Chapter 1: What is Corporate Law?

Question 1

‘nexus of contracts’.

Answer 1

often used to characterise a firm. it emphasises that most of the important relationships within a firm, eg. among firm owners, managers and employees, are essentially contractual in character and hence based on consent, rather than involving some form of extracontractual command-and-control authority.

Question 2

‘separate patrimony’

Answer 2

involves the demarcation of a pool of assets that are distinct from other assets owned, singly or jointly, by the firm’s owners (shareholders), and of which the firm in itself, acting through its designated managers, is viewed in law as being the owner.

Question 3

priority rule

Answer 3

grants to creditors of the firm, as security for the firm’s debts, a claim on the firm’s assets that is prior to the claims of the personal creditors of the firm’s owners.

Question 4

rule of ‘liquidation protection’

Answer 4

provides that the individual owners of a corporation (shareholders) cannot withdraw their share of firm assets at will, thus forcing partial or complete liquidation of the firm, nor can the personal creditors of an individual owners foreclose on the owner’s share of firm assets.

Question 5

authority rule

Answer 5

rules specifiying to third parties the individuals who have the authority to buy and sell assets in the name of the firm and to enter into contracts that are bonded by those assets.

Question 6

procedure rule

Answer 6

rules specifying the procedures by which both the firm and its counterparties can bring lawsuits on the contracts entered into in the name of the firm.

Question 7

limited liability

Answer 7

creditors are limited to making claims against assets that are held in the name of the firm itself, and have no claim against assets that the firm’s shareholders hold in their own names. it is a strong form of owner shielding.

Question 8

entity shielding

Answer 8

protects the assets of the firm from the creditors of the firm’s owners.

Question 9

asset partitioning

Answer 9

business assets are pledged as security to business creditors, while the personal assets of the business’s owners are reserved for the owners’ personal creditors. it allows firms to isolate different lines of business for the purpose of obtaining credit. it is made up of entity shielding and limited liability.

Question 10

transferability

Answer 10

permits the firm to conduct business uninterruptedly as the identity of its owner changes, thus avoiding the complications of member withdrawal that are common among, eg. partnerships, cooperatives, and mutuals. fully transferable shares do not necessarily mean freely tradeable shares.

Question 11

statutory form

Answer 11

usually major jurisdictions have at least one that is specialised in the formation of closed corporations.

Question 12

quasi-corporate statutory forms

Answer 12

can be used to form business corporations with all of the five core characteristics, though some of these must be added by contract.

Question 13

Konzernrecht

Answer 13

German law of groups. it qualifies limited liability and limits the discretion of boards of directors in corporations that are closely related through cross ownership, seeking to protect the creditors and minority shareholders of corporations with controlling shareholders.

Question 14

securities law

Answer 14

have strong effects on corporate governance through rules mandating disclosure, regulating sale and resale of corporate securities, mergers and acquisitions, and corporate elections.

Question 15

corporation charter

Answer 15

the principal contract that binds the participants in a corporation. it sets out the basic terms of the relationship among the firm’s shareholders and between the shareholders and the firm’s directors and other managers.

Question 16

‘majoritarian’

Answer 16

if they reflect the terms that the majority of well-informed parties would themselves most commonly choose.

Question 17

‘either-or’ provision

Answer 17

corporate law sometimes specifies the rule that will govern if the default provision is not chosen, eg. French corporate law allows a two-tier board structure as an alternative (‘secondary’ provision).

Question 18

‘place of incorporation’ rule

Answer 18

permits a business corporation to be incorporated under the law of any of the 50 individual states in the US (or any foreign country), regardless of where the firm’s principal place of business, or other assets and activities, are located.

Question 19

overall objective of corporate law

Answer 19

to serve the interests of society as a whole.

Question 20

the appropriate goal of corporate law

Answer 20

to advance the aggregate welfare of all who are affected by a firm’s activities, including the firm’s shareholders, employees, suppliers, customers, and third parties eg. local communities and beneficiaries of the natural environment. this is the pursuit of overall social efficiency.

Question 21

political economy

Answer 21

the political and economic forces that shape law-making. it generally reflects the interests of influential constituencies, eg. controlling shareholders, corporated managers, or organised workers.

Question 22

political effect

Answer 22

when lawmakers pay undue regard to the interests of particular constituencies. or, the phenomenon of populist reforms after a scandal or crisis.

Question 23

distributional effect

Answer 23

the influence patterns of corporate ownership give to particular interest groups to shape corporate law in ways that distribute a larger fraction of the fruits of enterprise to themselves.

Question 24

efficiency effect

Answer 24

share ownership patterns shape the problems to which reforms designed to facilitate investment respond.