lecture 7&8

Question 1

what are stakeholders

Answer 1

stakeholders with a formal/contractual relationship (“primary stakeholders”)
Stakeholders without (“secondary stakeholders”)

Stakeholders include: community, government, employees, customers, creditors, minority sharholders, shareholders, and other stakehodlers

Question 2

1) employees (primary stakeholders)

Answer 2

contractual counterparties (stakeholders)

firm-specific investments generate hold-up problems

Employees: will not consider firm specific investments without protection from labour laws, like receiving a contract for a longer period, not being easily fired, etc.+

Corporate law solution:
employee-appointed directors in (EU) countries

German system of co-determination (mitbestimmungsgesetz)
Half of the supervisory members can be employeerepresentatives

But chair is usually shareholder representative;

large board sizes

Question 3

How effective is codetermination as an employee protection tool?

Answer 3

Influence business policies
Insurance to skilled workers
Information role
Valueable first hand operational knowledge

effect on firm value, arguments including avoid value destroying activities (like strikes), information argument
> no conclusive findings regarding the effect onf irm value

Question 4

Creditors (primary stakeholders)

Answer 4

Debt: fixed claim

Repay principle amount + interest

At predefined points in time

Vis-a-vis the corporation: contractual counterparties

Asset partitioning (creditors)
a) entity shielding (liqu. prot)

b) Entity shielding (liqu. prot.)

c) owner shielding

d) entity shilding (priority rule)

Question 5

Shareholder-creditor agency problems (ex ante)

Answer 5

misrepresentation (before debt contract is signed; falsely claim company has particular assets; hidden info)

Question 6

Shareholder-creditor agency problems (ex post)

Answer 6

Take actions at expense of creditors (when the contract has been signed; hidden information)

Question 7

general shareholde creditor agency problems

Answer 7

1) asset diversion or asset dilution -> take out assets from the corporate asset pool: capital protection rules

2) asset substitution

3) debt dilution .> increase firms overall borrowing

4) debt overhang

Depends on managerial risk aversion and shareholder control

Question 8

Asset substitution:

Answer 8

leverage provides shareholders with an incentive to replace low-risk assets with riskier ones

Leads to overinvestment

Question 9

Debt overhang

Answer 9

leverage provides shareholders with an incentive to choose not to finance new, positive-NPV projects

Leads to underinvestment

changeE < investment or NPV < changeD when changeE +changeD = investment + NPV

Rationale = new gains are only used to pay back the debt, so not beneficial for shareholders

Question 10

Creditor-creditor (agency) problems

Answer 10

coordination problems
-> bankruptcy law tries to overcome this coordination problem

Classical example: prisoners dilemma: two suspets are held in two different cells. If none of the two confesses, they will be sent to jail for three years. If both confess, they will be sent to jail for five years. If only one confesses and the other doesnt, the former will get one year and the other six years in prison. Both prisoners independelty decide between dont confess and confess

Question 11

Legal capital (formula)

Answer 11

par vlaue* number of shares issued

Question 12

Capital protection rules

Answer 12

are rules about:
1) constituting the companys capital: minimum capital

2) increasing the companys capital: capital resolutions/board decisions

3) maintaining the companys capital: distribution restrictions

Question 13

Minimium capital: europe article 45 of directive EU

Answer 13

the laws of the member states shall require that in order for a company to be incorporated or obatain authorisation to commence business, a minimum capital shall be subscribed the amount of which shall be not less than 25000 EUR

Question 14

minimum capital - private companies

second company law directive =

Answer 14

Public companies, not for private companies

germany and the netherlands opted for voluntary implementation on private companies GmbH: 25000 EUR
BV: 18000 EUR

Question 15

Dutch Flex BV (minimum capital private companies)

Answer 15

No stated minimum capital required, but for dividend and other distirbutions the corporate board needs to do a solvency test

no approval: null and void

liable under some circumstances: if the management knew or reasonably should have forseen that the company would not be able to continue paying its debts

shareholders may be required to pay back distribution

Question 16

Minimum capital

Answer 16

the group has reached the conclusion that the only function of the minimum capital requirement is to deter individuals from lightheartedly starting a public limited company. We are not convinced that minimum capital, at its present levels, performs any other useful functions, but there is no evidence that it constitutes a hurdle to business activity either. it is probably wise not to spend much time on minimum capital in a reform which are more relveant. The minimum capital requirement should not be removed, nor increased

Question 17

External constituencies (secondary stakeholders)

Answer 17

non contractual parties

negative externalities and (global) public goods

Cannot protect themselves through contract

There has been a visible resuregence in the sue of legal strategies that shape the internal governane of business corporations in particular in the financial sector, to tackle broader social and economc problems