WHAT IS A CORPORATION

Question 1

2 functions of corporate law

Answer 1

1. facilitate coordination within participants in corporate enterprise (i.e. reduce conflicts)
2. reducing the scope for value-reducing forms of opportunism among different constituencies

Question 2

3 potential sources of opportunism (agency problems)

Answer 2

1. conflicts managers vs sh
2. conflicts controlling vs non-controlling sh
3. conflicts sh vs other contractual counterparts of the corporation (creditors, employees)

Question 3

5 basic characteristics of the corporation

Answer 3

1. legal personality
2. limited liability
3. transferable shares
4. centralised management under a Board structure
5. shared ownership by contributors of capital

Question 4

2 rules of law involved by entity shielding

Answer 4

1. priority rule
2. liquidation protection (specific of the corporation, protects the going concern of the firm)

Question 5

2 rules for the firm to serve as a contracting party

Answer 5

1. there must be rules specifying to third parties who is the delegated management of the firm
2. there must be 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 6

2 consequences of entity shielding

Answer 6

1. firm is not affected by what happens to owners/ sh
2. a sh does not have to care for who the other sh are

Question 7

limited liability facilitates (2)

Answer 7

1. diversification (there is limited risk, so it is easier to get authorisation from sh to invest in multiple companies using firm’s assets)
2. reduces cost of debt (investors ask for a lower premium since risks for them are lower)

Question 8

shielding/ asset partitioning (legal personality & limited liability) consequences

Answer 8

1. business assets are pledged as securities for business creditors
2. reduction of cost of debt ( creditors of both firm & sh can better monitor their debtor)

Question 9

advantages of transferable shares

Answer 9

• for firms: can conduct business uninterruptedly as the owners change
• for sh: can liquidate their shares at any point in time

Question 10

4 basic features of the BoD

Answer 10

1. Board is separate from executive managers of the corporation !! conflicts (3)
2. Board is elected (at least substantially) by sh
3. Board ≠ sh !!! exceptions (2)
4. Board has multiple members

Question 11

3 possible conflicts BoD vs executive managers

Answer 11

1. strategy
2. top executives’ salaries
3. financial statements

Question 12

EXCEPTIONS Board ≠ sh

Answer 12

1. majority sh may appoint himself as member of the Board
2. representatives of control company A may be appointed as members of the Board of controlled company B

Question 13

3 possible solutions to conflicts of interests

Answer 13

1. increase power of sh
2. mechanisms to deal with managers abusing their position
3. stronger alignment of managers and sh’s interests

Question 14

2 key elements of ownership

Answer 14

1. right to control the firm
2. right to receive net earnings

(both rights are PROPORTIONAL)