5-8. Company Law

Question 1

What can we view a company as?

Answer 1

A way to simplify contracting.

Question 2

What are the six blocks of the Companies Act?

Answer 2

Block 1: Form. Chapter 1-6.
Block 2: Corporate governance. Chapter 7-10.
Block 3: Acquiring capital. Chapter 11-16.
Block 4: Creditor protection. Chapter 17-21.
Block 5: Restructurings. Chapter 22-25.
Block 6: Special rules. Chapter 25-32.

Question 3

What are the marking characteristics of a company?

Answer 3

1. Limited liability
2. Transferable shares
3. Delegated management with a board structure
4. Investor ownership
5. Legal personality

Question 4

What are some effects of limited liability?

Answer 4

• Cost of capital and risk is reduced. If this rule did not exist, unsatisfied creditors would go to the richest shareholders. Before investing, it would thus be necessary to look over who the other shareholders are.
• It allows for portfolio diversification. Investors can invest in multiple companies without increasing their personal risk.
• It also allows for entity shielding (mirror; the other way around). Creditors of shareholders cannot get to the company.

Question 5

What are some effects of transferable shares?

Answer 5

• Reduces cost of capital
• Allows for investor protection. (can exit when they want to)
• Allows longevity.
  This aligns with the accounting terms of going concern, where the company is set to operate indefinitely. If this function did not exist, the company would need to sell off assets to pay shareholders that want exit.

Question 6

Why do we need delegated management?

Answer 6

It is impossible to conduct business if all shareholders are involved in every decision. The company is instead ruled by the majority found at the general meetings.

Question 7

What are the parts of investor ownership?

Answer 7

SHAREHOLDERS engages at the GENERAL MEETING and elects a BOARD that appoints a CEO.

The CEO is responsible to the board, who are responsible to the shareholders (shareholder omnipotence).

Question 8

What is implied by legal personality?

Answer 8

The same rights as a natural person have is given to a fictive subject (the company).

Can bear rights, duties and own property.

Question 9

What is the process of a new issuance of shares (in short)?

Answer 9

1. Decision is made by the general meeting (including price)
2. Shares are subscribed for
3. Shares are allotted
4. Shareholder pay for the shares
5. The issuance is registered

Question 10

What is a warrant?

Answer 10

A right to purchase shares at a set price in the future. Can be issued for free or for a price. It increases capital of the company in two steps:
1. You sell the warrants
2. The warrants are converted to shares for a price.
(can’t have negative value)

Question 11

What is a convertible and why can it be good for the involved parties?

Answer 11

A promissory note = right (or obligation) to convert debt to shares at a certain point in time for a set price.

For the creditor (=convertible-holder), the benefit compared to only becoming a shareholder or having a regular credit, convertibles give an opportunity to choose between two options. Either take the nominal value back for the loan or to convert it to shares (which pays off if the market value is higher).

From the company’s perspective, convertibles is better than a regular credit since it has a lower interest rate (and occasionally none at all).