IBCL/CL2 2023-24 Introduction to Business Law PDF

TODAY’S ICBL/CL2 (FIRST) LECTURE  Introduction to Business Law/1  Globalized economy: just few remarks (I assume you know all about it!)  The Role of the Law in the Globalized Business Environment  This is – indeed – a much more complex issue!  Now, t...

TODAY’S ICBL/CL2 (FIRST) LECTURE  Introduction to Business Law/1  Globalized economy: just few remarks (I assume you know all about it!)  The Role of the Law in the Globalized Business Environment  This is – indeed – a much more complex issue!  Now, try to answer this question: can you do business in any Country (can you access any “domestic” market) without knowing the law of that Country?  In legal “lingo” we use to say: … without knowing the legal system (= compound of legal rules enacted/applicabile in a specific jurisdiction), of that specific “jurisdiction” (roughly = Country)); IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 1  TODAY’S ICBL (FIRST) LECTURE/2  Introduction to Business Law/2  Globalized economy: just few remarks (I assume you know all about it!)  The Role of the Law in the Globalized Business Environment  Business Law = Law & Economics?  Contract Law = rules concerning contracts => a con- tract is an essential tools for businesses, everywhere!  Corporate law => Law of Business Organizations: virtually all legal system provide for “incorporated firms”, i.e., the ability to engage in a trade or business using the “corporate” (“company”) forms;  The importance of comparative business (corporate) law; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 2  IBCL/CL2 2021-2022: WHY, IS COMPARATIVE BUSINESS LAW SO IMPORTANT TODAY?  Since the last decade of the XX th Centur y, «firms» are not only pro- ducing and selling across the bor- der s («cross-borders transactions»), but they also look for (and compa- re among) the most attractive places to inc orpora te and, thus, to settle their headquar ter s and/or their respective operative plants;  Just like when you shop for apples or peaches and you want to buy them at the c heapest price, an increasing number of (incorpora- ted) firms star ted comparing dif- ferent factor s impacting their cur- rent and future activities before …. «buying».… any of the econo- mic, legal (tax) systems available at dif ferent latitudes of the Globe; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 3  IBCL/CL2 2021-2022: WHY, IS COMPARATIVE BUSINESS LAW SO IMPORTANT TODAY?  Fiat, upon becoming FCA, controlled by Stellantis, «left» Italy in 2014 and settled in Netherlands: the Dutch company law system «offered» multiple voting shares to the FCA controlling family Primo Stabilimento Fiat di corso Dante, Torino (Italy). (Fotografia di Dario Lanzardo, 2010. © MuseoTorino) IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 4  IBCL 2021-2022: WHY, IS COMPARATIVE BUSINESS LAW SO IMPORTANT TODAY?  ONE-WORD ANSWER: GLOBALIZATION  OF FORMERLY STATE-BASED (REGION-Based) ECONOMIES  Economic globalization makes capital flows easier, thereby making direct investments easiers  Note: in EU one of the four «fundamental economic freedoms» is the «free-flow» of capitals  G. puts pressures to standardize all the types of rules needed to effect cross borders investments and to conduct cross borders transactions IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 5  IBCL/CL2 2021-2022: WHY, IS COMPARATIVE BUSINESS LAW SO IMPORTANT TODAY? In a globalized World, Corporate Law is becoming more and more international: - Economic-social trends heading towards standardization of all forms of business (= business organizations) - More specifically, the consequential legal trend is moving towards standardization of the (legal) rules (=> more reliable!) concerning: a) «Outside» of the «business organization» => Market transactions (various types of trading: among firms [B2B] and among a firm and an indefinite number of consumers [B2C]) => «tailored»; semi-standard and standard contracts; long-term (relational) business contracts; JV; consumer contracts; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 6  IBCL/CL2 2021-2022: WHY, IS COMPARATIVE BUSINESS LAW SO IMPORTANT TODAY?  In a globalized World, Corporate Law is - (cont’d) More specifically, the consequen- becoming more and tial legal trend is moving towards stan- more international: dardization of the legal rules concerning: - Economic-social- political trends are b) «Inside» of the business organizations driving towards (i.e., the way of structuring the standardization of all forms of «business entities» in the most effi- business cient way) => corporate governance (= «business organizations») Corporate law rules: both (i) those imposed by the legal system (of each jurisdiction) and (ii) those adopted by investors who retain the «voice right» to structure the firm’s internal offices - convergence of different corporate laws in a globalized World? Yes, but it’s a process IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 7  THE FIRST PART OF THE IBCL COURSE A. The «firms», the «market» and the «modern Corporation»: a complicated «liaison» B. Understanding the main legal rules of the (for-profit) «incorporated firms» 1) Formation of a company A. Freedom of establishment; B. Incorporation process and its legal and economic effects; 2) Equity financing 3) Corporate governance A. Shareholders’ rights B. Management: types and roles of corporate directors IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 8  THE SECOND PART OF THE IBCL COURSE UNIT 1: INTERNATIONAL CONTRACTS  We will learn: (1) what is a «contract»; (2) what is an «international contract»; (3) What is a “B2B” contract (as opposed to a B2C contract) IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 9  THE SECOND PART OF THE IBCL COURSE UNIT 1: INTERNATIONAL CONTRACTS A. Basic contract rules B. international contract rules; C. long-term/relational contracts theory  Theory of the “firm” (enterprise/undertaking)  Why do we have firms?  What kind of contracts do characterize firms?  Operating contracts (i.e., contracts firms use to operate their trade or business)  Organizational contracts (i.e., contracts firms/firms founders use to organize themselves) IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 10  IBCL/CL2 ( A. Y. 2 0 2 3 - 2 0 24 ) INTRODUCTION TO THE LEGAL PRINCIPLES OF PART I, UNIT 1, THE «INCORPORATED SECTION 1 FIRMS», WITHIN AN INTERNATIONAL/COMP ARATIVE PERSPECTIVE IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 11  THE FIRST PART OF THE COURSE/UNIT 1: THE «INCORPORATED FIRMS» WITHIN AN INTERNATIONAL/COMPARATIVE PERSPECTIVE  What will be learning, with respect to companies (by the way, there are different types of companies): (1) What are their main common legal characteristics? (2) What are “structural” and “functional” (legal) features of the 5 common legal characteristics? (3) Why did these 5 legal characteristics become “global”? Note: In the following Units of Part I of the IBCL Course we’ll learn the main legal rules with respect to the 5 common legal characteristics; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 12  THE FIRST PART OF THE IBCL COURSE: UNIT 1: TOPICS  The «firms», the «market» and the «modern Corporation»: a complicated «liaison» General (legal) definition of “firm” (“enterprise”/”undertaking”); “Organization” is the “key” concept of any “firm” and thus, of any trade or business => “business organizations” => companies; [Understanding why do we have “companies” and “partnerships” and their legal natures] The five common legal characteristics of the modern company (= incorporated firm); IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 13  THE CURRENT DRAMATIC RELEVANCE OF THE «INCORPORATED FIRMS» IN THE GLOBALIZED ECONOMY  if you want to focus on the key legal and econo- mic institutions of the globalized markets, then you probably are steering at a set of “contract(s)” and a “company” (or “corporation”), as the main form to organize the factors of production in a productive way (=> Firm)  Contract necessary “tool” to operate in the market;  Firm (“enterprise”, “undertaking”) organization of factors of production alternative to market system;  Company organizational form of firms, consisting in a “nexus of contracts” under the “Umbrella” of the “legal person” concept; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 14  THE CURRENT DRAMATIC RELEVANCE OF THE «INCORPORATED FIRMS»  What is the “connection” between “contracts” and the “firm” and more specifically between B2B contracts and the “company” (“corporation”);  Contract  Firm [vs. Market(s)] Company  Nexus of:  Contractual + Quasi-contractual relationships 15 ©Maurizio Bianchini 2024  «INCORPORATED FIRMS»: THE «FIRM»  Where could we find a (legal) definition of “firm” (aka: “enterprise”, “undertaking”)?  just as an example, you may read Article 2082 of the Italian Civil Code:  Whoever carries out, on a professional basis, any organized economic activity in view of the production or trade of any goods or services, shall be qualified as an entrepreneur  You may also find a specific definition of “undertaking” under (and according to) EU Law IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 16  THE «INCORPORATED FIRMS»: THE «FIRM»/2  (cont.d) Where could we find a (legal) definition of “firm” (aka: “enterprise”, “undertaking”)?  The specific definition of “undertaking” under (and according to) EU Law: “in the context of [European] competition law, […] the concept of an undertaking encompass-ses every entity engaged in an economic acti-vity” – consisting in offering any goods or services in the market – “regardless of the legal status of the entity and the way in which it is financed […]” (ECJ, Hoefner and Elser, 23.4.1991) IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 17  YOU NEED TO UNDERSTAND «ORGANIZATION», IN ORDER TO UNDERSTAND «BUSINESS ORGANIZATIONS»:  First, please have a look to the word «organization» multiple meanings (=> moodle): 1. an organized group of people with a par ticular purpose, such as a business or government depar tment [organization as a collectively, a collective body, a “label” behind which a set of people and/or infrastructures, activities are assembled, compounded, arranged, administered/managed in a coordinate way, according to some rules or under someone’s authority]  e.g. "a research organization"  synonims: company, firm, concern, operation, corporation, institution, group, establishment, consortium, conglomerate, combine, syndicate, body, agency, federation, confederation, alliance, coalition, association, movement, society, league, club, network, confederacy 2. the action of organizing something [organization as the action of organizing, planning, arranging, managing, coordinating elements or factors, like coordinating factors of production when administering a firm organization]  e.g. "the organization of conferences"  synonims: planning, arrangement, coordination, structuring, administration, organizing, running, management, logistics 3. the way in which the elements of a whole are arranged [“result” meaning: the organization here is the result of an activity, probably of an act of organization, planning etc. (see meaning no. 2)]  "the spatial organization of the cells"  synonims: structure, arrangement, scheme, plan, pattern, order, form, format, framework, system, composition, constitution, shape, make-up, configuration. 4. the quality of being systematic and efficient IBCL/CL2, A.Y. 2021-22 [axiological meaning: organization now bears and ©Maurizio Bianchini 2021 brings about a (positive) “value”]  e.g. "his lack of organization"  synonims: ef ficiency, order, orderliness, sense of order, method, system, tidiness, planning  BUSINESS ORGANIZATIONS: WHY DO WE HAVE THEM?  “Organization” (both the organizing action and the product of organizing actions) is key in economizing costs of production/distribution (e.g. economy of scale);  therefore, every form of «firm» embeds some (or all) of those four meanings;  thus, carrying out a trade or business (and even a profession, like the legal profession, or the accounting profession) imports combining the factors of productions – capital and labour – by implementing some form of «organization»; IBCL/CL2, A.Y. 2021-22 ©Maurizio Bianchini 2021  BUSINESS ORGANIZATIONS: WHY DO WE HAVE THEM?  Intuitively, the bigger, the more diversified and the more sophisticated the trade or business is, the higher the level of organization of the factors of production should be (“multi-unit” type of firms: Chandler); IBCL/CL2, A.Y. 2021-22 ©Maurizio Bianchini 2021  BUSINESS ORGANIZATIONS: WHY DO WE HAVE THEM?  This is why, along history, human beings «invented» and implemented different forms of Business Organizations, each with its specific level of sophistication;  Companies are formed by a combination of law provisions and a very specific type of contract; today, their principles and operating rules tend to converge worldwide (=> 5 common legal characteristics of the modern corporation); IBCL/CL2, A.Y. 2021-22 ©Maurizio Bianchini 2021  THE CURRENT RELEVANCE OF THE INCORPORATED FIRMS  A BO traditionally, serves as a «vehicle» to carry out a trade, business or profession in the market => two intertwined meanings! 1. it organises how the business activity is carried out in the market; + 2. it provides for «internal» organization too (it provides rules to operate the business organization itself), more or less like a PC operating system!  Under the «fredom of enterprise» (or «business freedom») principle, both steps are usually carried out throughout «contractual relationships»;  «Contracts» are the «tools» that one can use (=> freedom of contract) in order to «build» the BOs and to get them operating in the Mkt (=> business freedom); IBCL/CL2, A.Y. 2021-22 ©Maurizio Bianchini 2021  Why is the corporation useful to carry out a business activity?  Efficiency of its structure with respect to its typical objectives (carrying out a trade or business for profit);  The 5 main and common legal characteristics of a «company»: 1. Legal personality; 2. Delegated/centralized management; 3. Investors’ ownership; 4. Free transferability of the shares; 5. Limited liability; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 23  MATCHING THE 5-CLCS WITH THE 5(+1) BASIC QUESTIONS THAT ARISE IN EVERY INVESTMENT RELATIONSHIP (RETRO) Each Business Organization The 5 legal common Form must resolve at least 5+1 features of a company: basic issues: 1. Legal Personality; 1. When/how/where does the investment begin and end? 2. Centralized/Delegated 2. Who manages the investment? Management; (2-bis) What are the managers’ respon- 3. Investor’s Ownership sibilities to others corporate stakeholders (shareholders + 4. Free Transferibility of the + third parties)? Shares (in Delaware: Stocks); 3. What is the return on the investment? 5. Limited Liability of the company’s shareholders 4. How can investors get out? (members), vis-à-vis 5. What are investors’ responsibilities company’s obligations to others? (debts); IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 24  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 1) How long does the investment last? [legal personality + free transferability of shares]  The corporation, once formed, has an independent, perpetual existence;  It is an entity distinct from both: (a) those who contribute capital (shareholders) or finance its business with capital (creditors) and (b) those who manage the business (directors and officers);  the company, as a “legal person”, “buys” and “owns” the business assets and is liable for all its debts;  the persons who constituted and/or managed the company may come and go, but the corporation remains;  Shareholders, at any time, may buy and sell their shares (stocks in DE) in the “secondary market” (securities market) where the shares have been listed; therefore, their capital investment in the company’s businesses is “liquid” (=> Publicly-held Corps. Vs. Close Corporations) IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 25  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 2)Who manages the investment? [delegated management + investor’s ownership]  The locus of corporate power is the board of directors, which manages and supervises the business.  The board often delegates its power to officers to act for and bind the corporation;  In exercising their management powers, the directors are subject to fiduciary duties.  Shareholders have only a limited governance role; but have no power to act on behalf of the corporation  Shareholders’ corporate governance role (shareholders’ rights) focus on the right to vote, which is however limited in scope; they can vote to:  elect/remove directors,  approve fundamental corporate changes (mergers, acquisitions, conversions, divisions, dissolutions), and  initiate some organization rules reforms (articles of incorporations and by-laws amendments, subject to some procedural and substantive limits); IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 26  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 2-bis) What are mangers' responsibilities to others? [delegated management + investors’ ownership]  each member of the board of director s – as “agent” of the shareholders (“principals”) – are liable to the shareholders, as a group of “owners” of (or, better, as a group of “residual claimants” over) the company’s net assets, for mismanaging the company’s business and/or looting shirking the company’s assets (=> fiduciar y duties); shareholders have (a) a derivative action (that is, under cer tain conditions, they can lodge in cour t the company’s direct action) and (b) a direct action (for damages directly suf fered as shareholders), vis- à-vis the management (directors and top-executive of ficers);  as in any agency relationship the directors, the source of such liability rest in the breach of “fiduciar y duties” owed by the agent(s) to the principal(s) according to the agency relationship terms: duty of care; duty of loyalty (sometimes, duty to act in good faith);  In addition, directors (and management) may be liable to 3 rd par ties for damages suf fered in consequence of management actions or omissions (vicarious tor t liability and vicarious contract liability); IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 27  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 3) What is the return on the investment? [investor’s ownership]  The corporation law, sometimes complemented by specific members’ and/or management’s choices (set in the articles of incorporation and/or in the corporate by-laws), establishes a hierarchy to the financial returns generated by the business.  However, basic corporate governance rules are “mandatory” as they are connected to the “capital maintenance rules”, i.e., those rules that should ensure that the incorporated firm stays financially healthy;  Creditors (including bank lenders, bondholders, trade creditors, and employees) are first in line and receive a return based on their contracts;  Shareholders are last in line and receive dividends as declared at the discretion of the board (=> residual claimants of the corporate assets and cash flows).  If the business dissolves, creditors' claims have priority, and shareholders are treated just as “residual claimants”; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 28  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 4) How can investors get out? [free transferability of the shares]  Ownership interests (shares) are freely transferable;  They must be transferable at will, if the shares ought to be traded in a securities market (one cannot wait for other shareholders or management consensus every time a transaction involving the sale and/or purchase of shares is about to close);  Shareholders can realize the value of their investment by selling to other investors interested in acquiring their financial rights;  The corporation, however, has no obligation to repurchase these ownership interests;  Managers (directors and officers) cannot transfer their positions, but can resign at any time; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 29  MATCHING BUSINESS ORGANIZATION BASIC ISSUES WITH THE COMMON LEGAL FEATURES OF (ANY) COMPANY 5) What are investors' responsibilities to others? [Limited Liability Privilege + Investor’s Ownership]  The corporation is liable for its own obligations, but otherwise creates a "nonrecourse" structure (limited liability privilege)  Corporate investors and managers risk only their respective (money and/or) investments;  Corporate insiders (directors, officers, shareholders), usually (there are exceptions) are not personally liable to outsiders on corporate obligations;  Outsiders (such as contract creditors and tort victims) bear the risk of corporate insolvency. IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 30  WORLDWIDE CONVERGENCE OF CORPORATE LAWS TOWARDS SOME COMMON LEGAL CHARACTERISTICS OF (ANY) COMPANY  Why these 5 basic characteristics of the company/ corporations are commonly found virtually anywhere? s  Darwinian evolution of business organization form throughout history;  In 1989, Prof. Butler (George Mason Univ. School of Law) wrote an important article on the «contractual theory of the corporation»: “The modem corporation is one of the most successful inventions in history, as evidenced by its widespread adoption and survival as a primary vehicle of capitalism over the past century”;  The “paradigm corporation” – the modern business company and its bundled 5 legal characteristics – represents a set of answers to the five basic questions that arise in every investment relationship [retro]; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 31  WORLDWIDE CONVERGENCE OF CORPORATE LAWS TOWARDS SOME COMMON LEGAL CHARACTERISTICS OF (ANY) COMPANY/2  (cont.d) Whythese 5 basic characteristics of the company/ corporations are commonly found virtually anywhere? these characteristics have strongly complementary qualities for many firms. However, not all incorporated firms present all the 5 common legal characteristics: main distinction between Publicly-held and Privately-held companies (or close corporations) E.g., “limited liability companies” (“LLCs”) statutes (laws) may depart from either or both “centralized/delegated management” and/or “free transferability of the shares”; They are to some extent flexible (= can be changed/adapted). Thus, the 5 CLCs together make the corporation uniquely attractive for organizing virtually all productive activities. IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 32  WORLDWIDE CONVERGENCE OF CORPORATE LAWS TOWARDS SOME COMMON LEGAL CHARACTERISTICS OF (ANY) COMPANY/3  (cont.d) Why these 5 basic characteristics of the company/ corporations are commonly found virtually anywhere? the idea behind each of the 5 CLCs is that by providing these rules “by default” (i.e. when incorporating business firms all of them will be “embedded” in the company’s governance rules) will be easier and cheaper (lowering “transaction costs” and “agency costs) for the investors; however, these characteristics, although curbing some of the transaction costs associated to organizing businesses, at the same time they also generate tensions and tradeoffs that lead to the “agency problems” (and thus to “agency costs”) that Corporate law (and sometimes Securities Law) must address; IBCL/CL2, A.Y. 2023-24 ©Maurizio Bianchini 2024 33