Summary Internanational Business

THE COMPANY ACTORS

Modern Corporations: «creatures» of State law, formed according to organizational rules, to carry out any

lawful business

A company is a specific kind of business organization (see retro!), whereby capital and labor are strategically

pooled and combined together for the purpose of carrying out any lawful trade or business:

«Money capital» comes from:

a) shareholders : equity interest claims (“residual claims”), and

b) creditors : debt interest claims (“fixed claims”):

(b.1) «inside» creditors: bondholders (organizational rules/corporate governance rules usually encompass these

«stakeholders» by assigning them collective rights; they can act individually and as group (similarly to

shareholders)

(b.2) «outside» creditors: banks, financial institutions, suppliers, etc. ( at arm’s length contracts)

• «Human Capital» (“Labor”) comes from: executives (including directors, top-ranking officers) and employees ;

Both category of money (capital) and labor providers expect a return on their respective investments:

Therefore, corporate law (providing organizational rules and enabling contractual provisions to “fine tuning” the

business organization layout), by defining their legal relationships and by affording legal tools to mediate their

conflicting (economic) interests, must also provide for legal rules whereby the return on each stakeholder’s



investment (whether labor or capital provider) can be defined ex ante and, thus, reasonably relied upon (

standardization of the corporate contract; rules of priorities in case of liquidation or insolvency);

Many types of persons participate in “Modern Corporation”:

 Shareholders, whether

 Individual investors = “retail investors” (sometimes referred to as “de minimis shareholders”, because, in the

public corporation setting, retail investors own directly only a very trivial fraction of the company’s entire

equity capital, corresponding to a very small number of common (voting) shares),

 Institutions (partnerships or companies themselves, that invest for their beneficiaries (“institutional

investors”, as pension funds, mutual funds, banks, insurance companies, endowments); they typically

provide capital to the incorporated firm, in the form of “equity” contributions (money/cash; assets, including

intangible assets; but no services can be contributed as equity capital to companies, whether listed or not in

a securities market); 34

 Lenders (= creditors): supply additional money capital in the form of debt claims, as secured bank loans,

unsecured bonds, short-term notes, and suppliers' trade credit. Suppliers provide inputs for the business under

long-term contracts and in market transactions.

 Equity interest vs. Debt interest

  

Equity interest/investment typical of shareholders/members of a LLC “residual” claim very risky,

volatile, unpredictable)  “fixed” 

Debt interest/investment typical of creditors claim still hazardous, but relatively less risky than

equity)

 Customers (some deem them as the very reason the business exists);

 Those injured by the business (whether as employees, customers, or strangers/Bystanders) that may have

torts or contracts claims on the business directly, or through governmental enforcement — antitrust, banking,

environmental, health, product safety, and workplace safety.

 Directors and Officers (Managers): directors usually oversee the business and its managers; they take

strategic business decisions, review the business accounts and actively concur in adopting organizational

decisions; (top) managers make day-to-day decisions also administer the business and direct and supervise the

employees

However, Corporate Laws mainly focus on the long-term relationships between shareholders and managers,

i.e., the two constituent groups understood to comprise the core of the "internal organization" of the Company;

 "Outside" relationships with creditors, suppliers, customers, employees, and government authorities usually

fall outside the “Organizational Rules” Company Laws mainly consist in. Rather, these relationships are

subject to legal norms that treat the corporation as a person (as a separate entity from both shareholders

and managers), such as the laws of contract, tort law, debtor-creditor law, antitrust law, labor law, and tax

law;

 however, Corporate law also regulates the roles (powers, duties, obligations) of the company, the

shareholders and the managers vis-à- vis the “bondholders”, who who are technically creditors of the

company (as they hold securities representing a fixed debt claim vis-à-vis the corporation), and thus

parties to what would otherwise qualify as an “outside relationship”;

THE «INCORPORATED FIRM» AND THE «AGENCY COSTS»: (FINALLY) CONNECTING THE DOTS

Worldwide Convergence of the Laws Towards 5 Common Legal Characteristics of (Any) Company

Today, in virtually all jurisdictions (= legal systems), worldwide, there is a basic statute (a Business Organizations or

a “Company Law” statute) that provides for the formation of firms with all of the following 5 legal common features

(incorporated firms):

1. Legal Personality (entity status; segregation of patrimony, perpetual life);

2. Centralized/Delegated Management (under a «board» structure);

3. Investor’s Ownership (shared «ownership interests» are proportionally tied to residual claims over the firm’s

earnings and assets).

4. Free Transferability of the Shares (Stocks), that is, of the «ownership interests»;

5. Limited Liability Privilege, enjoyed by company’s shareholders (members) vis-àvis company’s obligations

(debts);

The idea behind each of the 5 CLCs is that, by providing these rules “by default” (“off the shelf”), in the Business

Organizations (or Company Law) Statute, the incorporation of business firms will be easier, faster, and cheaper

(thereby lowering “transaction costs”) => more businesses in the markets;

But these 5 characteristics, although curbing some of the “transaction costs” usually associated to the organizing of

business activities, at the same time they also generate tensions and trade-offs that could (and usually will) lead to

the “agency problems” that, in turn, Company Law (as a set of legal, contractual and courts’ rules) must address;

The agency problems – as usual – create “agency costs” in three main types of (agency-kind) of relationships, both

“inside” and “outside” the incorporated firm;

“Transaction costs”?

 TCs “Outside” the firm (Coase; Williamson);

  

TCs “Inside” the firms (Coase, Williamson, Cheffins) Agency relationships “Agency costs”;

We should remind that any agency relationship creates an agency problem and that means that it bears costs

(agency costs):

 “Me and my brother” example;

 “Meinhard-salmon” example;

 Jensen & Meckling’s agency costs theory

 Monitoring costs

 Bonding costs 35

 Residual loss 

J&M theory, to be applied to companies the firm intended as a “nexus of contracting” relationships + “nexus for



contracting” legal person (companies = incorporated firms).

Agency theory and the «incorporated firm»

• According to the “contractarian” view of the corporation (US legal theory/law and economics approach very

common in the 1970s and 1980s) the business company gradually started to be studied and to be described as a

sophisticated form of business organization for the coordination of labour and capital, inherently intended as an

organized “business vehicle” meant to carry out one or more trades or businesses;

• A company could be thought as an “incorporated firm”, based on (created upon) a voluntary agreement

( freedom of incorporation business freedom), formed by using, both (a) a very special formal (legal) process

and (b) a kind of longterm/relational contract, provided and regulated by to the applicable Business

Organization Law;

• Within this (law+contract based) business organization forms, one could re-cast the incorporated firm as a set of

several contractual and quasi-contractual relationships (long-term, relational-type of contracts, whose private rules

are deemed incomplete /open-ended, since they need to be integrated by organizational rules+processes);

J&M theory, can be applied to companies as “incorporated firms”: traditionally, a distinction is drawn:

 inside vs. outside view of the “incorporated firms” (companies/corporations)

 Inside the firm (inside the business organization), the company could be intended and could be re-cast as a set

“nexus

of contractual/quasi-contractual relationships of contracting ”

 

From outside, the firm (the business organization) can be perceived (and used) as a “nexus for contracting”

very powerful concept of firms as legal persons (companies are thus intended as incorporated firms);

Each of these relationships can be construed as “agency relationships” (again: “agency” is thought as a sort of

“modular unit” for larger and more sophisticated types of business organizations); thus, with companies we also get

to deal with “agency problems” (“agency costs”);

Company as a «nexus for contracts»: the company is an organization of capital and labour providers

( company’s actors), that, once duly formed (incorporation process), can be conveniently represented as a

legal entity ( “legal person”)

that is endowed with the ability to, e.g.:

 Enter into contracts,

 Hold and own property or any other type of assets (e.g., intangibles assets), and

 Be a party (plaintiff or defendant) to litigation (lawsuits) in courts;

That becomes distinct and separate from its “members” (shareholders) and its managers (directors and officers): so

different indeed that its members can sue it and/or its directors and managers! And the company also can sue its

directors and managers!

As a “legal person” (and as a very important economic actor in society at large), the company pays federal, state,

and local taxes; can contribute to electoral campaigns; can sue (or be sued) for misuse of its name (“libel and

slander”; unfair competition)

It comes in assorted sizes (“types”), from a publicly-held multinational conglomerate, to a one-person (incorporated)

business;

However, behind the “legal personhood” you have different categories of “corporate actors”, each pu