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WAKE FOREST UNIVERSITY School of Law COMPARATIVE LAW PROGRAM Venice Italy Summer 2007 PART III The Green Book COMPARATIVE COMPANY LAW SYLLABUS AND COURSE MATERIALS Prnf Alan R Palmim 20 My ventures are nut in me hnnnm trusted Nu me we place nnrismywhnle estate u an the fnrmne mm presmtyear Therefnre my merchandise make me nnt m1 Antonio 7712 Merchant of Vemce t 1 s ene 1 e e wunam Shakespeare DEFINITIONS CAPITALIST You have two cows Your neighbor has none So COMMUNIST You have two cows The government seizes both and provides you with milk You wait in line for hours to get it It is expensive and sour CAPITALISM AMERICAN STYLE You have two cows You sell one buy a bull and build a herd of cows AMERICAN CORPORATION You have two cows You sell one lease it back to yourself and do an IPO on the 2nd one You force the two cows to produce the milk of four cows You are surprised when one cow drops dead You tell analysts you have downsized to cut costs Your stock goes up FRENCH CORPORATION You have two cows You go on strike because you want three cows You go to lunch Life is good GERMAN CORPORATION You have two cows You engineerthem so they are all blond drink lots of beer give excellent quality milk and run a hundred miles an hour You also discover they demand 13 weeks of vacation per year ITALIAN CORPORATION You have two cows but you don39t know where they are While ambling around you see a beautiful woman You break for lunch Life is good RUSSIAN CORPORATION You have two cows You have some vodka You count them and learn you have five cows The Mafia shows up and takes however many cows you really have SYLLABUS i Professor Alan Palmiter Summer 2007 Day 1 Monday July 16 I COMPANY LAW AN EXERCISE IN COMPARISON Y 1 39 I Drury amp Xuereb Introduction Comparative Company Law 2 Notes 1 A What is a company Lane Venice s Maritime Republic 5 Palmiter The Corporation An Overview Notes 1 1 1 European Conception of Company Paillusseau The Nature of the Company 13 2 American Conception of Corporation Easterbrook amp Fischel Contractual Freedom in Corporate Law 21 Notes 77 Day 2 Tuesday July 17 B Company Typology 1 Business Organizations United States Palmiter Choice of Organizational Form 29 Notes w business forms W 2 Societa Italy Companies in Italy 15 Notes w business forms 40 Lorenzo Stanghellini The Italian System of Corporate Governance 46 Ferrarini Corporate Governance Changes in the 20 Century 48 Notes w business forms 57 C EU Company Law I J y Notes 5 Conard The European Alternative to Uniformity in Corporation Laws 54 Notes 60 Carney The Political Economy of Competition for Corporate Charters 60 Notes 64 Report of the High Level Group of C ompany Law Experts on a Modern Regulatory Framework for Company Law in Europe 64 Statute for a European Company 67 Kellerhalls amp Truten Creation of European Company 69 Notes 73 ii SYLLABUS ii Day 3 Wednesday July 18 II FORMATION OF BUSINESS Shareholder Liability for Defective Incorporation 1 A Defective incorporation rules United States Cantor v Sunshine Greenery Inc NJ Super 1979 75 Model Business Corporation Act 201204 14201421 76 Notes 20 Defective incorporation rules Europe Second Company Law Directive 1968 82 Notes 24 Italian Civil Code 26 Notes 29 Drury Nullity of Companies 29 Marleasing v La Comercial Int39l ale Alimentacion ECJ 1991 90 Notes 92 Day 4 Thursday July 19 B Corporate Choice of Law 1 Choice of law in United States internal affairs doctrine Model Business Corporation Act 1503 1505 93 Notes 94 M cDermott v Lewis Del 1986 96 Romano THE GENIUS OF AMERICAN CORPORATE LAW 101 Notes 105 Choice of law in Europe siege social under attack English Company Law in the European Single Market 107 Reform of Italian System of Private International Laws 108 Notes 108 Carney The Political Economy of Competition for Corporate Charter 109 Notes 1 14 Centros Ltd v Erhvervs og Selskabsstyrelsen ECJ 1999 117 Wymeersch Centros A Landmark Decision in European Company Law 120 Notes 123 U berseering BV v Nordic Construction Company Baumanagement GmbH NCC 124 Notes 127 Kamer van Koohanalel v Inspire Art Ltal 128 Notes 131 iii SYLLABUS iii Day 5 Monday July 23 III CORPORATE GOVERNANCE A Power Over Business Earnings 1 Locus of corporate power United States Delaware General Corporation Law 141 170 135 Sinclair Oil Co v LevienDe1 1971 135 Notes 137 Litle v Waters Del Ch 1992 138 Notes 140 Locus of corporate power Europe quot J yNotes 142 Stanghellini Corporate Governance in Italy Strong Owners Faithful Managers an Assessment and a Proposal for Reform 143 Note 148 Italian Civil Code 149 Note 1 55 Report of the High Level Group of Company Law Experts on a Modern Regulatory Frameworkfor Company Law in Europe 155 Notes 1 59 Day 6 Tuesday July 24 B Corporate Purposes 1 Shareholder wealth maximization United States Dodge v FordMotor Co Mich 1919 161 Pennsylvania Business Corporation Law 1715 1990 166 Notes 1 67 Mitchell A Framework for Enforcing Corporate Constituency Statutes 1 68 Macey An Economic Analysis for Making Shareholders the Exclusive Beneficiaries of C orporate Fiduciary Duties 175 Notes 1 80 Companies as social institutions in Europe Notes 1 81 Italian CiVil Code 1 82 Stanghellini Corporate Governance in Italy Strong Owners Faithful Managers an Assessment and a Proposal for Reform 184 Notes 1 88 Hopt Labor Representation on Corporate Boards Corporate Governance and Economic Integration in Europe 189 Notes 1 94 Corporate Law DijfkrentAcross Legal Systems Corporate Governance Around the World WSJ 2003 195 iv SYLLABUS iv C Worker Rights in Business Changes not included 1 Employee lights on transfer of business United States McLeod Rekindling Labor Law Successorship in an Era of Decline 11 Hofstra Labor L J 271 1994 Alarcon v Keller Industries Inc No 9217045 9th Cir June 17 1994 Macey Externalities F irm Specific Capital Investments and the Legal Treatment ofFundamental Corporate Changes 1989 Duke L J 173 2 Employee lights on transfer of business Europe Council Directive OFFICIAL JOURNAL THE EUROPEAN COMMUNITY 77 1 87 EEC P Bork Int39l AS v Foreningen afArbeejdseldere 1988 ECR 3057 ECJ Case 10187 Litster v Forth Dry Dock Co2 CMLR 194 House of Lords 1989 Day 7 Wednesday July 25 IV SHAREHOLDER LIQUIDITY AND STOCK MARKETS A Insider Trading Regulation 1 Insider trading regulation United States quot J yNotes 99 United States v 0 Hagan 700 Palmiter Insider Trading Securities Regulation EampE 205 Notes 713 2 Insider trading regulation Europe y Notes 713 Council Directive of 28 January 2003 On Insider Dealing And Market 391 39 quot 714 Raghavan Ascarelli amp Woodrugg Europe s Police Are Out of Luck on Insider Cases SJ 2000 718 Notes 771 B Corporate Takeovers Not Included 1 Introduction to regulation of takeovers United States Palmiter Takeover Contests An Introduction Corporations Eamp E 2 Ownership structures and takeovers Europe Lorenzo Stanghellini Corporate Governance in Italy Strong Owners Faithful Managers an Assessment and a Proposal for Reform 6 Ind lnt l amp Comp L Rev 91 1995 Gilson The Political Ecology of Takeovers Thoughts on H armonizing the European Corporate Governance Environment 61 Fordham L Rev 161 Oct 1992 V SYLLABUS V Day 8 Thursday July 26 C Shareholder Ownership and Activism 1 Ownership structures and shareholder activism United States Robert W Hamilton Corporate Governance in America 1950 2000 Major Changes but Uncertain Bene ts 226 Notes 724 Carolyn Brancato The Institutional Investor s Goals for Corporate Law in the Twenty rst Century 2 Ownership structures and shareholder activism Italy Stanghellini Corporate Governance in Italy Strong Owners 724 Faithful Managers An Assessment and a Proposal for Reform 242 Notes 7 57 Ronald Gilson Globalizing Corporate Governance Convergence of Form Or Function 254 761 Notes Internet resources Law articles Social Science Research Network SSRN httpssrncom Delaware General Corporation Law httpwwwdelcodestatedeustit1e8cOO1 Model Business Corporation Act NC BCA httpwwwsqueduNpalmitarCorporationLawPolicyConexusConexushtm EU Company Law EC Materials http ec europa euinternalimarketcompanyindexien htm Italian Civil Code company law provisions including 2003 reforms httpwwwaspmanitraggioCodiceCivileNuovo Codice Civilehtm Italian Civil Code httpwwwjusunitnquot 39 Lquot J39 J 39 J 39 htm My thanks to Melinda H anzel WF Law 2009 for her invaluable help in assembling and editing these materials vi SYLLABUS vi Class Participation and Grading Daily preparation and answers The readings are interesting and the casesstatutes worth learning Ours will be a small group your participation will add to the class experience To prepare for class you will want to prepare your own summary of the readings For each court case law review article and legislative statute you should prepare a brief 7 either on a separate sheet of paper or in the margin The brief should contain the following F Factual summary of the case or facts anticipated by the article or statute I Issue or issues addressed by the author and the author s position R Statement of the rule or rules proffered by the author A Summary of the analysis presented by the author C Your view importance of the case article or statute US students For US students I will base your grade on class participation 25 and a final exam to be administered when we return to the States 75 The written portion of the exam will call for multiplechoice responses and short essays demonstrating your knowledge and understanding of the principal topics of all three areas covered in the course civil law European law and comparative company law Following the written exam I also anticipate that there will be an oral component in which I will ask followup and more general questions based on the written exam You should expect these events will happen in late September Italian students For Italian students taking the course for a grade I will base your grade on class participation 25 and a course paper to be sent me by email by September 30 75 The paper between 1015 pages in length should identify a court decision in Italy or elsewhere in Europe It should compare the actual outcome in the case to what would have been the outcome had the case been litigated in an identified US jurisdiction such as Delaware Your paper should have the following parts 1 an introduction that identifies the case the issues it raises and the main points of the paper 2 a section that describes the case and its outcome including excerpts translated of the important passages from the court s opinion or judgment 3 a section that analyzes how the case would have been decided in a US jurisdiction with specific reference to relevant statutes legislation cases jurisprudence and law review articles doctrine 4 a comparison of the two approaches including any relevant references to the course materials and 5 your conclusion on this comparative law project Please keep your materials and notes from the course l COIVIPARATIVE CONIPAN Y LAW 1 I COMPANY LAW AN EXERCISE IN COMPARISON Companies B or corporations as Americans call them B are really quite fascinating What is a company Simply stated it is a group of persons who join together in a business enterprise to make money The company includes those who provide capital investors and creditors and those who provide labor managers and employees Company law constitutes the public and private rules that govern the relationships of the company s constituents What does company law specify X Structure for doing business B the method for organizing a company the duration of the company and the circumstances for the companys dissolution X Rights of investors B nancial rights voting powers limits on their liability rights to information and the ability to sell their shares X Role of business managers B the discretion of the board of directors to run the business the responsibilities of corporate managers and their ability to adapt to business change X Protection of those who deal with company B personhood recognition of company contracts property ownership litigation status and creditor recourse to company assets X Process for changing rules B management initiatives shareholder proposals and the restructuring and combination of companies such as in a merger or sale of assets Some company law rules might seem prosaic Who cares when the shareholders meeting must be held Or how much money must be contributed to start a limited liability company Or whether shareholders can vote by proxy But the rules pixels in a larger picture are important In large and small ways company law re ects fundamental policy and social choices about market capitalism B company law is private constitutional law For example a rule that a company s employees must be represented on the board of directors re ects a view of capitalism dramatically different from one that compels directors to maximize the wealth of company shareholders Or a rule that foreign businesses that operate in a country become subject to that countrys company laws affects even de nes the country s business climate Or a rule that directors are liable for their business mistakes if the company becomes insolvent creates incentives to avoid risks that reverberate through the whole economy And sometimes company law even makes the headlines Company law is the sentinel watching over insider trading it motivates institutional shareholders to be active and it mediates adaptation through hostile takeovers How sleepy or alert company law says a lot about a country s fundamental views on protecting old oligarchies and fomenting new ones So company law deserves our study And that study is all the richer when it is done comparatively not in isolation B in this case by looking at the United States and Europe Company law allows us to study how managers and investors are answerable to each other and to third parties and thus to gain insights into varying views on capitalism and society 2 COIVIPARATIVE CONTPAN Y LAW 2 Introduction Comparative Company Law from European Company Laws A Comparative Approach edited by Robert Drury and Peter Xuereb Dartmouth Press 1991 The idea that no one nation has a monopoly of wisdom applies just as strongly to law as it does to any other eld of human endeavour It is one of the motives that have sent lawyers over the years in search of the ways of other jurisdictions and has provided the foundations of a discipline of comparative law Before beginning to examine the nature and techniques of comparative company law it might be useful to start with a working de nition of comparative law itself One that is broad enough and apposite is the de nition that Acomparative law is the comparison of the spirit or style of different legal systems or of comparable legal institutions or of the solutions of comparable legal problems in different systems The bene ts that can be derived from a comparative study of the laws of other systems are many but the preeminent ones particularly for company lawyers are the following Such a study hones students critical faculties to the sharper edge needed to understand their own system with greater and more creative insight As Professor Jolowicz has said Comparative legal study does however provide a tool for lawyers to discover some of the things they take for granted They can come to see that other legal systems are eXplicable only on the hypothesis that what those systems take for granted is not always what we take for granted By discovering what are the foreigners assumptions we can work backwards and see what are our own When we see the ways in which other countries deal with the problems that confront us in our own system we have access to a range of different solutions in a given problem and hence in the hands of a good critical scholar it can guide a potential legislator towards the better solution to the particular problem that is being confronted Indeed the mere eXistence of this gene pool of solutions call prompt the legislators to initiate the task of seeking to improve the solution that is current in their own particular system To quote Zweigert and Kutz The basic methodological principle of all comparative law is that of functionality From this basic principle stem all the other rules which determine the choice of laws to compare the scope of the undertaking the creation of a system of comparative law and so on Incomparables cannot be usefully compared and in law the only things which are comparable are those which ful l the same function In order to identify rules or mechanisms which ful l the same function it is necessary to approach each system with an open mind and to use considerable imagination coupled with common sense If for example one is looking for rules which ful l the same function as those which require a minimum capital for a company on its incorporation it is necessary to articulate the creditor guarantee function of the minimum capital rules Then it becomes possible to perceive that this function can be performed by a requirement of disclosure of the actual capital position of a company at any given time allowing a prudent creditor to take steps to protect himself Company law as a branch of legal discipline is particularly well suited both in the application of the comparative approach and to the production of useful and highlypractical results from the analysis that has been done This is because the company is called upon to ful l a similar function in most legal systems If the system in question knows the use of the commercial company it will usually attribute a 3 COIVIPARATIVE COIVIPAN Y LAW 3 corporate personality to it If so then this leads on to the heartland of company law which is a study of the ways in which the system in question has framed its rules so that the corporate person may integrate its activities with the rest of society This will include questions of both the external and internal dynamics of the organization and thus cover relationships within the company and between the company and the outside world In carrying out research in this area the wide range of in uences that have been brought to bear on company law becomes apparent In some countries the subject is classi ed as a compartment of commercial law Thus it is a natural and logical step to apply to company law concepts such as the security of transactions which in other systems are normally associated with the law of sale In other jurisdictions company law is dealt with as part of business law and hence it becomes closely associated with and in uenced by labour law and revenue law In many countries it is easy to see that these last factors linked with areas such as securities regulation have led jurists to question the label of company law itself Where any group of nations is actively seeking to reform their laws together in order to achieve a joint objective there is tremendous scope for the operation and positive deployment of comparative law The skills of the comparativist are at a premium both in discovering and comparing the laws of the different systems and more particularly in evaluating the results of the analytical comparison The Community par excellence is a legislator looking for the best solution to a particular problem or range of problems This is precisely what the comparativist can help to provide The existence of this harmonization programme is a major ground for the importance of comparative European company law at the present time The completion of the internal market of the European Community EC by 1992 is another reason for the importance of comparative European company law at this time With the removal of the internal barriers to trade business people in all countries are going to be faced ever more frequently with contracts of all sorts from companies and rms emanating from different jurisdictions In order to understand the internal and external mechanics of such companies so that they can pass on the bene t of this wisdom to their clients professional lawyers are going to need access both to the detailed laws relating to such entities and to works of comparative law in order to help explain how the foreign law works both in relation to the rest of that system and also in relation to known reference points within their own system NOTES 1 There are many reasons for comparative legal studies a What are the reasons identi ed by Robert Drury and Peter Xuereb They are British solicitors B that is nonlitigation transactional lawyers b Does a comparative study of law make a lawyer more sensitive to her own legal surroundings Or is it just a nice excuse for exotic deductible professional travel 7 such as to Venice c Can comparative study create value That is would a US client ever care if her lawyer had a comparative perspective Can the lawyer use rules principles and philosophies from other legal systems to his clients advantage 2 In fact study of comparative company law has been much in the vogue Some scholars believe that company law systems can be transplanted to great bene cial effect For example a group of Harvard and Columbia law professors in the early 1990s came up with a company law code for COIVIPARATIVE COIVIPAN Y LAW 4 postcommunist Russia using their theories about corporate law The project was a dismal failure Why had the new Russian company law modeled on a successful US corporate law system been a failure The law professors who had engaged in the original transplantation offered an eXplanation In Russia and elsewhere proponents of rapid mass privatization of stateowned enterprises ourselves among them hoped that the pro t incentives unleashed by privatization would soon revive faltering centrally planned economies The revival didn t happen We offer here some partial explanations First rapid mass privatization is likely to lead to massive selfdealing by managers and controlling shareholders unless implausibly in the initial transition from central planning to markets a country has a good infrastructure for controlling selfdealing Russia accelerated the selfdealing process by selling control of its largest enterprises cheaply to crooks who transferred their skimming talents to the enterprises they acquired and used their wealth to further corrupt the government and block reforms that might constrain their actions Second pro t incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of among other things a punitive taX system of cial corruption organized crime and an unfriendly bureaucracy Third while selfdealing will still occur though perhaps to a lesser eXtent if state enterprises aren t privatized since selfdealing accompanies privatization it politically discredits privatization as a reform strategy and can undercut longerterm reforms A principal lesson developing the institutions to control selfdealing is central to successful privatization of large rms Black Kraakman amp Tarassova Russian Privatization and Corporate Governance What Went Wrong 52 Stan L Rev 1731 2000 SSRN Paper 181348 Other scholars perhaps stating the obvious have concluded that company law is highly dependent on a countrys legal and business culture See John Ciof State ofthe Art 48 Am J Comp L 501534 2000 reviewing KLAUS J HOPT COMPARATIVE CORPORATE GOVERNANCE THE STATE OF THE ART AND EMERGING RESEARCH Offering a somewhat sanguine view on comparative law studies a US law professor recently commented Comparative law is in a state of disorientation inside and outside of legal academia it appears irrelevant and outdated Comparative law scholars seem unable to de ne and develop comparative law as a coherent eld of scholarship that serves any social purpose Comparative law has traditionally served two overarching purposes First comparative law promised to provide insights on our own legal order through a comparison with other legal systems However modern jurisprudential doctrines such as critical legal studies legal feminism law and economics and critical race studies have replaced comparative law by playing that role in a more challenging provocative and appealing way The second purpose of comparative law was to illuminate the structures and internal processes of foreign legal systems either for the purpose of legal harmonization or to facilitate negotiations with foreign lawyers and business entities However these 5 COIVIPARATIVE COIVIPAN Y LAW 5 goals appear irrelevant and outdated in light of US federalism and the convergence within the international legal system In the early twentieth century Justice Brandeis commented that the states in the US federal system may serve as legal laboratories Why look abroad for examples of distinct legal approaches if different ideas can be developed and tested in a more homogeneous and therefore more transferable setting And why look abroad if our own legal order appears so different and maybe even superior that it is difficult or impractical to implement legal ideas from abroad at home Another more recent development seems to render the comparative enterprise even more unnecessary With the export of US business laws and procedure foreign legal systems increasingly resemble our own If that is the case why compare these systems to our own at all Comparative law could live up to its promise of providing a perspective on our own legal system through the presence of a vibrant migrant population from different legal systems on our territory The understanding of respect for and engagement of foreign legal systems rather than their mere tolerance will allow us to appreciate cultural genderbased religious and legal differences at home to a greater extent To accomplish these goals it is necessary to discard the missionary approach and replace it with that of an insightful traveler who gains insights on her home system through distance While culture is relevant to the development of law comparative law may be able to help us see the fault lines between law and culture more clearly whether in developing a coherent legal response to the arrival of migrants from different legal backgrounds or in re ning the international human rights system Tolerance alone will not suf ce since it might merely amount to quotsmugness condescension contempt for others and intellectual isolationquot What is needed is real engagement with different ideas different views that put quotour own most deeply held beliefs always at riskquot Ultimately only that approach of comparative law will bring us from more accurate knowledge of quotthe otherquot to quotempathy and respect in a pluralistic worldquot Nora V Demleitner Combating Legal Ethnocentrism Comparative Law Sets Boundaries 31 ARIZ ST L J 737 1999 A What is a company Frederic Lane Venice s Maritime Republic 1973 One might venture to guess that Venice with its optimal location was an extremely successful maritime republic But its location was only part of its allure Private nancing government involvement and the Venetian banking system all contributed to Venice s maritime success In 12 h century Venice sea loans and colleganze were the most prevalent forms of nancing for commercial ventures A sea loan used to obtain money for maritime voyages involved a high interest rate and the lender took the full risk of loss In a colleganza one party contributed labor in return for the other party s contribution of capital the capital provider received no xed percentage of interest but rather threefourths of the total pro t from the venture Family partnerships were also common between Venetian brothers these were inherited and one brother was fully liable for the other brother s debt 6 COIVIPARATIVE COIVIPAN Y LAW 6 In the 14 11 century the transition from colleganze to commission agents began A colleganza was most bene cial in risky foreign ventures since it offered those who stayed in Venice a threefourths claim of pro ts But during the 1439h century merchants who stayed at home in Venice began to turn to commission agents who were paid a percentage of revenue regardless of pro t Whereas in a colleganza an agent would receive one fourth of the pro t a commission agent received a percentage of the volume of business usually 3 to 5 percent of turnover Though colleganze continued they became less prevalent over the century because of commercial improvements such as doubleentry bookkeeping 7 which made it easier to keep track of actual receipts The Venetian government was directly involved in the maritime commercial affairs of its citizens In the 13 11 century Venetian maritime law was codi ed in what was known as Zeno s Code which required seamen s obedience to the law as citizens of the state before obedience as employees As the dogeship was transformed from a traditional monarchy to a more republican magistry in the 1239h to 13 11 centuries the government encouraged commercial loans and doges were often commercially affluent leaders In the 1439h to 15 11 centuries the Venetian government was overtly capitalistic encouraging Venetians to make pro ts through 39 39 39 The was a proponent of open inclusive cartels but discouraged or destroyed plainly exclusive monopolistic cartels The government involved itself in the auctioning of galleys which produced pro table revenue for the government itself yet also resulted in egalitarian commercial reforms such as providing equally secure transport fair common carriers and equal charges However it should be noted that although the government favored commercial capitalism it restricted manufacturing capitalism In the banking system the Venetian business de nition of usury was much more lenient than the Catholic Church It approved as nonusurious the payment on commercial investments of a rate of return determined by market conditions Local colleganze which did not have a xed percentage of pro ts but simply a rate of return and bills of exchange in foreign currency provided means of borrowing money that were not considered usurious The Venetian banking system was the unique Banche del Giro or girobank system in which bankers were able to turn over or rotate girare credit between different accounts They did their business at tables near the Rialto and transferred credit on the books rather than in coin or by check The book was an official notarial record which meant that anyone who had an account could appear at the banker s table and make or receive payments orally In the 16 11 Century Venice exhibited conservative business practices Laws forbid limited liability partnerships and instead required shared pro ts and shared liability Joint ventures of limited liability were mostly unions of capital for limited duration and limited purposes rather than the large jointstock companies that began to develop in England and Germany at this time CORPORATIONS EXAMPLES AND EXPLANATION S Aspen Law amp Business 4th ed 2003 Alan R Palmiter CHAPTER 1 THE CORPORATION AN OVERVIEW What is a Acorporation It is a framework through which people conduct modern business It is a convenient legal entity that can enter into contracts own property and be a party in court It comes in assorted sizes from publiclyheld multinational conglomerates to a oneperson enterprises The corporation is a creature of lawCa legal arti ce Nobody not even your law professor has ever seen one The corporations existence and attributes arise from stateenabling statutes which give 7 COIVIPARATIVE COIVIPAN Y LAW 7 business participants signi cant freedom to choose their own customized relationships The statutory framework however is incomplete Many gaps left by the statutes are lled by judicial norms Other gaps particularly those involving disclosure to investors are lled by federal securities law Ultimately the corporation is an investment vehicle for the pooling of money and laborCa grand capitalist tool Money capital comes from shareholders and creditors human capital comes from executives and employees Both money and labor expect a return on their investment The corporation de nes their legal relationships and mediates their con icting interests 11 Corporation Basics 39 111 Five Basic Attributes Suppose you are asked to make an investment What would you ask The paradigm corporation answers the ve basic questions that arise in every investment relationship How long does the investment last The corporation has an independent perpetual existence It is an entity distinct from those who contribute capital shareholders and creditors and those who manage the business directors and officers The persons who constitute the corporation may change but the corporation remains It owns the assets of the business and is liable for any business debts Who manages the investment The locus of corporate power is the board of directors which manages and supervises the business The board often delegates its power to officers to act and bind the corporation In exercising its management powers the board is subject to duciary duties Shareholders have only a limited governance role They have no power to act on behalf of the corporation but instead have voting power to elect directors approve fundamental corporate changes and initiate limited reforms What is the return on the investment The corporation establishes a hierarchy to the stream of earnings generated by the business Creditors including bank lenders bondholders trade creditors and employees are rst in line and receive a return based on their contracts Shareholders are last in line and receive dividends as declared in the discretion of the board If the business dissolves creditors claims have priority and shareholders are residual claimants How can investors get out Shareholders ownership interests their shares are freely transferable This means that shareholders can realize the value of their investment by selling to investors interested in acquiring their nancial rights The corporation however has no obligation to repurchase these ownership interests Managers directors and officers can resign at any time What are investors responsibilities to others The corporation is liable for its own obligations but otherwise creates a Anonrecoursefs1 structure Corporate insiders directors of cers shareholders and lenders are not personally liable to outsiders on corporate obligations Outsiders such as contract creditors and victims of torts committed by corporate actors bear the risk of corporate insolvency Corporate investors and managers risk only their investment In effect the corporation is a combination of ve attributes 1 separate perpetual existence 2 centralized management 3 ownership interests tied to residual earnings and assets 4 transferability of ownerships interests 5 limited liability for all participants Of course there are exceptions For example in closely held corporations shareholders can agree to manage the business to pay themselves speci ed dividends and to limit their ability to transfer their stock In some circumstances courts may hold shareholders personally liable for corporate debts beyond their investment or lenders may require shareholders to guarantee personally the 39 debt 39 quot 39 The 39 is largely a 1 1 8 COIVIPARATIVE COIVIPAN Y LAW 8 malleable set of default rules that speci es the terms of the parties relationship unless they agree otherwise This places a premium on the lawyers role as creative planner Corporate constituents You will notice that there are many persons who participate in the joint economic activities that constitute the corporation Shareholderswhether individual investors or institutions pension funds mutual funds banks insurance companies university endowments that invest on behalf of their bene ciariesprovide money capital Managers directors and of cers oversee the business and its employees Lenders also supply money capital whether as secured bank loans unsecured bonds shortterm notes or suppliers trade credit Suppliers provide inputs for the business whether under longterm contracts or in market transactions To some customers are the reason the business eXists Those injured by the business whether as employees customers or strangers have claims on the business directly or through governmental regulationCantitrust banking environmental health product safety workplace safety As an economic actor in society the corporation is also subject to federal state and local taxes Corporate law however focuses on the relationship between shareholders and managersCthe two constituent groups usually understood to comprise the Aintemalfs1 organization of the corporation AOutside relationships with creditors suppliers customers employees and government authorities usually are subject to legal norms that treat the corporation as a personCsuch as the laws of contract debtorcreditor antitrust labor and taX 12 Sources of Corporate Law 121 Historical Sketch ofthe Corporation During the late 1800s two major trends leading in opposite directions shaped modern US corporate law The rst trend led to restraints on business activities In the 1880s Congress created the Interstate Commerce Commission to regulate the railroad monopolies In 1890 and 1916 Congress passed antitrust legislation the Sherman and Clayton Acts to combat consolidations of corporate economic power In the early 1900s states enacted blue sky laws to deal with fraud in the sale of corporate securities In the 1930s Congress passed a series of securities laws aimed at abusive management practices in interstate securities markets The other trend led to a liberalization of state corporation statutes In the late 1800s to attract incorporation revenues some states amended their statutes to lift limits on the amount of capital that a corporation could raise to permit corporate ownership of other corporations and generally to increase the exibility available to corporate management Eventually Delaware won this race which some have called a scurrilous Arace to the bottom and others an ef ciencyproducing Arace to the top Today most large publicly traded US corporations are incorporated in Delaware 39 122 Modern State Business Corporation Statutes The corporation statutes of each state many based on the Model Business Corporation Act or MBCA describe the basic corporate attributesC how to form a corporation MBCA Chapters 1 2 3 4 5 the nancial rights of shareholders MBCA Chapter 6 the governance powers of shareholders directors and of cers MBCA Chapters 7 8 the transferability rights of shareholders MBCA 39627 limited liability for shareholders MBCA 39622 structural changes such as charter amendments mergers and dissolution MBCA Chapters 10 gtltgtltgtltgtltgtltgtlt 9 COIVIPARATIVE COIVIPAN Y LAW 9 11121314 Some of the statutory terms are mandatory such as the annual election of directors and shareholder voting on mergers Others such as the removal of directors without cause or shareholder voting without a meeting are default terms that apply unless the parties choose different terms Contractarians often view corporate statutes as providing standardized Aofftherack terms that apply unless the parties usually in the charter choose different rmspeci c terms Under the internal affairs rule the law of the state of incorporation governs all shareholdermanager matters in multistate corporations Although no two state corporation statutes are identical there has been a trend toward greater uniformity and modernization In 1950 the American Bar Associations committee on corporate laws published the rst model business corporation act This model act and its many revisions served as the basis for corporation statutes in most states In 1984 the ABA committee substantially reorganized and rewrote the model act which has since been revised on a number of occasions The 1984 model act rst referred to as the Revised Model Business Corporation Act RMBCA has become simply the Model Business Corporation Act MBCA Signi cant revisions since 1984 include provisions on directors con icting interest transactions 1992 director standards of conduct and liability 1998 and shareholder rights in fundamental transactions 1999 A majority of states 38 as of 2005 have enacted corporate statutes based on the 1984 MBCA Not all states however have enacted a version of the model acts In fact the most prominent corporate law statesCDelaware California and New YorkChave their own idiosyncratic corporation statutes Delawares statute is particularly important in corporate law because of the leadership of its legislature in enacting corporate law reforms the sophistication of the states corporate bar and the expertise and in uence of its judiciary and because most large public corporations are incorporated in Delaware State corporation statutes generally treat all corporations the same Corporations with numerous widely dispersed shareholders publicly held corporations generally are subject to the same statutory rules as corporations with a small group of shareholders who do not have a public market for their shares closely held corporations 123 Role ofJudge Made Law Corporation statutes are not allencompassing court decisions clarify and ll in the gaps of the statutes and the corporations constitutive documents The most important judicial gap lling involves the duciary duties of directors officers and controlling shareholders Commonlaw duciary principles that regulate abuse by those who control the corporations decisionmaking machinery lie at the heart of corporate law 39 124 ALI Principles of Corporate Governance In 1977 the American Law Institute embarked on a longterm project to describe and unify the basic standards of corporate governance and structure particularly in those areas not addressed by state corporation statutes The project was controversial often pitting contractarians against traditionalists In 1993 after more than fteen years the project came to a conclusion when the ALI approved a nal version of the Principles of Corporate Governance The ALI Principles have not received the same reception as other ALI documents such as the ALI restatements Although some courts have embraced portions of the ALI Principles as useful statements of corporate law other courts have given them little attention and some have openly rejected them 10 COIVIPARATIVE COIVIPAN Y LAW 10 125 Federal Law There is no federal corporation statute although there are regular calls for a uniform national law applicable to some or all aspects of publicly traded corporations Nonetheless federal law adds a signi cant layer of corporate regulation Raising capital in public markets whether by selling stock or taking on debt is subject to disclosure regulation under the federal Securities Act of 1933 Corporations whose stock is publicly traded are subject to periodic reporting requirements and proxy disclosure and voting rules under the Securities and Exchange Act of 1934 In addition the Exchange Act regulates the trading of securities in public and private markets including insider tradingCthat is the use of material nonpublic corporate information to buy or sell stock In 2002 Congress enacted the SarbanesOxley Act in response to a spate of accounting and corporate scandals that raised questions about the adequacy of US corporate law The SarbanesOxley Act both sought to increase the integrity of the federal securities disclosure system and to federalize speci c aspects of US corporate law as it applies to public corporations The Act which responded to the Enron nancial scandal does the following 7 X Regulate auditors It created a new quasigovernmental board to regulate the US accounting profession and particularly the auditing of public companies It banned auditors from performing certain types of nonaudit services and required preapproval by the companys audit committee of permissible nonaudit services X Regulate company boards It required the stock exchanges to set rules on the composition and authority of board audit committees It authorized the SEC to remove Aun tfs1 directors and of cers from their positions and to bar them from similar offices in other public companies It banned the personal loans to company directors and of cers except in the regular course of the companys lending business X Require internal nancial controls It required the Securities and Exchange Commission SEC to create new rules on internal controls to detect illegal conduct in the corporation It required the companys top of cers to certify the truthfulness and completeness of company nancial information X Regulate insider trading It required the forfeiture of executive stockbased pay and trading gains when the company restates its nancial information due to misconduct It prohibited company executives from selling their company stock during any trading blackout period imposed on employees X Strengthen gatekeepers It mandated the SEC to create rules requiring lawyers who work for the company to report securities violations and duciary breaches up the internal corporate ladder It encouraged whistleblowers by imposing criminal liability on those who retaliate against employees who provide evidence or assist in the investigation of business crimes Many of these provisions had before the Act been the exclusive domain of state corporate law For example the speci cation of the composition and responsibilities of the boards audit committee restrictions on loans to corporate executives speci cally authorized in many state statutes the prohibition on trading during a blackout period and the forfeiture of executive pay after a nancial restatement have been traditional subjects of state corporate statutes and judgemade duciary law Not surprisingly there has been a wide and heated debate B in the United States and around the world B whether SarbanesOxley was a useful remedy or an overreaction Preliminary empirical studies suggest that the Act has had a positive effect Investor con dence in nancial disclosures certi ed by corporate 1 1 COIVIPARATIVE COIVIPAN Y LAW 1 1 of cers has increased and Amanagementfs1 of accounting earnings has decreased since the Acts enactment NOTES 1 What do people who join together in a forpro t enterprise want a What are the objectives of those who invest their human capital that is those who invest themselves Are they interested in future returns or present returns Are their interests consistent with those who put in money capital b What are the objectives of those who invest their money that is their saved or excess human capital Are they interested in immediate returns or longterm returns Do they want to run the business 2 Consider the types of business organizations found in medieval Venice a What were the 39 39 of l 39 391 in quot Why did colleganze give way to collection agents b Why did Venetian law unlike British and later American law not permit jointstock companies in which dispersed investors each had the right to share in pro ts and the protection of limited liability c How is a US corporation different from a colleganza 7 how does it satisfy the mutual objectives of the human and money capitalists 3 In a recent book that seeks to identify the fundamental aspects of business corporations across modern developed economies the authors identify ve core structural characteristics of the business corporations 1 legal personality 2 limited liability 3 transferable shares 4 centralized management under a board structure and 5 shared ownership by contributors of capital R KRAAKMAN P DAVIES H HANSMANN G HERTIG K HOPT H KANDA amp E ROCK THE ANATOMY OF CORPORATE LAW A COMPARATIVE AND FUNCTIONAL APPROACH 7199 2004 The authors also assert the animating purposes of corporate law are to create a structure for business activities and to control con icts of interest among corporate constituencies B such as shareholders vs managers majority shareholders vs minority shareholders and insiders shareholders and managers vs creditors These con icts are often referred to as Aagency problems since they mimic the con icts in the principalagent relationship For example consider all the problems if you decided to ask somebody to sell your car for you How can you make sure your agent will be hardworking honest trustworthy loyal 7 that is focused on you How does corporate law regulate principalagent con icts The authors suggest there are 10 strategies to minimize these con icts thus to maXimize the bene ts of the corporate parties and more generally social welfare Some of these strategies are regulatory mandatory rules imposed by law to govern the parties relationship others derive from governance by the parties private rules established by the decisionmaking hierarchy created through corporate law In addition some of the strategies involve constraints that are imposed before the agent undertakes corporate activities socalled ex ante rules and others are imposed after the agent has acted so called ex post liability This framework helps identify that corporate law works in many different though interrelated ways COIVIPARATIVE CONTPAN Y LAW 12 Here is the table slightly modi ed proposed by Professors Kraakman and Hansmann followed by a short description of each of the entries Strategies for Protecting Principals Regulatory Strategies Governan ee Strategies Agent Affiliation Appointment Decision I Agent constraints terms powers powers incentives EX ANTE Rules Entry Selection Initiation Reward EX POST Standards Exit Removal Veto Punishment Agent constraints This is a popular strategy B rules by legislative regulatory and judicial lawmakers that require or prohibit speci c conduct and standards that leave compliance to adjudication after the fact Rules tend to be straightforward such as the requirement of annual shareholder meetings while standards deal with more complex situations such as the nuanced standards for selfdealing by controlling shareholders A iliation terms This strategy focuses on the point at which parties decide to begin or end the corporate relationship At entry rules mandate that investors receive disclosure to make an informed decision forcing corporate managers to tell a convincing story To facilitate exit rules permit shareholders to sell their shares without management interference and other rules mandate a right to be paid Afair value in a corporate merger Appointment powers This strategy allows the parties to protect themselves Shareholders have the power to select directors a power that sometimes can be exercised by minority shareholders and even employees directors and managers can also choose what corporation to work for Or after the fact shareholders can vote to remove directors who have not ful lled expectations To ensure management continuity there are limits on when and under what circumstances these powers can be exercised Decisions powers This strategy involves a careful demarcation of who decides what For example corporate statutes in the United States allow shareholders to initiate by nominating director candidates proposing changes to the corporate bylaws but not the articles and recommending nonbinding resolutions B but no more The board can propose amendments to the articles mergers and dissolution B subject to a shareholder veto Otherwise the board of directors is the center of the bulk of corporate decisionmaking Agent incentives This strategy assumes that agents will not respond merely to the call of conscience and reputation but will need nancial incentives Some incentives come as promises or rewards for good behavior B like stock options that rise in value as share prices rise generally Some incentives come as threats or punishment for undesirable behavior such as criminal penalties for stealing corporate assets It s the old story of carrot and stick Where does corporate law come from in the United States a Is corporate law in the United States uniform What is the MBCA Who promulgates it and why What is the process by which the MBCA becomes law How is it different from uniform laws such as the Uniform Commercial Code 13 COIVIPARATIVE CONIPAN Y LAW 13 b What is the pattern of corporate lawmaking in the United States Some have described US corporate law as a Alaboratoryfs1 of 50 different state jurisdictions Corporate law innovations in one state tend to spread to other states in a dynamic process in which legal experimentation identi es rules eventually adopted by a majority of states B creating a de facto uniformity in US corporate law Delaware is often the rst state to adopt reforms and the MBCA soon follows Roberta Romano The States as a Laboratory Legal Innovation and State Competition for Corporate Charters SSRN Paper 706522 Apr 2005 Lately however the MBCA has begun to set its own course with provisions dealing with director standards of liability safe harbors for directorinterested transactions and functionally equivalent treatment of different forms of corporate combinations c What are the ALIs Principles of Corporate Governance Who pays attention to the ALI Principles Can you think of something comparable to them d What is the role of federal law in the structure of the corporation Before 2002 the federal role in US corporate law was largely limited to specifying rules of disclosure for publiclytraded corporations But the SarbanesOXley Act of 2002 enacted by Congress in response to the accounting and corporate scandals that came to light in the early 2000s changes the nature of US corporate federalism Under the SarbanesOXley Act a number of matters of corporate governance in publiclytraded corporations have been taken from state control and placed under federal oversight l the composition of corporate boards including the board s audit committee 2 the hiring of outside nancial auditors 3 the responsibilities of corporate attorneys toward their public corporation clients 4 loans by public corporations to corporate insiders 5 the internal corporate monitoring systems to ensure accurate and honest nancial reporting 6 the liability of corporate officers who certify corporate disclosures 7 the protection of whistleblowers who eXpose corporate fraud and 8 corporate codes of ethics 1 A European conception of company The Nature ofthe Company JEAN PAILLUS SEAU from European Company Laws A Comparative Approach edited by Robert Drury and Peter Xuereb Dartmouth Press 1991 The concept ofthe company ADoes the company contract still eXist During the last 30 years or so we have witnessed a veritable revolution in the concept of the company The previous conceptual approach to the company has been completely overturned and a new dual approach has arisen This re ects profound changes in the reality of company law in statutes case law and in practice This new approach while originating in France is equally capable of applying to the company laws of other European countries The main idea of this new approach is that the company is a gtsupporting framework for the enterprise or more precisely that it provides a gtlegal structure for the enterprise Under these conditions therefore it is no longer possible to deal with the corporate contract according to traditional concepts and to deliberate for example upon whether the company constitutes a contract or an institution The problem cannot be put in these terms any more When one takes the view that the company is a legal framework or organization for the enterprise the following questions have to be answered What is it that is organized or more precisely What are the social and economic character istics of that enterprise which is set up by the law Who organizes that enterprise the parties or the 14 COIVIPARATIVE COIVIPAN Y LAW 14 legislator What are its aims and objectives What are the organizational techniques chosen and used law contract or both The contract theory Nevertheless there was a time when the corporate contract was extremely important Indeed the company was in effect a contract whereby two or more individuals agreed to put something in common with a view to sharing the possible pro ts That was the de nition in art 1832 of the French Civil Code Similar de nitions have been adopted for example in Italy under art 2247 of the Civil Code in Switzerland under art 530 of the Code des Obligations and in Belgium under art 1832 of the Civil Code This de nition had its origins in Roman Law and lasted in France until the law of 4 January 1978 amended it for the rst time But it was the Act of 11 July 1985 which introduced the oneman company in France that has brought the most important change to the wording of art 1832 In place of the old wording which began gtThe societe is a contract the new wording con rms the development towards the concept of the company as an institution The societe is instituted by two or more persons who agree by way of a contract to appropriate their assets or their labour to a common enterprise with a view to sharing the pro ts or bene ting from the savings which result Before the de nition was amended in order to make the oneman company possible it had been clear that the company could only be created by several individuals or legal entities and it is precisely to allow several individuals to link up with the aim of running a common activity that the corporate contract had been devised Thus the assertions that the company is a contract gtbetween two or more individuals according to art 1832 ofthe Civil Code before the Act of 15 July 1985 and that it is a legal entity hence a group of individuals necessarily impose a certain concept of the company This is the traditional conception which has had a profound in uence upon everyones way of thinking for many centuries and in many countries From this point of view then what is the relationship between the corporate contract and the legal person First it is the contract that creates the company It is through the contract that the group of individuals who wish to be associated is formed This group then becomes a legal entity when it is registered as a company societe at the registre du commerce et des societes The second point results from the conjuncture of an af rmation that the company is a contract and a need that of organizing the group of individuals who become its members Indeed the group formed by these associates can only function if organized by the law Who for example is to take the decisions How Following which procedures With which powers Which liability How are the pro ts and losses to be shared How and when are they to be distributed And so on From the moment that one asserts that the company is a contract it seems only natural to assume that this organization ought to be effected by the parties themselves they who constitute the company societe and thus their organization can only be contractual This analysis has given birth to the contract theory The institution theory The development of company law nevertheless contradicts the contract theory Indeed the legislature has intervened over and over again in saying how the company should be organized An organization based on contract has been replaced by one based on the law at least partly and to an extent 15 COIVIPARATIVE COIVIPAN Y LAW 15 which varies according to the type of company or partnership involved Furthermore the majority of these rules established by the legislature have been made matters of public policy ordre publique In its analysis of the company the institutional theory stresses the legal person to the detriment of the contract As the legal entity is a group of individuals it is with reference to those individuals that the institution is to be de ned It is a concept of work or enterprise which takes shape and has a legal existence in a social environment To implement this idea an authority is established which provides the enterprise with organs In other respects between the members of the social group concerned with the realisation of the idea some manifestations of their common will are produced which are directed by the duly empowered organs and regulated by their procedures Numerous lawyers have been attracted by this concept in France the Netherlands and elsewhere They thought that it enabled them to understand why the legislature has substituted itself for the parties in organizing the company for example to confer powers on the board of directors which the general meeting of shareholders was not able to exercise The company is an institution at least in part Everyone agrees on that point although to varying extents and the will or in uence of the legislature has been emphasized as art 1832 of the Civil Code or art 34 of the Act of 24 July 1966 on the SARL private company show But the word does have a very different meaning from those that we have seen so far The new approach The traditional conception of company law is no longer relevant and does not correspond to modern company law any more As soon as the law expressly accepted the existence of the oneperson company it became impossible to assert that if is inherent in the nature of the company to be a group of individuals a contract or in institution But if the fundamental nature of the company is not that of a group of individuals and a contract what is it Similarly when company law takes into account interests other than those of the members it becomes difficult to assert that the company is only a group of members organized by a contract Thus countries where gtcomanagement or gtcosupervision has been instituted as in the Federal Republic of Germany for example it is clear that the very idea of codetermination goes completely against the traditional concept of the company The company that is to say the individual members themselves are now sitting on executive or supervisory boards and participating in the exercise of power by people representing outside interests Furthermore in these companies it is no longer possible to assert that the general meeting has the supreme power here again the traditional concept has failed It is not even necessary to have to resort to comanagement or cosupervision in order to reach this conclusion It is enough that interests other than those of the members are taken into account by company law for example the interests of the creditors or third parties But if the company is no longer solely the organization of a group of members what has it become The answer to these questions as far as I am concerned is very clear the company has become a technique for the organization of the enterprise This doctrine is the basis of what is now called gtthe modern concept of the company as opposed to the traditional concept It is in this direction that the development of company law has gone as both new statutes and case law show In fact the rise of the enterprise in French law is irresistible and irreversible One can see this everywhere in company law labour law tax law the law on enterprises in difficulties accountancy law competition law and so on There is practically no recent statute in the eld of business law in the last 16 COIVIPARATIVE CONTPAN Y LAW 16 few years which has not referred to the gtenterprise expressly either in the title or in the actual provisions In order to understand the modern concept of the company and its numerous consequences one can start either with the analysis of the company itself or with that of the enterprise Starting with the company one shows how the different mechanisms techniques and rules of company law have become the means for the organization of the enterprise to the extent that the company has become the supporting framework for the enterprise or in other words provides the legal structure for the enterprise The best way to understand the reality of todays company law is to start with the enterprise trying to forget for a moment the traditional concept of the company and by trying to nd out how the enterprise is organized by law in general and how it is organized by company law in particular From this perspective two things are essential The rst is to de ne the concept of enterprise What is the enterprise The second is to nd out how the enterprise is organized by the law THE CONCEPT OF ENTERPRISE The enterprise is not a legal concept it is an economic and social concept My research has led me to perceive two essential realities in the enterprise a business and a center of interests The enterprise is rst and foremost a business In the competitive economy of the market place the enterprise is rst and foremost a business involving the production transformation or distribution of goods or the supply of services or some of these functions It may be a business of producing and selling cars as well as that of distributing products in a hypermarket or in a small grocery shop as well as the rendering of insurance and accountancy services or even of legal services The business is organized according to the markets chosen by the enterprise as well as by its strategic options Its existence and its management require the following a large range of intellectual resources skills and work material and nonmaterial resources nance contracts such as for example contracts of supply franchise and concession contracts strategic options a decisionmaking procedure an organizational hierarchy and the de nitions of functions generally speaking an elaborate strategy of action gtltgtltgtltgtltgtltgtlt A business only exists and develops in so far as its customers sought after also by other enterprises buy the enterprises goods and services in sufficient quantities to ensure its viability and to make it a gtgoing concem This means that the ow of cash generated by its sales balances during an accounting reference period one or more nancial years exploitation cycles the out ow of cash resulting from its total expenditure that is that required for its necessary internal growth If it fails to satisfy the requirements for viability the continued operation of the enterprise cannot be assured It will only be able to survive by means of a system of guaranteed subsidies either from its members or from the group of enterprises to which it belongs or from the State The effectiveness of the business depends essentially on the quality of its managers and more generally on the quality the competence the motivation and the courage of the people who run it regardless of the level of their responsibility The enterprise is secondly a focus of interests The creation and the functioning of an enterprise gives rise to a variety of interests There are those of its founder B the entrepreneur his interest is obviously essential for without him the enterprise would not exist It owes him its development and he bears the risks But he is not the only one From 17 COIVIPARATIVE CONTPAN Y LAW 17 the moment of its creation the enterprise becomes a focus for other interests such as those of its creditors and its employees When its development proceeds the interests of the contributors of capital partners shareholders money tenders riskcapital companies institutional investors depositors and so on These interests vary according to the size of the enterprise The bigger it is the more important they are the smaller it is the fewer the people who will be involved to the eXtent that it becomes hardly distinguishable as an enterprise But everything is relative for the economy of a small provincial town may depend upon the fortunes of an enterprise whose impact would be negligible in a metropolitan reglon THE LEGAL ORGANIZATION OF THE ENTERPRISE One of the functions of the law is to provide a legal structure for peoples activities their position in society arid their personal relationships The law has an organizational nature and it is also a science of organization This function of the law is particularly evident in the eld of business law Thus with the aid of techniques and mechanisms which belong to very different disciplines such as the law of contract company law labour law accountancy law the law concerning enterprises in difficulties and so on the law organizes the enterprise It organizes its structure its functioning its nancing its decisionmaking procedures the nancial information on its condition and results its transmission its sale the prevention of difficulties and even its reorganization when in difficulties Having established this it is then necessary to determine for which purposes and aims this organization is effected There are two fundamental aspects of the enterprise its business and its center of interests The business The business of the enterprise is organized by the law which I will try to elaborate with reference to the oneman company Why did the legislature crease the oneperson company in France by the Act of 11 July 1985 and in Belgium by the law of 14 July 1987 Quite simply so that the entrepreneur for his own reasons can give a legal autonomy to his commercial industrial or service providing business so that he can create a speci c legal organization Thus it is necessary to provide a supporting legal framework for the conduct of activities of this kind What characteristics must such a supporting legal structure have The approach to this question is simple and obvious the needs of the enterprise in this area must be listed and the best legal solutions applied So for example if the business consists of the sale of goods or the provision of services the legal structure must provide for legal personality because only that facilitates the execution of legal acts and the conclusion of contracts which are implicit in that activity The attribution of legal personality follows directly from the practical necessity of giving some legal form to the business The consequences of the attribution of legal personality are the eXistence of a corpus of assets of some identi cation of the business its designation of a domicile and of a nationality it involves its legal creation its duration and its end In order to run the business there is a need for money assets and so on Legal techniques and mechanisms are necessary in order to allow for the use of this money and assets for the advantage of the business The running of the business involves a multitude of decisions This presupposes the organization of a decisionmaking process The supporting framework must thus allow for the legal organization of 18 COIVIPARATIVE CONIPAN Y LAW 18 authority and of decision taking organs having the necessary legal competence to run the business with if needed a corresponding liability A focus ofinterests It is obvious that the enterprise operates as a focus for different interests These interests derive from the eXistence of the business and are in turn supported by it These interests include those of the founder of the enterprise of the individual shareholders who provide the capital of the institutional investors the employees the creditors third parties and so on These interests have a common cause because it is to the bene t of all of them that the enterprise thrives and prospers The employees will however only pro t from this where as is often the case there is a pro tsharing plan between the shareholders and the employees The interest of the entrepreneur is selfevident other shareholders have an interest in the dividends the creditors want to see their money back in due course third parties have an interest in safeguarding the agreements that they have made with the company the employees want to get their wages as well as keep their jobs and so on However this overall convergence of such interests in the enterprise cannot hide the fact that the interests of these various groups can come quite sharply into ict It follows therefore that there are at least three possible scenarios 1 The legislature can leave the different interest groups to sort themselves out and agree among themselves on the way in which they want to organize their relationships and resolve their con icts That would be an organization of a contractual nature 2 Or rightly or wrongly the legislature takes the view that this is neither possible or advisable and thus stipulates the rules of the game generally in an imperative way This would be an organization of a legal nature or in other words an institution 3 Or nally the legislature may only regulate certain aspects of these relationships or lay down rules of general guidance leaving it to the different interest groups to sort out on a contractual basis those matters which are not mandatorily regulated by the law The legislature has chosen to intervene in order to determine the respective rights and levels of protection to be accorded to those who have an interest in the enterprise This intervention is more or less farreaching depending upon the form of the enterprise involved and upon the nature of the interests which it is desired to protect The four principal lines of this intervention are protection by means of information the increase of the rights of certain interest groups the protection of these interests through the very concept and structure of the company and eXtemal protection To these we shall now turn The protection of different interest groups by means of the dissemination of information The legislatures wish to protect the different interest groups has led it to require companies to communicate and publish a great deal of information addressed to those who could have an interest in its activities Among this we nd especially information on a company s nancial position and this is of paramount importance A fair number of individuals contributors employees bankers creditors and so on will all base their decisions on this information In order to certify its credibility the institution of auditors commissaires aux comptes has been created They also certify the credibility and accuracy of certain other information This is an important protection for all those affected by this information 19 COIVIPARATIVE CONTPAN Y LAW 19 The importance of this information is such that it has been increased in both quantity and quality by numerous legislative provisions relating for example to the consolidation of accounts the establishment of the requirement budgetary and other forecasts to be sent to the directors the auditors and to the works council These include the pro ts forecast and the provisional nancial plan Increasing the rights and protection afforded to certain categories of individuals Generally speaking the rights of members and third parties have been strengthened in the countries of the EC through company law harmonization Directives Moreover in France the rights of the members and minority shareholders in private arid public companies have recently been increased by the law of 1 March 1984 which empowers thorn to initiate an alarm procedure when they learn of facts which might put the continuance of the business in jeopardy The rights and the protection given to the employees of the enterprise have also been greatly increased To give a simple example the directors of the company are obliged to show to the works council before their presentation to the general meeting of shareholders all of the documents which have to be laid before this meeting together with the auditor s report The members of the works council have the right to receive the same information as the shareholders and at the same times In companies exceeding a certain size the directors must send them many more documents including the draft pro t and loss account the nancial report the provisional nancial plan and the nal auditors report on these documents The council has the same right as the members and shareholders to bring an action to require an experts report on one or more aspects of the companys management and the case law asserts that the object of this exercise is to protect the interest of the company It can also initiate the alarm procedure when it learns of any fact which could jeopardize the economic situation of the enterprise It can also bring an action for the dismissal of the auditor nominated by the general meeting when for example it has reason to suspect his impartiality or independence on the grounds of his links with the majority which appointed him The works council has to he informed and consulted on a great number of occasions for example on questions concerning the organization management and important operations of the enterprise on any modi cations to the legal and economic organization of the enterprise especially in the case of merger or sale This also applies in the case of any important changes in the production structures of the enterprise as well as to the acquisition or disposal of subsidiary companies and when the company in which the enterprise is located is made the object of a transfer of the controlling interest Two or four members of the works council depending on the type of enterprise have a consultative role at all meetings of the board of directors or the supervisory board in public companies They are entitled to the same documents as are sent to the members of these boards for their meetings They have the right to express their opinions on the matters dealt with at the meeting The protection of different interest groups through the concept and structure of the company The very organization of the company is without doubt a fundamental element in the recognition and protection of the welfare of the different interest groups Speci cally some protection results from the fact that companies carrying on a particular type of activity for example banking nance or insurance are subjected to special regulations These regulations are there speci cally to protect those interests which can be put at risk by these activities But more generally it is the very way in which the concept of the company is conceived independently of its particular form B cooperative or capitalist which reveals how and to what extent the interests of these different groups have been taken into account For example in certain companies the 20 COIVIPARATIVE CONIPAN Y LAW 20 liability of the subscribers of capital is limited to the amount of their contribution Third parties will then have as their only guarantee the property of the company or name precisely the assets of the enterprise Such third parties include not only the present and future creditors of the enterprise but also its employees and members in their capacity as individuals In order to ensure their protection company law includes provisions which are designed to establish the actual existence of these assets and their value Thus an undertaking to do work or perform services cannot he accepted by a public company in payment for its shares and in France at any rate only exceptionally in a private company Contributions in kind must immediately be fully paid up and problems posed by their valuation have been solved by the institution of a valuation procedure to be performed by a special body of auditors commissaires aux apports To ensure the ef ciency of these measures certain criminal penalties have been laid down The crime of misusing the assets of the company is in this respect very signi cant Its objective shows clearly the intention of the legislature and that of the judges of protecting the enterprise and the interests that are bound up in it Thus the Cour d gtAppel in Paris in a decision of 29 May 1986 in the Willot case stated that the object of these restrictions is to safeguard the Property of the company against directors inclined to abuse their powers or dominant position and also to ensure the protection of the minority shareholders that of the enterprise as a going concern that of the creditors and other interested parties in the company The law has been concerned to recognize the existence of these different groups having an interest in the company and to protect them as ef ciently as possible The protection of the different interest groups through the interest of the company The protection of the enterprise and its interests is the best guarantee of the protection of the different interest groups If the enterprise is the cause of the existence of these interests its prosperity is also the common denominator of the protection of the various interest groups It is in the perspective of its expansion and viability that the shareholders have contributed their capital that third parties have given it credit that the directors manage it that the workers and the staff work there that the partners admit it to a cooperative or to a groupment d interet economique that the state or the local authorities provide it with the facilities for setting up in an industrial development area grants or tax bene ts and so on If the enterprise fails all of these interests will be damaged whatever protection each enjoys It is for that reason that a good number of legal rules have as their objective the protection of the enterprise and its interests However as these are dispersed throughout various different disciplines ascertaining them determining their precise foundation and producing a synthesis are no easy matters The rules can be found in the law governing collective agreements in tax law in employment law in the law of succession and in company law and so on The protection of the enterprise can also involve the suspension or suppression of the protection or representation of another interest group The protection of the enterprise can lead for example to the suspension for a time of certain of the rights of the companys creditors This happens for example in the case of the legal reorganization procedure redressement judiciare It can also lead to putting at risk the nancial liability of the companys directors under the provisions of the French law of 25 January 1985 it may also mean their dismissal where their defaults have led the company into insolvency It can lead equally to the justi cation of certain decisions of the directors of the enterprise taken with regard to al or some of the employees The protection of the enterprise and its interests constitutes a fundamental element in the protection of the welfare of the different interest groups even if in certain circumstances it involves a weakening in the protection of some among them