Business Law Parte Due PDF

CAPITOLO 10 LEGAL CAPITAL AND CAPITAL FORMATION LEGAL CAPITAL: the sum of assets contributed to a company by shareholders when they are issued shares. Minimum capital, expressed in euros: 120 000. EU CAPITAL FORMATION and maintenance: is expressed in the second law directive. authorized capital:...

CAPITOLO 10 LEGAL CAPITAL AND CAPITAL FORMATION LEGAL CAPITAL: the sum of assets contributed to a company by shareholders when they are issued shares. Minimum capital, expressed in euros: 120 000. EU CAPITAL FORMATION and maintenance: is expressed in the second law directive. authorized capital: the maximum amount, as contribution from shareholders when issuing new shares. Authorization is given by the shareholders; subscribed capital: subscription of capital or of shares means the engagement to contribute to the company with new assets; issued and paid-up capital: the amount of assets that the company has already received from its shareholders in exchange for the issuance of shares, thus as contribution to the capital formation. -CONSIDERATION IN CASH -CONSIDERATION OTHER THAN IN CASH (The subscribed capital may be formed only of assets capable of economic assessment). THE SHARES: - They represent parts of the legal capital and measure the shareholder’s interest in a company; - Have a nominal value, and the overall amount of all shares’ nominal values corresponds to that of the legal capacity; - The nominal value of all shares is equal; - MS permits shares of different classes to have different nominal values; - Shares may be subscribed at a higher price; - Share PREMIUM: the difference between the nominal value and the total consideration paid. -CONTRIBUTION OTHER THAN IN CASH: The value must be assessed. in order to ensure the protection ECL mandates for a report by an expert appointed or approved by an administrative or judicial authority. -CONTRIBUTIONS IN KIND NOT REQUIRING AND EXPERT’S REPORT: 3 CASES: 1. Transferable securities admitted to stock exchange listing; 2. Assets contributed which have already been subject to a fair value opinion by a recognised independent expert; 3. Assets whose fair value is derived by individual asset from the statutory accounts of the previous financial year. CAPITOLO 11 CAPITAL MAINTENANCE -Dividend distribution: dividends are only paid when a company is showing a profit. Net assets = EQUITY -> They measure the resources contributed to the company or accumulated by it, which are not liabilities or debts towards third parties. Not all these resources are available for distribution to shareholders. ECL requires that, prior to distribution, the company performs a balance sheet test. ECL does NOT permit the distribution of nimble dividends, which are paid out of the net profits of a company, in cases where there is a deficit in the account from which dividends may be paid. ECL doesn’t require a solvency test in order to make distribution, but the US MBCA does require it (other than the balance sheet). Distribution of dividends: money paid to the shareholders shall be returned to the company. Dividends are declared and paid after the general meeting or the supervisory board approve the annual accounts. -Interim dividends: dividend payment made before a company’s general meeting to approve final financial statements. Interim dividends are generally paid at semesters. TWO CONDITIONS: Must be drawn up showing that the funds available for distribution are sufficient; the amount to be distributed may not exceed the total profits made since the end of the last financial year for which the annual accounts have been drawn up, plus any profits brought forward and sums drawn from reserves available for that purpose, less losses brought forward and sums to be placed to reserve pursuant to the requirements of the law or the statutes. -CAPITAL REDUCTION: two means to make distributions to shareholders: dividends and share repurchase. Corporations may also reduce their stated capital, and reimburse to the shareholders part of their contribution. It mandates for the adoption of certain safeguards to protect the interests of creditors. ECL requires that existing creditors are allowed to object, in case the distribution could prejudice the company’s ability to pay debts. MS may permit the acquisition of the company’s own shares.+ In order to prevent the company from distributing the same funds twice, it’s required that if treasury shares are accounted for in the assets, an equivalent reserve unavailable for distribution shall be included among the liabilities. Similar conditions are required for the redemption of shares without reduction of capital; Partially different rules apply to a compulsory withdrawal of shares, as this aims to permit the company to perform a reduction of the subscribed capital. -FINANCIAL ASSISTANCE: the assets of a company should not be used to finance the purchase of its own shares. Before 2006, the ECL prohibited companies from advancing funds or making loans or providing security, but now, (thanks to the SLIM Group), MS laws may permit it, provided that safeguards are granted. -SERIOUS LOSSES AND RECAPITALISING OR LIQUIDATE RULE: In circumstances of a serious loss of the subscribed capital, (net patrimony < legal capital), ECL requires that the board of directors calls a general meeting of shareholders to decide on appropriate measures. A capital reduction to offset losses incurred is permitted, unless the new subscribed capital would be less than the minimum required by the legislation of MS. (In Italy losses are considered serious when they exceed ⅓ of the net patrimony). In cases of losses bringing the net assets below the minimum capital, recapitalisation or liquidation (ROL) rules apply. (The general meeting must recapitalise the capital= reorganization involving substantial change in a company’s structure). CAPITOLO 12 ANNUAL AND CONSOLIDATED ACCOUNTS -ANNUAL ACCOUNTS: Two balance sheets alternative layouts (MS choose between horizontal and vertical Layout); Two layouts for the profit and loss account (MS choose between Nature or Function of Expense); Notes; In addition, the management board has to issue an annual report. SIZES OF A COMPANY: -Small, -Medium, -Large, -Micro-undertaking. MICRO, small and medium-sized undertakings: should not exceed at least two CRITERIA: balance sheet total, net turnover, average number of employees during the financial year: 10, 50 and 250 respectively. (Large undertakings, instead, shall exceed at least two of those criteria). -ACCOUNTING PRINCIPLES: true and fair value TRUE: annual financial statements are factually correct and they do not contain any material errors or omissions; FAIR: present the information faithfully. (current value of the asset) A true and fair view is compromised by missing information, but also by an excess of info and detail. Correctness of the annual financial statements implies going concern, accrual bases principles, and PRUDENCE, which requires that items included show the purchase price or production cost. To ensure reliability informations, financial statements should be measured on the basis of: -PURCHASE PRICE: the price payable and any incidental expenses, minus any incidental reductions in the cost of acquisition. -PRODUCTION COST: price of raw materials, and other costs directly attributed to the item. -CONSOLIDATED ACCOUNTS: Present the sum of all the activities of all the companies that are part of a group. = parent holding company + subsidiaries controlled by the parent. -CONTROL: an undertaking is deemed to be subsidiary to a parent undertaking when the latter has control over the former. The concept of control is based on: holding a majority of voting rights in the general meeting. The consolidated financial statement becomes necessary when the parent undertaking has a majority of the shareholders’ or members’ voting rights in another undertaking (a subsidiary undertaking). Consolidation requires the full incorporation of the assets and liabilities, of the income and expenditure of group undertakings. Similarly to the annual financial statements,consolidated accounts shall also: include notes; be complemented by a management report. -IAS: International accounting standards -IFRS: International financial reporting standards (both contained in European Regulations); Compliance with those is mandatory for the preparation of the consolidated accounts of all companies. All the ordinary companies must apply the national accounting principles -> Directive 34; All the listed companies must apply the international accounting principles -> EU Regulation. The financial statements of public-interest entities, medium-sized and large undertakings are audited. The audit report is a document complementing the annual consolidated financial statement, in which statutory auditors express their opinion, (that can either be positive or negative, as if the F.S. doesn’t comply with the requirements). CAPITOLO 13 CORPORATE GOVERNANCE: It involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. It determines the way companies are managed and controlled. An effective corporate governance framework is important, because well-run companies are likely to be more competitive and more sustainable in the long term. Good corporate governance is first and foremost the responsibility of the company concerned, and rules at European and national level are in place to ensure that certain standards are respected. (in EU company law there aren't mandatory rules about corporate governance). - The interest of the company, the shareholder value, the interest of the minority, The interest in the life of the company: it involves many many figures: Shareholders, investors, employees, the state, the EU, customers,... ; The interests a company is committed to serve: only those of the shareholders, or also those of other stakeholders, such as other investors, commercial and financial creditors, workers or suppliers, consumers, of the State or of the local community; The interest of the shareholders: interest of long term shareholders is not only to receive high dividends, but also to increase the value of the shares; The interest of managers: obtain a high remuneration, and high performances of the company. (shareholders’ and managers’ interests may coincide: high performance). -Although there are differences in the corporate structures of companies around the world, there is substantial convergence on the conclusion that: Directors are committed to maximizing the shareholders’ value in the long term; In cases where the ownership of the firm is concentrated, (managers are also owners), protection of the interests of minorities is necessary, and directors are burdened with the duty of ensuring such protection; Other interests circulating around a company are not matters of corporate law, rather they are governed by other laws, (labor, consumer, environmental law), influencing from the outside how the company is managed -> protect the minorities (object of company law); Directors are not committed to pursuing the interests of creditors, although company law focuses not only on the protection of shareholders, but also of creditors: as long as the company is solvent, the interests of the creditors are protected, and the directors’ focus shall be on maximizing shareholder value, as this is the best means for the pursuit of the aggregate social welfare. (maximizing the value of the company may be in contrast with specific social interests, (ex. climate change), so the managers have to act in between the limits of an aggregate social welfare). -THE CORPORATE GOVERNANCE MODELS: 2 PREVAILING MODELS: 1. Shareholder oriented model: developed in it prevails; 2. Managerialist model: developed in the USA. Two less important models: 1. State oriented model: like France, Italy, and Japan; 2. Labor oriented model: developed in Germany. -The ECL approach to corporate governance has changed over time: 5th Directive -> two-tier system -> NOT approved; 3rd Draft expressed neutrality as to whether good corporate governance requires a two-tier structure, and workers’ co-determination within the supervisory organ; 2003 Action Plan: MS have different systems of corporate governance, which reflects their different cultures. 2012 Action Plan: The Commission specified that the EU is neutral in respect to the different corporate governance models. Both Action Plans aim at enhancing corporate governance in the EU by the adoption of several measures at various levels. These measures particularly focus on the governance of listed companies, (because they operate in an international market, so it's important to create a uniform set of rules), as this consistently affects the smooth functioning of financial markets. -Therefore the EU Commission proposed to undertake actions aiming at: 1. Enhancing disclosure, mainly through an annual corporate governance statement to be included in the consolidated financial statements and information on the involvement of the institutional investors; 2. Strengthening shareholder powers through various measures; 3. Modernizing the board functioning, particularly as regards the composition, responsibility and remuneration of the board; 4. Co-ordinating corporate governance efforts of Member States. 1. Enhancing Corporate Governance Disclosure Annual Corporate Governance Statement: listed companies are required to include in their annual report and accounts a statement covering the key elements of their corporate governance structure and practices; Information about the Role Played by Institutional Investors: a. to disclose their investment policy and their policy with respect to the exercise of voting rights in companies in which they invest; b. to disclose to their beneficial holders at their request how these rights have been used in a particular case. 2. Strengthening shareholders’ Rights Access to Information: shareholders of listed companies should be provided with electronic facilities to access the relevant information in advance of General Meetings; Other Shareholders’ Rights: a need for enhancing the exercise of a series of shareholders’ rights in listed companies; Shareholder Democracy: strengthening shareholders’ rights should be based on: a. the provision of comprehensive information on what the various existing rights are and how they can be exercised; b. the development of the facilities necessary to make sure that these existing rights can be effectively exercised. This approach is fully consistent with the OECD Principles of Corporate Governance. 3. Modernizing the Board of Directors Board Composition: in key areas where executive directors have conflicts of interests, decisions in listed companies should be made exclusively by non-executive or supervisory directors who are in the majority independent. The High Level Group further recommended that at least listed companies in the EU should generally have the option between a one-tier board structure (with executive and non-executive directors) and a two-tier board structure (with managing directors and supervisory directors). Director Remuneration: the Commission considers that an appropriate regulatory regime should be composed of four key items: a. disclosure of remuneration policy in the annual accounts; b. disclosure of details of remuneration of individual directors in the annual accounts; c. prior approval by the shareholder meeting of share and share option schemes in which directors participate; d. proper recognition in the annual accounts of the costs of such schemes for the company. Director Responsibilities: with a view to enhancing directors’ responsibilities, the collective responsibility of all board members for financial and non-financial statements should be confirmed as a matter of EU law. The High Level Group made several other recommendations designed to enhance directors’ responsibilities: a. introduction of a special investigation right: shareholders holding a certain percentage of the share capital should have the right to ask a court or administrative authority to authorize a special investigation into the affairs of the company; b. development of a wrongful trading rule: directors would be held personally accountable for the consequences of the company’s failure, if it is foreseeable that the company cannot continue to pay its debts and they don’t decide either to rescue the company and ensure payment or to put it into liquidation; c. imposition of directors’ disqualification across the EU as a sanction for misleading financial and non-financial statements and other forms of misconduct by directors. 4. Co-ordinating corporate governance efforts of Member States. The Commission shares the view of the High Level Group that the EU should actively co-ordinate the corporate governance efforts of Member States through their company laws, securities laws, listing rules, codes, or otherwise. Member States should participate in the co-ordination process set by the EU, but the process itself should be voluntary and non-binding with a strong involvement of market participants. Future Plans for EU Corporate Governance?(2012 Action Plan). These new goals include: enhancing transparency by: 1. requiring disclosure of board diversity policy and management of non-financial risks; 2. improving corporate governance reporting; 3. permitting shareholder identification; 4. strengthening transparency rules for institutional investors; engaging shareholders by: 1. better shareholder oversight of remuneration policy; 2. better shareholder oversight of related party transactions; 3. regulating proxy advisors; 4. clarification of the relationship between investor cooperation on corporate governance issues and the ‘acting in concert’ concept; 5. employees share ownership. Enhancing transparency 1. 1.1: Disclosure of Board Diversity Policy: board composition plays a key role in a company’s success -> The need for greater diversity on their boards; 1.22: Disclosure of Non – financial Risk: non-financial parameters would help in establishing a more comprehensive risk profile, enabling more effective design of strategies to address those risks. (To encourage companies to adopt a sustainable and long-term strategic approach to their business). 2. Improving Corporate Governance Reporting: by provisions that enhance explanations in cases in which the company does not comply with national codes. 3. Shareholder Identification: to help issuers identify their shareholders in order to facilitate dialogue on corporate governance issues. The European Parliament supports the view that companies issuing name shares should be entitled to know the identity of their owners, but that owners of bearer shares should have the right not to see their identity disclosed. Engaging Shareholders 1. Better Shareholder Oversight of Remuneration Policy: shareholders need clear, comprehensive and comparable information on remuneration policies and individual remuneration of directors; 2. Better Shareholder Oversight of Related Party Transactions: related party transaction: a deal where the company contracts with its directors or controlling shareholders may cause  prejudice to the company and its minority shareholder(s), as they give the related party the opportunity to appropriate value belonging to the company. The Commission considers that shareholder control over related party transactions should be strengthened. 3. Regulating Proxy Advisors: proxy advisors, such as voting advice, proxy voting and corporate governance ratings. Therefore proxy advisors influence the voting.However, proxy advisors are currently not regulated at EU level. 4. Clarification of the Relationship between Investor Cooperation on Corporate Governance and the “Acting in Concert” Concept. 5. Employee Share Ownership. CAPITOLO 14 MANAGEMENT AND CONTROL 1. System Options: one-tier system two-tier system mixed system (hybrid) 1. general meeting of shareholders; 2. either a supervisory organ and a management organ (two-tier system) or an administrative organ (one-tier system) depending on the form adopted in the status. The administrative organs are composed of two types of directors, some executive and some others not: the one-tier system is in fact made of 3 organs. -Function of the general meeting -> shareholders’ meeting: the appointment and removal of members of the management organ in the one-tier system and, exceptionally, in the two-tier system; the appointment and removal of members of the supervisory board in the two-tier system; the above appointments are adopted upon majority vote (no unanimity); The SE Statute does not preclude that national law permits that some of the members of a company organ are appointed by constituencies other than shareholders, such as worker or public bodies or by minority shareholders. -The involvement is based on the agreement between the management and the employees. This agreement must include: information and consultation procedures; employee involvement, where appropriate, in the management body of the SE, involvement which is mandatory only if the employees already benefited from it before the creation of the SE. -TWO-TIER SYSTEM Structure: general meeting supervisory organ (responsible for supervising the management) management organ (responsible for managing the company). Management organ: single member or more members; appointed and removed by the supervisory organ; no person may at the same time be member of both the management organ and of supervisory organ of the same SE; Supervisory organ: its members may not manage the company; its members are appointed and removed by the general meeting; the statutes shall determine the number of the members of the supervisory organ. The SE Statute: A. allows the MS to grant the supervisory organ the power to make certain categories of transactions subject to authorization; B. requires the management organ to provide the supervisory organ with information on business events; C. grants the supervisory organ powers of investigation. -The casting vote: when members are even and the votes are perfectly 50 and 50, the chairman may solve the deadlock by exercising a casting vote (his vote is more ‘powerful’). -ONE-TIER SYSTEM: Structure: general meeting single organ -> management organ The SE Statute only: A. requires the organ to meet at least once every three months to discuss the business; B. mandates equal treatment of all members. -Non-executive directors: not all members of the administrative organ engage in the day-to-day management of the company. (They instead supervise the activities of the executives). -Appointment of members and board functioning: members of the organs of SE may be re-elected; members of the organs may be both natural and legal persons; no person can be a member of SE if disqualified from its management position. -Quorum: the minimum % of participation, necessary to make decisions: at least half of the members must be present or represented; decision-taking by a majority of the members present or represented. (All members are equal). -The SE Statute does not require that companies follow mandatory rules on how the organ shall be convened and how meetings shall be held. Under the SE Statute single members of the management organ or the administrative organ may individually engage in transactions on behalf of the company. -Board Composition in listed Companies: A recommendation focuses on the role of non-executive or supervisory directors of listed companies and on the committees of the administrative and supervisory board. Another one recognizes and fosters the role also of independent directors, sets fundamental points on the independence of the directors and the connected disclosure obligations of the company, and stresses the importance of the presence of a sufficient number of the independent directors in the board. The supervisory role of non-executive or supervisory directors is commonly perceived as crucial in three areas: - Nomination of directors; - Remuneration of directors; - Audit. Committees generally make recommendations in preparing the decisions, that are then taken by the management board. Their primary purpose is to increase the efficiency of the board. The three Committees (mandatory for listed companies): The nomination committee should: -Evaluate the balance of skills, knowledge and experience on the board; prepare a description of the roles and capabilities for a particular appointment; assess the time commitment expected; -Periodically assess the structure, size, composition and performance of the unitary or dual board and make recommendations to the board with regard to any changes; -Periodically assess the skills, knowledge and experience of individual directors, and report on this to the board; -Properly consider issues related to succession planning. The remuneration committee should: -make proposals to the supervisory board on the remuneration policy for executive or managing directors; -make proposals on suitable forms of contract; -assist the supervisory board in overseeing the process whereby the company complies with existing provisions regarding disclosure of remuneration-related items.  The audit committee should: -monitor the integrity of the financial information provided by the company; -review at least annually the internal control and risk management systems; -ensure the effectiveness of the internal audit function, (and the components of this audit are well selected and appointed). -Conflict of interests: Financial Assistance as example The potential for conflict of interest of management is particularly high as regards the nomination and remuneration of directors. So the presence of independent non-executive or supervisory directors in committees advising on such matters is strongly recommended as a means of preventing conflict of interests. -Director’s Liability (unlimited liability): All members of the organs of an SE shall be liable for loss or damage sustained by the SE following any breach of the legal, statutory, or other obligations inherent in their duty, except for the case where liability arises as consequence of members of an organ divulging confidential information during their office or after this is ceased, the SE Statute does not cover the field of civil liability. When there is a breach, civil liability should be regulated by the national law of where the SE has its registered office. The ECL provides specific rules only when directors of a private company do not follow the obligations for drawing up or publishing financial statements. There are several ways to limit the civil liability of auditors, but scholars believe that it is not a good idea to limit it. (ex, in italy, liable for the damage caused to the company) CAPITOLO 15 GENERAL MEETING One-tier system -> it approves the financial statements Two-tier system -> it decides the distribution of dividends -The Case for Increasing Shareholder Powers? In the 2003 Action Plan, the EU Commission proposed various actions to increase shareholder rights, as a means of enhancing corporate governance in Europe, and increasing their interest in the company. Access to Information: shareholders should be provided with information functional to the General Meeting. (Listed companies were put in the condition to use electronic means to inform their shareholders). Other Shareholder Rights: right to ask questions, to table resolutions, to vote in absentia, to participate in general meetings via electronic means, (to permit the shareholders that are in other MS to participate). Shareholder Democracy: Strengthening shareholder’s rights based on: -the provision of comprehensive information on what the various existing rights are and how they can be exercised; -the development of the facilities necessary to make sure that these existing rights can be effectively exercised. -US model and EU model: The US corporate governance model is traditionally management-oriented, in contrast to the EU model, which is more shareholder-oriented. In EU the power is balanced: day-to-day decisions -> management board; decisions about the structure of the company -> general meeting. In US is less balanced: both structural and organizational decisions -> management board. -The SE Statute requires the shareholders’ meeting to decide on: the appointment and removal of members of the management organ in the one-tier system, and, exceptionally, in the two-tier system; the appointment and removal of members of the supervisory board; any amendment of the SE Statute; the winding-up; the conversion; and increase or reduction of capital, and a redemption of shares; the acquisition of the company’s own shares; approval of annual and consolidated financial statements, (unless the company adopts a two-tier system, in which case is power of the supervisory board). -The Shareholders’ Meetings Procedure: 1. The Convocation of the general meeting Who can request it? administrative board, management board, supervisory board, or shareholders holding a certain amount of shares. -The meeting has to be held at least once a year (annual meeting), to decide the destination of the profit. When there is a loss, the general meeting can decide to cover it with previous reserves, and if the reserves are not enough either the gen. meet. can decide to reduce the capital or to call the shareholders for an increase of the capital, or else the capital must be liquidated or wounded up. The shareholder meetings shall follow a legal procedure granting that shareholders are put in a condition to take part in the meetings: -on a certain date; -with all necessary information needed to express a conscious vote. Frequently shareholders’ meetings are concerned with a second convocation in case the necessary quorum is not reached in the first one. -Extraordinary general meeting -> just when it’s necessary: merger, conversion, change of the objective, change of capital, …. The period between the date of dispatch of the notice and the date of the opening of the general meeting shall be at least 30 days, but it may be reduced to 15 days in urgent cases. (just one rule about first and second convocation: the 2nd convocation must be on a different date). -Rules for listed companies: The Shareholder Rights Directive requires that shareholders are given comprehensive information prior to the general meeting regarding in particular: the place and date of the meeting; the items on the agenda, the procedures to take part in it and how to vote their shares; a notice of meeting issued no later than 21 days before the day of the annual meeting (or not later than 14 days before the day of other meeting); the notice shall be published in the Internet site of the company. 2. The Participation in the General Meeting in Listed Companies Two different strategies may be chosen by the Member States: 1. Easing direct voting from shareholders: direct shareholder’s democracy model 2. Proxy voting, indirect shareholder’s democracy model: particularly effective if the final investors give proxies to banks and investing firms. -BLOCKING OF SHARES: consists of the burden of depositing the shares with the company or banks before the general meeting, (today deposit times are very short, cause we have digital shares). 3. The General Meeting Resolutions The goal of the shareholders’ meeting: discussion of the items put on the agenda + to permit voting on proposed resolutions. Shareholders’ democracy -> Majority principle (in limited companies: one share/ one vote principle). CAPITOLO 16 PROTECTION OF MINORITIES AND EQUAL TREATMENT OF SHAREHOLDERS 1. Reinforced Majorities and Double Voting Majority principle related to shares interest vs. to people The majority principle related to shares of interest is itself an expression of inequality, but even if it's unequal it's the only one applicable in the meetings, because it's almost impossible to always obtain unanimity, (principle of unanimity is the only equal one). Anyway this principle which solves the deadlock requires adequate consideration of minority shareholders’ which are contemplated by ECL: Reinforced majorities for some fundamental matters; Double majority for decisions affecting special classes of shares; There must be the approval of the general meeting and the special meeting. When decisions affect only certain classes of shares, the resolution of the general meeting shall be effective only upon consent of the holders of the class of shares whose rights are affected by the general meeting’s decision. 2. Capital increase and Pre-emptive Rights Antidilution tools in case of capital increase EU Company Law provides Preemptive Rights: The right to participate in the increase of the capital before third parties, (so that old shareholders can maintain their majority percentage). It's a decision of the shareholder to participate in the increase, (only after the expiry of the period of the pre-emptive rights the new shares can be offered and sold to 3rd parties). The pre-emptive right is attributed to all the shareholders (not only the ones with the majority of the shares). The Pre-emptive right may be withdrawn in the interest of a company.