Commercial Contracts Law Review PDF

Week 1: Basics of Commercial Contracts and Role of Law What is a Contract? General Definition: Agreement between two or more parties to do or not do something in exchange for something else. ○ Legal framework setting out obligations for parties to satisfy their interests and...

Week 1: Basics of Commercial Contracts and Role of Law What is a Contract? General Definition: Agreement between two or more parties to do or not do something in exchange for something else. ○ Legal framework setting out obligations for parties to satisfy their interests and expectations ○ A contract is a meeting of minds, no specific formality ○ Can be biding and enforceable even if not in writing, not signed Commercial Contracts: Focused on business purposes like buying, selling, or trading goods/services, often formal and written. Valid Contracts an Enforceable Contract Steps for Validity: 1. Existence: Offer and acceptance; mutual consent. (meeting of mids) 2. Capacity: Legal capacity (e.g., age, sound mind). => conset is not vitiated 3. Limits: Must align with laws, good morals, and public order. Role of Law in Society and Economy Society: ○ Regulates behavior. ○ Protects rights (e.g., privacy, freedom). ○ Resolves disputes. ○ Promotes justice. Economy: ○ Facilitates transactions. ○ Enforces contracts. ○ Regulates markets. ○ Protects property rights. Sources of Social Obligations and Social Rules Week 2: Negotiating Commercial Contracts in Global Trade Three Stages of Commercial Transactions 1. Pre-Contractual Stage: ○ Negotiation, exchange of information, preliminary agreements (e.g., LOI, MOU, NDA). ○ Duties: Good faith. Confidentiality. Avoid misrepresentation. ○ Goals: Align interests, clarify terms. Statements Representations Declarations Acts Behaviours Preliminary agreements Advertisement ○ Time Factor ○ No Contract ➔ Interpretation ➔ Gap-filling ➔ Vitiated consent 2. Formation Stage: ○ Offer: Terms presented. ○ Counteroffer ○ Acceptance: Unconditional agreement. ○ Consideration: Value exchange (money/services).  ○ Stage in between the formation of the contact and the contract itself => Nonfulfilment can lead into a breach of contract Breach of contract = what I am offered does not meet expectations = need to use remedies ○ Presume dealing in Good faith in both parties ○ Having freedom to negotiate 3. Performance Stage (Negotiating and Concluding a Contract): ○ Fulfillment of terms or breach leading to remedies. ○ Ideas: Reasonableness Parties expectations Dealing in good faith Letter of Intent /Memorandum of understanding CISG = international sales of goods Offer, counteroffer & acceptance Arbitration. New York Convention THE 9 COMPONENTS OF A MOU 1. Introduction : a description of the project or program, why its needed and who the parties involved are 2. Purpose: What are the parties involved want to achieve. 3. Scope: A description of the full extent of the the project 4. Participatnts: Who the individuals involved are and their contact information 5. Roles and Responsibilities: Expected contributions and obligations of each pariticpant 6. Time frame: the length of the agreement, when it begins and when or how it ends 7. Terms of review: Criteria for when and how any progrsm reviews wil happen 8. Administration: Who signatories are and how the MOU can be changed or amended 9. Other provisions:. How conflcts of interest are handled, data is protected and disputes are resolved 2.2 Pre-Contractual Duties in Different Legal Systems CIVIL LAW COMMON LAW Good faith! Traditional View: Good fath - Liability Each is at liberty = can break off negotiations Grounds to impose precontractual liability: at any time General obligation + Contractual remedies Traditional view: Freedom to negotiate = no No general principle in pre contract (only in liability contract) Grounds to impose precontractual liability : Other grounds for liability Pre and Contractual doctrines liability arises from fraud or misrepresentation. Common law envisages negotiations in the pre contractual stage from an adversarial point of view Uniform Law Limit of BAD FAITH and specific duties CASE STUDY: WindSurf Case -CISG This case study examines a contract dispute between Fly Surf, a Spanish windsurfing equipment company, and Surf & Beach, a Californian supplier. Fly Surf placed a large order with Surf & Beach in anticipation of a windsurfing championship. Communication between the parties primarily occurred via email. The order was confirmed, but upon delivery, Fly Surf found damaged goods and discrepancies between what was ordered and what was received. The delivery was also late. Surf & Beach’s confirmation letter included an exoneration clause limiting their liability for damage during transport or delay. The case asks whether a contract exists, when it was formed, and what remedies are available to Fly Surf, considering the need for timely resolution before the championship. This case hinges on several key issues: Contract Formation: While initial communication was by phone, the subsequent email exchanges, especially the confirmation email (Annex VII) from Surf & Beach specifying the order details and pricing, suggest a contract was formed. The dates of the emails and order confirmation are crucial for determining when the contract was formed. Contract Terms: The crucial question is whether the exoneration clause limiting Surf & Beach’s liability is part of the contract. Under the CISG (Contracts for the International Sale of Goods), a clause must be explicitly agreed to by both parties. Breach of Contract: Surf & Beach appears to have breached the contract due to: Non-conformity of goods: The delivered goods were damaged and differed from what Fly Surf ordered. Delayed delivery: The delivery was four days late. Applicable Law:Surf & Beach incorrectly invoked Californian law. The CISG, of which both countries are signatories, is likely the applicable law. The CISG favors the party who didn't choose the applicable law. Remedies: Fly Surf can potentially claim remedies under the CISG, including: Price reduction: For the non-conformity of the goods. Damages:For the costs incurred due to the delay and repair of damaged goods Specific performance: To potentially compel Surf & Beach to deliver conforming goods. Answers to the Questions: 1. Applicable Law: Surf & Beach's reliance on Californian law is unreasonable as Fly Surf was unaware of this choice. The CISG, as an international treaty, should govern this contract unless the parties explicitly excluded it. Articles 1-6 of the CISG clarify the conditions under which the Convention applies, including the parties' place of business and the contractual choice of law. 2. Contract Formation: A contract appears to exist. It was formed when Surf & Beach sent the confirmation email (Annex VII) on September 3rd, 2020, accepting Fly Surf's offer and specifying the terms of the sale. Articles 14-19 of the CISG provide guidance on offer, acceptance, and contract formation. 3. Exoneration Clause: Whether the exoneration clause is part of the contract depends on whether it was explicitly agreed upon by both parties before or at the time of contract formation. Fly Surf did not explicitly accept this clause. It is crucial to analyze all communications before and after the confirmation email to ascertain its incorporation. Articles 14-23 of the CISG deal with the formation of the contract and offer/acceptance. 4. Remedies for Fly Surf: Given the urgency of the championship, Fly Surf should seek remedies that ensure a quick resolution. They could negotiate a price reduction for damaged goods, claim damages for delay, and request replacement of the non-conforming goods or an expedited shipment. Articles 30, 35, and 45-52 of the CISG provide a comprehensive framework for available remedies. Fly Surf should seek legal advice to navigate this effectively. Part III: Sale of Goods Article 30 (Seller's Obligations): The seller must deliver the goods, transfer ownership, and provide necessary documents as specified in the contract. Article 35 (Conformity of Goods): Goods must conform to the contract's specifications regarding quantity, quality, description, and packaging, unless otherwise agreed. They must be fit for ordinary use, any special purpose the seller knew of, match samples/models, and be properly packaged. Articles 45-52 (Buyer's Remedies for Seller's Breach): If the seller breaches the contract, the buyer has several remedies including requiring performance, obtaining substitute goods, requesting repair, reducing the price, claiming damages, and declaring the contract avoided (cancelled). Specific articles (46-52) detail when each remedy is appropriate. Articles 45-44 detail the seller's liability for non-conformity of goods and third-party claims. Week 3: Contract and Business Law in Europe Key Components of Contract Formation The 3-Stage Contract Formation Process 1. Precontractual Stage: ○ Negotiations occur, but there is no binding contract yet. ○ Importance of gap-filling mechanisms to address unresolved terms. ○ Fixing errors in consent to ensure valid agreements. 2. Formation Stage: ○ Offer: Intention to be bound. Sufficient precision in terms. Offer addressed to a specific person or the public. ○ Counteroffer: Includes modifications or additions. Rejects the original offer. ○ Acceptance: Can be express, tacit, or implied through silence/inactivity. Acceptance must match the terms of the offer ("mirror image rule"). ○ Consent is manifested through actions like accepting terms and conditions or signing agreements. 3. Performance Stage: ○ Fulfillment of contractual terms by all parties. Concluding Contracts in International Trade: The CISG (United Nations Convention on Contracts for the International Sale of Goods) 1. Structure of the CISG: ○ Sphere of Application (Articles 1-6): Direct applicability if businesses are in different contracting states. Indirect applicability through conflict-of-law rules. ○ Formation of Contract (Articles 14-24): Covers offer, counteroffer, and acceptance in international trade. ○ Sale of Goods and Remedies (Articles 30-70): Obligations of buyers and sellers. Risk transfer and breach remedies. ○ Final Provisions: General rules about the scope and termination of CISG application. 2. Contract for Sale (Article 3): ○ Clarifies when contracts for goods to be manufactured are treated as sales.  ○ Excludes agreements where the supply of services predominates. Lex Mercatoria in Commercial Contracts Lex mercatoria is generally defined as the body of rules of international commerce which have been developed by the customs in the field of commerce and affirmed by the national courts. ○ A body of rules developed from international commerce customs. ○ Operates alongside formal laws like the CISG. ○ Principles often prevail in cases where statutory law may not be comprehensive. Application in Arbitration: Arbitration is a key mechanism for enforcing lex mercatoria. ○ Criteria for arbitration: Compliance with the 1958 New York Convention. Respect for party autonomy and choice of law. Availability of resources for efficient arbitration. Significance: ○ Fills gaps where formal rules may be silent. ○ Encourages trust in international trade relationships. Lex Mercatoria, also known as "merchant law," is a set of rules and customs that govern international trade and commerce. It developed from practices that merchants used historically to handle disputes and trade smoothly across different regions and legal systems. 1. Custom-Based: Lex Mercatoria is built on the common practices and customs of merchants, not laws made by governments. It's like a universal trade language that merchants agree on. 2. Flexible: Unlike strict national laws, it adapts to the needs of international business. It allows traders to resolve issues practically, without being bound by a single country's legal system. 3. Works with Formal Laws: Though it's independent, Lex Mercatoria complements treaties like the CISG (Convention on Contracts for the International Sale of Goods) and national laws. For example, if there's a gap in the contract, merchants might rely on Lex Mercatoria principles to fill it. 4. Often Used in Arbitration: Many trade disputes are settled by arbitration (a private way to resolve disputes), and Lex Mercatoria often guides the process because of its neutrality and global acceptance.  5. Modern Role: While it's still based on merchant customs, today it's supported by treaties and international agreements, making it more formalized. Why Is It Useful? It simplifies global trade by providing a common framework for merchants from different countries, reducing the need for lengthy legal proceedings under various national laws. Lex Mercatoria and Arbitration: 1. Special Courts for International Commercial Law: ○ Historically, courts specifically dealing with international trade disputes have been established. ○ These courts rely on Lex Mercatoria (merchant law) for resolving cases efficiently and fairly. 2. Significance of the Seat of Arbitration: ○ The choice of arbitration seat is critical to meet the needs of businesses and arbitration users. 3. Key Criteria for an Arbitration Seat: ○ Compliance with International Conventions: Must be a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This ensures arbitration decisions are enforceable globally. ○ Pro-Arbitration Legal Environment: Laws of the seat should support arbitration and minimize court interference. ○ Respect for Party Autonomy: The seat should honor the parties' choice of arbitration procedures and applicable laws. ○ Resources and Efficiency: Professional expertise and infrastructure must be available to ensure a smooth, secure, and quick arbitration process. 4. Role of Lex Mercatoria in Arbitration: ○ Provides a neutral, widely accepted framework for resolving disputes. ○ Complements the formal arbitration process, particularly in international contexts. The CISG (United Nations Convention on Contracts for the International Sale of Goods) relates to the concept of lex mercatoria in the following ways: Support for lex mercatoria: The CISG is mentioned as supporting treaty law for the modern lex mercatoria, which is described as "the law immanent in principle, created by the internationalmarket place and its participants itself" International commercial rules: Both CISG and lex mercatoria are concerned with rules governing international commerce. The CISG specifically deals with contracts for the international sale of goods, while lex mercatoria is a broader body of rules developed through customs in international commerce. Complementary systems: While lex mercatoria operates alongside statutory and treaty texts like the CISG, it's noted that established principles and practices of lex mercatoria may sometimes prevail over these texts in appropriate cases. ARBITRATION VS MEDIATION Arbitration: Outcome Control: Arbitrators control the outcome of the dispute. Decision Power: The arbitrator has the power to make a final and binding decision. Discovery: Often requires extensive discovery (gathering of facts and evidence). Process: Formal process; often involves attorneys, testimony under oath, and evidentiary hearings. There is no private communication between parties and the arbitrator. Decision Basis: Decisions are based on facts, evidence, and applicable law. Result: Typically a "win/lose" scenario; relationships between parties may be damaged or severed. Cost: More expensive than mediation, but less expensive than traditional litigation. Publicity: Decisions are generally private but may be publicly available. Mediation: Outcome Control: Parties retain control over the outcome. Decision Power: The mediator has no power to decide the dispute; a settlement requires the agreement of all parties. Discovery: Information exchange is voluntary and often limited. Process: Informal process; emphasizes communication and problem-solving; parties share their perspectives and engage in creative problem-solving. There are often joint and private meetings. Decision Basis: Outcome based on the needs of the parties. Result: Aims for a mutually satisfactory solution that may preserve or even improve relationships.  Cost: Less expensive than arbitration or litigation. Publicity: Private and confidential. Week 4!: Performing Commercial Contracts and Solving Disputes Performance Evaluation: Goods must meet ordinary use, specific purposes, match samples/models, and proper packaging. INCOTERMS (Risk and Cost Allocation) 1. EXW (Ex Works) Definition: The seller makes the goods available at their premises (e.g., factory or warehouse). The buyer is responsible for arranging all transport, insurance, and customs clearance. Risk Transfer: The risk shifts to the buyer as soon as the seller makes the goods available for pickup. Responsibilities: ○ Seller: Minimal; only prepares goods for pickup. ○ Buyer: Handles all logistics, including loading onto transport, export clearance, shipping, insurance, and delivery to the final destination. Buyer Risks: ○ Damages or loss during transport (since the buyer arranges and assumes responsibility). ○ Delays in arranging pickup or transportation. ○ Additional costs from customs duties or mismanagement in shipping logistics. 2. FOB (Free on Board) Definition: The seller is responsible for delivering goods to a named port and loading them onto the shipping vessel. Once loaded, the risk and responsibility transfer to the buyer. Risk Transfer: Occurs when the goods are loaded onto the vessel at the port of shipment. Responsibilities: ○ Seller: Handles inland transport, export customs clearance, and loading onto the ship.  ○ Buyer: Manages sea transport, insurance, import customs clearance, and final delivery. Buyer Risks: ○ Damages or loss once the goods are loaded onto the ship. ○ Unexpected shipping costs or delays at the port of arrival. ○ Failure to insure goods adequately after risk transfer. 3. CIF (Cost, Insurance, and Freight) Definition: The seller covers the costs of shipping, freight, and insurance up to the buyer’s port of destination. However, the risk transfers to the buyer once the goods are loaded onto the shipping vessel at the port of origin. Risk Transfer: When the goods are placed on the ship at the origin port, even though the seller arranges and pays for transport and insurance. Responsibilities: ○ Seller: Covers freight and insurance to the destination port but does not bear risk beyond loading. ○ Buyer: Handles risk during sea transport, unloading, import customs, and final delivery. Buyer Risks: ○ Risk of damage or loss during sea transport, despite seller-arranged insurance. ○ Limited insurance coverage if the seller opts for minimal protection. ○ Costs or delays from issues at the destination port, such as customs clearance or cargo handling. Comparative Overview of Buyer Risks: TeRm When Risk Transfers Key Buyer Risks EXW At seller’s premises Risks in transport, insurance, customs, and logistics entirely on the buyer. FOB When goods are loaded Damages during shipping and insurance gaps after onto the ship loading. CIF When goods are loaded Limited insurance and responsibility for issues at the onto the ship destination port. Fundamental Breach A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him or what he is entitled to expect under the contract. Unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstance would not have foreseen such a result. Severe deprivation of the contract’s benefits. Foreseeability of harm affects the breach’s classification. Insight into Remedies in Case of Breach of Contract (CISG) A. Claim Damages (Articles 45, 74-77) Purpose: To compensate the injured party for losses caused by the breach. Scope: ○ Damages include actual losses and loss of profit. ○ Compensation must be foreseeable at the time of contract formation (Article 74). Mitigation: The injured party must take reasonable steps to minimize losses (Article 77).  Example: A buyer who suffers financial loss because the seller failed to deliver goods can claim the cost difference for procuring replacements and lost profit. B. Period of Grace (Articles 45.3 and 47) Purpose: To allow the breaching party additional time to perform their obligations. Conditions: ○ The non-breaching party can fix a reasonable time period for performance. ○ If the breaching party fails to comply, further remedies (e.g., contract avoidance) may follow. Example: A seller delayed in delivering goods may be granted extra time by the buyer to fulfill the order. C. Specific Performance (Article 46) Purpose: To compel the breaching party to perform their obligations as agreed. Applicability: ○ Available for fundamental breaches, provided it's reasonable and within a suitable time frame. ○ Not universally enforceable in some jurisdictions, depending on local laws. Example: A buyer may demand delivery of specific goods rather than seeking monetary damages. D. Repair (Article 46.3) Purpose: To remedy defects in the goods delivered by the seller. Conditions: ○ The buyer can request repair unless it is unreasonable in the circumstances. ○ The request must be made within a reasonable time. Example: If machinery delivered is defective, the buyer may ask the seller to repair it rather than replace it. E. Avoidance of the Contract (Articles 49, 81-84) Purpose: To cancel the contract when a fundamental breach occurs. Conditions: ○ The breach must deprive the injured party of what they were entitled to expect under the contract. ○ Avoidance must be declared within a reasonable time. Consequences: ○ The parties are released from further obligations.  ○ Goods and payments made must be returned. Example: A buyer avoids a contract if the seller delivers goods that fail to meet essential specifications and can't be remedied. F. Reduction of the Price (Article 50) Purpose: To allow the buyer to pay less when goods delivered are non-conforming but still usable. Conditions: ○ The reduction corresponds to the diminished value of the goods. Example: A buyer accepts a batch of goods with minor defects but deducts a percentage of the price to account for the flaws. G. Substitute Transaction (Replacement or Resale) Purpose: To procure replacement goods or resell the goods when a contract is breached. Applicability: ○ The injured party can recover the price difference between the original contract and the substitute transaction. ○ Must act within reasonable time and in good faith. Example: A buyer purchases alternative goods from another supplier after the seller's non-delivery and claims the additional cost from the original seller. Summary Table of Remedies Remedy Purpose Key Conditions Claim Damages Compensation for losses Foreseeability, duty to mitigate losses Period of Grace Extension for performance Must set a reasonable deadline Specific Fulfill obligations as agreed Limited to fundamental breaches and Performance reasonable time Repair Fix defects in delivered goods Must not be unreasonable Avoidance Termination of contract Fundamental breach, reasonable time for declaration Price Reduction Adjust payment for Goods must still be usable non-conforming goods  Substitute Procure replacements or resell Act reasonably and in good faith Transaction goods Week 6!: Basics of Company Law What is a Company? Companies are tools to organize business undertakings, addressing the increasing complexity and risks of modern business. Their creation aims to: Pool resources. Establish organizational rules. Grant the organization legal personality and identity. Creation and Operation Companies are created through a contract of incorporation (the founding document). Their internal operations are governed by bylaws (rules agreed upon by the members). Bylaws specify the company's name, capabilities, etc. Natural Perons:(people) Identity = name Rational and cognitive abilities Relational abilities Legal Persons (companies): Companies are considered legal persons, distinct from their members (natural persons). This means They possess an identity (name and address). They have organs (e.g., the general meeting, the board of directors) to conduct business and make decisions. The general meeting is the ultimate authority, although the board handles day-to-day operations. Types of Companies: Governed by national laws; the relevant law is usually the law of the place of incorporation or the company's registered office (e.g., a Spanish company is governed by Spanish law). Choice of company type is flexible, allowing adaptation to specific business needs. Two main categories:  1. Persons Companies: Emphasis on the identity and qualities of the members; often feature unlimited liability. Identity and qualities of members are important Trust each other not allowed other people to join Only do business with others if they know the other members Liability to the debts of the company Non limited liability companies 2. Capital Companies: Emphasis on the company's capital or assets; often feature limited liability (members are not liable for the company's debts beyond their investment). What matters is the company’s capital or assets Ability to pay debts Limited liability companies Members not liable for company’s actions Need a minimal capital Individual Entrepreneur (SOLE TRADER) vs Legal Persons Individual (Sole Trader): Business initiative/risk/exposure Full exposure Single entrepreneur Pros: low organisational costs Easier and less expensive Complete authority over decisions No risk of conflict with partners Cons: Full exposure to the business to the business risk Unlimited liability for all clams against the firm Exposes her assets Heavily dependent on the owner’s risk to manage the business Difficult to raise debt capital Companies: The faces of legal personality of companies LEGAL PERSONALITY: The fundamental attribute of corporate personality is that the company is a legal entity distinct form its members.  Is often described as an artificial person in contrast with a human being, a natural person. Pros: Funding Limited liability Cons: Incorporation costs Management and transaction costs LIMITED LIABILITY Follows that a corporation is a separate person that its members = not liable IN absence of express provision, the members will be completely free form any personal liability for the companies debts The rule of non-liability also applies to obligations other than debts THE CORPORATE VEIL Definition: A legal doctrine that separates a corporation from its shareholders, shielding them from personal liability for the company's debts and obligations. Purpose: ○ Ensures shareholders are not personally responsible for the corporation's actions or financial liabilities. ○ Promotes business activity by limiting personal financial risks. Piercing the Corporate Veil Definition: An exception where courts disregard the corporate separation and hold shareholders personally liable. Limited Circumstances for Piercing: Courts in Europe typically allow this in very specific cases: ○ Evasion of Legal Obligations: When a person uses the corporate entity to avoid existing responsibilities or liabilities. ○ Frustration of Enforcement: When a company is deliberately interposed to obstruct or evade the enforcement of legal obligations. Strict Requirements: ○ Courts are clear that this remedy is used sparingly and solely to prevent misuse of the corporation's separate legal personality. Purpose of Piercing: To ensure fairness and justice by preventing individuals from abusing corporate protections for personal gain.  Prevents wrongful advantages that harm creditors, stakeholders, or legal processes. The Business Judgment Rule (BJR) Purpose:The BJR protects directors and officers from liability for honest mistakes in judgment, provided they act with due care. It's a judicially created doctrine, meaning it stems from court decisions rather than statutes. Key Elements: To benefit from the BJR, directors must: Act in good faith. Exercise due care (the level of care an ordinary prudent person would exercise under similar circumstances). Consider all reasonably available material information. Related Fiduciary Duties:** The BJR interacts with other fiduciary duties directors owe to the company: Importance Encourages directors to make bold decisions without fear of personal liability for unforeseen negative outcomes. Protects the decision-making process in businesses from excessive judicial interference. Duty of Care: The legal and ethical standards for director decision-making. Directors must act reasonably and with prudence. Duty of care refers to the fiduciary responsibility that company directors hold. The duty encompasses ethical and legal standards that directors must adhere to. Directors are required to make decisions in good faith, considering the betterment of the organisation they represent at all times. The duty of care requires the manager of a busines to reach decisions using the amount of care that people of ordinary prudence would use under similar circumstances, and to consider all material information that is reasonably available Duty of Loyalty Requires unselfishness and avoidance of conflicts of interest. The burden of proof shifts to the directors to demonstrate the fairness of their actions if a material conflict of interest is shown The fiduciary duty of loyalty is sometimes described as a duty of unselfishness.40 An important component of conventional duty of loyalty claims is that they involve material conflicts of interest, typically based on financial benefits. Some loyalty cases do not involve director conflicts of interest, but this element is often required for a successful cause of action. In court, when a material conflict of interest is demonstrated, the burden of proof shifts to the defendants, who must show the entire fairness of their actions. Duty of Good Faith: Requires honesty of purpose and acting in the best interests of the corporation. The exact meaning of this duty can be ambiguous. Although good faith has long been required of directors, as a distinct fiduciary analysis it is a recent arrival, and its meaning is notoriously vague. Furthermore, the doctrine may have different meanings in different contexts. Some question whether a fiduciary duty of good faith is not simply equivalent to the implied contractual covenant of good faith and fair dealing in a fiduciary setting. Good faith is commonly understood to require that directors act with “honesty of purpose,” in pursuit of the corporation’s best interest The Disney Case Study- BJR The Disney case, specifically the *Brehm v. Eisner* case, is a landmark case concerning the application of the Business Judgment Rule (BJR). The case involved Michael Ovitz's short, unsuccessful tenure as president of the Walt Disney Company and the resulting $130 million severance package. Shareholders sued the Disney board, claiming the compensation was excessive and a breach of fiduciary duty, arguing the board hadn't exercised due care in approving the contract. The Delaware Supreme Court's decision hinged on the BJR. The court ultimately upheld the board's decision, emphasizing that the BJR creates a presumption that directors acted on an informed basis, in good faith, and in the honest belief that their actions were in the best interests of the corporation. To overcome this presumption, the plaintiffs had to demonstrate that the directors acted in bad faith, with gross negligence, or in a way that violated their fiduciary duties. The court found that the plaintiffs had not met this burden of proof. While the court found no evidence of bad faith or gross negligence, the case highlighted some crucial aspects of the BJR and its application: The importance of the process: The court focused heavily on the process the Disney board followed in approving Ovitz's contract. While the outcome was ultimately unsuccessful, the process, including consultation with experts, showed due care. A flawed outcome doesn't automatically invalidate the process. The difficulty in piercing the BJR: The BJR creates a high bar for plaintiffs. Simply showing a poor business decision isn't enough; a plaintiff must show that the directors acted improperly. This protects directors from liability for honest mistakes in judgment. The role of informed decision-making: The court emphasized that informed decisions are key to invoking the BJR. The board's reliance on expert advice was a critical factor in the court's decision. Public scrutiny and the BJR: The Disney case underscored the intense public and media scrutiny that large corporate decisions face, particularly concerning executive compensation. This highlights the challenges directors face in balancing appropriate risk-taking and avoiding excessive scrutiny and potential legal challenges. In essence, the *Brehm v. Eisner* case demonstrates how courts apply the BJR and the difficulties plaintiffs face in challenging board decisions even if those decisions result in significant financial losses. The case did not change the BJR significantly, but it reinforced its importance in protecting directors from liability for honest mistakes of judgment. It also served as a reminder of the high bar required to prove a breach of fiduciary duty in such situations. Shareholders' Agreements Shareholders can create agreements that govern the company's governance beyond the articles of association (the formal company constitution). These agreements can dictate various aspects of the company's operations, though the company itself may or may not be a party to these agreements. General Meeting of Members/Shareholders: Brain of the Company This is the ultimate decision-making body of the company. The text details formal requirements for convening such meetings, including notice periods and publication requirements (especially for "annual" vs "extraordinary" meetings). decision-making power relating to the most fundamental issues of the organization: relations between members and the company, structure or purpose of the company. The general meeting called within six months of the end of the previous fiscal year is known as the “annual” general meeting (or “AGM”). If a general meeting is held outside that time frame, it is “extraordinary” (“EGM”) and meant to address urgent or pressing matters that couldn't be settled at the AGM. Calling the general meeting must accomplish formal requirements, it should by called by letter or email, or by public announcements (or both). The content of the general meeting it should follow an agenda that should be notifed to the shareholders alongside with the calling. Directors of the Company: Directors represent the company, manage its day-to-day affairs, and are legally responsible for its actions. They are subject to the oversight of the general meeting. Are the people that represent the company in front of other people or entities they are legally responsible for the company’s business and can be held accountable for its actions. Although being closer to the daily life of the company and having their own authority for that purpose, directors are in general subject to the internal authority of the general meeting. WEEK 6: CASE STUDY GLOVO OGLOV is a Barcelona-based company, founded in 2021, specializing in food delivery and other services. It operates in over 2,000 cities across 32 countries and collaborates with 200,000+ businesses. Initially, OGLOV chose a Limited Liability Company (LLC) structure and classified its delivery riders as self-employed contractors rather than employees. This was due to high labor costs and unclear legal requirements. Despite a 2020 ruling by Spain’s Supreme Court and the 2021 "Rider Law" requiring riders to be employees, OGLOV continued its business model, facing potential penalties. 1) Legal Form Choice: OGLOV chose a Limited Liability Company (LLC) because it offers limited liability, protecting owners' personal assets from business debts. It also provides operational flexibility, easier management, and tax benefits. As a startup, this structure allowed OGLOV to scale more easily while attracting investors, which was essential for its global expansion plans. LLCs are often favored by businesses operating in high-risk industries, as they provide a balance of flexibility and legal protection. 2) Why the Model Wsas Not Amended: OGLOV likely stuck to its self-employed rider model due to the significant cost savings it offered. Employing riders would have meant higher labor costs, including salaries, benefits, and taxes, which a startup could not easily afford. Additionally, there were legal ambiguities surrounding worker classification, and OGLOV may have believed it could delay full compliance or that the legal environment would change in their favor. The company also faced intense market pressure to expand quickly, making it difficult to adjust the model without risking delays or cost overruns. 3) ESG (Environmental, Social and Governance) Oversight: From an ESG perspective, OGLOV's actions raise concerns in the social dimension, as the company did not provide riders with the same benefits and protections as employees, potentially leading to exploitation of workers in the gig economy. The lack of proper employment contracts and protections for workers undermines fair labor practices. In terms of governance, OGLOV's failure to align with legal rulings and regulations suggests a lack of accountability and ethical leadership, which could negatively impact trust with stakeholders. OGLOV’s decision to prioritize cost savings over the well-being of its workers does not align with modern ESG principles of fair treatment and corporate responsibility. CASE STUDY: LOTSI CREAMS Lotsi Creams is a business launched in 2022 by Rose, focused on producing and marketing hand creams and lip balms. Rose is considering expanding the business by hiring more personnel, contracting with a wholesaler for marketing, and licensing the production and marketing to another firm. The decision about the company’s legal structure, whether as a sole trader or a Limited Liability Company (LLC), is central to its growth strategy. 1) Legal Structure Choice: Sole Trader vs. LLC Sole Trader: A sole trader is the simplest business structure, where the owner is the business and takes all the profits but also bears full responsibility for any debts or liabilities. LLC: A Limited Liability Company (LLC) offers personal liability protection for the owner, meaning that Rose’s personal assets would be protected in case of any business debts or legal issues. It also allows for more flexibility in terms of raising capital and bringing in other business partners or investors. For Lotsi Creams, an LLC would be the better choice if Rose plans to expand significantly. As the business grows, particularly with hiring additional staff and purchasing assets for increased production and marketing, the LLC structure would provide the necessary protection against potential liabilities and offer a more robust framework for managing a larger scale operation. 2) Best Structure for Growth If Rose decides to pursue growth through hiring additional personnel and purchasing assets for extended operations, an LLC would be preferable. The expansion would involve higher risks, investments, and potentially more complex financials, which an LLC is better equipped to handle. It provides: Limited liability protection for personal assets. Flexibility to bring in partners or investors if needed. More credibility when dealing with larger contracts, suppliers, or potential employees. The sole trader structure may be too limiting in this case, as it doesn’t offer liability protection, and scaling could expose Rose to personal financial risk. 3) Advantages and Disadvantages of Sole Trader vs. LLC Sole Trader: Advantages: ○ Simplicity and low cost: Easier to set up and manage. There’s less paperwork and no requirement for formal meetings or reports. ○ Full control: Rose would have complete control over decisions without needing to consult partners or shareholders. ○ Direct tax benefits: Income is taxed directly as personal income, which can be simpler for smaller operations. Disadvantages: ○ Unlimited liability: Rose is personally liable for all debts, which puts her personal assets at risk if the business fails. ○ Limited capacity for growth: As the business expands, it may be harder to raise capital or attract larger clients without the credibility that an LLC provides. ○ Harder to scale: As the business grows, managing everything alone could be difficult without the support and structure that an LLC offers. LLC: Advantages: ○ Limited liability: Protects Rose’s personal assets from business debts or legal action. ○ Potential for growth: The LLC structure facilitates raising capital, expanding the business, and hiring employees or investors. ○ Credibility: It gives a more professional image, which can be beneficial when dealing with suppliers, large clients, and financial institutions. Disadvantages: ○ Higher setup and ongoing costs: There are fees and paperwork involved in forming and maintaining an LLC. ○ More regulatory requirements: LLCs must file annual reports, adhere to formal management structures, and comply with various business regulations. ○ Less control: If Rose decides to bring in partners or investors, she may have to share decision-making authority. Conclusion: For Lotsi Creams, if Rose intends to expand the business by hiring more personnel, increasing production, and scaling marketing efforts, an LLC would be the better choice due to liability protection, scalability, and credibility. However, if Rose prefers to keep the business small and simple, a sole trader structure might be sufficient for the early stages. Week 7: Critical Issues in Creating a Business Company Critical Issues in Establishing a Business Key Decisions: ○ Name, Address, and Purpose: Define the company’s identity. ○ Legal Form: Choose between sole proprietorship, partnership, or a corporate structure. ○ Duration: Decide if the company is established for a fixed term or indefinitely. Capital Contributions Forms: ○ Monetary contributions. ○ Non-monetary assets (must be convertible to a monetary value). Valuation: Contributions must be appraised and recorded in official currency. Share Structures LLPs (Limited Liability Partnerships): Capital is divided into parts, notion of face value Joint Stock Companies: Capital divided into shares, more suitable for public investment. ○ Differences between parts and shares : closed companies vs open or public companies Rights of Members Political Rights: Attend and vote in General Meetings, access company information. Economic Rights: Receive dividends, claim liquidation quotas. Hybrid Rights: Preemptive rights to maintain ownership percentage. Week 8: Critical issues when creating a company The Company as a Legal Person Rights of Memebers : Devising the members’ or shareholders rights in the bylaws - Rights of members or shareholders and the proportionality principle STRUCTURE ➔ Sole Director: 1 person acting as director alone, power to make decisions by themselves, fast and simple, company depends on 1 person only ➔ 2 or more directors on a joint basis = decisisons made together, safer, avoiding dependence on one person. Issues could arise when making decisons if not all agree. ➔ 2 or more directors on an independent basis: They act by themselves not need to do it again. But need to have a common view between themselves ➔ Board of Directors (most common): has to act collectively, at least 3 directors. Usually an odd number, no ties. Different from the General meeting. --- not very flexible. However, most larger companies think this is convenient. Decisions clearly protect the company and its decisions. ➔ Delegate = can act by himselves but only with approval from the board General Meeting Decision-Making The General Meeting is the main decision-making body of a company, where shareholders/partners deliberate and decide on significant matters. Decisions are made based on the majority rule. ○ Decisions on capital changes, election of directors, approval of annual accounts. ○ Can be ordinary (scheduled annually) or extraordinary (urgent matters). ○ Has a minimum quorum ○ Directors call the meeting ○ Specific date, place, time ○ Extremely important decisions ○ Need a president or head to guide the meeting ○ Formalization of decisions: The minutes of the GM Rights of Shareholders/Partners Shareholders participate as owners in decision-making. Ordinary meetings are held in the first half of the year to decide on: 1. Management evaluation. 2. Approval of accounts from the previous year. 3. Allocation of current financial results. Convening the General Meeting Legal Requirements (A.173 SCA): ○ Primary Method: Announcements are published on the company’s website (if officially created, registered, and published). ○ Alternative: Publication in the Official Gazette of the Mercantile Registry. Announcement in a major provincial newspaper (if the company lacks an official website). ○ Bylaws-Based Notices: Can include individual written communication sent to shareholder-designated addresses. For shareholders abroad, notifications may be limited to designated locations within the national territory. Additional mechanisms (e.g., electronic alert systems) may be implemented for better communication. Flexibility: ○ Members can modify formal rules and establish simpler procedures through bylaws. Location: ○ Unless otherwise stated, the meeting occurs in the company’s registered office municipality. ○ If the location is not specified, the default venue is the registered office. Timing of Notice For corporations (sociedades anónimas): Minimum 1-month notice is required. For limited liability companies (sociedades de responsabilidad limitada): Minimum 15-day notice is required. For individual notices: Notice period starts from the date the last notice is sent. Universal Meeting Informal Meeting:  ○ Valid without formal notice if all members holding the entire capital are present and agree to the agenda. ○ Common for small or medium-sized companies. ○ Decisions can be made spontaneously when all members are together. Minimum Quorum The minimum quorum must attend within 24 hours of the second call to validate the meeting. Minutes Purpose: ○ Provide evidence of decisions made. ○ Allow shareholders to stay informed about company activities. Registration: ○ If required, decisions from the meeting must be recorded in the Registry. CASE STUDY: KRAFT’S TAKEOVER OF CADBURY 1. Background: Changes in the confectionery industry prompted companies to seek growth through mergers to improve economies of scale. 2. Kraft's Position: Kraft, a multinational known for its diverse food products, targeted Cadbury to expand its market reach. 3. Takeover Details: The takeover was hostile with an offer 30% above Cadbury's market value, which was eventually accepted. 4. Cadbury's Situation: Cadbury was a strong performer but faced challenges due to economic conditions. Kraft's acquisition aimed to leverage Cadbury's established market presence. 5. Outcome: Kraft's takeover allowed it to utilize Cadbury's market insights and expand globally, particularly benefiting from Cadbury's established brand image in emerging markets. EX 2: IN CLASS Company Name: MERCADONA CorporationResolution No. 2024-05: Approval of Contract Date of General Meeting: October 15, 2024 Resolution: "It is resolved that MERCADONA shall enter into a long-term contract with Seurodis the principal manufacturer of Divertidas galletas for the procurement of cookies at a price 30% lower than the market average for similar products. This contract shall be effective for a duration of five years and is to be signed by the Chief Financial Officer.“ 1) The owner of Seurodis is the wife of Emilio (Mercadona head of strategy). 2) Although the price of the product is lower, the quality is also lower, so the company knows that it will face a reduction in price Question Can the minority shareholders of Mercadona contest the agreement of the general meeting Conflict of Interest: The fact that Emilio, Mercadona's head of strategy, is married to the owner of Seurodis creates a significant conflict of interest. Emilio's involvement in approving the contract, even indirectly, could be seen as prioritizing his personal relationship over the company's best interests. This is a major breach of corporate ethics and governance. 1. Duty of Care: Directors and officers of a corporation must act with the care an ordinarily prudent person would take in similar circumstances. In this case, the board and executives, including Emilio, should have carefully considered both the lower price and reduced quality of the cookies. By knowing that the contract involves lower-quality products, they may have failed to properly evaluate the long-term impact on Mercadona’s reputation, profitability, and customer satisfaction. If the board did not exercise sufficient care in assessing these risks, the minority shareholders could challenge the decision on these grounds. 2. Duty of Loyalty: This duty requires directors and officers to act in the best interests of the company, free from personal conflicts of interest. Emilio’s connection to Seurodis, through his wife’s ownership, raises concerns of a conflict of interest. Even if Emilio did not directly approve the contract, his position as head of strategy could influence the decision. If this relationship was not properly disclosed or managed, shareholders could argue that the contract was not made in the company’s best interests, violating the duty of loyalty. Week 9: Raising Capital and Preparing for Sale Sources of Corporate Finance Debt Financing: Loans or bonds. Equity Financing: Selling shares or stakes in the company. Revenue Negotiating an investment transaction to raise new capital 1. Determine Requirements: Assess how much funding is needed and for what purpose. 2. Negotiate Terms: Discuss with potential investors regarding: Investment contract ○ Investment amount. ○ Share or part issuance. ○ Rights attached to the shares. 3. Update Company Bylaws: Reflect changes in capital structure. Preparing for Sale Key tools: ○ Drag-Along Agreements: Streamline sale by aligning all shareholders. ○ Tag-Along Agreements: Protect minority stakeholders. Ensure clarity in the company’s legal framework to attract investors and facilitate the transaction. Investment Contracts Must detail: ○ The rights of new investors. ○ Governance changes due to new capital injection. ○ Exit strategies for investors. CASE STUDY : PAYMENT SL AND TIM SHAFER INVESTMENT - MOOT COURT Discussed ○ Initital amount ○ Face value and premium value ○ Voting power ○ Confidentiality NDA ○ Non compete clause ○ Lock in period of 1 year/2 years ○ Prepare for the sale of the company Drag along clause Tag along clause