Diritto commerciale II Paola Lucantoni Professore associato di Diritto dei mercati finanziari Università degli Studi di Roma “Tor Vergata”

Core structural characteristic LEGAL PERSONALITY B LIMITED LIABILITY

Firm’s creditor’s dual role in relation to other participants in the enterprise. Ordinary circumstances Most creditors are no more than contractual counterparties Default scenario The creditor becomes entitled to seize and sell its assets The creditors change role: owners of the firm's assets.

Firm’s creditor’s dual role in relation to other participants in the enterprise. Ordinary circumstances Agency problems: possibility of opportunistic behaviour by the firm acting in the interests of its shareholders. creditor –shareholders conflict of interest. Default scenario Agency problems: ensuring that one group of creditor is not expropriated by another creditor – creditor conflict of interest.

Creditor –shareholders conflict of interest Asset partitioning and corporate creditors Securitisation shareholder – creditor agency problems Ex ante: problems connected with misrepresenting the value of corporate assets Ex post: actions that benefit the shareholders at the expense of the creditors. Asset dilution – asset substitution

Creditor –shareholders conflict of interest The vicinity of insolvency Legal restriction targeting corporations in financial distress Groups Groups structures make intensive use of corporate law’s asset partitioning functions within a single economic firma – this can be used to facilitate the allocation of credit risk to creditors best place to evaluate and monitor particular assets. Externalities: workers, consumers, environment i.e. Brasil: unlimited liability through veil piercing whenever corporate assets are insufficient to compensate the damages caused to workers, consumers, environment

Creditor – creditor conflict of interest. Classes of creditors Dividing line: insolvency

Solvent firms: How corporate law seeks to control shareholder – creditor agency problems The affiliation strategy: disclosure: Closely held corporations Banks are the principal supplier of outside finance to small companies – close companies must prepare financial statement available for public inspection Publicly traded corporations Disclosure – extensive regulated USA and EU : prospectus regulation and transparency regulation Groups Creditors of group companies are especially vulnerable to shareholder opportunism The role of the gatekeepers CRA

Solvent firms: How corporate law seeks to control shareholder – creditor agency problems The rules strategy: Legal capital. Prescribing a minimum of capital Restriction on payment out to shareholders Triggering actions that must be taken

Distressed Firms: How corporate law seeks to control shareholder – creditor agency problems Ex post liability Directors: personal liability for net increases in losses to creditors resulting from the board’s negligence or fraud to creditors USA: lowest intensity standard for directorial liability to creditors – consistent with its long story of dispersed ownership and managerial autonomy – shift the duty to the corporation rather then individual creditors – also UK Italy and France: responsibility for taking actions following serious loss of capital Japan: actions taken earlies even when the company is solvent

Distressed Firms: How corporate law seeks to control shareholder – creditor agency problems Ex post liability Shareholders: The doctrine of the facto or shadow directors Pierce the corporate veil Creditors and other third parties Avoiding that a particular creditor being placed in a better position than the others in the debtor’s bankruptcy

Distressed Firms: How corporate law seeks to control shareholder – creditor agency problems The governance strategy in distressed companies – triggering bankruptcy proceedings