Session 1 - Corporate Form Flashcards
civil and common law
civil law: legal system born in ancient Roman focused on laws and codes governing principles supposedly applicable to most situations
- common law: people were free to start business and sign contracts, no laws or codes and they applied the principle of the previous judge
business organization definition
is the framework hat laws provide to the business in order to be structured properly and run its on operations and relationships with third parties
what does ownership mean in corporate law
Shared ownership is tailored by contribution of capital: ownership rights are proportionally tied to the amount of investment of capital contributed to the firm.
owners of the company holds shares that include the same set of obligations and rights.
which is the meaning of legal personality
the firm serves as a single contracting party that is DISTINCT from the various owners and managers of the firm (a «nexus FOR contracts»)
what does it mean limited liabilities
business creditors are limited to making claims against assets that are held in name of the firm itself and have no claim against assets that are firm’s shareholders’
assets partitioning allows to
isolate different lines of business
share (and reduce) the risks
grant flexibility in the allocation of risk and return between equity-holders and debt-holders
to facilitate tradability of firm’s shares
to facilitate “delegated management”.
two tier system (dualistic) - two boards
separation between managers and supervisors
one tier system (monistic)
only one board consisting of management and supervisors
3-tier system (latin system)
operational + management + executive different boards
the board of directors is elected by
shareholders (except from Germany)
the board of directors is normally distinct from
shareholders
free transferability of shares permits the firm to
- conduct business uninterruptedly as the identity of her owners changes
- maximize liquidity of shareholdings
- maximize ability of shareholders to diversify their investments
- flexibility in raising capital (on stock exchange markets).
sole proprietorships
- UNLIMITED liability (you create debt, creditor can ask money to the one who owns the company)
- NO legal personality (no separation between the person and the entity)
- fiscal personality
Partnership
Simple organization, substantially based on the individuals: who by default are also vested with the powers of managing and monitoring the business activity
- UNLIMITED liability
- NO CLEAR CUT between partners and partnership
- fiduciary interpersonal relationship
- i can ask money to my other partners
limited liability partnership
- partnership with some or all partners with limited liability
- limited partners’ risk is the amount invested and no parts in running the business
- general partners have unlimited liability and manage
- encourages investors to invest without risking more than the capital they have contributed
limited partnership
a partnership that must have AT LEAST ONE UNLIMITED PARTNER
what is the main distinction between private and public companies
Public Companies vs Private Companies base their distinction due to the different way the Companies RAISE & COLLECT “Equity” and partially “Debt”
Collecting equity means that the share capital can be increased and you can offer the subscription and contribution to third parties.
private company law is typically based on
- FREEDOM OF CONTRACT
- coincidence of shareholders/managers
how many shareholders has a private company?
is based on fiduciary relationships among shareholders (limited number), few shareholders interacting to carry out business, based on network of contracts
is individual interest in information and monitoring high for private companies?
individual interest in information/ monitoring is (proportionally to the investment) intensive (stress the management to be in line with shareholders expectations)
5 common features of public companies
- LEGAL personality
- LIMITED liability (consequence of legal personality)
- INVESTORS OWNERSHIP
- DELEGATED MANAGEMENT with a board structure (shareholders are not directly present in the board but delegate management to selected and appointed managers)
- TRANSFERABLE shares in the market (even if not listed)
Widely and closely held corporations
- «Widely held Corporations» company’s shares are held by a great and dispersed number of individuals (U.S. system).
- Closely held Corporations» company’s shares are held by a smaller and more concentrated number of holders (stable “blocking equity-stakes”) (E.U. system).
why public companies have limited liabilities, legal personality and transf. shares?
is a (necessary) way for “converting savings” in “(long term) business investments”
why delegated management is a benefit?
each investment does not require individual commitment in firm’s management
changes in ownership do not diminish firm’s reliability in obtaining finance: modification of shareholders does not affect directly the management
what is the incorporation process?
The incorporation of a limited liability company implies the REGISTRATION of the constitution documents (article of association and memorandum of association)
memorandum of association
document prepared and signed at the beginning of the business entity’s life, it is a list of requirements
- name and address
- purposes and scope of activities to achieve it
- nominal amount of share capital
- number and classes of shares
- once signed, it CANNOT BE CHANGED
memorandum of association: Can it change?
Once signed, it cannot be changed
article of association
rules by which the company is governed that will regulate its life:
- Financial statements
- Shareholder enter or not
- When and how the company will finish its purpose
- Process to liquidate assets
This CAN be modified according to changes in activities and outside environment
COMMON law incorporation
- generally easy, quick and inexpensive
- no minimum legal capital . but there are disadvantages, since raising capital is more difficult.
civil law incorporation
- more complex and more time
- specific rules about form and content of memorandum or articles of association
- governing documents is subject to an ex ante control by a notary public
- a minimum legal capital is also required
regulated industry incorporations (banks, investment funds, insurance companies)
even more complex
- (higher) minimum legal capital
- ownership structure (qualified investors)
- programme of the activity
- stricter governance structure (organization and control systems)
role of directors
to oversee managers and report to shareholders
role of managers
report to directors and act as agents for shareholders
role of shareholders
appoints/remove directors and provide funds to managers
