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Lecture notes corporate law + practice questions and answers
Lecture notes of all the lectures + practice exam + practice questions and answers
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Corporate law lecture notesWeekly Module 1 – 7 september
What is a corporation?
Business Forms
Limited Liability Company
Sole proprietorship: the simplest form of doing business. One person who forms this sole
proprietorship. Owned and run by one person.
Partnerships: more than one participant. Different forms of partnerships. General
partnership: agreement to run a business together. Limited partnership: at least one partner
accesses unlimited liability. Limited partners cannot lose more money than they brought in.
limited partners are not involved in the active management of the business.
Limited liability partnership: often used for law firms. All partners enjoy limited liability.
Corporations: mainly focuses on corporations (US term). Companies is the term that is used
in UK. Hybrid: LLC (commonly used in the US).
What is a corporation?
Legal personality = making capable of owning property and entering into contracts
independently of its owners.
Share capital = capital of the firm is divided in shares and is owned by shareholders.
Articles of Association = core corporate contract. Internal structure. Articles are always
made public.
Corporate board manages the company. Two board models: one tier or two-tier board
model.
,Investor ownership = ownership claim controls control in capital right that are connected to
these shares.
- appointment rights
- decision-making rights
Residual claimants = in case of bankruptcy, residual claimants get paid after the fixed
claimants are paid. Shareholders are only liable up to their investment. = owner shielding.
Creditors who have a contractual claim. This claim is a priority claim, thus a fixed claim.
Creditors are also called fixed claimants.
What are the different jurisdictions that are going to be covered?
Global Corporate or Business Law?
… we have a comparative focus, but mostly focus on exploring the rationale behind
important business law rules.
Main jurisdictions:
- UK (common law) (case law is the primary source of law)
- US (common law)
- Continental European countries (civil law)
But also, other jurisdictions will be considered.
,Introduction to the jurisdictions: US
- Federal government
- State governments
Courts:
Federal courts on federal subject matters or interstate suits.
States: everything else, including corporate law. (But: SOX (board matters), Dodd-Frank
(SoP)).
Companies are free to incorporate in any state regardless of whether they are doing
business there or have any contact with this state. A lot of competition.
Most corporations are incorporated under the law of the state Delaware!
Why Delaware?
According to the literature: reputation to be friendly towards corporations
- Political consensus to keep the Delaware Corporation law modern and up-to-date
o Example: virtual shareholders’ meeting
o Low administrative burden
- Experienced judges
- (Tax policy)
Delaware General Corporation Law (DGCL) , http://delcode.delaware.gov/title8/c001/
Other important statute:
Model Business Corporation Act (MBCA)
Also, Federal laws, for example:
Sarbanes-Oxley Act (2002) for public companies
Listing Rules, including NYSE and NASDAQ.
Introduction to the jurisdictions: Europe
Member States have national statutory company law but are also subject to European law
- Regulations – a binding legislative act. It must be applied in its entirety across the EU.
- Directives – set out a goal that all EU countries must achieve. However, it is up to the
member states to devise their own laws on how to reach these goals.
- Recommendations – not binding. A recommendation allows the institutions to make
their views known and to suggest a line of action without imposing any legal
obligation on those to whom it is addressed.
Less regulatory competition in Europe than in the US!
Why?
- Reputational aspects
- Two conflicting doctrines in Europe:
o Doctrine of incorporation
Company laws applicable to the legal entity are those of the
jurisdiction in which the legal entity has been incorporated,
irrespective of the ‘real seat’.
, o Doctrine of real seat
The place where the company is effectively managed or operated.
Hence, a company cannot simply adopt the legal structure of a French
company, or a French company cannot simply move its business
elsewhere.
European Company (Societas Europaea, SE)
Soft Law Requirements
Yet another source of ‘law’: Corporate governance codes
Soft law with principles and best practices: comply or explain principle
Almost all countries, some supra-national, some part of country (see
http://www.ecgi.org/codes/all_codes.php)
Articles of Association: the corporate contract
Also referred to as the corporate charter. All companies need these articles of association.
Incorporation = the formation of the company
Different documents need to be filed, including the Articles of Association, mandatory
capital and registration in the Commercial Register.
Articles of Association
1. Mandatory rules
- Cannot be modified by contract (articles of association).
- Usually aimed at protection of weaker parties (for example creditors).
2. Default rules
• Applicable in case articles of association or another contract does not state
otherwise.
• Article 2:195(1) DCC: Unless the articles of association provide otherwise, a
valid transfer of shares requires that the shareholder who wants to dispose of
one or more of his shares, firstly offers those shares to his co-shareholders in
proportion to the number of shares that is held by each of them at the moment
that such offer is made. […].
• France: default rule is one-tier board structure.
The goals of corporate law
Corporate law performs two general functions:
1. Provides the structure of the corporate form and ‘housekeeping rules’ to support
this structure;
2. Control conflicts between corporate ‘insiders’ and ‘outsiders’. (Agency problems)
Comparative (corporate) law
- Harmonization – for instance, the EU
- Convergence – the five characteristics
- Transplantation – including legal transplants
,Kamer van Koophandel v. Inspire Art Ltd.
Purpose of the case law videos
1. Know what the law of the land is
2. Learn how to read a case or a legal opinion! Critical skill for any legal researcher or
lawyer.
Main points to address
Simple formula:
1. Procedural History (what court, which instance, what year)
2. Facts of the case (the relevant facts!)
3. What is the legal question (there is probably more than one…)
4. What is the holding (the holding is the answer to the legal question(s))
5. The reasoning (why did the Court answer in this way)
6. The remedy
Procedural History
- Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art
Ltd.
- Court: Court of Justice of the European Union
- Procedure: Reference for a preliminary ruling (Kantongerecht te Amsterdam –
Netherlands sends questions to the CJEU)
- Year: 2003
Relevant facts
• Inspire Art. Ltd was formed on 28 July 2000 in the UK
• The company deals with art objects and has a branch in Amsterdam
• Its business activities were almost exclusively happening in the Netherlands
• The Dutch Chamber of Commerce wanted to impose additional obligations (beyond
the 11th Company Law Directive) under Dutch national law
• In regard to minimum share capital, production and publication of documents and
penalties for non-compliance (director’s liability until compliance with these
requirements is met) (paras 35-37)
• Inspire Art Ltd brought the Chamber of Commerce to court claiming that the Dutch
national law runs contrary to EU law
• NB: the Court of Justice is not a court of facts!
Legal questions
1. Are Articles 43 EC and 48 EC to be interpreted as precluding the Netherlands from
attaching additional conditions to the establishment in the Netherlands of a branch of a
company which has been set up in the United Kingdom with the sole aim of securing the
advantages which that offers compared to incorporation under law, given that Netherlands
law imposes stricter rules than those applying in the United Kingdom with regard to the
setting-up of companies and payment for shares, and given that the Netherlands law infers
that aim from the fact that the company carries on its activities entirely or almost entirely in
the Netherlands? (para 39)
2. Could the said law be justified by overriding reason of public interest? (para 39)
, Ruling
1. Yes, the Netherlands is precluded from imposing additional obligations not included
in the 11th Company Law Directive as it restricts the right of freedom of
establishment.
2. No, the justifications put forward by the Dutch government to implement such
provision, namely to counter fraud, protect creditors and ensure effective tax
inspections and fairness in business dealings, do not fulfill the criteria of efficacy,
proportionality and non-discrimination. Hence, the national provisions cannot be
justified on grounds of overriding public interest. (paras 131-143)
Reasoning
First question:
The legislation in effect impedes the enjoyment of the right of freedom of establishment.
(paras 99-104)
The fact that Inspire Art Ltd. was incorporated in the UK whereas has its main activities in
the Netherlands so that it can evade the stricter Dutch company law regime is not a reason
for the Dutch government to restrict its freedom of establishment. (paras 95-96)
Freedom of establishment may be restricted only when there is an abuse or fraud. In this
case, the purpose of enjoying a more favorable company regime does not constitute abuse
or fraud. (97-98)
Second question:
The justifications put forward by the Dutch government do not meet the established in
previous case law legal criteria, namely the national provisions relating to minimum capital
and liability of directors must be (para 133):
• applied in non-discriminatory manner;
• justified on grounds of public interest;
• Effective;
• proportionate.
Outcome/remedy
Case is referred back to the Amsterdam court.
The national measure has been declared invalid on the grounds of a breach of EU law.
Inspire Art Ltd. could continue its business in the Netherlands without complying with any
additional obligations
Forum shopping = choosing the best jurisdiction.
Reading materials
- Chapter 1 C&D: pp. 3-24.
- Chapter 2 C&D: pp. 25-60.
- Chapter 3 C&D: pp. 94-101.
- Chapter 4 C&D: pp. 105-133.
- Chapter 5 C&D: pp. 150 – 166.
- Hansmann, Henry and Kraakman, Reinier H., What is Corporate Law? (Feb 25, 2004). Yale
Law & Economics Research Paper No. 300. Available at SSRN:
https://ssrn.com/abstract=568623 (pp.1- 15).
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