BUSINESS ORGANISATIONS Flashcards
Agency problem
Situation where there is a conflict of interest between the principal and the agent
Asset partitioning
Separating a company’s assets from the assets of equity holders
The depersonalisation of assets is essential to have a legal entity that can operate independently of its owners [Pargendler]
Assigning contracts
Transferring the obligations and liabilities of a contract to another party, so as to make them the new counterparty to the contract
The default rule in contract is that this is not possible
Liquidity and flexibility required for corporations is thus achieved by assignability of contracts
Bargaining power
The ability to exert influence over another contractual party
Capital lock-in
Impossibility of shareholders to withdraw their equity at will and force the liquidation of the entity
Entity shielding
Protecting company assets from creditors of shareholders
Weak: firm creditors have priority over personal creditors
Strong: firm creditors only have access to financial rights (i.e. shares) in the firm, not physical assets (no property rights)
Complete: personal creditors cannot access firm assets (capable through the law)
Hold-up problem
The incentive to underinvest in firm-specific innovation when a transaction is non-contractible ex-ante (GM and GB)
Incomplete contracts
The impossibility to write clauses for all possible contingencies (bounded rationality)
Legal personality
The legal status given to entities that allows them to exist in the legal world (enter into contracts, go bankrupt, act in court, own property)
Possible because of regulatory partitioning
Limited liability
Prevents company creditors from the personal assets of shareholders
Notice
Public disclosure of the existence of property rights (i.e. bond notes, land registry)
Property rights
Residual control rights - Alchian & Demsetz
Right in rem, erga omnes - Hansmann & Kraakman
Protection from more powerful parties
Regulatory partitioning
Separation of the legal entity from its shareholders so that it can operate under the law independently of its owner [Pargendler]
Representation/agency
The manager’s ability to act for the company and sign contracts on its behalf, but not make himself personally liable for the obligations
Residual control rights
The ability to control the asset in an un-planned for situation
The right to decide the preferred course of action once all contractual rights and obligations have been fulfilled
Transferability of shares
In order to facilitate capital lock-in, shareholders are able to sell their equity in the entity to third parties
Veil peeking
Permitting characteristics associated with individual shareholders to be attached to the company (e.g. Devaux) to prevent frustration of the purpose of regulation or legislation
bidirectional, good and bad, public law
Veil piercing
Breaking the barrier created by limited liability and imposing liability for obligations of the entity on its shareholders
unidirectional, always bad, private law
Waqf
An unincorporated trust that pursues a public benefit deemed appropriate by Islam, created by an owner of immovable property.
Withdrawal from circulation of the assets.
Always provided a public function, and so the risk of expropriation was tempered
