these notes focus on:
- Commercial and company law principals
- Definition of European law, European Company law and Comparative company law
- The Origins of European Company Law: the four freedoms of European
- Union and the notions of Companies and Firms
- The right of Establishment. Prim...
What is a company? A company doesn’t exist in nature, it is not tangible and it is not an individual natural person.
A company is a creature of law which carries out an economic activity.
A company has a legal entity separated from its member or founders.
If we look at the relationships among the members, what is interesting is that in each member state we have a
definition of companies considering this prospective.
A company is defined as a contract, that thanks to specific law provision becomes a subject or better said acquires
legal entity and personality.
What is the content of this contract for the members? It is a contract focused on what?
It is a contract that regulates the liabilities and rights of the members. And also the economic aspects such as the
distribution of the profit.
How many people? There is an unlimited number of people, however if we have a company with just one person
that could be an issue.
What do these members have to do? The shareholder has to contribute, it is very important because it gives us the
rule on the governance. The more you contribute, the more power you have. It is a contract by which the parties
contribute in order to carry on an economic activity.
So, it is a contract by which the members control the contribution, by which each party undertake to contribute
goods, services in order to make profit.
How do we make profit? Carrying on an economic activity, this is named undertaking an enterprise. So you
technically can carry on an enterprise alone or collectively, as a partnership.
Company is the way in which we organize the way to carry out an activity. The enterprise is the activity.
Business is the set of assets, means, materials, goods used and organized by the entrepreneur to carry on the
activity.
The definition of company can have two meanings:
- a subject of law which enters into contracts for enterprises (internal prospective)
- a contract under sight executed by its members (external prospective) in this case I am analyzing the
company in the prospective of third subjects, I am considering the company as contract.
These two prospective are the ones which are analyzed in each state and by European legislators.
,It is also important to underline that undersigning a contract means entering a contract. When I undersign a
contract, I can say I executed a contract, it doesn’t mean I fulfilled it, performed it.
What is company law?
Company law has a specific function, it intends to provide an enterprise with legal form which considers 5 core
attributes:
- Legal personality: to recognize the capacity of a company to be a subject of law, to have rights and
duties. It’s a legal entity separated from its members, shareholders, therefore it has limited liability (the
private assets of the members cannot be touched in case of debt, the only assets they can lose is the
contribution they made to the company, their investment).
- Limited liability: refers to member liabilities, we have two kinds of liabilities in this case such as liability
for debts or for damages. When we talk about limited liabilities, we are referring to liability for
company’s debts.
A shareholder knows that starting a company with rights and duties and liabilities he doesn’t have
company debts, he will lose his share but he will not be required to cover the debt.
This is very important as an aspect because it changes whether we are considering a company or a
partnership.
How do partners respond for partnership debt? Here we have to distinguish the internal perspective to
the external perspective. Normally a partner is jointly and severely liable for third party debt. In this case
the third party can enforce its complete damage to one member party of the partnership. Considering this
form an internal prospective means that the member that has paid all the debt can require its partner to
pay for his portion of the debts.
In companies it is different because the third party can only claim the debt from the assets of the
company. This is why companies are more attractive for investors, because you can lose your investment
but not more than that, it’s a useful tool for business.
Company is the most important instrument to make business in the world, its shares can be sold in stock
exchange markets. In fact LLC (limited liabilities companies) are the companies which can be listed in
exchange markets.
We have different rules for public and private companies. Public companies have more shareholders, that
is why European company law ruled substantially exclusively companies and not partnerships. This is
because the target of the EU is the creation of a single market, and therefore legislators are more interest
in companies.
The different prospective approach on liability refers also on the governance, if we want to protect third
parties, in particular creditors we know that a creditor is more protected in a partnership rather than in a
company, because the creditor can enforce its debt to the assets of the partnership and the partners.
, Legislators, because of this, provide more rules for governance of companies, because creditors are pretty
much covered in partnerships.
So, for company debts, when a company enters in contracts, it can be in active or passive positions, as
creditor or debtor, it means that for these debts only the company is responsible, with only its assets,
which are the ones contributed by the shareholders. The assets of the private shareholders are untouched
in case of debt, but once they invest in the company those become company assets, and those are the only
ones they can lose. This is very import to understand, it is a cornerstone of corporate law.
The creditor that wants to obtain the debt cannot enforce its right on to the shareholders but only to the
company and its assets. This is the main difference from a partnership, in a partnership the creditor can
enforce the debt on the partners, and their private assets.
- Transferable shares connected with the company as a contract
- Delegated management under a board structure: it is strictly connected with the structure of a company
and a governance. Under a broad structure connected with the company as a
contract, the shareholders decide to delegate the management of the company to another shareholder or
third party, their relationship is important also for the role of the directors and decisions also towards
third parties.
- Investor ownership: connected with the company as a contract, the relationship of the shareholders with
the investors, also the shareholders can be the investors of the company
The function of a company law is to provide these five characteristics.
But we have another important issue: the so called agency problems. They are conflicts of interest in which one
party is expected to act in the best interest of another party.
There can be possible conflict of interest inside the company, in each company law we have these 3 agency
problems:
1. Conflict between managers and shareholders, divergences in the behaviors of shareholders and
managers (which can damage the company using money for their interest etc.) For example the
remuneration (payment for work or services: they demanded adequate remuneration for their work)
between the director and the shareholders.
2. Conflict among shareholders (they are not in the same position, some contribute more and have more
relevance inside the company than others, inequitable distribution of the profits can also cause this) For
example because some shareholders want to maintain their shares and others want to sell them
immediately
, L2-20/02/24
3. Conflicts between shareholders and the corporation’s other constituencies
This creates an important issue around the concept of interest of the company. What could the interest of a
company be? The interest of the company is to exist, to maintain its position, to make profit, to protect third
parties. The answer to this question is very complicated.
About this we can find two doctrines: contractualism theory and institutional theory.
1- Contractualists: the interest of the company is the interest of the shareholders because they are
the owner/founders. What is the interest of the shareholders? Can we distinguish the interest of
the shareholders? If we are shareholders how can we earn money?
- Selling the share
- Distributing profit
These are two different ways to earn. In the contractualism we find two other different approaches:
1. The interest of the shareholders is the interest of the distribution and profit;
2. The shareholder’s interest is the shareholder’s value, so the value of the shares. It means that the
interest of the company is to increase the value of the shares
2- Institutionalists (Germany): considers that the interest of the company is the interest of third
parties. The company has to act for the benefit of the employees, creditors etc. so not for the
shareholders, but for the stakeholders.
Example: If we produce ships our target in this situation is to improve the circulation of the river in the society.
Not to make profit but to improve the ship system, the navigation in general.
Today, considering the various crisis and also the new important role of the ESG-factor (set of rules and
recommendation to consider interests of third party in carrying on the activity) we are considering a new
institutionalism. Because before the economic crisis the majority opinion was in the sense of contractualism in the
sense of shareholder value. Nowadays with the so called institutionalism the interest of the company is the interest
of the shareholder but in the sense of a shareholder value in a long term prospective. This is because the long term
helps consider other constituencies.
The definition of the company in this sense is very similar to the so called enlightened shareholder value (this
comes from the Companies Act of 2006 in UK). The director has to maximize the interest of the shareholder but
taking into account various constituencies like said in art.172 of the companies act.
What is the enterprise? Which kind of characteristics does an activity have to have to be considered an
enterprise?
The most common definition of enterprise is an organized economic activity carried on professionally to produce
or exchange goods or services. This is the activity carried on by the company.
Considering this aspect: what does economic activity mean?
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