Corporations and Shareholders

Question 1

What is the difference between corporations (joint-stock companies) and limited liability companies?

Answer 1

Corporations are ready to be opened to the market and can be either private or public while limited liability companies are not ready to be opened to the market, with the benefit of being more flexible in management and taxation

Question 2

What defines a corporation?

Answer 2

The fact that it is a separate legal personality, where no direct individual carries responsibility

Question 3

What are the effects of incorporation, i.e the procedure of forming a company into a corporation?

Answer 3

1. Limited liability - i.e no single person is responsible for the debts of a corporation
2. Perpetual succession - refers to the fact that a corporation lives on regardless of changes in ownership e.g
3. Business property is owned by the company - despite owning 99% of a company, you do not own the assets themselves
4. Full contractual capacity in its own right - corporations can enter into and fulfill contracts
5. Liability in crime and tort - penalties are not only given to responsible individuals, but also the corporation itself in terms of monetary fines
6. In the case of damage, remedies are granted to the company - the so called Foss v Harbottle rule which stems from the fact that there are many stakeholders affected by a corporation

Question 4

What does it mean to lift or pierce the “Corporate veil”?

Answer 4

When shareholders take advantage of a corporations’ benefits by e.g hiring their friend as CEO

Question 5

What are the five dimensions of a corporation?

Answer 5

1. Limited vs Unlimited liability
2. Private vs Public - refers to the tradeability of shares. LLCs can not go public without a conversion
3. Parent companies vs Subsidiaries
4. Size (Small, Medium, Large) - affects the rules and regulations with regards to revenue
5. Domestic vs Foreign

Question 6

What are the two overall steps required for the formation of a company and what do they entail?

Answer 6

1. Memorandum of Association (aka charter of incorporation) - a legal document that explains why the organisation was founded
2. Articles of Association (aka bylaws) - defines the functioning of a company which means that it changes constantly over time

Question 7

What is a notary public?

Answer 7

A state-approved authority that serves the public in non-contentious (non-controversial) matters

Question 8

What are the contents of a MoA (seven in total)?

Answer 8

1. The name/denomination clause - does not state the name of members
2. The registered office clause - a declaration of under which laws the corporation will operate, not necessarily where the business is carried out
3. The objects clause - the corporation purpose which can be changed in the bylaws
4. The limited liability clause
5. The authorised share capital - the maximum amount of capital that a company can issue to stakeholders
6. The duration
7. The name of the initial directors - since someone needs to have the authority

Question 9

What are the contents of an AoA (seven in total)?

Answer 9

1. Internal functioning of the company - who oversees who
2. Transfer of shares - states the limitations such as lock-up (the time that an investor has to own their shares) and right of first refusal (the priority of current shareholders to buy shares before they become available to the market)
3. Rights attached to shares - generally more shares equal more influence
4. Rules on shareholders meetings - sets the framework for rules and procedures
5. Appointment and powers of directors
6. Internal monitoring - “who is in charge of the internal control system?”
7. Majorities/supermajorities - how votings are to be settled

Question 10

What are the two general shareholder meeting types?

Answer 10

1. Annual General Meeting (AGM) - At least once a year due to annual reporting, where financial statements need to be communicated and verified
2. Extraordinary General Meeting (EGM) - Urgent meeting to address current difficulties

Question 11

What is the definition of share capital?

Answer 11

The total amount of all contributions made by shareholders in cash or in kind (property, trademark e.g)

Question 12

What is the difference between Authorised, Issued and Paid-up capital?

Answer 12

• Authorised capital - the maximum amount of share capital that a company is allowed to issue
• Issued capital - the value of the shares that a company has allocated and sold to shareholders
• Paid-up capital - the amount of money that a company has received from shareholders

Question 13

What are multiple voting shares?

Answer 13

As the name states they are shares that grant the shareholder multiple votes. An example is loyalty shares which may have the privelege of “remain a shareholder for one year and you will get an extra vote”

Question 14

What are preference shares?

Answer 14

Stocks that include a preference, e.g a liquidation preference where shareholders receive dividends before ordinary shareholders

Question 15

What are saving shares?

Answer 15

Shares without a voting right which may benefit better from profit distribution

Question 16

What are deferred shares?

Answer 16

The opposite of preference shares, where these shareholders are last in line for liquidation. Carries fewer rights than ordinary shares

Question 17

What are redeemable shares?

Answer 17

Shares that will be available for buy-back to the company at a set price

Question 18

What are three ways in how shares can be issued cost-wise?

Answer 18

At a discount to receive further shareholders or at a premium to raise additional capital or strenghten financial position. Or there can be bonus shares which are issued at no extra cost to existing shareholders

Question 19

What is the pre-emptive right of shareholders?

Answer 19

It states that existing shareholders have the right of buying newly issued shares before external buyers are introduced

Question 20

What are dividends?

Answer 20

Money paid to shareholders out of distributable profits or reserves

Question 21

What does treasury stocks imply and what do they mean?

Answer 21

That a company has purchased its own shares, which is also known as buyback. The purpose is to give a statement of confidence or support shareholders in a loss of value. The voting rights and dividends distribution of treasury stocks is suspended

Question 22

What are bonds?

Answer 22

Bonds are outgoing loans to a company or government

Question 23

What are warrant bonds?

Answer 23

Bonds that gives the right to subscribe, at a predefined price, to shares of future issuance

Question 24

What are convertible/exchangeable bonds?

Answer 24

Convertible bonds can be converted to shares, where an exchangeable bond can be exchanged to shares in a subsidiary

Question 25

What are subordinated bonds?

Answer 25

Bonds that have a lower reimbursement (re-payment) priority, which means higher returns (interest) with a higer risk

Question 26

What are perpetual bonds?

Answer 26

Bonds with no maturity date that guarantees a long term stream of interest to the holder (likened to equity)

Question 26

What are debentures?

Answer 26

Bank loans that are not backed by physical assets or collaterals (assets), but rely on creditworthiness and reputation

Question 27

What defines the traditional latin governance system?

Answer 27

Shareholders decide for the Board of Directors or Sole Director as well as the Board of Statutory Auditors (the internal control body). Also, the shareholders decide which external auditors to use

Question 28

What defines the two-tier governance system?

Answer 28

Shareholders decide for a supervisory board which in turn decides for a management board. The shareholders also decide which external auditors to use. Employees are represented by the supervisory board, which is different from other boards

Question 29

What defines the single tier governance system?

Answer 29

Shareholders decide for a Board of Directors who independently form an internal Audit Committee, which also takes part in influencing and voting for the strategy and operations of corporations. The shareholders also decide which external auditors to use.

Question 30

In corporations, who is the owner and who controls the outcome and decisions of the company?

Answer 30

The owners are the shareholders and the ones in control are the board of directors. One exception is when the CEO is a shareholder

Question 31

In corporations, what is the role of directors in terms of loyalty?

Answer 31

Directors are agents of the company and not of the shareholders, meaning that the BoD should act in the best interest of the corporation

Question 32

What are the four most common ways in which a director can be terminated?

Answer 32

1. Resignation - a formal procedure of quitting
2. Rotation - replacing a portion of the board
3. Expiration - in the case of having a time limited directorship
4. Disqualification - events that prohibit the director from continuing their work, e.g health issues or criminal activities

Question 33

What is the difference between executive and non-executive directors?

Answer 33

Executive directors are actively involved in the day-to-day operations of a corporation while the non-executive directors may only have a few meetings per year. Most often there is only one executive director, the CEO

Question 34

What are the three general powers of directors’?

Answer 34

1. General power and responsibility of managing the company
2. Delegate powers to executive directors
3. Right and duty to be informed and act in an informed manner

Question 35

What are the liabilities of a director?

Answer 35

• They are liable for damages to the corporation and to creditors, individual shareholders and third parties
• Specific duties - e.g call the shareholders’ meeting or prepare draft financials
• General duties - e.g duty of care, skill and loyalty
• In LLCs there are extended liabilities for shareholders that actively participate to the management

Question 36

What does the duty of care entail for directors?

Answer 36

Directors have a duty of being careful in their operations not to be liable in the case of damages or bad results. The bar for care depends on several factors such as competence, background and nature of the office. In a legal pursuit, a director can never be held liable directly with respect to whether the results were good or bad, but rather if the decisions leading to the results were

Question 37

What does the duty of loyalty entail for directors?

Answer 37

That competing without the approval of shareholders, using confidential information and/or pursuing personal business opportunities may lead to termination. Also, it means that directors have a duty of disclosing their personal interest when needed, not to let there be a conflict of interest

Question 38

What needs to be considered when doing transactions with related parties?

Answer 38

It needs to be extensively disclosed not to allow for suspicions

Question 39

What is the dissenters’ right for shareholders?

Answer 39

A withdrawal right that enables shareholders to liquidate their shares if they do not agree with a fundamental change in the corporation

Question 40

What are shareholders’ lawsuits and what are the two variants?

Answer 40

When shareholders brings the board of directors (usually) to court. The lawsuit can either be derivative (decision taken by shareholders but initiated by the corporation) or individual (an individual shareholder brings the bod to court due to personal damages)