Company Law - Part 1 PDF

LEGAL CHALLENGES OF COMPANIES Session 1 2023-2024 Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Course learning objectives  Know or master the fundamentals rules concerning compan...

LEGAL CHALLENGES OF COMPANIES Session 1 2023-2024 Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Course learning objectives  Know or master the fundamentals rules concerning companies.  Recognize the fundamental rules concerning the creation of commercial companies  Recognize the different legal structures in the UK, US and France  After this course, participants should be able to identify a legal problem and to choose between different legal solutions from a manager’s perspective Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Methodology A Business and practical approach to legal situations 1. Recognizing legal structures 1. Individualize potential liabilities 1. Adopt a legal prevention approach Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Sequence description 01 Introduction to company law 02 Corporate veil 03 Formation of requirements companies and 04 Directors and shareholders 05 Shareholders agreements 06 Classes of shares 07 Forms of business organisations capital Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Exams and assessments A) Continuous assessment (50%) Mid-term short exam (20%) This exam tends to assess comprehension of basic notions and applied knowledge. Group assignment (30%) B) Final exam (50%) A more transversal approach to questions and activities. Discussion, comments, criticisms and a deepened analysis. Crossing and connecting different topics. Determine the best option available from a legal perspective. Legal challenges of companies 2023/2024 Introducing the course 1. Course objectives 2. Methodology 3. Content 4. Exams and assessments 5. Class rules and suggestions Class rules and suggestions Some rules… Keep conversation to a minimum Take notes by hand (or use computers to take notes). Limit the use of internet (no social media etc…). Keep your phones away. Any class disruption will imply a disciplinary procedure Some suggestions… Ask the professor all necessary questions. Any question. Class slides will normally be uploaded after class. Further reading material in case of curious students Studies generally show that writing notes by hand allows you to remember the material better than typing it. Class rules and suggestions Legal challenges of companies 2023/2024 INTRODUCTION TO COMPANY LAW Legal Challenges of Companies 2023/2024  What is a natural person ?  And a legal person ?  What does it mean to say liability is limited? Legal Challenges of Companies 2023/2024 Company Law the set of laws that control how businesses are formed and managed Legal Challenges of Companies 2023/2024 Introduction Suppose that you get an idea to produce a novel product that could lead to profits. Should you produce it yourself by creating your own business? What are the legal implications if your business is not successful? What legal responsibilities do you have with respect to your business? Maybe you share your idea with your friend, who suggests that the two of you become partners. What are the benefits of a partnership? What are the disadvantages? Are there any other form of business that you should consider? Deciding what form of business to create is one of the most important decisions a business makes. Extent of liability Extent of the control Legal Challenges of Companies 2023/2024 Limited and unlimited liability A major factor that business owners must consider is whether they would like to limit their liability should the business incur unpayable debts or liabilities. The business structure chosen will determine if the owner(s) have (see sessions 3 and 4 on forms of business organisations) limited or unlimited liability Legal Challenges of Companies 2023/2024 What is “limited liability”? Businesses incur debts and liabilities in a variety of ways in the course of their operations. This could include through: 1.bank loans or other debts; 2.unexpected business expenses; and 3.being sued. In limited liability companies (see sessions 3 and 4 on forms of business organisations), the shareholders’ liability is limited to the value of their shares. Although they may lose the value of their shares, generally, they will not be personally responsible for the business’s debts or liabilities. Legal Challenges of Companies 2023/2024 What is “unlimited liability”? In contrast to limited liability, in a sole trader or partnership business, the owner’s personal assets and finances may be required to be used if the business is not able to meet its financial obligations or fails to repay its debts and/or liabilities. If the risk of unlimited liability is so high, then why does anyone choose the sole trader or partnership options? There are several factors that may mean a sole trader or partnership business may be more appropriate, e. g.: - a company is generally more expensive to set up and - it has a more structured framework of legal requirements. Legal challenges of companies 2023/2024 THE CONCEPT OF CORPORATE VEIL Legal Challenges of Companies 2023/2024 Company Law Juristic personality THE CONCEPT OF JURISTIC PERSONALITY Juristic person: « An entity, such as a corporation, that is recognized as having legal personality, i.e. it is capable of enjoying and being subject to legal rights and duties. It is contrasted with a human being, who is referred to as a natural person » Source: Oxford Reference Legal Challenges 2023/2024 Limited liability Upon incorporation the company itself possesses a separate legal personality, distinct from the shareholders This means that the assets of the company vest in the company and not its shareholders. Company Law Company Law Legal Challenges 2023/2024 Due to this legal personality a company may: - Enter into contracts on its own behalf - - Own property Sue and be sued - Incur debt, etc. Limited liability creates an invisible barrier around the personal assets of the shareholders and directors. the corporate veil The corporation (not the shareholders) is liable for its debts Legal Challenges of Companies 2023/2024 Salomon v. Salomon & Co. Ltd (1897) Leading case which laid down the principle of the Corporate veil The judgment recognised the principle of separate legal entity of company Legal Challenges of Companies 2023/2024 Company Law The Salomon V. Salomon case Facts: Salomon was running a business of boot making and leather merchant as a sole proprietorship and transferred his business to Salomon Ltd, incorporated with members comprising of his own family and himself. The price for such transfer was paid to Salomon by way of shares, and debentures having a floating charge (security against debt) on the assets of the company. Later, when the company’s business failed and it went into liquidation, Salomon’s right of recovery (secured through floating charge) against the debentures stood a prior to the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds. To avoid such alleged unjust exclusion, the liquidator, on behalf of the unsecured creditors, alleged that the company was sham, was essentially an agent of Salomon, and therefore, Salomon being the principal, was personally liable for its debt. Company Law Legal Challenges 2022/2023 Ruling The House of Lords, reversed the Court of Appeal ruling, and unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”. Thus, the legal fiction of “corporate veil” between the company and its owners/controllers was firmly created by the Salomon case. Legal Challenges 2022/2023 The “corporate veil” metaphorically symbolises the distinction between the company as a separate legal entity and the shareholders who own the shares in the company. “LIFTING” OR “PIERCING” THE CORPORATE VEIL The effect of ‘lifting’ or ‘piercing’ the corporate veil is that the shareholders, rather than the company, are regarded as the relevant actors on whom liability of the obligations of the company are placed Company Law Legal Challenges 2022/2023 When "piercing the corporate veil" takes place, limited liability is no longer available to the shareholders and their personal assets are at stake to pay the debts of the company. The Courts will disregard the corporate entity and and hold the shareholders personally liable. Company Law Legal Challenges 2022/2023 Cases justifying the piercing Company Law Legal Challenges of Companies 2023/2024 Company Law 1. Fraud, wrongdoing or injustice to third parties  Using the company to do acts contrary to the law or with an abusive character against the law (wrongful fraudulent actions)  The company is a mere “façade” or a “sham” calculated to carry out an improper purpose Example: Corporation A receives a final judgment for money damages against Corporation B. Corporation B cannot pay the judgment and, as a result, is forced to shut down. Just prior to shutting down, Corporation B transfers all of its assets to Corporation C and Corporation C continues on to operate essentially the same business as Corporation B. Corporation C uses the same assets, whatever funds were left when they were transferred and is basically the same business. Legal Challenges of Companies 2023/2024 X Case Marc is the sole administrator of “A” company, and as consequence of its activity, A is immersed in debts. Later, he creates a company “B”. He incorporates B at the same registered office, and with the same contact details. But not only that, it also has the same corporate object and same customers. In addition, he begins to transfer assets from company A to company B. In this way, it ends up leaving A’s debts unpaid, leaving its creditors in a situation of defenselessness. In this situation, through the lifting of the veil, we observe the abusive nature of the legal personality of company A, which is used to defraud creditors. Both companies and the administrator himself, Marc, may eventually be jointly and severally liable for payment of the debts and compensation. We therefore see a clear limitation of the principle of protection of the legal personality of companies. Company Law Legal Challenges of Companies 2023/2024 2. Corporation is the mere “alter-ego” of its shareholders or of the parent company Failure to maintain the separate identities of the companies Several affiliates or multiple companies acting under the umbrella of one company, but they fail to maintain separate identities of the companies. PARENT COMPANY  Controls the subsidiary  Finances the subsidiary  Same officers  Address, corporate information SUBSIDIARY  Can be accused of being the alter-ego of the parent company Legal Challenges of Companies 2023/2024 SUBSIDIARY COMPANY ALTER EGO PARENT COMPANY SHAREHOLDERS Legal Challenges of Companies 2023/2024 Example Corporate A is a parent company of Corporation B, its subsidiary company. Corporate A operates and controls Corporate B, provides the capital for the Corporate B, indicates the same officers, address, and corporate information, and files consolidated taxes with Corporation B. With so much overlap, Corporation B is at risk of being seen as a “mere alter ego” of Corporation A. In such cases, a court may pierce the corporate veil to pursue the personal liability of corporate officers (especially since they are the same for both companies). Among the factors involved in this type of analysis, the court would analyse the following to show that Corporation B was merely an instrumentality or alter ego of Corporation A: (1) the same person controlled both the parent and subsidiary; (2) they operated out of the same facilities as the parent; (3) the subsidiary’s contracts were performed by employees of the parent; (4) the subsidiary was never capitalized; and (5) the subsidiary shared bank accounts and financial obligations with the parent. Legal Challenges of Companies 2023/2024 Reading – case study analysis See reading « OCALA BREEDERS SALES COMPANY v. HIALEAH INC » Brightspace/Session 1/Course content Legal Challenges of Companies 2023/2024 Reading – exercise After having considered the Ocala Breeders V. Hialeah case, discuss the following issues: Did the Court pierce the corporate veil in this case ? If yes, on what grounds ? What elements did the Court take into consideration in the decision at issue ? Company Law Legal Challenges of Companies 2023/2024 OCALA BREEDERS SALES COMPANY v. HIALEAH INC case Hialeah, Inc. Hialeah Park PARENT COMPANY Runs a racetrack Ocala Breeders Piercing the corporate veil SUBSIDIARY Runs all non-racetrack activities (weddings) When sued for USD 1.5 million, the subsidiary claimed it had no assets. Contracts with Hialeah Park 3 Legal Challenges of Companies 2023/2024 Company Law 3. Failure to capitalize the company  Not a reason to lift the corporate veil  But: in case of “undercapitalization” (significant discrepancy between the capital invested by the partners and the object and the corporate purpose and risk), the courts might analyze if the level of capital is reasonable or enough (linked to the purpose of the business).  The creditor must prove that the owner intentionally underfunded the entity, when it was formed, to defraud the business's creditors. Company Law Legal Challenges 2023/2024 EXAMPLE  In a case involving a car dealership, the court refused to pierce the veil of a corporation, even though the business's growth meant that the entity became significantly undercapitalized.  The court ruled that the capitalization, at the time the business was formed, was the relevant consideration. The court found that, at the time the business was formed, it was adequately funded. Subsequently, due to significant growth, unanticipated at the time the business was formed, additional capital became necessary. A failure to provide this additional capital was not fraudulent. Thus, the undercapitalization theory was inapplicable WHEN THE VEIL IS LIFTED : Shareholders may be liable for the debts of the company Legal Challenges of Companies 2023/2024 The personal assets of the shareholders may be used to recover the debts of the company Legal challenges of companies 2023/2024 COMPANY FORMATION THE CAPITAL- TYPES OF CONTRIBUTIONS Legal Challenges of Companies 2023/2024 Social capital What is it? Social capital is the original assets business. It is composed of all the resources provided by the partners when the business is created. There are 3 types of contributions:  Cash (i.e. money)  Contributions in kind (buildings, machinery, etc.)  Sweat - industrial contributions (know-how, experience, relationships that a person puts at the service of business) Only contributions in cash and in kind constitute the share capital of the business. Legal Challenges of Companies 2023/2024 Social capital Uses The share capital created when the business is created has two uses: 1) It is used to distribute powers within the business. The shareholders will get voting rights based on the contribution they made to the business' share capital. These voting rights will be useful during ordinary and extraordinary general meetings in decision-making. The partners will also receive dividends will be proportional to their participation. 2) It serves as a method of financing. Social capital will make it possible to compensate for the excessive losses of the business and to prevent it from ending up in default. The amount of the share capital must appear after the name of the company and the legal form on all documents of the business. Legal Challenges of Companies 2023/2024 Share capital – France Minimum subscription In France the starting amount of social capital is: free for SAS and SARL must be greater than or equal to €37,000 for SA It is defined in the “statuts” of the business. Legal Challenges of Companies 2023/2024 Share capital – UK Minimum subscription Limited company There are no minimum subscription requirements for a private limited company. Public limited company The minimum authorised amount of share capital for a public company is £50,000, of which at least 25% (of the nominal amount and of any premium) must be paid up. Legal Challenges of Companies 2023/2024 Share capital - US Minimum subscription C corporation No minimum capital requirement. S corporation No minimum capital requirement. Limited liability company (LLC) No minimum capital requirement. BUSINESS OPERATIONS: FORMATION OF COMPANIES Capital formalities and requirements The capital – Types of contribution A. Cash Cash contributions. Certain forms require a minimum to be paid on incorporation of the company (France: 20% for SARL, 50% for SAS and SA). The remaining amount must however be paid within a maximum period of 5 years following the company’s incorporation. BUSINESS OPERATIONS: FORMATION OF COMPANIES Capital formalities and requirements The capital – Types of contribution B. Kind A contribution in kind is defined as the contribution of any asset (tangible or intangible, movable or immovable) that is not a contribution in cash or in the form of services, provided that this asset has a pecuniary value, is transferable and is not subject to any limitations provided for by law. Ex. real estate property, equipment, customer base, intellectual property (including patents, trademarks, software, etc.) France: For SARLs shareholders might assign a fair market value if the good is under a certain amount (€30,000 and half of the share capital ). An expert (Commissaire aux apports) will be needed for higher amounts and for SAS and SA. BUSINESS OPERATIONS: FORMATION OF COMPANIES Capital formalities and requirements The capital – Types of contribution C. Services (sweat) Contributions of work or services may be made in consideration of shares which give right only to dividends, but it does not contribute to the constitution of share capital of the company. Contributions of work or services only allocate shares. Shareholder A: Kind. Real estate: 150,000 (150 shares) Shareholder B: Cash. Euros: €40,000 (40 shares) Shareholder C: Services. Know how (valued: €40,000, 40 shares) Total share capital: €190,000 Legal Challenges of Companies 2023/2024 The capital – Types of contribution Exercise You have set up a new company. Your new company has 3 shareholders (Liam, Kate and Lucy). Capital contributions are made in the following way: - Liam: Kind (real estate) - 200.000 € Kate: Services (know-how) - valued 50.000 € Lucy: Cash – 50.000 € Value of each share: € 1000 Take into consideration the type of contributions and calculate: a) the total share capital b) how many shares are allocated to each shareholder Exercise Legal Challenges of Companies 2023/2024 In-depth analysis – limited and unlimited liability VIDEO - LIMITED and UNIMITED LIABILITY https://www.google.com/search?q=LIMITED+AND+UNLIMITED+LIABITY+com panies&sca_esv=563414948&ei=NOP5ZLHNAu6jkdUP252UkAo&ved=0ahUKEwixtPY35iBAxXuUaQEHdsOBaIQ4dUDCA8&uact=5&oq=LIMITED+AND+UNLIMIT ED+LIABITY+companies&gs_lp=Egxnd3Mtd2l6LXNlcnAiJ0xJTUlURUQgQU5EIF VOTElNSVRFRCBMSUFCSVRZIGNvbXBhbmllczIHEAAYDRiABDIIEAAYigUYh gMyCBAAGIoFGIYDSKwvUIoIWM4ucAR4AZABAJgBY6AB2QeqAQIxM7gBA8g BAPgBAcICChAAGEcY1gQYsAPCAgYQABgWGB7iAwQYACBB4gMFEgExIECIB gGQBgI&sclient=gws-wiz-serp#fpstate=ive&vld=cid:0db61c7c,vid:42T-K3wmZZs Legal Challenges of Companies 2023/2024 Summarizing Specify 3 important ideas or topics that are relevant in this chapter: 1) 2) 3) Exercise Legal Challenges of Companies 2023/2024 HOW TO PREPARE SESSION 2 - Capital raise Search on the internet and define the following terms: - Shareholders’ agreements - Pre-emptive rights Thank you for your attention !