BUSINESS ORGANISATIONS

Question 1

Agency problem

Answer 1

Situation where there is a conflict of interest between the principal and the agent

Question 2

Asset partitioning

Answer 2

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]

Question 3

Assigning contracts

Answer 3

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

Question 4

Bargaining power

Answer 4

The ability to exert influence over another contractual party

Question 5

Capital lock-in

Answer 5

Impossibility of shareholders to withdraw their equity at will and force the liquidation of the entity

Question 6

Entity shielding

Answer 6

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)

Question 7

Hold-up problem

Answer 7

The incentive to underinvest in firm-specific innovation when a transaction is non-contractible ex-ante (GM and GB)

Question 8

Incomplete contracts

Answer 8

The impossibility to write clauses for all possible contingencies (bounded rationality)

Question 9

Legal personality

Answer 9

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

Question 10

Limited liability

Answer 10

Prevents company creditors from the personal assets of shareholders

Question 11

Notice

Answer 11

Public disclosure of the existence of property rights (i.e. bond notes, land registry)

Question 12

Property rights

Answer 12

Residual control rights - Alchian & Demsetz

Right in rem, erga omnes - Hansmann & Kraakman

Protection from more powerful parties

Question 13

Regulatory partitioning

Answer 13

Separation of the legal entity from its shareholders so that it can operate under the law independently of its owner [Pargendler]

Question 14

Representation/agency

Answer 14

The manager’s ability to act for the company and sign contracts on its behalf, but not make himself personally liable for the obligations

Question 15

Residual control rights

Answer 15

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

Question 16

Transferability of shares

Answer 16

In order to facilitate capital lock-in, shareholders are able to sell their equity in the entity to third parties

Question 17

Veil peeking

Answer 17

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

Question 18

Veil piercing

Answer 18

Breaking the barrier created by limited liability and imposing liability for obligations of the entity on its shareholders

unidirectional, always bad, private law

Question 19

Waqf

Answer 19

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