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EUROPEAN COMPANY LAW
Super complete notes of European Company Law, including slides and recording of the classes. Using only these notes I got a 9,5 on the final exam.
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EUROPEAN COMPANY LAWStephanie Aun Santiago
03/02/20
EUROPEAN COMPANY LAW
UNIT 1
EU company law harmonization. Definition of corporates
I. COMPANY LAW – INTRODUCTION
INTRODUCTION
- The course European Company Law offers an introduction to company law within the
European Union, covering common characteristics as well as differences.
- Harmonisation and regulation in the European Union have led to a convergence of the
corporate laws of the Member States, but only to a limited extent
- Meanwhile, efforts continue to be undertaken at EU level to address current issues, such as
shifting views on the role of corporations in a capitalist society and the integration of European
capital markets.
- In the course, we will assess the EU's policy objectives in these areas, and analyse the
instruments through which the EU is seeking to fulfil such objectives.
Member State level vs. European Level
We can understand company law as the one stipulated by the European Union. But EU legal
system is not unify, we don’t have the same laws through the EU (each Member State has its
own laws). Nevertheless, there is an overarching concept of the European Union which interacts
with national law.
Some topics are addressed,
- Topics at internal level
- Topics at EU level
Some topics are addressed at an internal level, and some other at the European level. These
topics can be regulated in a uniform fashion throughout the EU or in a general way by guidelines
or directives (on how to amend their own corporate law).
Key Challenges (roles, how they should be run, etc.)
Themes gaining importance at the EU level:
- Importance of climate change (reducing carbon emission) – topic treated at the EU level.
- Rising inequality: increase in taxes
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- Executive pay - Large CO salaries
- Near monopoly positions of large network type corporations like Facebook.
KEY FEATURES OF CORPORATION
1. Legal personality
a. Perpetual life: eternal life, created by law. Fictional: they don’t exist, our
imagination gives them value – we agree to believe and agree to live by certain
practices which helps us to function as large groups – Ex. Money. Rules are not
tangible.
b. Enables ownership, acting on its own: the fact that they exist as a legal person,
allows them to own assets, be liable, have obligations, act in the economy.
2. Limited liability for investors
a. Encourages risk-taking, entrepreneurship (but also opportunism). Companies
have shares and investors own them. This increase the appetite for risk.
Company law shields investors from liability. If the company can’t repay debts, it
goes bankrupt: shareholders are affected because the value of the share is 0, but
they are not liable.
Entrepreneur has incentive to do the best they can as to preserve the value of
the share and not to go bankrupt, but they won’t be liable for the debt.
b. Enables separation of capital supply function and executive function: delegate
management of companies to professional managers. They don’t have to
constantly be involve to make sure that nothing goes wrong, because if it does
their private property is not touched by the bankruptcy of the company (only the
value of their shares)
So: companies are not run by investors themselves.
3. Free transferability of investor interest
The shares go from hand to hand, from one type of investors to other.
a. Protects investors (exit option): you can sell the share in the company, the
investor can capitalize the investment if he or she doesn’t have faith about how
the company is doing. The investor is not tied to the company he or she had
invested. This illustrates the difference between shareholder, investors,
founders and the company itself.
Founder: if he needs money:
i. Early stages (investors): the company is not stable, there is a high risk that it
won’t be profitable or successful. Angel investors are people who can spare
money (Ex. Own savings, family, etc.)
ii. Start-ups investors (venture capitalist): high risk investments at an early
stage of the company. Venture capital investors: invest in a large number of
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start-up companies accepting that 19 out of 20 will likely fail, but if there is a
“Facebook” in there, it would have been all worth it.
iii. The business has grown (bank): there is an initial capital and the Bank will
lend us money if we have a proven concept or a revenue. Apply for a loan.
iv. Issued securities
Debt vs. Equity
The venture capitalist will have generated return on their investment and would want to
capitalize them and get out. Others investors will get in.
In terms of debt, we can either go to the bank or (if the business have grown) we could issue
bones. We can “slice” a million pieces of debt instead of going to the bank. People lend money by
acquiring a bone issued by the Company, which has a fixed return.
So, a bone is a loan sliced up into tiny pieces of debt issued for investors in the market, who can
also start trading these bones. Debt security is being traded.
Debt: fixed return + periodically paid. There is obligation to pay interests periodically and to
repay the full amount after a certain period of time. The lender has less risk and less return (he
will settle for less than the shareholder). The interest rate payed to the bank or to bone holder
will be typically lower than what investors in the market expect as return (they have a higher
risk)
b. Enables entry of new investors
There are two ways to structure IPO (initial public offering)
- Current shareholders selling their shares: the investor wants to get out.
The company is not issuing shareholders itself, the existing shareholders are selling existing
shares to other investors, so this is not helping the company to rise funds. The money isn’t
flowing to the company.
To find growth and investment, the company has to offer new shares to the public (issue new
offers). When the company goes IPO for the first time, it goes to the stock market, increase the
capital, issue new shares and now the new money will flow to the company.
In practice, there is a mixture between both.
Companies which don’t do well: the share prices go down. They need capital but they cannot
issue shares because the market don’t believe in them. They a) can be sold, b) be restructure, c)
bankruptcy or been d) takeover. We have two types of takeovers,
- Investors who take a company
- A competitor most who is more successful in the market
A private equity investor could also buy the company.
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Private equity investors ≠ venture capital: VC is for start-ups, whereas PE invests on already
existing companies. PE invest in larger companies which have stable cash flow, useful to repay
debts, and is basically a team of investment management who raise capital from venture funds,
wealthy individuals.
PE may buy companies from venture capitalist, without the company going in the stake market,
or they may require companies that are listed in the market. They start running it and
generating value.
4. Centralized management
Companies are run as hierarchical organizations: CO (chief executive) with other executives.
There are different layers of management.
a. Enables maximum efficiency in large organizations
b. Investors give up veto right except in respect of key decisions
The board is also at the very top. This is efficient and enables investors to delegate control to
professional managers. The founder shareholder can decide everything, but as the company
grows the company will become more and more autonomous, the board will have more power
and discretion and as a shareholder we will take a step back from the management perspective
and we will only have veto rights in respect to key decisions. Ex. Electing directors, dismissing
de CO, distribution of profits – declare dividends – change the article associations, issue more
shares – because my interest is diluted, that is why we have the opportunity to buy my pro rata
share as not to be diluted/preference–.
Article of associations: contract between shareholders and the company: majorities required,
how many stocks are, etc.
5. Investor ownership
a. Could be founder, private investors, investors in publicly listed companies.
CORPORATE GOVERNANCE: THREE AGENCY PROBLEMS
Shareholders are stakeholders at the same time. There are different kind of stakeholders:
managers, board, the stake is similar to the one all employees have. They rely on the company
for their income and there reputation can also be affected.
- Shareholders
- State
- Neighbours
- Lenders: they can be harmed if the company doesn’t fulfil payment obligations or goes
bankruptcy.
- Customers: EJ. Pharmacies
- Employees
- Environment
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