Midterm

Question 1

What are the five basic legal characteristics of the business corporation? And what do they achieve together?

Answer 1

1) legal personality 2) Limited liability 3) Transferrable shares 4) Delegated management 5) investor ownership

All together they create a statutory form of establishment

Question 2

What exactly is the idea of limited liability?

Answer 2

Shareholders are only liable for the debts and obligations of the corporation to the extent of their investment. Their personal assets are protected.

Question 3

What does transferable shares refer to?

Answer 3

The idea that shareholders can easily buy,sell, or transfer their ownership interest in the company without affecting its operations or structure

Question 4

What does delegated management refer to?

Answer 4

The idea that shareholders delegate the day to day management of the corporation to a Board of Directors who act on their behalf

Question 5

What is the principal function of corporate law?

Answer 5

Corporate law aims to maximize social welfare by advancing the interests of both shareholders and stakeholders involved in the firm’s activities, additionally it creates a statutory form of establishment

Question 6

How does corporate law lower the cost of conducting business?

Answer 6

Corporate law protects owners and the company itself, reducing risk and consequently lowering the costs associated with conducting business. By mitigating agency costs (conflicts of interest between managers and shareholders), corporate law helps streamline business operations and enhance efficiency.

Question 7

Function of a corporation’s charter:

Answer 7

Function of a corporation’s charter:

Question 8

What does entity shielding refer to?

Answer 8

Refers to the legal principle that separates the assets of a corporation from the personal assets of its owners (shareholders).

Question 9

Give an example of entity shielding

Answer 9

Suppose a shareholder of a corporation faces personal bankruptcy. Due to entity shielding, the creditors of the shareholder cannot seize the assets owned by the corporation to satisfy the shareholder’s personal debts. The corporation’s assets remain protected and separate from the personal financial troubles of its owners.

Question 10

The three foundational rules of an effective legal personality include:

Answer 10

1. entity shielding
2. authority
3. procedures

Question 11

What are the three foundational rules for an effective legal personality, and what purpose does each serve?

Answer 11

The three foundational rules are entity shielding, authority, and procedures. Entity shielding protects the corporation’s assets from the personal creditors of its owners. Authority delegates management to the Board of Directors, separate from individual owners, ensuring effective decision-making. Procedures subject corporations to lawsuits rather than individual owners, maintaining legal accountability.

Question 12

Explain the concept of entity shielding and its significance for corporations and their owners.

Answer 12

Entity shielding refers to the legal principle that separates the assets of a corporation from the personal assets of its owners. This separation ensures that creditors of the individual owners cannot access the corporation’s assets to satisfy personal debts, providing protection for both the corporation and its owners from financial liabilities.

Question 13

How does authority contribute to the effective functioning of a corporation’s legal personality, and what role does the Board of Directors play in this regard?

Answer 13

Authority involves delegating management powers to the Board of Directors, separate from individual owners. This separation ensures professional decision-making and accountability. The Board oversees corporate operations, hires management, and sets strategies, maintaining the corporation’s integrity and legal identity.

Question 14

What distinguishes a public limited liability company from a private limited liability company, particularly regarding share tradability and ownership structure?

Answer 14

Public LLCs have transferrable shares and can be listed on stock exchanges, while private LLCs have restrictions on share tradability and are closely held by a smaller group of shareholders.

Question 15

What is strong entity shielding?

Answer 15

It’s a form of entity shielding which adds an extra layer of protection for the corporation and its shareholders. It includes a rule called “liquidation protection,” which prevents owners and their creditors from forcing the payout of the owner’s share of the company’s assets. This protection keeps the owner’s share safe from being taken by creditors.

Question 16

How does the nexus of contracts theory define companies?

Answer 16

It defines them as a contract between different individuals, they are a collection of contracts between different individuals

Question 17

What are the 5 basic elements of corporate structure in law?

Answer 17

1. legal personality
2. limited liability
3. transferrable shares
4. delegated management
5. investor ownership

Question 18

Because a company is a legal personality, its assets are _____

Answer 18

seperate from the assets of the owners; thereby allowing the company to operate as a seperate patrimony

Question 19

What does entity shielding refer to ?

Answer 19

The idea that the company’s assets are shielded from the creditors of the owners

Question 20

What does entity shielding ensure?

Answer 20

It ensures safety of the contract signed and negotiated by the firm, making it a safe nexus. It makes it easier to negotiate contracts as well as provides liquidity on the part of shareholders

Question 21

What are the 2 rules of law that apply to entity shielding?

Answer 21

1. Priority rule –> : This principle ensures that creditors of a firm have priority access to the company’s assets over the claims of its owners and investors.
2. Liquidity protection –> this rule restricts shareholders from unilaterally withdrawing their invested capital from the corporation. While shareholders have the option to sell their shares, they cannot simply reclaim the money they originally invested.

Question 22

What is the purpose of the liquidity protection rule?

Answer 22

This restriction serves to prevent the destabilization or collapse of the firm due to shareholders hastily withdrawing funds. If shareholders could easily withdraw their capital, it could lead to partial or total liquidation of the company, which would be detrimental to both creditors and remaining shareholders.

Question 23

To properly function as a company, companies need 2 additional rules (apart from priority rule and liquidity protection rule)

Answer 23

1. Specify third parties and individuals who can buy/sell assets in the name of the firm and to enter into contracts that are bonded on these assets
   
   2. There needs to be a rule specifying the procedures by which both the firm and its counterparties can bring on lawsuits on the signed contracts in the name of the firm. Those rules often eliminate the need to name and serve the notice to specific firm owners (sth that plagued the system very long)

Question 24

What is the purpose of specifying authorized representatives within a firm?
a) To create confusion and disputes
b) To establish clarity and accountability in transactions
c) To increase legal challenges

Answer 24

B : To establish clarity and accountability in transactions

Question 25

Why are procedures for legal actions related to contracts important?
a) To complicate the legal process
b) To reduce administrative burdens
c) To delay resolution of disputes
d) To individually name and serve notice to specific firm owners

Answer 25

To reduce administrative burdens

Question 26

What is the primary function of specifying third parties and individuals who can buy/sell assets in the name of the firm?
a) To increase confusion in transactions
b) To establish clarity and accountability
c) To discourage business activities
d) To complicate contractual agreements

Answer 26

To establish clarity and accountability

Question 27

Why are clear guidelines for authorized representatives crucial for a firm?
a) To promote disputes and legal challenges
b) To streamline business transactions
c) To discourage financial investments
d) To hinder growth and developmentCorrect answe

Answer 27

To streamline business transactions

Question 28

What does the Priority rule entail?
a) It grants priority access to creditors over owners and investors.
b) It allows shareholders to withdraw invested capital freely.
c) It facilitates liquidation of the firm’s assets.
d) It encourages higher risks in partnerships.Correct answer:

Answer 28

A

Question 29

What is the purpose of Liquidation protection?
a) To encourage shareholders to withdraw their invested capital.
b) To facilitate the destruction of corporations by individual shareholders.
c) To prevent partial or total liquidation of the firm.
d) To isolate the value of the firm for tradability of shares.

Answer 29

To prevent partial or total liquidation of the firm

Question 30

What distinguishes the Weak form from the Strong form?
a) In the Weak form, only liquidation protection applies.
b) In the Weak form, only priority rules apply.
c) In the Weak form, both rules apply.
d) In the Strong form, neither rule applies.Correct answer

Answer 30

B

Question 31

What is the purpose of procedures for initiating legal actions related to contracts signed in the name of the firm?
a) To increase administrative burdens
b) To expedite the resolution of disputes
c) To prolong legal proceedings
d) To avoid transparency in contractual agreements

Answer 31

To expedite the resolution of disputes

Question 32

What does limited liability refer to?

Answer 32

The fact that creditors have a claim to the assets owned by the company itself but not the private assets of its owners and investors

Question 33

What does limited liability put a cap on?

Answer 33

The potential losses owners can suffer

Question 34

Why does limited liability encourage business diversification?

Answer 34

Because with unlimited liability shareholders would try to keep their risk under control at all times. With limited liability, however, they may be more likely to invest in various ventures

Question 35

What kinds of companies have freely traded shares?

Answer 35

Open or public corporations

Question 36

What kinds of companies do not have freely traded shares?

Answer 36

Closed or private corporations

Question 37

For open corporations we have 2 distinctions. What are they?

Answer 37

1. Listed (or publicly traded)- where shares are listed on global stock exchange to be solf
2. Unlisted - shares held by smaller number individuals whose interpersonal relationship is important tothe functioning of the firm. In this case this is closely held corporation oppose to widely held

Question 38

All corporations with freely tradable shares are listed on the :

Answer 38

stock exchange and are widely held

Question 39

What are the 4 main features of a corporate board?

Answer 39

1. Board is seperate from the company’s management (on paper). The board check’s managers. This serves as a good quality-control check when it comes to decision making in a corporation.
2. Corporate board is elected by shareholders. This aligns its goals with the company’s owners. Many other non-corporate firms have boards but those do not have to be chosen by the company’s actual owners
3. Although board is chosen by shareholders, it is seperate from them. It has its own decision making capability and does not need to inform shareholders of all their actions and decisions.
4. Boards have multiple members

Question 40

How come fully tradeable shares do not mean the same thing as freely tradeable shares?

Answer 40

Fully transferable shares DO NOT MEAN freely transferable shares. Shares might still be limited to be traded only among some group of individuals or only with approval or in certain conditions. Freely tradeable shares however, provide most liquidity to shareholders and give biggest flexibility to the firm to raise capital.

Question 41

What are default provisions?

Answer 41

Default provisions are laws that are present but companies may choose to opt out of them and instead specify their own personalised nature of their legal personality

Question 42

Explain the difference between law, charter and contracts?

Answer 42

In summary, while laws are mandatory regulations created by the government, charters are legal documents that establish and govern corporations, whereas contracts are agreements parties that are legally binding

Question 43

Explain the key characteristics of laws:

Answer 43

Laws are rules and regulations created by government bodies that apply to all companies in a
given jurisdiction.
* They are mandatory and enforceable by government agencies or through legal action.
* Examples of corporate laws include labor laws, environmental regulations, and securities
laws.

Question 44

What is a charter?

Answer 44

A charter is a legal document that establishes a corporation and sets out its purpose, structure and governance. It outlines the rights and
responsibilities of the corporation’s officers, directors, and shareholders.
The charter may also include provisions related to ownership, stock issuance, and other key
corporate matters

Question 45

What is a contract?

Answer 45

A contract is a legally binding agreement between 2 or more parties
Contracts can cover a wide range of topics, such as the sale of goods or services, nondisclosure agreements, or employment contracts.

Question 46

What subjects are dealt with in the charters of a company and why?

Answer 46

The charters of a company typically include the following subjects:
* Name and purpose of the corporation
* Types of stock and the rights and privileges associated with each class of stock
* Composition of the board of directors and their powers and responsibilities
* Procedures for holding shareholder meetings and voting
* Limitations on the corporation’s ability to take certain actions or engage in certain activities

Question 47

What do charters help avoid?

Answer 47

They help to avoid confusion and disputes in the future

Question 48

Is a business code legally binding?

Answer 48

No

Question 49

What is a business code?

Answer 49

A business code is a set of ethical and behavioural guidelines that a company creates for its
employees, contractors, and other stakeholders.