EUROPEAN (EU) COMPANY LAW Prof. M.E. de Leeuw Università di Ferrara Spring semester 2018

Topic and method Topic: Method: Analysis of the law of company organisation Central is the PLC (public limited company) Company law exists at two levels: EU and national level Method: Comparative in regard of some aspects. Lectures and seminars (assignments/case law analyses)

Course outline Introduction to company law; Developments, instruments and objectives of EU company law; Discussion of EU company law by following the life cycle of a company: Formation and current operation (formation, capital, decision-making, powers of the various organs, and the reporting of economic results); Freedom of establishment; Structural changes: creation of branch or subsidiary, transfer of seat, merger and division, and finally to take-overs and groups of companies; Winding up and Insolvency Supranational types of companies Evaluation of the harmonisation programme; Topical issues regarding company law, such as minority v majority voting, regulatory competition.. The Future.

INTRODUCTION TO CORPORATE LAW Lecture 1 15 March 2018 Course European Company Law

What is corporate law? Corporate law consists of legal norms relating to certain type of business organisations, i.e. provides the legal structure of a business enterprise. Corporate law comprises all incorporated forms of business organisations and, hence, comprises more than “company law”. Company: association of people who combine for the purpose of joint activity. “Company law” in continental language comprises partnerships and capital companies.

Daily Mail ECJ case(1988) Business organisations are subject to national laws of the MS: ECJ: “it should be borne in mind that, unlike natural persons, companies are the creatures of the law and, in the present state of Community law, creatures of national law. They exist only by the virtue of the varying national legislation which determines their incorporation and functioning”. Exceptions: e.g. the SE, SCE and EEIG

Types of business organisations in Europe Natural person: sole trader/proprietor v. business organisation; Business organisations: any form by which two or more persons are involved Partnerships Private companies Public companies Hybrid legal forms

Small, medium-sized and large companies Small enterprises are defined as having fewer than 50 persons employed. Figure 1 shows that they make up the vast majority of enterprises, ranging from 95 % in Switzerland and 97 % in Germany to above 99 % in the remaining countries. In contrast, large enterprises with 250 or more persons employed account for less than half a per cent of all enterprises in the EU. (Eurostat statistics: June 2017)

Some elements Partnership Coordination of economic activity of two or more persons; personal relationships (professional firms/family business): General: unlimited liability for debts, each has management right; Limited: partners with limited liability have restricted management rights

Some elements Private company Designed for small and medium size concern that require limited liability and legal personality, but that do not require access to public funding through a general capital markets, e.g.: Germany: Gesellschaft mit beschrankter Haftung (GmbH); Netherlands: Besloten vennootschap met beperkte aansprakelijkheid (BV); UK: The private limited company (Ltd.); France: Société a responsabilité limitée (SARL); Italy: Società a responsabilità limitata (srl).

Some elements Public company Designed for larger enterprises of economic importance, which have access to the capital markets for raising finance (equity capital from shareholders or loan capital). Owners are shareholders (large number and diverse), but do not manage/control it. Large number of employees. Germany: Aktiengesellschaft (AG) Netherlands: Naamloze vennootschap (NV) UK: Public limited company (Plc) France: Société anonyme (SA) Italy: S.p.A (Joint stock company)

Social Economy “In many areas of eco. activity, groups of individuals have got together to set up their own structure to promote their own or general public interest”. Basis: membership and solidarity. Members vote on the direction the enterprise takes, and it then acts in their common interests; strong personal involvement of members in the management and absence of seeking profit to remunerate shareholders capital. Social Economy: 10% of all European businesses; involves 6% of the working population of the EU. Source: http://ec.europa.eu/enterprise

Different enterprises: “Social Economy” Association: permanent grouping of natural/legal persons whose members pool their knowledge or activities for general interest purpose or to promote the trade or professional interests of its members; e.g. service providers, voluntary work, sports and providers in health care, care for elderly, children, social services; legal person; profit (by economic activity) must benefit shared purpose. Members’ fees - no capital contribution. Cooperative association: association of persons (members) united voluntarily to meet their common eco., social and cultural needs. Cooperatives exist to serve their members, whether they are customers, employees or producers. These members are the owners, with an equal say in what the cooperative does. As well as getting the products and services they need, members help shape the decisions their cooperatives makes. It is a legal person; contribution of capital by members through purchase of shares. Profit must benefit other interests. One man one vote principle. (healthcare, agriculture, banking, supermarkets, sport clubs, housing) Source: http://ec.europa.eu/enterprise

Different enterprises: “Social Economy” Foundation: are bodies with their own source of funds which they spend on projects or activities of public benefit (research, support projects, provide grants to individuals, fund voluntary work, health, elderly care); no members; run by independent management boards; may run a business and make profit (use for benefit purpose); legal person. Capital is supplied through donations and gifts. Mutual associations: A mutual enterprise is an autonomous association of persons (legal entities or natural persons) united voluntarily, whose primary purpose is to satisfy their common needs and not to make profits or provide a return on capital. They operate according to the principles of voluntary and open membership, equal voting rights (one member = one vote; resolutions carried by majority), autonomy and independence. They operate with their own, collective and indivisible funds, no share capital. Members pay fees. “Insurance and health sector”. Source: http://ec.europa.eu/enterprise

Main elements of a corporation Legal personality Limited liability Transferable shares Delegated management with board structure Investor ownership * Source: Kraakman, Armour a.o., The anatomy of Corporate Law, 2nd ed. “Asset partitioning”

Legal personality Corporate law allows firm to act as single contracting party, distinct from owners/managers. Core element is “separate patrimony”, and its core function is “entity shielding” “Entity shielding”: Priority rule Liquidation protection rule Authority Procedure Separate Legal personality

“Entity shielding” Priority rule: Creditors of firm have a claim on the firm’s assets that is prior to claims of personal creditors. Liquidiation protection rule: Individual owners (shareholder) cannot withdraw their share of the firm assets at will; Personal creditors of an individual owner cannot foreclose on the owner’s share of the firms assets.

2. Limited liability The firms’ creditors are limited to making claims against assets held by the firm itself, and have no claim against assets that the firm’s shareholders hold in their own names (personal assets)= “owner shielding”. Nearly universal feature of the corporate form.

3. Transferable shares Corporations have “transferable shares” (change of owner without interrupting business), which is not the same as “freely tradable” shares. Public or Open corporations have freely tradable shares, which can be: On securities exchange market, then they are called “listed or publicly traded” corporations: Unlisted corporations. Private or Closed corporations which have restrictions on tradability of shares. “Widely held” or “closely held” shares.

4. Delegated management Board of Directors (BoD) is elected by shareholders and has the authority for taking most decisions. Four characteristics of BoD: Separate from management (one or two-tier structure); Elected; Formally distinct from shareholders; Multiple members

5. Investor ownership The law of business corporations provides a special statutory form for corporations owned by investors of capital. “ownership” means the right to control the firm (voting) and the right to receive the firm’s net earnings. Both rights are proportional to the amount of capital contributed to the firm.

The sources of corporate law Statutes to enable the formation of different corporate forms; Related bodies of law, for example, laws providing for employment representation on board of directors and Konzernrecht; securities laws; stock exchange rules. Bodies of law which have an effect on corporate structure and conduct, such as bankruptcy law, tax law and labor law.

The relationship between law and contract in corporate business Principal contract that binds participants in a corporation is the corporation’s charter; Corporations are also subject to the large body of law deriving from different sources. Question: what role does this body of law play? A considerable part of corporate law consists of default rules (apply, unless parties provide for something different). Important rules of corporate law are mandatory in content.

Functions of corporate law Provide business enterprises with a legal form through which to conduct business; Put constrains on opportunistic behavior by different actors (reduce costs); Overall objective: to serve the interest of society as a whole or maximizing the return for shareholders?