Elements of Shareholder Democracy

This chapter begins with a discussion of the origins of corporate power. Shareholders are often considered the owners of the corporation. However, this is questionable in an economic and social, if not a legal, sense. In fact, the position of shareholders in many legal systems is confined to that of mere investor who acquires cash flow rights, but has minimal (and only indirect) influence on business operations through the election of directors. Where shareholders (or, for that matter, directors) have the power to decide, the law needs to ensure that they do not abuse their position of power to the detriment of corporate actors bound by the decision without being able to influence it. The chapter then covers the limits of corporate power, shareholder decision-making, and the appointment and removal of directors.

Corporate Insolvency

This chapter discusses the termination of the corporate existence and in particular the issue of corporate insolvency. There are many reasons for ending the corporate existence such as corporate failure, a merger, or formation of the corporation for only a limited period of time which has expired. In all these incidences, corporate law has to provide a process that ensures that pre-existing contractual entitlements are respected in accordance with the idea of creditor preference and shareholder residuarity. The remainder of the chapter discusses the special case of insolvency, in particular concepts of insolvency, the transition regimes from corporate governance to bankruptcy governance, and insolvency and restructuring options under the legal systems under consideration here. It concludes that the rise of the ‘rescue culture’ has resulted in a remarkable convergence of insolvency and restructuring law on both sides of the Atlantic.

Veil-piercing

This chapter focuses on strategies that, in a broad sense, set the principle of limited liability aside in order to reach (the assets of) the natural or legal persons that benefit from corporate activity. These concepts are complementary to the ex ante strategies discussed in previous chapters. They are ex post in the sense that they will be triggered only if and when the former have failed for some reason. Their aim is to internalize as far as possible the social cost of corporate activity in order to set appropriate incentives for corporate decision-making. The legal concepts under consideration are largely standard based with open textured norms whose application heavily depends on the factual settings in every individual case. Consequently, the challenge is to provide workable criteria and coherent guidance for courts in order to ensure predictability for entrepreneurs and their legal advisers.

Incorporation and Corporate Representation

This chapter presents a general discussion of incorporation and corporate representation. General incorporation requires a formal process that company promoters have to go through, at the end of which the company or corporation emerges as a separate legal entity. Since investors will have access only to the corporate property, a certain degree of publicity is required in order to facilitate a clear attribution of assets and liabilities to a specific corporate entity. Disclosure is therefore an important element of the incorporation process, and remains significant throughout the duration of the company. Once incorporated, the company or corporation conducts its business by contracting and transacting with other market participants. This requires the attribution of the acts of natural persons to the corporation, causing the corporate property to be subject to, or released from, liability, or to be increased or decreased by the receipt or disposal of assets.

Legal Capital

This chapter discusses the doctrine of legal capital. In the second half of the nineteenth century, legal systems developed the doctrine of ‘legal capital’ to ensure the corporate creditors’ preferential access to the corporation’s assets, and in order to prevent shirking and inter-shareholder wealth transfers. The core of the concept of ‘legal capital’ is that an amount of capital is fixed in the company’s articles of association. This amount can be changed only by formal reduction or increase in capital. The basic starting points for the development of the doctrine of legal capital were remarkably similar on both sides of the Atlantic. However, early in the twentieth century developments in the United States and Europe parted ways.

Constraints on Discretion: Part 2—Shareholders

This chapter distinguishes between the constraints imposed on the majority or controlling shareholder in the context of business operations that affect the minority detrimentally but do not result in a change in ownership of the business, and in sale of control transactions, such as a merger, sale of all or almost all of the company’s assets, or a takeover. In both cases, agency problems arise between majority and minority shareholders, but legal systems provide for distinct solutions that reflect the different economic importance of the two types of transactions and the fact that minority shareholders are particularly vulnerable to collective action problems when control of the company changes hands.

Corporate Governance Regulation

This chapter first analyses whether the corporation is merely a profit-maximizing entity or performs a more inclusive, social function. It then discusses some basic economic concepts that are important to understand the underlying conflicts that corporate governance regulation seeks to address, such as efficiency, incomplete contracts, and agency costs. Next, it examines the goals that corporate governance regulation in the United States, the UK, Germany, and France pursues, and gives an overview of the evolution of the corporate governance movement, which started in the United States in the 1970s. The chapter then introduces the most important corporate actors—officers, directors, and shareholders—and explores whether the ownership structure of public stock corporations has changed over time and continues to differ between countries. The final section analyses how corporate boards are designed, and how best practice standards contained in corporate governance codes shape the composition of boards.

The Europeanization of Corporate Law

This chapter begins with an overview of the nature and effects of EU law and the EU law-making process, with particular focus on the internal market. This is followed by an analysis of the acquis unionaire—the EU law with company law relevance at both Treaty level and the level of secondary legislation (regulations and directives). It emphasizes the trajectory of EU company law and its development in distinguishable ‘waves’. It then turns to the issue of corporate mobility within the Union, on the basis of the Court’s case law on freedom of establishment, as well as the emerging EU law infrastructure for corporate mobility transactions. The chapter concludes with some speculation about the future of EU company law in the light of Brexit.

Legal and Theoretical Foundations of the Business Corporation

In accordance with comparative law methodology, the chapter seeks to define and delineate in functional terms the subject matter of this book. It aims to provide a workable conception of ‘business corporation’ and ‘company law’ that transcends national boundaries. The modern business corporation (or company) is a comparatively recent phenomenon that emerged in the nineteenth and twentieth centuries. Its rise is linked with the development of the modern nation state and capitalism. Despite a growing interest in comparative company law scholarship, most lawyers still approach the subject with preconceptions formed by their own domestic corporate law experience. This can be problematic given that major differences in typology, historical development, regulatory framework, and legal characteristics remain. Consequently, this chapter discusses the concepts and terminology used in this context in common law and civil law systems, explores separate legal personality and limited liability as defining properties of the business corporation, provides an overview of the historic development of the business corporation and of corporate (law) theory, and analyses the sources of domestic corporate law.

Enforcement

This chapter explores whether the lower level of investor protection that some commentators associate with the civil law can be explained with deficiencies in the enforcement mechanisms that investors, and in particular minority shareholders, have at their disposal. It starts with a discussion of the so-called ‘contracwetualisation of responsibility’. It then analyses how the claims that a company has against its own directors can be enforced, in particular, by minority shareholders. The last part of the chapter gives an overview of substitute enforcement mechanisms for the minority shareholder lawsuit that are of great practical importance in some jurisdictions. In contrast to litigation by the company (acting through its authorized organ or minority shareholders), these substitute mechanisms are predominantly of a public law nature. Thus, this final section will illustrate how some legal systems have a preference for public enforcement, while others rely extensively on private enforcement.