03 (CLASS SLIDES) MARKET ENTRY STRATEGIES.pdf

BLAW511 INTERNATIONAL BUSINESS LAW AND ETHICS Spring 2024 SESSION 3 MARKET ENTRY STRATEGIES FOR INTERNATIONAL BUSINESS 1 MARKET ENTRY STRATEGIES: LEGAL FORMS FOR DOING INTERNATIONAL BUSINESS  LEGAL FORMS FOR OPERATING A BUSINESS  Business vehicles are created by...

BLAW511 INTERNATIONAL BUSINESS LAW AND ETHICS Spring 2024 SESSION 3 MARKET ENTRY STRATEGIES FOR INTERNATIONAL BUSINESS 1 MARKET ENTRY STRATEGIES: LEGAL FORMS FOR DOING INTERNATIONAL BUSINESS  LEGAL FORMS FOR OPERATING A BUSINESS  Business vehicles are created by law.  Different business vehicles have different legal forms. INTRODUCTION  Each legal form has different legal rules/consequences for:  management  liability (e.g. for debts of the business)  tax  right to share in the profits of the business 4  BUSINESS VEHICLES Legal forms for conducting business - 2 main types: INTRODUCTION 1. INCORPORATED entities (companies/corporations)  separate legal personality: i.e. a ‘legal person’ separate from the individuals who own/operate them  to incorporate = to form/create a company How is a company usually created (incorporated) under national laws? 5  BUSINESS VEHICLES cont’d 2. UNINCORPORATED entities – e.g.  sole traders INTRODUCTION  agents  partnerships are not legal persons separate from the individual owners or operators of the business. The individuals who own/operate these business are liable (legally responsible) for the acts of the business. 6 2 UNINCORPORATED BUSINESS FORMS  SOLE TRADER Simplest way to run a business: a single person operates a business in his/her own name or under a registered trade name. UNINCORPORATED FORMS Management The same person owns and manages the business. Liability Sole and unlimited personal liability for debts and other legal claims against the business (contract, tort, etc). Tax Business income is treated as the individual’s (personal) taxable income. Regulatory (public law) requirements Minimal e.g. register a business name. 8  AGENCY Agent acts on behalf of and subject to the control of the principal. Legal form UNINCORPORATED FORMS Agency relationship created by contract (e.g. agency agreement) or implied from the circumstances. Management The principal authorises the agent to do certain acts but the agent is (usually) free to choose the manner of performing. Liability Principal is liable for acts of the agent only if they are within the scope of the authority granted by principal. Otherwise, agent is personally liable for loss or damage caused by his/her acts. 9  PARTNERSHIP 2 or more parties (individuals or companies) working in a common venture for profit. UNINCORPORATED FORMS Regulatory (public law) requirements  No formal steps (usually)  Partnerships usually created by agreement (e.g. partnership agreement)  A partnership is the ‘default business form’ implied by law (if no specific business vehicle is adopted). 10  PARTNERSHIP cont’d Management Partners have equal rights to manage the business UNINCORPORATED FORMS (unless they agree otherwise). Legal form A partnership is not a legal person, but a group of individuals working together. Tax Partners are treated as individuals for tax purposes: profits and losses of the business flow through directly to the partners. 11  PARTNERSHIP cont’d Liability UNINCORPORATED FORMS  Partners have unlimited personal liability for the debts and other liabilities of the business.  Partners have joint and several liability - each partner is jointly (with the other partners) AND individually liable for the total debt. Thus, one partner will have to pay the whole debt if the other partners do not pay their share. 12 3 INCORPORATED BUSINESS FORMS  INCORPORATED BUSINESS FORMS Some form of incorporated limited liability business vehicle exists in most countries - e.g. INCORPORATED FORMS 1. In US: limited liability company (LLC) for small business owners (alternative to sole trader):  limited liability for owners who contribute funds and work in the business  BUT owners treated as individuals for tax purposes – business profits and losses flow through to individuals. 14  INCORPORATED BUSINESS FORMS 2. Social enterprise companies Many countries have ‘social entrepreneurship’ vehicles INCORPORATED FORMS (for-profit or not-for-profit) with tax benefits - e.g. US: benefit corporation (B-corporation) UK: community interest company (CIC) 15  COMPANY Most common legal form for doing business - created by statute under national laws. INCORPORATED FORMS Legal form  Investors buy shares (stocks) in a company: each shareholder (stockholder) owns a part of the company (in proportion to the number of shares they hold).  A company is a legal person separate from its owners Regulatory requirements (public law) Can be extensive for companies: e.g. registration and reporting requirements. 16  SHAREHOLDERS ABC Corporation Inc INCORPORATED FORMS Shareholders in ABC Corporation Inc John Smith Sara Schmitt Go Tech Co 30% in ABC Co 40% in ABC Co. 30% in ABC Co Shareholders in Go Tech Co Sam Smith Kate Jones 40% in Go Tech Co 60% in Go Tech Co17  COMPANY cont’d Ownership  A company is owned by shareholders who do not participate in day-to-day management of business INCORPORATED FORMS i.e. ownership is separate from management. (except in small companies where shareholders and directors are often the same people).  Shares (stocks) are units of ownership which grant certain rights to shareholders: 1. voting rights: to appoint directors, approve important decisions/transactions 2. income rights: to receive dividends (i.e. share in profits). 18  COMPANY cont’d Tax Double taxation: INCORPORATED FORMS  the company pays income tax on profits (earnings and losses from the business)  shareholders pay income tax on dividends (paid from profits) Note: in practice, national laws often give tax concessions on dividends tax (e.g. franking credits, tax offsets, etc). 19  COMPANIES cont’d Liability  As a legal person separate from its owners and managers, the company is liable for: INCORPORATED FORMS  the debts of the business;  other claims (e.g. contract or tort) arising from the business operations.  Generally, shareholders and directors are not liable for the company’s debts and other liabilities BUT see slides under Part 5 Shareholder Liability.. 20  COMPANY cont’d Management Company is managed by directors -- usually a board of directors but note differences under national law e.g. INCORPORATED FORMS  Germany: mandatory 2-tiered board structure –  supervisory board elected by shareholders and employees, sets strategic objectives, supervises management board  management board makes day-to-day management decisions, implements strategic objectives of supervisory board.  France: public companies may have either a board of directors OR an executive board / management committee and a shareholders’ council.  China: shareholder decision-making is dominant. 21 4 DIRECTORS  DIRECTORS Appointment Directors are appointed (approved) by shareholders (voting). Also removed by shareholdings (voting). Role DIRECTORS Directors:  make decisions as a board (voting)  are responsible for the day-to-day management of the company and its business  must act in accordance with the company’s constitution and national company (public) laws  on certain matters, they are subject to shareholder control/approval. 23  DIRECTORS AS AGENTS  Directors are agents of the company.  their acts bind the company (e.g. with third parties)  must act within the authority granted to them by DIRECTORS the company:  in the constitution/by-laws, or  by shareholders (voting).  As they are agents of the company, the acts of directors are attributed to the company - hence, the company is liable for the acts of directors (so long as they act within the scope of their authority). 24  DIRECTORS AS AGENTS cont’d Liability Directors are not personally liable if:  they act within the scope of their authority, OR DIRECTORS  shareholders ratify (approve/authorise) their actions (even if beyond the scope of directors’ authority) Otherwise, they are personally liable for any transaction they enter into beyond the scope of their authority. 25  DIRECTOR’S DUTIES Directors are fiduciaries (they act on behalf of the company) so they owe duties to the company (not to shareholders) to:  act with: care DIRECTOR’S DUTIES   loyalty  in good faith  in the best interests of the company  disclose information of any:  actual or potential breaches of duty or law, or  conflicts of interest (e.g. whistleblower obligations)  not disclose confidential information of the company. 26  DIRECTOR’S DUTIES cont’d Liability Directors are personally liable for a breach of any director’s duties. DIRECTOR’S DUTIES 27 5 SHAREHOLDER LIABILITY  THE CORPORATE VEIL  Limited liability a distinguishing feature of incorporated business vehicles SHAREHOLDER LIABILITY  Legal separation between a company and its owners: The ‘corporate veil’: a ‘barrier’ that protects shareholders from liability for the acts of a company e.g. claims against the company for payment of a debt, breach of contract, tort, etc from customers, suppliers, the government and other third parties BUT there are limits to this protection... 29  PIERCING THE CORPORATE VEIL  Courts sometimes allow creditors or other third parties of a company to ‘pierce the corporate veil’ – SHAREHOLDER LIABILITY i.e. to go behind the company legal form to sue the individuals in the company responsible for decisions that cause loss or damage to third parties.  Circumstances in which corporate veil is pierced vary from country to country - Aim: to prevent directors or shareholders using the company form to protect themselves from liability for fraud or other wrongdoing in dealings with third parties. 30  PIERCING THE CORPORATE VEIL cont’d  Corporate groups: in some countries (not US), the law allows courts to ‘pierce the corporate veil’ if affiliated (related) companies break the law: i.e. the affiliates in SHAREHOLDER LIABILITY a company group are considered to be operating a single enterprise – so all companies in the group can be liable for the wrongdoing of any one or more affiliates in the group. e.g. a parent company can be liable for the acts of its subsidiaries/affiliates.  US courts are generally less willing to pierce corporate veil. 31  CORPORATE GROUP STRUCTURE ABC Holding Company (US) Inc INCORPORATED FORMS ABC Limited (UK) ABC Co (China) ABC Co (France) ABC Co (Germany) WOFE SAS GmBH 32  PIERCING THE CORPORATE VEIL cont’d Raven Metal Products v. McGann (1999) (USA) Raven Metal Products (the seller company) sued the SHAREHOLDER LIABILITY  buyer company for breach of contract (non-payment of goods delivered by seller)  The buyer company had no assets/money – so the seller sued McGann: the sole director and shareholder of the buyer company  Evidence showed McGann (director) had spent company funds to pay for her personal expenses 33  PIERCING THE CORPORATE VEIL cont’d Raven Metal Products v. McGann (1999) (USA)  Court held: 2 conditions are necessary for court to SHAREHOLDER LIABILITY pierce the corporate veil: 1. director/shareholder must exercise complete domination of the company 2. the domination is used to commit a fraud or other wrongful act against a third party.  Court did not pierce the corporate veil in this case: despite McCann’s domination of the company’s decisions, there was no evidence of actual fraud (intentional wrongdoing) in this case. 34 4. ASPECTS OF EUROPEAN LAW I Required reading: Textbook ch 6 pp 209-223 Extract: Intro to EU law (Mon Campus) Presentation topic: Case studies on EU data protection law (GDPR) and its impact on business HOMEWORK FOR NEXT CLASS