing. An acceptance is in fact a promise made by the drawee of a draft or bill of exchange that the instrument of payment will be honored at maturity. Acceptances could be bank’s acceptances or trade acceptances. A bank’s acceptance could be used by a seller (i.e. exporter of goods) because the seller gets paid cash immediately, the bank providing an “acceptance” and endorsing the debt. A “trade acceptance” is similarly used, except that the entity providing the money is not a bank but a merchant. Another way of short-term financing business operation comes from the work of venture capital companies and leasing companies. National laws that vary greatly deal with this type of entities so, generalization about their specific operations is hard to do. However, a venture capital company will provide debt or equity financing for other business entities, usually early in their existence or when they expand their operations. Similarly, a leasing company helps a business entity to obtain the use of equipment without purchasing it outright. Thus, the business entity remains with more cash while using the equipment. 3.1.3. Commercial Papers Financing National laws on commercial papers are complex and they do not always use the same terms in defining commercial instruments; that is promissory notes and bills of exchange. Their following definitions are consistent with the most international usage. 7 See the explanation in the paragraph bellow. 24 A promissory note is a written, dated and signed payment instrument between two parties containing an unconditional promise by a maker to pay a specified some of money to a payee on demand or at a specified future date. A bill of exchange is a written, dated and signed payment instrument between three parties containing an unconditional order by a drawer that directs a drawee to pay a definite sum of money to a payee on demand or at a specified future date. There are several types of bills of exchange. The most common one is the check that is issued by a person (the drawer) who has money on deposit in a bank and it used to direct the bank (the drawee) to make to payment to the person presenting the check (the payee). Also, another alternative could be that the payee could take the check to the bank where he/she has a deposit and ask for a transfer from the drawer’s bank account to the payee bank account. The use of bills of exchange is governed by a set of rules that has been developed throughout centuries. In the seventeenth century a set of international rules called Lex Mercatoria (mercantile law or commercial law) was applied in Europe. However, little by little, with the rise of independent state-nations in Europe, national rules have been developed. Thus, the need for uniform and updated international rules determined the creation and enforcement of new international rules meant to facilitate finance in the business sector. As a result, in the beginning of the twentieth century three treaties were created: the Uniform Law on Bills of Exchange and Promissory Notes (1930) and two more were concerning the Uniform Law on Checks (1931). These rules were adopted by most European countries. Among other conventions concerning finance and trade, in 1988, the United Nations (UN) Commission on International Trade Law (UNCITRAL) has finalized a new treaty called the Convention on International Bills of Exchange and Promissory Notes. The treaty does not apply to checks and it did not enter into force, yet. One of the most recent UN treaties states rules for security interests, namely, the Convention on the Assignment of Receivables in International Trade (2001)8. The UN Convention is insisting on promissory notes as commercial instruments that can be used for short-term financing the operations of a business entity. Thus, a 8 For more information, see www.uncitral.org. 25 promissory note has to have certain attributes in order to be used properly and produce the desired effects. It is essential that the promissory note is transferable from one person to another. In other words, the promissory note is negotiable for its value. Thus, the promissory note can be almost used like currency. The key elements of a promissory note are:  that it be in writing  that it be payable to order or to bearer  that it contains the term “promissory note”  that it states the place where drawn  that it states the place where payable  that it be dated  that it states un unconditional promise or order to pay  that it states definite sum of money  that it be payable at demand or at a definite time; and  that it be signed by the maker. International Promissory Note (UNCITRAL Convention) (date)_______ €__________ (place)______ (number of days, e.g., 90) days after the above sate, for value received, the undersigned maker promises to pay this promissory note to the order of (name of payee) at (place), the amount of (amount in words), with interest thereon from the date above at the rate of (percent) per annum payable at maturity. Maker_____________ 3.2. Accounting Rules 26 Reliable, accurate information on costs and values in needed when making a business decision. In the context of business organizations, accounting standards and practices have been developed to help provide this information. Over centuries, business activities and structure of business organizations have become very complex, hence the need for extensive and complicated rules. Accounting rules differ from country to country. However, there are some key concepts, principles and practices that are straightforward and used by most countries around the word. The International Accounting Standards Board works towards harmonizing accounting around the world. The history of the modern, uniform accounting rules usually begins with Italy, where in 1494, Luca Pacioli was the first person to publish a work on double-entry bookkeeping. This was triggered by the rise of the large merchant companies with many investors that needed accurate information about the assets and the liabilities of these companies. The same happened in the Northern Europe, in the 17th and 18th century. Also, in 1673, in France, an ordinance was given forcing merchants to follow orderly record-keeping norms. Later, in the 19th century, legislation was created to protect shareholders in corporations. Also, more complex methods were used to assign values to property, including calculations to reflect the declining market value of assets over time (depreciation) and fluctuations in the value and number of goods held by a company awaiting further processing or sale. These developments were caused by the need for “uniformity” in accounting practices. However, the term “uniformity” can have more than one meaning. Thus, it can mean that all business should use the same form of accounts (chart of accounts). In this case, we are referring to “format uniformity”, every particular kind of payment must appear on the financial records of every company exactly the same way. Also, uniformity can refer to the methods used. “Method uniformity” would require for example that all business organizations use the same method for recording the value of unsold goods. Most business managers argue against the two types of uniformity, sustaining the freedom of using the format and method in accountings of their own choice as long these are reasonable in their particular type of operations. 27 At the same time, there is a “uniformity over time” in accountings that is widely accepted. A business organization should use the same method every year for recording its economic activities. If it changes the method it should explain the difference and how it affects the relevant financial records and documents. A. Dispositive requirements and disclosure requirements Governments have imposed two types of regulatory requirements: dispositive requirements and disclosure requirements. Dispositive requirements impose that a company to take or to refrain from taking a particular kind of action if a certain financial situation exists. For example, a company may be prohibited from paying a dividend to its shareholders unless its assets or earnings exceed a stated amount; or a company may be forced to declare bankruptcy if its assets falls below the level of its liabilities. Disclosure requirements obligate the managers of a company to report periodically to its owners or to their representatives. These reports enable the owners of the company (like the shareholders, for example) to make collective decisions about the management of the company or individual decisions regarding their interests in the company. These reports are also read by government representative, potential investors, workers etc. The more detailed these reports need to be, the more complex the accountings rules become for companies that reach a certain specified size and or whose shares are publicly traded in comparison with partnerships or single proprietorships. A common rule regarding disclosure imposes the issuance of an annual report regarding the financial situation of the company. B. Key accounting standards Four main standards are required to be maintained in accounting:  the double-entry system  objectivity  the going-concern assumption  inter-period consistency. 28 The double-entry system of accounting derives from the mechanism that has been developed for keeping track of transactions and values in the context of the following equation: Assets (economic resources: cash, merchandise, lend, etc.) = Liabilities (amounts owned by the enterprise to its creditors, including taxes owed to the government) + Ownership Equity (capitol stock, reserves & provisions, retained earnings) or Assets – Liabilities = Net Worth (the amount of equity that the owners have in the business). The standard of objectivity is used when assigning values. The movement of specific amounts of money from one account to the others has to be reflected with accuracy. The going-concern assumption means that in valuing assets and liabilities for purposes of an accurate financial report, it should be assumed that the business entity will continue its operation. If the company faces bankruptcy then this assumption disappears. The standard of inter-period consistency imposes that a business entity should use the same principles and approaches in its bookkeeping and preparation of financial statements in one year as in previous years. Thus, it will be easy to make comparisons between years regarding performance and the financial situation of a business entity. C. The Balance Sheet and the Income Statement The two key financial accounting documents in most systems are the balance sheet and the income statement (profit-and-loss-statement). The balance sheet presents a picture of the financial condition of the business entity, usually at the end of a financial year. Basically, it reflects the equation: Assets = Liabilities + Ownership Equity. The income statement provides an overview of the main categories of expenditures and revenues during a specified period. It reflects the changes that have been taken place within the period to which it refers, usually a one year period. The income statement presents the capacity of a business entity to produce earnings and dividends, which is crucial for long-terms investors. 29 Apart from these two important financial documents, there are prepared and sometimes even required other documents such as the statement of owner’s equity and the statement of cash flow. The statement of owner’s equity summarizes the changes that take place in the Ownership Equity accounts during a certain period of time (one year). The statement of cash flow details the changes in the cash flow during a particular period. These documents will contain additional information about the financial operations of a business entity especially if it is engaged in transactions involving more than one national currency. Also, explanations could concern, for example, the methods used for calculating the amount of depreciation or the value of inventories. 30 Chapter 4. Competition Law 4.1. The Goal of Promoting Competition The term “competition law” refers to law and regulations designed to ensure an adequate degree of competition among business entities operating in an economy. Competition is considered a good thing because it will require producers of goods and services to strive to satisfy customer desires at the lowest price with the use of the fewest resources. Hence the key aim of competition law is to promote competition at the market level. The precise method of achieving the aim of promoting competition varies from one national legal system to the next. Sometimes, a nation adopts rules regarding competition via both national and international legislation. For example, all members of the European Union have national competition laws that operate alongside the EU’s overall competition legal rules. Member states that did not have their own national competition laws drafted new ones based upon EU rules and regulations, whereas member states that did already have their own national competition laws simply amended their laws in order to integrate the EU’s laws. 4.2. Issues Addressed by Competition Law Avoiding the specific details of various national laws around the world in this regard, here is a fairly comprehensive list of the types of behaviors that competition laws might prohibit or restrict:  monopolies  market allocation  price fixing  resale price maintenance  group boycotts  tying arrangements  mergers 31 A monopoly has been defined as “a business entity that deliberately engages in conduct to obtain or maintain the power to control prices or exclude competition in some part of trade or commerce” 9. A business entity that it is the only one operating in a particular market is obviously a monopoly (or “has a monopoly” in the market). However, even if there are several business entities in a particular market, one of them can still in fact have a monopoly as the other entities lack the power to influence overall prices or output in the market. In contrast to a monopoly, a competitive system includes many business entities, each producing the same goods or providing the same services, with none of the business entities individually possessing the power to control overall prices and output. Determining whether or not a monopoly exists requires a definition of the relevant market. Usually, a market is defined both in terms of geography and in terms of product. For instance, assume the following hypothetical facts: 1. a business entity named Handle, Inc., located in Detroit, Michigan manufactures household-sized diesel-powered electrical generators and sells them throughout Canada and the USA; 2. there are other manufacturers of electrical generators located in Canada, but none of them makes household-size models; 3. there are other manufacturers of house-hold sized generators in the USA, but only in the southeast part of the country and the cost of transporting those products to Canada is prohibitively expensive. On these facts, it would appear that Handle, Inc. has a monopoly in the Canada for household sized diesel-powered electrical generators. It does not have monopoly in terms of producing electrical generators in general, nor does it have a monopoly in any product in all of the USA. But it does have a monopoly in its own particular geographical and product market. Although it might be argued that monopolies are not necessarily bad, the more widely accepted view is that, with certain exceptions, monopolies are bad because a company enjoying a monopoly can raise the price of goods and services at will, without 9 Douglas Whitman and John William Gergacz, The Legal and Social Environment of Business, McGraw- Hill Publ., New York, 1994, p.671. 32 the discipline imposed by competition. Therefore, competition laws often give special scrutiny to monopolies, prohibiting them in most circumstances. They are not prohibited however, in businesses that are considered “natural monopolies” (such as utilities companies) or in cases where control over some type of property or operation serves other important purposes. For example, copyrights and patent rights permit persons to exercise monopoly rights over the production of certain types of products, but such monopolies are considered justified in order to encourage persons to be creative, by promoting, for a limited period of time, their right to exclusively use the fruits of their creativity. In addition to monopolies, competition law often prohibits or restricts various other types of conduct having the effect of placing restraints on competition. For example, an agreement among ten companies to create horizontal market division (each company would only sell products in a particular specified territory) would often be prohibited by competition laws. In the EU, such an agreement is prohibited, as are vertical agreements (agreement under which a producer grants a distributor the exclusive right to distribute its products solely in a certain nation, region or territory). Likewise, a price fixing arrangement among several business entities under which they all agreed not to change less than a specific price for a particular product, would often be prohibited. A resale price maintenance arrangement represents a special type of price fixing, in which a single manufacturer and a retail seller agree to set either the maximum price or the minimum price at which commodity may be resold. The problem with such an arrangement is that it prevents the competition between retailers. For instance, if a television manufacturer required all television sets to be sold at no more than a certain price, every retailer will be forced to sell the television sets at a price somewhere between the wholesale price and the maximum price. This would probably lead to very little competition at the retail level10. If a business entity collaborates with another in order to refuse to deal with a third business entity, this is called a group boycott. Some competition laws prohibit such behavior. For example, a group boycott exists when for manufacturers of chairs, desiring 10 Ibidem, p.688. 33 to eliminate competition from Company X (another manufacturer of chairs) informed all of their customers (the various small retail companies purchasing chairs from them) that if they buy chairs from Company X, the first four manufacturers would stop selling chairs to them. Similar in concept to a group boycott is a tying arrangement, in which a seller asks a buyer to purchase certain goods from the seller in addition to those that the buyer really wants. In some countries, competition laws qualify such an arrangement as illegal. Mergers are usually allowed by law. The merger itself is a way of creating and organizing a new business entity that evolves from the union (combination) of two or more separate business entities. However, often the competition law forbids such mergers. The reason for it is that a merger can reduce competition, even creating a monopoly, when two or more business entities become one single entity. Mergers can take many forms. A horizontal merger involves a merger between two companies that formally competed with each other in the same product or geographic market. A vertical mergers involves a combination between a customer (or several customers) and a supplier. For example, if Handle Inc. referred to above, purchased (and in that way merged with) all the other manufacturers of household-sized diesel-powered electrical generators in the USA, it would be a horizontal merger. If Handle Inc. purchased all the retailers involved in selling such generators and the wiring used in installing them, it would be a vertical merger. Under some competition laws, both types of mergers would be scrutinized by government agencies responsible for fighting against anticompetitive behavior. By prohibiting or reducing anticompetitive behavior, legal systems aim at promoting competition and forbidding businesses from getting into a position or using that position in such a way that will work to the detriment of customers. Some laws have been criticized by companies and governments for their extraterritorial application (application outside the national territory of a state). The USA legislation falls into this category. 34 Chapter 5. Bankruptcy 5.1. Aim of Bankruptcy Law Bankruptcy law provides a mechanism for dealing with a business entity that is experiencing severe financial difficulties. According to one author „bankruptcy law has two major purposes: to give the debtor a fresh start and to provide equal treatment to creditors with the same types of claims” 11. However, beyond these general features, the specific rules on bankruptcy can vary significantly from one legal system to another. They can also vary within one legal system depending on the character of the person or entity that is bankrupt. For example, banks are often subject to different rules from those applicable to other business entities because of the special role the banks play in a country’s economy. 5.2. Common Themes and Concepts Despite the diversity in laws around the world, a few general observations can be made regarding bankruptcy. These relate to: 1. the situation that can trigger the commencement of bankruptcy proceedings; 2. the immediate effects of commencing such proceedings; 3. the difference between bankruptcies culminating in liquidation and those designed to reorganize a business entity; 4. the mechanism by which a bankrupt debtor’s assets are seized, sold and distributed in a liquidation proceedings; 5. the role of a „conservator” in a business organization. Commencement of bankruptcy proceedings typically can be triggered by a debtor voluntary, or by one or more creditors. Usually bankruptcy takes place only if a debtor is insolvent. Insolvency may be defined in various ways but a definition typically includes 11 George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ., 1994, p.379. 35 both: a situation in which the debtor’s liabilities exceed the debtor’s assets and a situation in which the debtor is not able to pay debts as they come due. Once bankruptcy proceedings have been initiated, creditors are usually prohibited from taking any further steps to collect outstanding claims against the debtor. The key questions relating to such a restraint, sometimes referred to as an „automatic stay” are: when does the automatic stay become effective, what is covered by the automatic stay, when does the automatic stay end and how a creditor obtains relief from the stay. In different legal systems, the answers to these questions are somewhat different. 1. Bankruptcy can lead to a liquidation proceeding, as the last phase of bankruptcy proceedings. It typically involves the appointment of a person to prepare an inventory of the debtor’s assets, take control over those assets (subject to certain exceptions for personal property), sell the seized assets and then distribute the proceeds to the creditors. In some legal systems, including Romania, the person in charge of bankruptcy proceeding, including liquidation, is a judge. In most cases, there will not be adequate proceeds to pay all creditors in full. At that point the issue of priority arises. Some creditors’ claims are given priority over others. For example, a creditor to whom specific property has been pledged as collateral for a loan will in most cases have priority over any other creditor in respect of the proceeds from the sale of that specific property. Likewise, priority is often given to a person or entity that extends credit or provides goods and services to keep a business entity in operation just following the initiation of bankruptcy. When several creditors having the same priority cannot all be paid in full, the law typically provides for pro rata payments. At the end of the liquidation phase, the debtor will be discharged (excused) from any further liability on the debts involved in the bankruptcy proceeding, with some important exceptions. These usually include taxes and fines due to the government, or liability for money obtained by fraud or false pretenses, or liability to creditors whom the debtor intentionally failed to inform of the bankruptcy proceeding. 36 2. Bankruptcy might also lead to a different outcome in the case of a debtor business: reorganization of the business enterprise. “Whereas liquidation is similar to a death, reorganization is similar to a rehabilitation or a resurrection” 12. The aim in such a case is to overcome a temporary and curable financial problem by imposing a temporary suspension of debt obligations while the business is being reorganized in a way that will permit it to return to financial health and then pay off those obligations in full. It is believed that this would also be less disruptive to the economy (especially the local one where business operates where its worker live) than a liquidation. In some legal systems, reorganization is done following a reorganization plan that has to be approved first by the owners of the business entities and second by the person in charge of the legal proceedings. Thus, sometimes reorganization will take place under the supervision of business entity’s own (pre-bankruptcy) managers that will remain in control of the company’s operations. In other cases, the bankruptcy law will require the appointment of a “conservator”, a person who will be responsible for turning around the fortunes of the business entity within a prescribed period of time. If those efforts fail, in many cases the business then will face liquidation as described above. 5.3. Cross-Border Insolvency International bankruptcy, sometimes called cross-border insolvency, has become a more important issue as businesses have become increasingly multinational. For example, in Europe nations may follow two different models of law when dealing with a multinational business’ cross-border insolvency: the territorial model and the universal model. According to the territorial model, in each nation the debtor has assets, that particular nation handles the insolvency according to its own law. The insolvency proceedings only concern the assets within the nation’s territory. Furthermore, only creditors from that nation may participate in the proceedings. The disadvantage of this 12 John W. Head, General Principles of Business and Economic Law, Ed. Carolina Academic Press, Durham, NC, 2008, p. 43. 37 model is that there can be many insolvency proceedings occurring simultaneously in every different nation where the debtor operated his or her business 13. In contrast, the universal model provides that a single insolvency proceeding is held in the debtor’s „home” nation. The same insolvency law applies to both procedural and substantive issues. The proceeding concern all debtor’s assets and activities from every nation in which the debtor operated his or her business and all creditors, both national and foreign, may participate. However, the disadvantage of this model is that foreign creditors and nations are forced to reorganize the „home” nation’s final judgment and settlement of the debtor’s insolvency. Sometimes, these two models can be combined, creating what is known as „modified universalism”. Modified universalism accepts the central premise of universalism, that assets should be collected and distributed on a worldwide basis, but reserves to local courts discretion to evaluate the fairness of the home-country procedures and to protect the interests of local creditors. When the local court decides to defer, deference may be general and unconditional or may be limited and conditioned upon certain developments in the bankruptcy case. Once the local court has determined to defer, however, substantial local assets may be turned over to the home-country court, or placed at its disposal and local creditors may be dispatched to the home-country court to pursue their claims and resolve disputes. 13 Miguel Virgos and Francisco Garcimartin, The European Insolvency Regulation: Law and Practice, Kluwer Law International Publ., The Hague, Netherlands, 2004, p. 11. 38 Chapter 6. Protection of Intellectual Property Rights 6.1. Intellectual Property Rights The term “intellectual property” refers to certain types of knowledge, expressions of ideas or other creations that can be ascribed to a particular person or entity. In many countries, legal protection is provided for at least three types of intellectual property. Patent law protects inventions, trademark law protects brand names and designs and copyright law protects writings, including films, recordings, etc. The first two of these (inventions and brands of names and designs) constitute “industrial property” and the third one (writings) constitutes “artistic property”. In addition, legal protection is sometimes provided for other types of intellectual property, including in particular industrial models and designs, trade secrets and “know-how”, the layout (topography) of integrated circuits, a famous individual’s “personality”, certain types of biological technology and internet and electronic commerce technology14. Regarding these cases, the fundamental purpose of the legal rules is to protect the results of innovation and creation, usually by providing a monopoly to the creator or owner of the right. This is meant to prevent the others from using and/or producing the protected item. Although multinational treaties have emerged in this area, most intellectual property law is essentially national law. Thus, the international efforts in the field of intellectual property have been undertaken to coordinate various national law provisions. 6.2. Patents Let us assume that after many years of research you have invented a special piece of equipment that involves the passing of electrical current through a very thin wire inside a sealed glass enclosure. The wire glows, creating light. In other words, you have 14 Gregory G. Letterman, The Basics of Intellectual Property Law, Hotei Publishing, Leiden, Netherlands, 2001, p. vii. 39 invented a light bulb. It might occur to you to “protect” your invention, in other one or two different ways. First, you may wish to prevent other people from copying it and selling it, thereby enjoying financial rewards from work that you (not them) have done. Alternatively, you may wish to prevent other people from knowing about your invention at all because you want to use it as a component of a larger product or process. Thus, you wanted for it to remain a secret. This example illustrates the difference between an invention and “industrial know-how” and therefore different types of legal protection that might be afforded to each. What is essential to know is that the invention of the light bulb could be protected as a legal matter under either patent or trade secret laws, but not both. Under the rules most widely applicable around the world, a patent is a right granted to the inventor of a technological product or process that is new, useful and “non-obvious”15. On the other hand, a trade secret is any information that provides a person with a competitive advantage so long as it remains a secret 16. In many countries, patent protection is provided by national legislation and various international conventions. In comparison, trade secrets protection varies widely from country to country and very little international law exists on the topic. However, trade secrets protection is much easier to acquire than patent protection but its disadvantage is that trade protection is less comprehensive than patent protection. For this reason and many other commercial reasons, creators usually choose to patent their inventions rather than to keep them secret. Each of the three required features of a patent is important. The product or process must be new or novel, in the sense that it has not already been invented, disclosed or described by someone else. Questions often arise on this point. For example, how much difference must there be between a particular type of light bulb that has already 15 A scientific discovery regarded as invention has to present some features that are established by law. These are the novelty, the usefulness and the „non-obvious”, meaning that the discovery must not be just a simple demonstration of an obvious physical, chemical, biological process but it has to bring something not noticed before. 16 Roger D. Blair and Thomas F. Cotter, Intellectual Property: Economic and Legal Dimensions of Rights and Remedies, Cambridge University Press, N.Y., USA, 2005, p.7. 40 been invented and patented and a new type of light bulb, in order to warrant protection? National legislations on patent protection provide definitions to answer such questions. Also, national laws establish standards on how useful an invention has to be in order to be granted patent rights. Although it might be assumed that some commercial use could be found to almost any invention, some of them might not have an immediate use. Typically, mere speculations about some possible utility in the future will not be sufficient to obtain patent protection. A common rule is that an invention cannot be patented if it is just a curiosity with no real benefit. Thus, under this rule is not possible to obtain patent rights for illegal, immoral and dangerous items. An invention must also be “non-obvious” in order to obtain patent protection. This means that the new product or process is not simply an elementary or apparent improvement over an existing product or process. Once a patent has been granted, the patentee typically will enjoy for a prescribed period of time an exclusive right to make use or sell the invention. In some countries, this includes the right to refrain from using the invention. In many countries, however, the inventor is obligated to “work” the patent. If the inventor does not do that, he can be required to grant compulsory license to others who wish to exploit the invention. The reasons for granting patent rights could be related to commercial customs or to prevention of “free-riding” and preserving an economic incentive to create. The “free- riding” issue refers to the risks taken by a person to create, disclose, commercialize new inventions. Persons spending time and money to create an invention need to be financially compensated for their efforts. However, since many legal systems reflect the belief that monopolies can bring economic harm to society, patent rights typically are limited to a specified number of years. After that period of time has run, the patent enters “public domain”, which means that anyone else then has the right to make, use, or sell the invention. A key multilateral agreement relating to patents is the Paris Convention for the Protection of Industrial Property. The treaty entered into force in 1884 and it was revised in 1967. It provides that an inventor from one member country will receive national treatment that is the same treatment that a citizen of that country receives. Moreover, the treaty also grants certain procedural advantages, including special filing priority (one 41 year) to an inventor from one member country intending to apply for a patent in another country. This is an important procedural right because in many countries the simple act of filing an application publicizes the invention, making it ineligible for patent protection in other countries that require absolute novelty of an invention (including lack of publication) in order to receive a patent. In Europe, the European Patent Convention allows applicants for patents to choose to be examined by a central authority that makes a decision on patentability and issues an European patent. However, it is still necessary to register formally for a separate patent in each EU member country. Also, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs Agreement) negotiated by World Trade Organization members in 1993 incorporates some of the rules of the Paris Convention as well as some other treaties regarding trademarks and copyright. Most countries in the world have accepted this treaty. 6.3. Trademarks A trademark is a sign, mark, or design that is used on or in connection with the marketing of a product or service in order to distinguish the owner’s product or service from those of other persons. Under typical intellectual property rules, no person other than the trademark owner may use the protected trademark or any similar mark in a way that would tend to confuse the public. It is believed that a trademark has traditionally performed four main functions:  it distinguishes the products of one enterprise from the products of another one, thus helping a consumer to identify a product that was already known to him or her;  it refers to a particular quality of products for which the trademark is used; 42  it relates to a particular product to a producer, thus indicating the origin of the product;  it promotes the marketing and sale of products. Thus, trademark law provides two types of protection. First, it can protect the trademark owner from “trademark dilution” or losing the benefit of goodwill17 that he has been able to build up in the minds of the consumers who recognize his products through quality and advertising. Second, trademark law can also protect the public from “consumer confusion” resulted when one business uses the same mark or design that another well-known business has already developed and used to distinguish its products on the market. The sign, mark, or design constituting the trademark may consist of one or more distinctive words, letters, numbers, pictures, drawings, or distinctive form (for example the shape of the Coca-Cola bottle). In certain cases and in certain countries, even a specific color can constitute trademark, or at least its use can be protected as constituting a key feature of a trademark. In order to register a trademark, and thus gaining legal protection for its use, a business needs to prove that it is already using the trademark in commerce. This requirement is consistent with the theory that a trademark is already recognizable by the consumers. However, in some countries (like the USA) it is also possible to register a trademark simply by demonstrating an intention to use it in the future in marketing a product. The international protection of trademarks is enforced by the Madrid Agreement Concerning the International Registration of Marks and its Additional Protocol. The agreement, entered into force in 1891 and updated over the years, grants automatic registration of a trademark in all member countries once the trademark is registered in the country of origin. Under the Madrid Agreement, the owner of a home country trademark may file an international application with its national trademark office designating those other member countries in which extension of protection is desired. The international 17 Goodwill (fond de comerţ) refers to everything that a business uses in order to function: different types of goods, exclusive rights to use trademarks, brands, designs, its clients and its public image etc. 43 application is then forwarded to the World Intellectual Property Organization 18, which issues an international registration for the mark and forwards the application to the designated countries. Under the Madrid Protocol, adopted in 1989, this international registration procedure could be started as soon as a home country application (as opposed to a home country registration) is made. The Paris Convention, discussed above, also provides certain procedural advantages (a filing priority of six months) in respect of trademark protection. TRIPs Agreement provides some rules for trademark legal protection, as well. 6.4. Copyright In very general terms, the protection of “copyright” applies to writings. In most countries, copyright protection extends beyond mere writings to include all original works – literary, dramatic, musical or artistic – that are fixed in any tangible means of expression. Copyright protection is often extended, for example, to a sculpture, videotape, recorded choreography and computer programs. There are two fundamental reasons for the existence of copyright law: expression and originality. The concept of expression means that only ideas as they are expressed are copyrightable. Another way of describing this principle is that ideas in and of themselves are not protectable under copyright law. The concept of originality means that the work must have originated with the author. The author could not have copied it from another. Once granted, copyright protects authors and artists against the unauthorized copyright or reproduction of their creative expression. The protection afforded by copyright is typically longer than that given by patents – often for the life of the author or artist plus some number of years after his death. However, throughout the life of the copyright exceptions typically are made from the prohibition on copying. For example, 18 WIPO was established by a 1967 treaty and became a Specialized Agency of the United Nations in 1974. Its activities center on facilitating the registration of intellectual property rights, the progressive development of intellectual property law, and the resolving of disputes among states that are parties to intellectual property treaties. 44 the right of “fair use” often permits portions of otherwise copyrighted works to be used for instruction purposes. Computer technology has made it possible to transform expressive works into electronic form, which has in turn made it possible to reproduce those works easily and inexpensively. This development gives more urgency to the question: how should the benefits available to society from the easy distribution of information and culture be balanced against the interests of copyright holders who fear loss of control over their expressive works? There are different theoretical approaches when trying to answer this question. According to one source, “copyright exists to reward creators for their work and disclosing them to the public and to foster cultural sensitivity and identity” 19. A somewhat different theoretical approach (emphasized more in the European law) rests on the notion of “moral rights” that authors or artists are viewed as having in their works. Such moral rights, which are thought to be inalienable, include the right to prevent a mutilation or other abuse of the work that would disparage the reputation of the author. At the international level, the Berne Convention for the Protection of Literary and Artistic Works (1886) is one of the treaties that govern copyright. The Berne Convention, which refers to “moral rights” guarantees national treatment and sets some minimum standards for copyright protection among its member countries. The Convention establishes three key principles:  The national treatment principle – works originating in one member country (to the Convention) must be given the same protection in each of the other member countries as they grant to the works of their own nationals;  The principle of automatic protection – the protection mentioned above must not be conditional upon compliance with any formalities; 19 Melvin Simensky, Lanning G. Bryer and Neil J. Wilkof, Intellectual Property in the Global Marketplace, vol. I, John Wiley & Sons Publishing, N.Y., USA, 1999, p. 0.7. 45  The principle of independence of protection – the protection mentioned above is independent of the existence of protection in the country of origin of the work. As in the case of patent and trademark, copyright protection at the international level is affected by the TRIPs Agreement. Thus, even those countries that had not acceded to Berne Convention earlier are now subject to some of its key provisions. 46 Chapter 7. Product Liability and Consumer Protection 7.1. Product Liability A legal topic of growing importance to business entities concerns their liability for injuries resulting from the use of products they manufacture and sell. Assume, for example, that a company operating out of Mumbai manufactures televisions for sale in Africa, Japan, Europe and USA. If several of those televisions are defective and explode, causing serious injury to the persons who ultimately purchased and used the televisions, can the Mumbai-based company be judged liable for those injuries and be required to pay damages? The answer differs from one legal system to another. In Europe and in the USA, the answer is almost surely yes – the company could face enormous financial liability. The trend in many countries around the world over the past few decades has been toward providing more and more protection to consumers by placing more and more liability on the manufacturers or sellers of consumer products. Traditionally, these issues were typically handled under normal rules of the law of obligations, divided in some systems, especially common-law ones, between contract obligation and tort20 obligations. Under contract obligations law, the predominant rule was stated in the Latin phrase caveat emptor, which means “let the buyer beware!”. In other words, the seller of goods generally was not liable for any problems in the goods, or injury caused, unless a specific provision in the contract imposed that liability on the seller. Instead, the buyer was responsible for inspecting the goods for defects or for suitability to the purpose that he had in mind for those goods. Today things changed almost completely in some countries, like the USA for example, where the rule might more accurately be described as caveat vendor – “let the seller beware!”. Other countries have witnessed similar developments. 20 The term “tort” as used in common law countries may be defined generally as a wrongful act, outside the context of a contractual relationship, by which one person causes some injury to another person, thereby triggering an obligation to compensate the injured person. The notion of tort is closely related to the notion of delict as used in many civil law countries. 47 Under tort obligations, in most legal systems people have a duty to exercise ordinary care in conducting their affairs, so as to avoid undue injury or damage to other people or their property. If, through negligence, a person violates that duty, commits a tort, then compensation is due. In other words, persons are held liable for the results of their carelessness and disregard of the health, safety, or property of others. On that basis, if a

Business Law Course 2024-2025 PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue