Corporate Law IBA 2025 Midterm

Public Law / Common Law

It is about the relationship between the state and its citizens.

• Government involvement is key

• Constitutional, administrative, and criminal law

• Characteristic: You do not depend on legal books but more on judgement. It is about the legal verdicts of courts (shareholder oriented)

Private / Civil law

Rights and duties of natural persons towards each other

• The government is typically not a party

• Contract, tort, property, trusts, family

• Characteristics: Primary source of the law is the law books. We still have verdicts that can also determine the determination of legal rights

Tort

It is a civil wrong, other than breach of contract, that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act

Corporate law originates from

• Statutory Law

• Judicial Precedents

• Regulatory Agencies

• Contractual Agreements

Statutory Law

Formal legislative enactments that define corporate operations

Judicial Precedents

Case law that interprets statutes and fills legal gaps

Regulatory Agencies

Bodies that enforce corporate governance and financial market regulations

Contractual Agreements

Internal governance rules established through charters and bylaws

Corporate law is influenced by

• Market forces: Economic incentives shape legal frameworks

• Political factors: Interest groups and government regulations affect corporate governance structures

• Legal traditions: The historical and institutional development of each jurisdiction impacts corporate law

Corporations

Legal forces where you can effectively organize your business activities. It is a legal entity with limited liability

Closed / Private Corporations

Not traded on stock excahnge, limited number of shareholders, less regulation

E.g., family businesses

Open / Public Corporations

Listed on stock exchange, many shareholders, stricter regulations, raises capital trough stock sales, such as Tesla and Apple

Main Actors Corperations

Shareholders, employees, the corporate board / directors, and creditors

Creditors

• Have a priority claim so are paid first in case of bankruptcy.

• No voting rights

• Fix claim

General Partnership

• Structure where two or more people co-own a business.

• Unlimited liability

• Everyone has the same authority

Limited Partnership

• Partnership with at least one general partner and one or more limited partners.

• General partners have unlimited liability,

• Limited partners have limited liability

Limited Liability Partnership

• All partnerships have limited liability

• All partners can be involved in management

Limited Liability Limited Partnership

• Both general and limited partners have limited liability

Sole proprietorship

• One person is responsible for all aspects of the business

• Unlimited liability, so responsible for all debts and liabilities

• Has full control over the business

Jurisdiction

• Legal authority that a specific country, state, or court has over a business entity

• Federal government: Governs national laws and regulations

• State governments: Handle laws specific to each state, including corporate law

Federal Court

Handles cases related to federal matters such as patents, securities, or interstate lawsuitsm, such as disputes that cross state lines

State Court

Handles most legal matters, such as corporate law, contracts, and business disputes

Example DGCL

Many multinational corporations are incorporated in Delaware due to its corporation-friendly policies and favorable tax policies

Example Sarbanes-Oxley Act

Federal US law that protects investors from fraudulent accounting activities by corporations

EU Regulation

A binding legislative act. It must be applied in its entirety across the EU

EU Directives

Set out a goal that all EU countries must achieve. However, it is up to the member states to devise their laws and how to reach these goals

EU Recommendations

Not binding. A recommendation allows the institutions to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed

Hard Law

Legally binding regulations, such as corporate laws and security laws (traffic lights)

Soft Law

Non-binding guidelines, principles, or best practices that companies are encouraged to follow but are not legally required to

Corporate governance code

A soft law. Sets of principles that outline the best practices for companies in areas such as transparency and shareholder rights

Incorporation

The formation of a company. Different documents need to be filed, including the Articles of Association

Articles of Association

Mandatory rules: Cannot be modified by contract. Usually aimed at the protection of weaker parties (creditors)

Default rules: Applicable in case articles of association or another contract do not state otherwise

Basic legal characteristics

1. Legal personality

2. Limited liability

3. Transferability of shares

4. Delegated management under a board structure

5. Investor ownership (sometimes state ownership)

Legal Personality

Treats a company like a person, meaning it can own property, sign contracts, and act separately from its shareholders.

However, since it’s not a real person, it needs someone to represent it and make decisions on its behalf

Entity Shielding

Because of legal personality, the company is the owner of the assets, and shield these from the shareholders

Liquidation Protection

The shareholders cannot withdraw the company’s assets at will, preserving the company’s ongoing value

Priority Rule

Ensure that the company’s creditors have the first claim on the corporation’s assets for any company debts before shareholders can claim any residual value

Separate Patrimony

Legal concept where a person or entity has distinct pools of assets and liabilities that are legally separated from their personal or other business assets

Limited Liability

Shareholders are only liable up to their committed investment

Owner shielding

Shields the shareholders from the liabilities of the company

Advantages of limited liability

1. Effective capital markets; without limited liability you wouldn’t invest in companies

2. Without you wouldn’t have any start-ups in the first place

3. Reduces the need for shareholders to monitor every step and facitilates the diversification strategies used by investors

Asset Partitioning

Assets of the corporation are separated from those of the shareholders

Tort victims

Creditors that become creditors unintentionally

• Become creditors when there is a lawsuit and the judge grants them a claim

• Cannot negotiate ex ante about the terms of their claims, and thus risk cannot be translated into better protection

Judgement Proof Problem

Occurs when companies limit their liability by structuring assets in a way that reduces what creditors can claim.

If a subsidary has low assets, creditors may not get full compensation, even if the corporate group as a whole is wealthy

Transferable Shares

• Really crucial for a company’s continuity when ownership changes

• Enhance the liquidity of shareholder investments because they make it easier for shareholders to maintain diversified portolios

Authorized Capital

The maximum share capital that the company is allowed to issuem which is stated in the articles of association. If it wants to increase this number, it needs to get approval of the existing shareholders

Issued Capital

Part of the authorised capital that is issued to investors

Treasury shares

Issued capital that is bought back by the company and held in treasury

Paid-up Capital

The amount of money received from shareholders for the shares

In-kind contributions

Shares can also be issued for non-monetary contributinos, these need to be assessed

European minimum capital rule

Minimum capital is 25,000 euros according to the European Capital Directive, but member states may set higher amounts

Main arguments against minimum capital requirements

1. Does not provide meaningful protection for creditors

   • The assets that are bought with the share capital can decline in value, whereas the legal capital stays fixed

2. There is no actual relationship between the minimum capital and the business activities or funding needs of a public company

   • The same requirement for both small and large firms

   • The liabilities of any company are well beyond this minimum capital requirement

3. Creditors can be better protected in other ways

4. The minimum capital may increase the costs of starting a public company, which may limit entrepreneurship and innovation

Delegated Management under a board structure

Principle authority over corporate affairs: generally elected by shareholders

This structure allows a company to operate efficiently by centralizing decision-making authority within a corporate board

Capital rights

Financial rights:

• Dividends

• Sale of shares

Control rights

Decision-making rights:

• Essential rights for shareholders to influence corporate governance

• Vote

• Question the board

• Certain information rights

Manager-Shareholder conflict

Managers have more information and potentially different interests than shareholders, leading to decisions that may not always be aligned with what would be preferable to shareholders

Different interests include FCF problems, risk appetite, different time horizons, and on-the-job consumption

The Majority-Minority Shareholder Conflict

In firms with controlling shareholders, majority owners may make decisions that benefit themselves at the expense of minority shareholders

Self-dealing transactions, excessive executive pay, or strategic dilution of minority stakes

The Shareholder-Creditor Conflict

Shareholders may pursue riskier projects to maximize returns, knowing that creditors bear much of the downside risk

Firms may issue excessive debt, prioritize dividend payments over loan obligations, or take on high-risk ventures without regard for creditor interests

Legal Strategies

Mitigate the vulnerability of principles to the opportunism of their agents

1. Regulatory strategies: Agent constraining

2. Governance strategies: Principal empowering

Agent Constraints

Rules and Standards: Corporate laws contain ex ante rules and open standards that require judocoal evaluation

Affilitation Terms

Entry and Exit: Including the disclosure of information, appraisal rights, and transfer rights

Incentive Alignment

Trusteeship and Reward: Incentive alignment strategies

Appointment Rights and Decision Rights

Selection and Removal / Initiation and Veto: Shareholder appointment rights, decision-making rights, and shareholder and management proposals

Exit rights

Investors and creditors can sell shares, trigger convenants, or seek legal remedies if corporate governance failures become evident