European Company Law

Week One:
A company is an association of persons who combine for the purpose of a joint activity, commercial or otherwise. Each
country allows certain specific forms under which joint economic activities may be carried out, generally partnerships and
companies.

Partnerships are individual agreements between the parties, while companies are organisations that exist independently of
its members and depend on capital resources.

The UK treats partnerships and companies as different entities for the purpose of legal regulation. Company law is reserved
to public and private limited companies; partnerships are regarded as contractual activities.

In the continental systems however, there is an overlap. Continental legal systems draw a distinction between civil and
commercial law, while this is unknown in the UK, an example of the distinction is in the French Article L210-1.

A business is considered commercial if the business name is registered with the commercial registry. In Germany, rules
applicable to merchants are also applicable to general and limited partnerships, capital companies are considered as
partnerships for this purpose. In Belgium, the objects determine the civil or commercial character of a company or
partnership.

In the UK there is a practical distinction between profit-making and non-profit-making organisations. A partnership can only
be formed with a view of profit while one form of private company limited by guarantee is designed for non-profit-making
organisation.

Legal Personality:

Capital companies are given legal personality while partnerships do not, or they have a modified form of it. A member whose
liability is limited by shares is only liable to contribute to the assets up to the amount, if any, unpaid by shares. Creditors of
the shareholders in principle have no recourse to the assets of the company.

Legal personality may imply no liability on its members at all for the debts of the company or other legal person. Linked to
H. Rayner Ltd v Departments of the Trade and Industry 1990. In practice, no business enterprise enjoys such pure legal
personality because the law provides that, despite the existence of legal personality, the liability of the members is either
unlimited or only limited to some extent.

Principle Forms of Business Organisation:

 General Partnerships
 Limited Partnerships
 Private Companies
 Public/Stock Companies

Countries are urged to limit the joint and several liability of the partners of large firms in the professional services who were
faced with substantial damages awards. Several MS have undertaken to develop forms of business organisations that suit
SMEs more than the traditional forms. Simplified and new types of companies have been introduced that are subject to less
formal requirements and enjoy more freedom. Such companies may not engage in activities where all protection of
shareholders, creditors and 3rd parties is necessary. The ECJ has enhanced the freedom of establishment for companies by
stating that no MS can withhold its citizens from using company forms of other MS. This enforces the trend to deregulate
private companies. The Companies Act 2006 has simplified decision making for private companies and abolished the
requirement to have a company secretary.

Partnerships:

They are not a popular medium for ordinary commercial transactions due to a lack of legal personality. They also aren’t
suitable for large organisations despite their very few restrictions on size. Partnerships are useful in regards of fiscal
transparency as they are granted tax deductions for loses endured by joint ventures. Partnerships have not been subjected
to any EU harmonising programme.
They are all personal relationships, and the assignments of a partner’s share is usually restricted without agreement from
the other partners. A contract can only be modified with the consent of each party to the contract.

It provides for a decision making mechanism comprising both the internal management structure and the authority of
partners to represent the firm. Partnership law generally leaves substantial freedom for the partners to agree on the internal
constitution of the firm. Creditors of simple partnership forms are very likely not to gain access to much of the assets because
the partners may remain the owners of the assets. Partnerships enjoying legal personality own the property that is brought
into the partnership and only the firm’s creditors may lay claim to this property.

Civil Partnerships and ‘Silent’ Commercial Partnerships:

In France, Spain, Germany and Belgium, civil partnerships that do not have commercial objects as defined by each country
have no legal personality and are regarded as essentially a matter of agreement between the partners. Several countries
have one or more forms of ‘silent’ commercial partnerships, which are regarded as a matter of agreement rather than
status.

In France, silent partnerships are strictly private arrangements that need not be disclosed to anyone. In Germany, it
resembles a limited partnership in that the undisclosed partner is only liable to his partner for the amount agreed in their
contract but not to 3rd parties. In Belgium there are no formal requirements and no separate partnerships capital, a creditor
can only lay claim to a partner’s share. In the Netherlands, a silent partnership may be used for both professional purposes
and commercial objects.

General Partnerships in the UK:

No partnership is capable of having any form of legal personality. It is simply a relation which subsists between persons
carrying on a business in common with a view of profit. There are no formal requirements in the formation of a partnership.

Every partner is an agent of his fellow partners in respect of any transactions carried out in the ordinary course of the
partnership business. Partners are regarded as being in a fiduciary position. This means that they owe each other absolute
duties of honesty and disclosure over and above the duties of care.

Continental General Partnerships:

They require some form of registration, and some countries confer legal personality upon the partnership. If a partnership
is a legal person the partnership is the owner of property brought into the partnership, as opposed to the co-ownership by
partners of a partnership without legal personality. The partners may bind the partnership when dealing with 3 rd parties
within the objects of the partnership unless the power to do so is limited by the partnership contract.

Partnership law generally provides for default rules on the distribution of profits and losses. All partners have an equal share
of the profits and losses, unless the partnership agreement prescribes for another distribution arrangement.

The provisions on the dissolution of general partnerships mirror the contractual character even where a partnership enjoys
legal personality. The dissolution must be published in order to inform the creditors of the partnership and is followed by
liquidation of the partnership’s assets.

Limited Partnerships:

This allows some partners to enjoy limited liability for partnership debts in the same way as a shareholder of a capital
company. General partners have management rights and are called managing partners. Between the general partners, the
rules of the general partnership apply.

The limited partner is principally only liable up to the amount of his contributions which must be in cash or in kind.

Private Companies:

Designed for small or medium concerns that require limited liability and legal personality but do not require access to public
funding through the general capital markets.

Public or Stock Companies:

These are designed for the larger enterprises which have access to all the capital markets for raising finance, both in terms
of equity capital from shareholders and loan capital from bondholders. Subject to far greater controls in such areas as
mergers and creditor protection. Each of the national public company forms in regulated by codes separate to those of the
national private companies with the exception of the UK.

Harmonisation Programme within Europe:

Its actual significance depends on how EU legislative measures are implemented onto national law and how their observance
is dealt with.

Legal Basis of EU Legislation:

The legal basis is found in Art. 44(2)(g). Art. 47 calls for MR of formal qualifications and Art. 94 opens up a wider area of
discretion.

European Legal Instruments:

Directives are the main legal instruments used. Another method is to set minimum standards, leaving it to the MS whether
or not they want to impose rules that are stricter. Regulations serve for the enactment of legal norms that supersede
national law and are pre-emptive to national legislation in the concerned area. In the Marleasing case, the court held that
in interpreting the provisions of national law national courts are bound to interpret their law in the light of the text and
purpose of the underlying Directive. The EU has taken initiatives to promote that courts of the various MS discuss their
experiences and have established a European Judicial Network in civil and commercial matters.

What is Corporate Law:

A principle function of corporate law is to provide business enterprises with a legal form that possesses the core attributes.
This allows them to transact easily through the medium of the corporate entity, and lowers the costs of business contracting.

 Legal Personality: Separate patrimony; the power to own assets that are distinct from the property of other persons
 Limited Liability: Nearly universal feature of the corporate form. Legal personality and limited liability can reduce
the overall cost of capital to the firm and its owners. Permits firms to isolate different lines of business for the
purpose of obtaining credit. It also permits flexibility in the allocation of risk and return between equity holders and
debt holders, reduces transaction costs of collection in case of insolvency, and simplifies and substantially stabilises
the pricing of stock
 Transferable Shares: Allows the firm to conduct business uninterruptedly as the identity of its owners changed,
avoiding the complications of member withdrawal that are common. Enhances liquidity of shareholders’ interests
and makes it easier for shareholders to construct and maintain diversified investment portfolios
 Centralised Management under a Board Structure: Permits the centralisation of management necessary to
coordinate productive activity. Corporate law vests principle authority over corporate affairs in a board of directors
or similar committee organ that is periodically elected, exclusively or primarily by the firms’ shareholders
 Shared Ownership by Contributors of Capital: There is the right to control the firm and the right to receive the
firm’s net earnings. Specialisation to investor ownership is yet another respect in which the law of business
corporations differs from the law of partnership

Secondary statutes include separate statutes for special classes of firms such as foreign firms or governmentally owned
enterprise. Law of groups, qualifies limited liability and limits the discretion of boards of directors in corporations that are
closely related through cross-ownership, seeking to protect the creditors and minority shareholders of corporations with
controlling shareholders. Open corporation statute, the rights of controlled companies are delimited by this statute which
provides for the regulation of both contractually formalised group relationships and de facto control relationships among
corporations.

Lecture One:

Art. 54 TFEU

Partnerships/contractual cooperation can be private or public.

General partnerships:

- Internal legal relationship (decision making, profits and losses)

- External legal relationship (binding, liability schemes)

Liability schemes are harsh – no capital requirements – assets at the disposal of partnerships often remain property of
partners in private

Limited partnerships:

- Internal legal relationship (same ^)

- External legal relationship (‘money put in the partnership pot’, unless they operate in the name and behalf of…)

Business formats in EU:

Sole entrepreneurship

Contractual partnerships (general and limited) – not subject to EU harmonisation programs

Legal persons (public and private companies)

Amalgamation (partnerships and companies)

Sui generis EU company types

EU company law

– Privilege of limited liability (possibility to avoid deterrence)

Company relationships:

- Legally independent entity acting in own capacity

- Presupposes due diligence amongst company officers

- Public listed companies are bound by the law and the company’s articles of association and ‘Corporate Governance Codes’

Limited liability company managers are not personally liable (unless misconduct). Company shareholders, not reaching
beyond the amount of money they put towards the company (shares).

Public limited company can only be limited at stock exchanges, but most are not.

Pro’s:

- Enhances risk-taking
- Diversification of portfolio’s
- Proper functioning of capital markets -> minimises monitoring costs for shareholders

Con’s:

- Externalisation of costs
- Risk transferred to others
- Monitoring costs for creditors
- Excessive risk taking
- Position of involuntary creditors may be frustrated
Week Two:

An incorporation means there has been a creation of a corporation; that is a legal person separate and distinct from its
members. Registered companies can be classified in different ways: for instance, limited companies as opposed to unlimited
companies. In several jurisdictions, the idea to return to the original concept of a restricted and flexible statute for the
private company has been put forward, owing to the enhanced freedom of establishment for companies within the EU and
the needs of business community.

The First Council Directive is based off Article 44(2)(g) and deals with three different subjects regarding the protection of
the interests of third parties. The Court held in the Daihatsu case, that the right to apply for the imposition of a penalty in
the event that a company does not publish its annual accounts cannot be restricted to, inter alia, the members and creditors
of the company. In the Ubbink case, it was held that national law will determine whether acts performed in the name of a
company not yet incorporated are to be regarded as having been performed in the name of a company being formed. In
Friedrich Haaga, disclosure must be made not only of the provisions as to representation applicable in the event of
appointment of several directors but also, in the event of the appointment of a single director, of the fact that the latter
represents the company alone, even if his authority to do so clearly flows from national law.

Traditionally, national laws have regarded companies as a form of cooperation between two or more persons. The Twelfth
Directive aims to eliminate divergences in the legislation of MS with respect to the single-member company.

A public company can be set up either through its formation or through the transformation of an existing legal entity. MS
are supposed to ensure that companies disclose their instrument of constitution and articles of association, where they are
comprised in a different instrument. After obtaining the deed of incorporation the incorporators must file an extract of the
deed and statutes within a certain timeframe and, where appropriate, file other documents with a view to register the
company into the commercial register. A public company can be formed for any purpose in accordance with the law by one
or more persons acting as founders/subscribers. The capital requirement to the formation is subject to the Second Directive.
Subsequently to obtaining legal personality, the company may assume liability for pre-incorporation transactions.

The formation of private companies is not so different from public companies. Registration is generally similar, differences
are in the form of national law. A private company may be formed by one or more persons for any legally permissible
purpose. There are no harmonised European rules with regard to capital.

Considering that the First Directive is applicable to both public and private companies, most of the elements pertaining to
the regulation of the company in formation, the moment of acquisition of legal personality, the liabilities for pre-
incorporation contracts and other aspects related to the liability of founders in private companies are generally regulated
in the same way as described previously with regard to public companies.

The GmbH is specifically designed for entrepreneurs and can be seen as the centrepiece of the legislator’s overall aim to
facilitate and accelerate the formation of companies and the underlying motive of the increasing the international
competitiveness of the GmbH. The main competitor in the regulatory competition of company law is the British private
limited company. The essential feature is the waiver of the traditional German minimum capital requirement.

In terms of the provisions on the payment for shares, the rules applicable to the UG are a lot stricter than those for the UK
Limited. First of all, the new § 5a (2) sentence 1 GmbHG provides that the share capital of the UG must be fully paid up
before registration. By contrast, English law does not provide any fraction of the share capital of a UK Limited to be paid up
before registration. Under the new CA 2006, however, the company’s constitution consists only of the articles (and certain
resolutions, see Section 17 CA 2006), while the memorandum merely serves the rather limited role of evidencing the
intention of the subscribers to form a company.31 In this respect, English and German law have converged because German
company law has always only provided for one single Satzung (constitution).

Companies House (the offical UK government register of UK companies) not only offers the option of an electronic
incorporation, but for an additional fee it is even possible to opt for a same day incorporation, either in paper (£ 50) or in
electronic form (£ 30). Despite the conversion of the Handelsregister (German register of companies) to electronic form and
the reforms brought about by the MoMiG - in particular the decoupling of registration and regulatory licenses - the new UG
will not be able to compete even if the new model articles are used.
With regard to the internal structure, in principle both the UG and the UK Limited give entrepreneurs a lot of leeway. Since
the new § 5a GmbHG does not stipulate any special rules for the management of the UG, the general rules of §§ 35 et seq.
GmbHG apply. The new § 5a GmbHG also does not stipulate any special rules on shareholder decision-making. Hence, the
general rules in §§ 45 et seq. GmbHG apply.

Restriction of distributions is actually one of the areas where English law is in some respects stricter than German law.58 A
company may only make distributions out of profits available for this purpose (section 830(1)) and section 830(2) CA 2006
provides that the profits available for distribution are only the accumulated, realized profits, so far as not previously utilized
by distribution or capitalization, less the accumulated, realized losses, so far as not previously written off in a reduction or
reorganization of capital duly made. By contrast, § 30 (1) GmbHG, which - absent any special provisions to the contrary - is
also applicable to the UG, only prohibits the distribution of assets which are necessary to maintain the registered share
capital.

French Company law model:

The company has to be set up in the common interest of the shareholders, prohibition of the clausula leonine, participation
of all members in common decision making, rights of shareholders proportional to their contribution to the capital for
companies limited. The code de commerce distinguishes between companies that are closely held and those whose
securities are held by a wonder public. External company life, the rule that limitations to the power of representation of the
president cannot be invoked against 3rd parties. Public securities issues may only take place by an SA, by a Societe en
commandite par actions or by a Societe civile immobiliere the latter reserved for real estate activities. The companies act
determines not the number of members of the board, but the number mandates a member can take up. It also provides
that the CEO has very extensive powers and has to be engaged full time in the firm as he cannot take up any other board
membership.

The AMF has rulemaking power in specific fields relating to corporate governance and risk control. It also gives authoritative
interpretations on issues relating to companies under its supervision. These interpretations published in its annual report,
carry great weight with market participants, although they are not legally binding.

Mandatory Provisions in French law:

The companies act indicates when partied may derogate from its provisions, but without indicating what additional
elements parties are entitled to introduce into the articles. French companies have the choice between a unitary board and
a two tier system with a supervisory council and a management board or “directoire”. By shares are entitled to issue
preference shares with or without voting rights and with such other rights as the charter may provide. On a certain number
of specific, but not so fundamental issues however, the law allows the charter to derogate from the legal provision.

Dutch Company law model:

It is part of the Dutch Civil Code Book 2, dealing with the different legal persons under Dutch law. The company types that
do not enjoy legal personality are dealt with in the Civil Code’s chapter on contracts. Common provisions applicable to all
legal persons are the rules on mergers and divisions and to a more limited extent the rules on the mandatory transfer of
shares in case of conflict among the shareholders as well as the rules on shareholders’ investigation right, a very powerful
legal instrument allowing the Enterprise Chamber to order an investigation in the affair of all legal persons and if necessary
decide about the transfer of the shares for administration purposes, the suspension or dismissal of board members or even
the dissolution of the company.

Governance for the NV is differentiated according to the legal dimension of the company; large companies are defined on
the basis of the capital and reserves, or more than 100 employees. In small companies the two tier board is not mandatory:
the charter can provide for the designation of a supervisory board, and how it will be appointed: as a rule by the general
meeting, or if the charter provides, by a 3rd party.

The formation of an NV requires a preventive investigation resulting in a declaration of no-objection on the part of the
ministry of justice. This type of external control has been replaced by a more limited one, whereby the ministry checks
whether the promoters have not been declared insolvent, or have been convicted for certain crimes.

Mandatory provisions in Dutch company law:

For large boards, due to codetermination rules, only the two-tier board is allowed and its composition regulated. With
respect to international groups, there is an effective choice between the two governance systems. As far as securities are
concerned, NV is entitled to freely negotiable bearer shares and can transfers can be restricted. In general Dutch company
law contains a considerable number of default provisions.

Dutch BV:

It is no longer necessary to deposit an amount of Euros to establish a BV. Moreover it is no longer obligatory to specify an
amount of authorised capital in the articles of association nor to insure that at least one-fifth of that authorised capital is
subscribed capital. The nominal value of a share is to be deposited at the time of acquiring it. The procedures for the
reduction of capital have been simplified. There is a two-prong test which consists of the following: (i) an equity test and (ii)
a liquidity test. The Board of Managing Directors is required to apply: redemption of shares is prohibited in the event that
(i) the B.V.’s equity, minus the price to be paid for the redemption of the shares, is less than the reserves that the B.V. is
required to hold by law or by its articles of association, or (ii) that the Board of Managing Directors knows or should
reasonably be expected to foresee that the B.V. will not be able to continue payment of its due and outstanding debts. The
B.V. creates the possibility of having shares with voting rights and shares without voting rights as well as shares entitled to
profit distributions and shares without entitlement to profit distributions, thus aligning the Dutch B.V. with other European
private limited liability corporate entities. The articles of association may determine that no transfer restrictions are
applicable or that other transfer restrictions, such as a right of approval, are applicable. If the articles of association are
silent on the subject, then the B.V. law makes a right of first refusal for the other shareholders applicable. The B.V. may
distribute profit to its shareholders, and other persons entitled to the profits intended for distribution, only to the extent
that the B.V.’s equity exceeds the subscribed capital plus the reserves that must be maintained by law or pursuant to the
articles of association. The general meeting of shareholders is entitled to decide on the distribution of profit, unless another
body of the B.V. has been granted such right pursuant to the articles of association.

German Company law model:

The AG is conceived as the legal form for the large company, based on the use of large amounts of capital, whether exchange
listed or not. This act has undergone a reform in the MoMiG. The law allows significant flexibilities for the GmbH, which are
largely excluded for the AG. The AG is considered a legal entity on its own, entirely regulated by the companies’ act, which
is supposed to cover all aspects. The strict regulation of the AG has led to the creation of mixed forms. Mostly one has to
infer the mandatory character from the formulation, or from the nature of the provisions itself. Indirectly this may appear
from the sanction: when the law states that contrary clauses will be held for null and void, or considered “unwritten”, it
means that parties cannot derogate. Some matters may be considered unlawful on the basis of general provisions of the
law, including general private law concepts. Case law may have clarified some of these points.

Mandatory provisions in German law:

The charter provisions of a German AG have to conform to the rule of strictness of the charter. Art. 23(5) states that “the
charter may not derogate from the provisions of this law, except when this has been expressly permitted. It is allowed to
adopt complementary provision, except when this law contains a comprehensive regulation”. This rule has been prevailed
for several reasons, one is the enterprise stability, another transparency of the market in the companies’ shares and hence
investor protection, or will to avoid market failure and race to the bottom. Flexibility has been introduced with respect to
the types of securities that can be issued by AG: different classes of shares may be issued, but shares with the same rights
belong to the same class. There is little to no flexibility with respect to the structure of the company organs: all AG must
have a management board and supervisory board, the latter also serving as the anchor point of the co-determination.

Week Three:

Due to the liability of shareholders in a public or private company being limited, national legislators have tried for a long
time to redress abuse. In principle, the minimum capital could have been distributed the day after incorporation.
Information must be available to enable any interested person to acquaint himself with the composition of the capital of
the company. A minimum capital must be subscribed. To maintain capital by prohibiting any reduction by distribution to
the shareholders where the latter are not entitled to it and by imposing limits on the company’s rights to acquire its own
shares. This ensures equal treatment of shareholders in the same position and the protection of creditors in case of
alteration of the capital. A working group made recommendations on the Simplification of the Legislation on the Internal
Market (SLIM) and by the High Level Group of Company Law Experts. It was recommended that reporting requirements be
eliminated in some cases and to facilitate certain transactions, such as the acquisition of shares by the company itself or by
a 3rd party with the company’s financial assistance and the streamlining of ownership in a company’s share capital.

The articles of association, or the instrument of incorporation, must always give at least information about various things
about capital – Articles 2 + 3 Directive 2006/68/EC.

Minimum capital is laid down in Articles 6, 7 8, 9, 10 and 26. Within at least a 2 year period after incorporation or
authorisation to commence business, the acquisition of assets may be subject to the same provisions as Article 10 and must
be submitted for the approval of the general meeting. The post-formation requirements do not apply to acquisitions
effected on the normal course of the company’s business, to acquisitions effected at the instance or under the supervision
of an administrator or judicial authority, or to stock exchange acquisitions. MS may decide not to require an expert report
where transferable securities are contributed as consideration, on the condition that they are valuated at the weighted
average price at which they have been traded on one or more regulated markets.

The maintenance of the Capital is stated in Article 15 of the Directive. Although an alternative is given in Article 19 (as
amended). Where MS permit a company to advance funds, make loans or provide security with a view to the acquisition of
its shares by a 3rd party, it must make such transactions subject to several conditions (Article 23).

The general meeting has to decide on any increase in capital unless this power is transferred to another body by the articles,
the instrument of incorporation or by the general meeting. Where there are several classes of shares, the decision of the
general meeting shall be subject to a separate vote for each class of shareholder, whose rights are affected by the
transaction.

The second Directive lacks effectiveness where the amount of capital and undistributable reserves at the closing date of the
last financial year is decisive for certain distributions and acquisitions. Between the date and the moment of distributions
or acquisition, these figures may have obviously changed. The text of the Directive itself gives rise to different
interpretations or even yields conflicting meanings in the various official languages of the EU. The Capital Directive may have
brought a certain harmonised level of capital requirements for the public company, yet this does not apply to private
companies because they fall outside the scope. Some MS have nevertheless implemented capital requirements for the
private companies but there is a tendency to more flexibility for this type of company.

MS creditor protection regimes are the result of an evolutionary process rather than of any comprehensive institutional
design. The High Level Group of Company Law Experts recommended that the EU Commission should conduct a study to
the feasibility of an alternative regime to the legal capital regime, doing away altogether with the concept of legal capital.
Any framework for the protection of corporate creditors has to incorporate problem dimensions compared with the case of
a natural person being the debtor. First, is the principle of limited liability or the principle of non-liability of shareholders for
corporate debts. Shareholders causing a corporation to act to the detriment of creditors are not liable for their decisions
with their personal assets towards creditors. This alters the incentive structure as compared with a natural person, the latter
being personally liable towards the creditors. Whether the protection of corporate creditors is based on ethical
considerations and notions of fairness respectively will mostly bear on the scope and contents of court-made creditor
protection rules. Ex post court intervention will lead to a high or excessive level of creditor protection if courts do not base
their decisions on economic welfare considerations reflecting the ex-ante incentives. The different risks that voluntary
creditors face can be analysed in three dimensions: time, cause and originator. Creditors face the risk that the terms and
conditions of the contract are inappropriate. The risk reflects an increase in the probability that at the time the claim is due
for repayment the debtor will be unable or at least unwilling to fully honour his debt. Initially inappropriate contracts are
often due to inadequate or even misleading information provided for by the debtor. Opportunistic behaviour on the
company’s part may be due to actions by either its directors or its shareholders. With regard to the directors, the most
common form of opportunism is a waste of corporate assets caused by directors who, when exercising their functions, do
not comply with the standard of a diligent and conscientious director. With respect to the shareholders, the lack of personal
liability for the corporations’ debts will serve as a powerful incentive to cause the company to act opportunistically.

The risks involuntary corporate creditors face are much the same as those run by voluntary creditors. If a claim does not
adequately reflect the risk of future non-performance by the company at the time the claim comes into existence, this will
be due to the company’s being in financial difficulties or even being insolvent, not because of misleading information
supplied by the debtor or bounded rationality on the creditor’s part. With regard to the ex-post-devaluation of claims
because of opportunistic behaviour, corporations as debtors and natural persons as debtors differ only in quantitative, not
in qualitative terms. Unlimited liability does not completely prevent people from acting opportunistically.
Shareholders do not participate in any losses the creditors suffer from dealing with a corporation. Creditor protection rules
and mechanisms seek to mitigate the effects of a ‘blind’ or automatic application of the principle of non-personal liability of
shareholders and directors. Creditors are to be protected against those risks that a fully informed rational creditor would
not accept voluntarily when contracting the claim in question. Efficient contracts fully reflect the risk that the corporation
will not be able to honour its obligation in full at the time the claim falls due for payment. Depending on the individual risk
preferences, risk averse creditors will either completely refrain from entering into a contractual relationship with the
corporation, or they will ask a much higher premium than those creditors holding a sufficiently diversified portfolio of claims.
Strong-form opportunism i.e. distribution of assets to shareholders or other forms of a deliberate increase in risk, on the
corporation’s part seems to be an obvious case for legal intervention in its creditors’ favour. Weak form opportunism is
different insofar as the company itself suffers losses due to substandard business conduct on the directors’ part. Limited
liability acts as a default rule for sharing the risks between creditors and shareholders that result from business misfortune.
Creditor self-help as an alternative to creditor protection by mandatory rules is not available to tort creditors, but only to
contractual creditors. Providing for mechanisms that ensure full compensation of creditors once the debtor has gone
bankrupt only comes second. If despite all efforts at prevention, a risk has materialised, effective creditor protection calls
for mechanisms and rules that minimise the losses incurred by existing creditors. Regulating behaviour to protect corporate
creditors boils down to providing for legal standards of behaviour for directors and shareholders. The sanctions attached to
these standards can either take the form of civil sanctions, or criminal fines and administrative sanctions.

Mandatory disclosure is universally acknowledged as in indispensable mechanism for creditor protection.

The background of the new Directive is to reduce the administrative burden, make the financial statements clearer and
easier comparable and to make certain payments to governments in the extractive industry and logging sector more
transparent. The scope of the New Directive is limited to those undertakings with share capital set out in Annex I and Annex
II to the New Directive. Since financial statements with participating interests that are accounted using the equity method
are not regarded as consolidated financial statements, it seems sensible that the Dutch legislator further studies this
approach, especially as it is – as in the past – doubtful whether the participating interests in partnerships are accounted by
the equity method. A Member State is not obliged to implement the ‘micro’ category. Given the background of this category,
it is probable that the Dutch legislator will implement this category. The New Directive allows the Member States to provide
that a parent undertaking must calculate the figures on a consolidated basis. The New Directive defines a ‘parent
undertaking’ as an undertaking that controls one or more subsidiaries. Member States are required to embody in their
national laws that the members of the management board and the supervisory board (two-tier board), or the administrative
board (one-tier board) have the collective responsibility to draw up the (single) annual financial statements and to prepare
the related management report, respectively to prepare the consolidated financial statements and related consolidated
management report. . It should be noted that Member States are not entitled to disregard the three grounds of excluding
entities from the consolidation requirement. In the event the laws of a Member State provide for the possibility that an
undertaking has the right to exercise a dominant influence over another undertaking pursuant to a contract entered into
with that undertaking or to a provision in its memorandum or articles of association, such Member State must provide for
(as is the event under the Seventh EEC-Directive) a fourth criterion in its legislation. The undertaking that has the right to
exercise dominant influence, shall be regarded as a ‘parent undertaking’, and the undertaking with respect to which such
right can be exercised as a ‘subsidiary undertaking’. With respect to this criterion, a Member State may provide for a
shareholding- or member requirement. As a result of the horizontal consolidation, a difference arises between the equity
and the consolidated equity, respectively between the income and the consolidated income.

Member States should ensure that the members of the administrative bodies (management board and supervisory board,
or the administrative board) are collectively responsible for the content of the financial documents in accordance with the
New Directive. , Member States are entitled to require that in the financial statements additional information other than
the balance sheet, the profit and loss account and the notes must be provided, apart from the information required pursuant
to the New Directive. The content requirements do not differ from what is currently provided for in the Fourth and Seventh
EEC-Directives, although certain simplifications and alleviations apply in relation to the group size. Regarding all assets and
liabilities (or identified portions thereof) that qualify as hedged items under a fair value hedge accounting system, Member
States may, as is currently the event, permit measurement at the specific amount required under that system. A combined
application of the measurement bases arising from the international accounting standards with the other requirements
arising from the European accounting directives system is neither permitted pursuant to the New Directive, nor pursuant
to Regulation 1606/2002. In the consolidated financial statements the equity method is, except when the capital
participating percentage is immaterial, prescribed for associated undertakings. The profit share will be recognized in the
consolidated profit and loss account of the participating undertaking as income of associated undertakings. Joint ventures
are consolidated by the proportionate method, provided that a Member State permits or requires proportionate
consolidation. . A Member State may permit or require an undertaking or certain categories of such undertakings, to use a
deviating layout provided that the information contained therein is at least equivalent to the layouts set out in the New
Directive.

Member States must ensure that it is the collective responsibility of the management board and supervisory board, or the
administrative board of a company that the management report, or the consolidated management report, as the event may
be, comply with the rules laid down in the New Directive. The management report and the consolidated management report
of listed undertakings also include the corporate governance statement, eventually to be included in a separate report or
presented on the website.

The obligation to audit financial statements and consolidated financial statements remains unchanged. The auditor shall
also express an opinion on the management report, respectively the consolidated management report. The auditor must
also state whether he, in the light of the knowledge and understanding of the undertaking and its environment obtained in
the course of the audit, has identified material misstatements in the management report and consolidated management
report, and shall give an indication of the nature of any such misstatement. With respect to listed undertakings, the auditor
has to comprise in its review the requirements regarding the description of the internal controls and risk management
systems as set out in the corporate governance statement, and those in the Directive on takeover bids as designated by the
New Directive.

Member States should ensure that the administrative bodies of an undertaking bear a responsibility collectively that the
financial statements with management report or the consolidated financial statements with the consolidated management
report are filed and published in accordance with provisions provided in the New Directive.

A Member State is permitted to disregard the requirements arising from the New Directive with respect to the content,
auditing and filing of the financial statements with management report out of consideration of a subsidiary governed by its
law in certain circumstances.

The New Directive requires undertakings active in the extractive industry and logging sector, which qualify as large-sized or
a PIEs, to prepare and publish an annual report with respect to payments in the amount of EUR 100,000 or more to
governments, unless its parent undertaking is governed by the laws of a Member State, and that parent undertakings include
these payments in its consolidated report. Member States should ensure that the responsible bodies are accountable for
ensuring that the relevant report will be prepared and published to their best knowledge and ability and in accordance with
the New Directive.

Lecture 3:

Financial resources –

Societal prosperity run risks of failures and is provided by competition in the market

Feeded by

-> Shareholders (own capital)

-> Outsiders providing for capital (company creditors)

Companies repay their loans faster while banks have to decrease (risk bearing) claims on the balance sheets.

Company and investments touch upon individual private life. Increase in the rescue operations where governments interfere
in individual companies.

Daring innovative investments…yet may fail.

Competition must be protected; primarily for company creditors but also company members, therefore there must be a
counterbalancing of interests of the company (Art. 50(2)(g) TFEU).

Counterbalances can provide relative immunity of investors and the interests of those doing business with the company.

Legal instrument to protect company capital:

1. Narrow sense; bringing up and maintaining capital in order to avoid a dilution of the proportionate share

2. Wide sense: provide outer world with records of the company’s well/ill-being, financially speaking

The 2nd Company Directive prohibits and sets out restrictions/conditions for certain resolutions/actions.

 The Directive aims at bringing up company capital for the company’s ‘formation’ in a ‘genuine’ manner,
representing ‘fair value’ (‘do’s’)

Safeguards are held in several articles (slide 13)

Assets function by spending money for business in order to produce money. Insolvency means that illiquid assets are
liquidated.

Authorised capital: maximum share capital

Issued capital: share capital subscribed to by investors

Paid up capital: part of issued capital which is paid up

Fixed capital (fixed nominal value) or fixed sum as a proportion of this figure; no stock in the sense of ‘no-par value shares’
in order to keep an accountable par for each shareholder.

Nominal equivalence between contributions and subscribed capital plus premiums; it is prohibited to issue shares below
par (exception in Art. 8(2)).

Week Four:

A distinction is made between

- actions carried out in the name of the company before it is formed and
- acts carried out after the company is formed.

In the first instance the company is bound only if it assumes obligations after its formation. To achieve this is it not necessary
to enter into a new contract with the other party by novation. If the company does not accept liability, the person that acted
in the name of the company is to be held liable. (Article 7 first Directive and Ubbink). Post-formation acts of the company
are binding upon it if the company is represented by persons with the authority to do so. The company will not be bound
by acts where organs acted in excess of the powers attributed to them and MS may provide that the company won’t be
bound where the acts of an organ fall outside the objects of the company. (Article 9 first Directive). Article 2 provides that
MS ensure the proper disclosure of provisions concerning the power of representation. (Friedrich Haaga). Third parties are
also protected against irregularities in the appointment of persons, who as an organ of the company, are authorised to
represent it (Article 8). Articles 8 + 9 force MS to offer solid protection to 3rd parties who rely on acts carries out by the
organs of the company. This cannot be carries out in the UK who don’t recognise the term ‘organs’. In the continental
systems an organ is the generic term for bodies exercising the functions and powers of a company, notably the general
meeting of shareholders and the board of directors.

One of the priorities of the Commission’s Action Plan on modernising company law and enhancing governance is the
improvement of the rights of shareholders of companies across the MS (Shareholders Rights Directive). This Directive applies
to companies that have their registered office in a MS and whose shares are admitted for trading on a regulated market
situated or operating within a MS (Article 1(1)). The Directive allows MS to set different record dates for companies that
have issued bearer shares and for companies that have issued registered shares (Article 7). Regarding proxy voting, the
directive provides that every shareholder shall have the right to appoint any other natural or legal person as a proxy holder
to attend, participate and vote at a general meeting in his name (Article 10 + 11).

Companies are artificial persons and thus the actual conduct of their activities must in practice be carried out by individuals.
Management, therefore, has to be delegated to one or more individuals with power to make binding decisions on all aspects
of management and each national law has to set out a management structure for its companies, entrusting these wide
powers to a management body. Several rules regarding corporate governance thus have a statutory character. Different
national laws provide different methods of providing for these management and control functions of companies. It is not
yet possible to harmonise the laws of the MS of the Community in this area although the draft 5th Directive has tried to do
so.

France – SARL is managed by one or more managers who are under the general policy direction and control of the members
of the company. Managers must be individuals but need not be shareholders (French commercial code/Code de commerce).
The managers may act on behalf of the company on all matters, subject to certain restrictions, such as the requirement not
to infringe on the company’s articles, not to exceed the type of business carried on by the articles. A disapproval declared
by one manager with regard to an act of the other manager will not render the act invalid unless the 3rd party had knowledge
of it. The managers will be liable to the company for any damage caused to it resulting from any breach of the law relating
to SARLs, any infringement and any negligent or deliberate mismanagement. The members exercise a controlling function
in relation to the managers are empowered to take major decisions such as those relating to an alteration of the Articles.
The members have certain statutory rights to information. The SA on the other hand, public companies may adopt one of
two management structures. Usually this will consist of a single board of directors. However, companies may adopt a two-
tier board system, having a management board and a supervisory board. In a single board company carried out by the
chairman and executive officers, with the other members of the board exercising a controlling function with only a
theoretical right to manage. In a two-tier system, the management board manages, whereas the supervisory board controls
and their functions are clearly regulated. The general meetings exercises an additional controlling function on certain basic
issues. The board of directors’ acts collectively through meetings and resolutions on all matters concerning the company
subject to the various matters reserved for the general meeting, though in practice it exercises only general policy
management functions. The two-tier system must be opted for in the company’s articles. All directors, executive officers
and members of the supervisory board, who are referred to as directors, are subject to various statutory controls on their
wide powers. In theory, the members acting in the general meeting are the supreme body of the company. However, their
role is, in effect, one of general control and they cannot interfere with the due exercise of the powers of the executive
director or the management board. The SAS refers to the provisions on public companies insofar as those constitute a body
of general company law. The management structure of the SAS is not regulated by law but subject to the articles of the
company. Given this scope of contractual freedom, the SAS is not allowed to be listed as the stock exchange.

Germany - The GMBH is governed by the 3rd part of the GmbHG. Management is vested in one or more managing directors,
with general control and certain residual powers being vested in the general meeting, either the act or the company’s
articles (German Limited Liability Companies Act/GmbHG). Whereas usually only organs of the GmbHG are the managing
directors and the shareholders meeting, any GmbHG may choose to interpose a supervisory board to carry out many of the
control functions of the meeting. The managing directors are subject to many duties with respect to their powers of
management. The members of the general meeting exercise general control over the managing directors, including their
appointment, dismissal and terms of appointment, and have specific functions allocated to them, including the approval of
the accounts, changes in capital and alteration of the articles. The AG operates with a management board, a supervisory
board and the shareholders’ meeting (German Stock Corporation Act/AktG). The management board is responsible for the
management of the company and for dealing with 3rd parties. The supervisory board has no right to interfere in the
management of the company, although its consent may be required for certain transactions. The main functions of the
supervisory board are the appointment and dismissal of the managers, general supervision of the management board and
approval of the accounts and other transactions, as set out in the articles. The shareholders in the general meeting are
required to, among other matters, appoint and dismiss the members of the supervisory board, appoint the auditors and
approve the accounts, consent to the allocation of profits as determined by the management and supervisory boards, and
to effect the alteration of the articles and the company’s capital.

NL – The Dutch public company (NV) and private company (BV) are governed mainly be identical statutory provisions, and
this also applies to their management structure. There are 3 regimes; the one-tier regime consisting of a management board
only, the two-tier regime on a voluntary basis and the compulsory two-tier regime (Dutch civil code). Any public or private
company that is not subject to the compulsory structure regime may be established, the management board must then be
supervised by the general meeting.

UK – Public and private companies is the same. The structure is that of a unitary board with share-holder meetings and
minority shareholder protection (Companies Act). The powers of the directors are very wide and the ability of the
shareholders to control them are very limited. The division of management powers between the directors and the general
meeting is a matter, subject to certain reserved functions for the meeting, for the company’s articles. Directors are liable if
they are negligent in managing the company’s affairs in the ordinary course of events and are subject to specific statutory
controls in specific areas.
German company law has traditionally relied upon statutory regulation, in which the two-tier board model (including co-
determination) is firmly rooted. Non-statutory rules became a supplementing regime only very recently in 2002, when the
governmental commission Regierungskommission Corporate Governance Kodex presented a consolidated German
Corporate Governance Code. The central feature of internal corporate governance lies in the organisational and personal
division of management and control by a two-tier structure that is mandatory for all public corporations, regardless of size
or listing. The supervisory board controls the management (not the corporation), its compliance with the law and articles of
the corporation, and its business strategies. The supervisory board cannot directly become involved in managing the
company, but if articles so provide or the supervisory board so decides, specific types of transactions may become subject
to its approval. From the viewpoint of the enterprise, the merit of co-determination is that it has proven to be an early
warning system for social conflicts and that it helps to keep down strikes. It further triggers the networking and interest-
balancing powers of the supervisory board. The success of both stronger involvement in management decisions and the
strengthening of control efficiency as a whole depends foremost on the level of information. The functioning of information
systems as they exist under the law or as recommended by the German Corporate Governance Code is strongly determined
by the two-tier structure.

The regulatory approach in the United Kingdom is somewhat more flexible than in Germany. In June 2001 the final report
of the Company Law Review Steering Group was presented, and the answers of the Secretary of State followed in July 2002.
The one-tier board model in the United Kingdom entrusts both management and control to the hands of the board of
directors, who are vested with universal powers. In larger companies, managerial power is revocably devolved to groups of
directors (committees) or individuals below board level. Comparing directors’ duties to the situation in Germany, the
impression is one of an inverse picture with weak rules on care and skill and strong ones on fiduciary duties. Concerning
enforcement, the situation is comparable to Germany, for shareholder actions are seldom brought to solve internal conflicts.
The overall assessment leads to the conclusion that corporate governance in the United Kingdom does not so much rely on
enforcing managerial care by directors’ personal liability, but rather on the danger of removal by ordinary shareholder
resolution, and in particular as a consequence of a change of corporate control. Seven indicators where a director, in
principle, should not be deemed independent: employment contract with the company or group within the last five years,
a material business relationship within the last three years, additional remuneration apart from the director’s fee, close
family ties, crossdirectorships, representation of a significant shareholder, or a directorship for more than nine years.
Auditors in Britain are elected by the general meeting and thus primarily serve as a control device of the companies’
members. A proposal has been made to take up the common practice of directors being authorised to fix auditor’s
remuneration and to confer the powers from the shareholders to the board.

Recent reforms in France indicate a strong movement towards organisational flexibility at the board level and impressively
illustrate the tendency towards a clearer distinction of management and control. Already in France in 1966, a choice
between the one-tier model with the conseil d’administration on top and the two-tier model with the conseil de surveillance
as the second board was introduced. Labour participation is secured in that two members of the workers’ council attend
meetings of the conseil d’administration in an advisory capacity.

In fact, the separation of the positions of board chairman and CEO and the growing tendency of appointing non-executive
directors can be rated as a systemic breakthrough for the two-tier system. One conclusion to be drawn from the Enron case
is that good corporate governance depends largely on (independent) directors asking the questions they have to ask and
thereafter acting upon the knowledge they have obtained. Law and rules of good conduct cannot do more than provide a
framework for efficient cooperation between internal audit committees and external auditors, and the similar efforts on a
clearer delimitation reflect the willingness to do so. To a considerable extent, the merits of soft law – its adaptability and its
power to provide common denominators for investors – depend on the flexibility granted under the national law. Provided
a minimum set of mandatory rules is kept, it seems most promising to leave the detailed definition of adequate board
balance to the discretion of the individual company. Setting the necessary standards of disclosure will be one of the
challenges, particularly in regard to cross shareholdings. A common standard of independence proves difficult for labour
participation. Representatives from workers’ unions could qualify as being free from any direct business relationship but
they are bound to the interests of the union’s members, i.e. the employees of the company.

Lecture 4:

Within a company structure there is no employee board -> focus on internal structure
Internal structure is mainly left to national law with EU guidelines (minimum standards).

EU law – not much on the internal division of powers, there was a proposal but no agreement on harmonisation.

Shareholders – Two types of rights; voting rights and dividend rights; can take one of the rights but not both. Generally
shareholders will not be held liable, there are rare circumstances where a shareholder can be held liable for the company.

In order to change to AoA the shareholders must also consent, this is in order to protect the shareholders rights.

The duties of shareholders includes paying their shares and in return may act in their own interests but they must remain
respectful of their other shareholders.

Directors – Deal with the day to day business of the company as well as representing the company to the clients.

Supervisors – can appoint and remove directors upon a vote and must approve certain transactions of the board.

Week Five:

Shareholders limited liability, however is not absolute. In some situations, their limited liability is set aside. Theories of
vicarious liability are not new to liability law; in many jurisdictions, employers, for instance, are fully liable for the torts
committed by their employees. There is a risk that the concept of negligence is stretched to include cases in which there is
no negligence. The case law in some countries shows a trend in that direction, and the liability threshold moves step-by-
step from direct participation in the wrongful act by the director to explicit authorization of the act, to implicit authorization,
to a formal responsibility-based test and finally to ultimate authority. The so-called actio pauliana, which can be
characterized as the civil law counterpart of the common law doctrine of fraudulent conveyance, allows creditors to
challenge transactions that the corporation was not required to enter into, if they adversely affect the creditors' possibilities
to collect from the corporation and the corporation knew or should have known this. In some situations, such transactions
are voidable and the remedy is that the transaction is undone and the assets are returned to the corporation.

Veil piercing has become an established doctrine in many legal system. Once the corporate veil is pierced, shareholders
become personally liable for corporate obligations, and all of their assets are available to satisfy these obligations. The
general negligence requirements must be met. Generally, in case of veil piercing, shareholders are exposed to joint and
several liability for the corporations’ obligations; pro-rated liability in proportion to ownership interest has thus far been
mainly of academic interest.

Under the 'alter ego' or 'instrumentality' theory, a controlling shareholder may be held liable for a company's tort or contract
liabilities if the corporation has served as the 'instrumentality' or 'alter ego' of the shareholder. It also does not relate to the
moral issue presented by many of these cases, namely the dishonesty, the intent to defraud others. Where there is no intent
to defraud but merely negligence, alter ego cases, although they tend to be elusive, often resemble cases of director and
officer liability.

A fraudulent conveyance, i.e. a transfer of property to frustrate a creditor's claim by putting the property beyond the
creditor's reach, may trigger veil piercing under the fraud exception to limited liability. An actual fraudulent conveyance is
intentional and reckless, and can be defined as a transfer made, or obligation incurred with the actual intent to hinder, delay
or defraud any creditor of the debtor'. A constructive fraudulent conveyance may be found when the transfer leaves the
debtor with unreasonably small assets or renders the debtor insolvent where any reasonable man would have foreseen that
insolvency was likely to follow.

Inadequate capitalization is a controversial ground for veil piercing and for good reason. It has been accepted as a ground
for piercing in only a few jurisdictions and in a small number of cases in most jurisdictions, under capitalisation alone is not
a sufficient ground for lifting a shareholder's limited liability. The fundamental problem with this theory is that it directly
contradicts the rule of limited liability. Where there is no agency or fraud, merely undercapitalization, there is no justification
for veil piercing.

The most common theory of negligent governance is based on the proposition that a parent company, which exercises de
facto or de jure control over its subsidiary (either as a director or shareholder, or both), must insure that its subsidiary's
operations are managed properly and owes a duty of care to persons (workers, neighbours, etc.) that are exposed to risk
arising from the subsidiary's operations. Beyond the principal's liability for his agent's torts and a few other narrowly defined
doctrines, however, there is no place in law for court created vicarious liability theories.
Limited liability of shareholders means no more than that shareholders cannot be held vicariously liable for the debts of a
specific other legal person namely the corporation in which they own stock. Under the doctrine of limited liability, a
corporation's creditors have no recourse against the shareholders or their assets, not even if the corporation is unable to
satisfy its debts.

The rationale for abolishing limited liability thus is that putting the shareholders', personal assets at risk will cause them to
take these costs into account, at least up to the value of the corporations assets plus their own assets; the additional
exposure would translate into the share price of publicly traded corporations, and the price mechanism would lead to an
efficient outcome. Some form of unlimited liability, accordingly would prevent corporations from engaging in unduly risk
activities and would cause corporate activities to tend towards the social optimum. At an operational level, unlimited
liability, if it is a viable and feasible concept, may involve enormous transaction cost in particular when applied to publicly
traded companies, and some of this cost will be borne by society.

Lecture 5:

Using economic concepts to study the law –

 Efficiency
 Utility
 Cost-benefit
 Price theory
 Transaction costs (costs of voluntary exchange)
 Statistical research
 Game theory

Agency costs – information; incentives; communication

 In order to reduce moral hazard (shirking, opportunism)

Sole proprietorships –

Advantages -

 Easy to form and to dissolve

 All decision making power resides on sole person
 Profit is taxed once

Disadvantages –

 Unlimited liability
 Raising funds is difficult
 Ends with death of proprietor

Limited liability of shareholders shifts risks from investors to creditors => lenders are likely to be superior risk bearers

Limited liability raises the borrowing costs of corporations (the interest rate will reflect the risk of default).

Disregarding limited liability –

 Separate incorporation is used in order to limit tort liability

 Separate incorporation misleads creditors
 Create additional risks to shareholders
 An administrative nightmare

Agency problems –

 Separation of ownership and control (conflict of interest?)

 Remedies
Tutorial 5:

Duties and Liabilities –

Two models:

 Stakeholders: civil countries

 Shareholders: US

There is a ‘3rd’ model = Enlightened shareholder model (take into account the interest of both stakeholders and
shareholders): UK

Duties of Directors:

UK:

S.170-177 Companies Act (Duties)

S.178 (Directors liability)

In case of insolvency, the use of the Insolvency Act 1986 - S.214

Derivative actions – S.260 CA

F:

There is no specific provisions for the duties of directors and is held in case law (don’t need to know the case law for the
exam only the relevant duties)

 Directors must have the best interest for the company.

 Act within their powers.
 Avoid conflicts of interest.
 Loyalty to the shareholders and to the company (information/transparency).

Liability – L223-22 SARL (private) & L 225-251 SA (public)

DE:

s. 93 AktG & s.43 GmbHG

Liability - s.43(2) GmbHG & s.93(2) AktG for damage caused

Insolvency – s.63 GmbHG & s.92 AktG (not in MC)

External liability – s.823 BGB

NL:

Art. 2:129 BW (public) & Art.2:239(5) BW

Internal – Art. 2:9 BW

External - Public: Art. 2:138 & private: Art. 2:248 BW

External – Art. 6:162 BW

Duties of shareholders:

They must act in their own interest but frustration of minority shareholders by majority shareholders and vice versa is not
allowed and will lead to the annulment of a decision.

In principle cannot be held liable, however, they can be when they pierce the corporate veil or act as a shadow director.

Lifting the veil –

 Alter ego: complete domination of management

 Fraudulent conveyance
  Undercapitalisation & abuse of the corporate form
 Negligent governance of the corporation
 Voluntary piercing

1. No harmonisation because it is difficult to incorporate all the different national law of duties and liabilities and MS do
not like having a complete overhaul of their laws.

2. Pro: Offers diversity Con: Establishment abroad could be confusing – duties are held in various provisions and not just in
one article, this can become time consuming for those companies wishing to establish abroad.

3. Already discussed ^

Week Six:

Two connecting factors in determining choices of company law –

 Real seat theory; looks to the law of the place of the head office of the business
 Incorporation theory; looks to the law of the place of the firm’s incorporation (registered office)

Freedom of establishment –

 Art. 49 TFEU: restrictions are prohibited

 Art. 54 TFEU: freedom of establishment may be relied upon by corporate as well as natural persons
 Status: corporate persons are creatures of national law and must comply with those restrictions in which they are
formed
 Scope: relied on Art. 49 TFEU

After Centros and Inspire Art, European entrepreneurs are in effect free to select the governing law of their choice (amongst
EU Member States) for newly-incorporated companies. The Court’s jurisprudence has always permitted Member States a
limited power to impose restrictions, based on domestic public policy, on the exercise of Treaty freedoms. This gives
Member States room to require foreign companies to comply with domestic norms, which freedom may be used to protect
vulnerable constituencies. However in order to avoid undermining the Treaty freedoms, such restrictions are subject to
strict review by the Court. In the context of freedom of establishment, permissible restrictions must be (i) applied in a non-
discriminatory manner; (ii) justified by imperative requirements of the public interest; (iii) effective to secure their objective;
and (iv) not disproportionate in their effect.

The purpose of the Treaty freedom of establishment was to grant persons liberty to establish themselves in Member States
other than their own other jurisdictions—that is, an ‘actual pursuit of an economic activity through a fixed establishment in
that State for an indefinite period’.

The massive migration of entrepreneurs from continental European countries in the years 2003-6 put lawmakers in these
countries under pressure. Virtually all major jurisdictions responded to the market pressure in an attempt to make their
company law system more appealing to businesses and to retain incorporations. We may infer that the ultimate
consequence of Centros is unlikely to be indefinite continent-wide legal migration of new firms. Rather, it will have been to
trigger the reduction or abandonment of minimum capital requirements across Member States.

Lecture Six:

Freedom of establishment:

Cross-border migration of legal persons (companies and firms) -> prospering economic development presupposing…

 Freedom of inbound and outbound company migration

 Freedom to let two or more companies from different EU MS merge

Single market should facilitate/promote freedom to benefit from optimal circumstances: business allocation and re-
allocation anywhere in the EU while enjoying the privilege of limited liability.

Companies/firms cannot function without branches/secondary establishments.

Migrate (HQ) activities to another EU MS.

Freedom to convert the law of the company.

Migrate HQ and RO.

Competition presupposes a level playing field (identical business conditions).

Ex nihilo = out of the blue

PIL remain highly relevant to cross-border company relationships in a non-EU context.

 Status of legal persons compared to natural persons: is paralleled legal treatment feasible

Recognition of legal persons, duly established in an EU/EEA/3rd country.

Real seat theory - Company matters are governed by the law of the country where the admin office (RO), centre of
management and control is situated.

 Reasonableness
 Abuse of foreign law hardly possible
 Fairness
 Pretty hard to determine
 Cross-border cooperation and transfer of company seats are frustrated

Incorporation theory – company matters are governed by the law under which the company has been duly incorporated.

 Flexible/lenient
 Legal certainty and predictability
 Attractive to investors
 Reciprocity
 Seat transfers allowed
 Race for bottom
 Unequal competition conditions at the domestic markets for investors
 Evasion

Recognition = narrow notion: company recognised as bearer of rights and duties, the proper law of the company not being
accepted; widened notion: recognition as such.

Cross-border company migration –

 Transfer of HQ (economic drive)

 Transfer of RO (legal drive)
 Transfer of both HQ + RO (both + practical convenience)

Incorporation theory serves economic interests.

Tutorial Six:

Real seat theory – governed by national law with the head office of the business

Incorporation theory – governed by the national law of the place of incorporation

In outbound situations companies can choose depending on what they wish to do with the company, inbound situations
will always be the real seat theory.

Art. 49 + 54 TFEU = Freedom of establishment

11th Directive (89/666)

HQ = Daily Mail, Inspire Art

HQ + registered office = VALE

Daily Mail => Outbound transfer of HQ does not fall under the scope of the Articles as it becomes not about freedom of
establishment but about the freedom of departure. Companies are creatures of national law and must comply with
restrictions laid down therein.

Centros => A refusal to register a branch of a company duly established in another MS is contrary to the Articles. Choice for
the least restrictive jurisdiction -> no abuse. Authorities can adopt appropriate measures for preventing or penalising fraud
(Gebhard).

Uberseering => If a company is duly established by the law of the MS, it is entitled to rely on freedom of establishment. A
host state has to recognise the legal capacity and the capacity to be a party to legal proceedings of the company.

Inspire Art => It is contrary to the Articles to impose on the exercise of freedom of secondary establishment in that State by
a company formed in accordance with the law of another MS certain conditions provided for in domestic law in respect of
company formation relating to minimum capital and director’s liability.

SEVIC => If mergers are permitted for domestic entities, then it is a discriminatory impediment to freedom of establishment
not to permit a foreign entity to merge with a domestic entity.

Cartesio => An outbound transfer of the HQ does not fall under the scope of the Articles.

VALE => A cross-border conversion falls under the scope of the Articles in cases where – a conversion is allowed under
national law; the converted company is reincorporated in accordance with the national law of the host MS. Also applicable
to outbound situations.

Inbound – when the company is coming into the country

Outbound – when the company is leaving the country

 Depends on perspective

Case Study –

1. A reincorporation involves the moving of the HQ and registered office = direct possibility = VALE

Indirect possibility = cross border merger = SEVIC

2. Both the home and host state are unable to prohibit the reincorporation = VALE

In the host state it is down to national law, if applicable then a company can reincorporate, if negative then the company
cannot.

3. The UK does not require a notarial deed in order to reincorporate, in the short run this is cheaper. Not if the company
then needs a lawyer. In the long run it could not be since there a lot of documents that a company would need annually.

Week Seven:

In continental Europe, the real seat (“siège réel”) doctrine has historically been a strong barrier to a European market for
corporate charters. Under the siège réel doctrine, a company is subjected to the corporate law of the country in which its
“real seat” is located.

As set forth in the EU Regulation authorizing the European Company framework, the purpose of the SE framework is to
“permit the creation and management of companies with a European dimension, free from the obstacles arising from the
disparity and the limited territorial application of national company law.” The SE framework permits a company to transfer
its headquarters to another Member State, without any winding up and without the creation of a new legal person, with
only a 2/3 majority of shareholder votes cast. In other words, a company may choose to change the location of its siège
statutaire either through a cross-border merger into an SE, or through the transfer of its headquarters, in order to benefit
from a more favourable legal regime.
The Directive provides that the supervision of the finalization and legality of the merger are to be carried out by the national
authority having jurisdiction over the resulting entity. Once a cross border merger has “taken effect” in accordance with the
law of the Member State having jurisdiction over the resulting entity, it “may not be declared null and void.”

Self-interested managers, will, other things being equal, seek out the most lax regulatory environment possible, in order to
maximize their personal returns. This model predicts that the highly dispersed shareholders of a modern corporation will
be unable or unwilling to effectively coordinate in order to counteract this self-interested action on the part of the managers.
State governments, in turn, have an incentive to attempt to attract out-of-state businesses in order to maximize tax
revenues. Under this theory, rational states will thus liberalize their laws in order to attempt to capture additional revenues,
with the ensuing rush among states to weaken shareholder protections creating a so-called “race to the bottom.”

The “race to the top” theory concludes that Delaware corporate system is thus the most popular because it is the most
efficient, providing the most balanced equilibrium among the divergent interests of shareholders, managers, employees
and creditors. In short, underlying the “race to the top” theory is a faith in the overriding efficiency of the market.

Business needs are constantly evolving and changing in response to new innovations and practices, and regulation, whether
it is corporate law or any other regulatory area, needs to evolve to meet these needs.

While, from a political and commercial perspective, Member States will likely continue to find it advantageous to foster
national champions and otherwise protect their internal markets, it is clear that a profoundly free market system is
becoming a reality in Europe.

In a civil law system, binding jurisprudence is not available, but other means may serve the same function. In this respect,
one potential approach could be the use of interpretations (circulaires), informed by recent issues (including court cases);
such interpretations are already used with respect to tax and are a source of considerable guidance in that area.

In this respect it is important to emphasize that the barrier created by the siège réel regime works in two directions. The
traditional purpose of the rule has been to prevent companies headquartered in France from leaving France. But the rule
also prevents companies headquartered outside of France from taking advantage of French corporate law, should they be
so inclined. The siège reel regime, is, as a matter of European Court of Justice Jurisprudence, no longer valid.

Apart from the rules contained in the Statutes for the European Company (SE), for the European Cooperative Society (SCE)
and for the European Economic Interest Grouping (EEIG), there are no EU rules enabling companies to transfer their
registered office across borders in a way which would preserve the company’s legal personality.

As regards company law in particular, the Commission believes that SMEs need simpler and less burdensome conditions for
doing business across the EU and it remains a clear priority for the Commission to take concrete measures in this regard.
The Commission will continue to explore means to improve the administrative and regulatory framework in which SMEs
operate in order to facilitate SMEs’ cross-border activities, provide them with simple, flexible and well-known rules across
the EU and reduce the costs they are currently facing.

Stakeholders complain about high set-up costs, complex procedures and legal uncertainty, often stemming from the many
references to national law, lack of sufficient awareness and practical experience with the Statute, and some reportedly strict
requirements in the Statute that must be fulfilled to create an SE.

European company law provisions are spread across many different legal acts. This makes it difficult for users to have a clear
overview of applicable law in this policy area. The large number of Directives dealing with company law also carries the risk
of unintended gaps or overlaps. The Commission considers it important to make EU company law more reader friendly and
to reduce the risk of future inconsistencies. It will therefore prepare the codification of major company law Directives and
their merger into a single instrument.

Lecture Seven:

CJEU – companies are creatures of national law = if no conversion, it is exclusively for national laws of EU MS to regulate
company formation, functioning, resolution making, dissolution and winding up, migration of exclusively company HQ.

European public limited liability company?

EU MS must provide for single member ltd liability company.

SUP exclusive (i) business format or (ii) complementary business format alongside national law

 An SUP can be incorporated by a natural or legal person

Tutorial Seven:

Action plan 2012 – transfer of seat; smart legal forms for EU SMEs; awareness of the SE and codification of EU company law.

SE – Regulation 2157/2001 (Public)

SPE – (Private) Draft was designed for SMEs

Incorporation is flexible – there was a proposal that is now abolished (p.779) (know what is in the lecture + arts. 3, 5, 7, 19,
31)

SuP – single member

Minimum capital of 1 euro

Uniform template

Exhaustive list of information required for registration

Online registration

Harmonising key elements for managing a subsidiary

No provisions on worker participation

Registered office and headquarters may reside in different MS

Possibility of transferring the RO to another MS without winding-up the company

1. Still have to abide by national law; cross-border element.

2. Minimum capital is higher in SE than national; what is not covered in regulation is covered by national law; taxation
system is not harmonised in regulation.

3. Proposals of harmonisation were abolished.

4. Low minimum capital requirement; no nationality; leeway to national law; lots of room for national law; uncertainty.

5. Race to bottom/race to top

Case Study –

Follow the requirements of German law (the national law) but follow the EU standard of minimum capital requirement
(from directive)

Case Study –

The second proposal has abolished a lot of the first proposal. Included in national law. However, the outcome is
unknown/uncertain. (Not going to be on exam since unknown).

Summary:

 Business Vehicles: companies (public/private); partnerships (general/limited); sole trader

General partners – management rights, jointly & severally liable
Limited partners – limited liability, very restricted management rights, contributions in case or kind
 Company formation: incorporation requirements (national law), disclosure of companies (Daihatsu/Ubbink), nullity
of companies (Marleasing & Art. 12)
 Pre-incorporation stage (Art. 8-1st Directive)
Tax directive – indirect taxes are prohibited, duties in the form of fees or dues are allowed (Albert Reiss, Ponente
Carni & Modelo)
 Capital protection: narrow sense – substantive capital requirements (2nd directive & Siemens, Karella, Kerafina,
Pafitis and Diamantis)
Widened sense – transparency of the company’s financial records (Directive 2013/34 & 4th/7th directive)
 Internal structure of a company: board of directors (Haaga), general meeting and supervisory board
 Duties and liabilities: Directors (national law) - Shareholder model, stakeholder model, enlightened shareholder
model.
Shareholders – act in their own interest, limited liability unless shadow director/piercing the corporate veil
 Freedom of establishment: setting up branch in another MS (inspireart, Centros), moving HQ (daily mail, Certesio,
Uberseering), moving HQ and RO (VALE), cross-border merger (SEVIC).