Appunti advanced company and business law

Choice of law and regulatory competition

Reminder of last lecture

Companies as creatures of law and the effect of a contract —> legal effect describes living person who has ability to undertake obligations, authority to make decisions etc. Mix of private will and formal requirement that must be met for these effect to be generated. Authority of law, but which one? Constitutional rules are principles that inspire an entire system. Articles of Incorporation and bylaws will generate an incorporation.

Case Centros

1990s, 2 Danish people want to incorporate in the UK and incorporate also a branch of Centros back in home country. The operations are settled in Denmark, not in the place of incorporation because of too low capital requirements. When they go to the office for incorporating the branch, they get the answer that they don’t run any business in the UK. For this reason they will not receive the recognition of the branch, they didn’t want to pay the high capital requirements in Denmark. Deliberate attempt to get their rights enforced not on Danish law: right of establishment. Europe is a synonym of freedom, the European treaties settled the 5 rights of freedom, one of them is right of establishment: right to get to a European country to first establish a new business. Denmark wanted also to protect the rights of Danish creditors who invested money in that business that could be put at risk. If they really operated in UK, nobody would have complained about a branch back to Denmark. For this reason, the court gave them reason. There is an opportunity for arbitrage in Europe.

Class 4

Last lecture: incorporating in US is easy. Default or enabling provisions: contractual freedom, predetermined set of solutions. Mandatory provisions: need to be included. Right for shareholders to elect board of directors is mandatory.

MBCA: Model Business Company Act. Model available to any jurisdiction, attempt in the US legal community to harmonize 52 jurisdictions, to limit the risk of too many differences, to provide a single model. Delaware is not likely to adopt this model. It states that a shareholder is not personally liable for the acts of the corporation. The general rule suffers from exceptions: there are situations in which a shareholder has a liability. The exception has to do with individual willingness: the shareholders decided so in the articles of incorporation or a voluntary act (personal guaranty, example in case of a new corporation with few assets).

Veil piercing doctrine

Used in cases in which the shareholders abused of the corporate structure.

Baatz v. Arrow Bar case

Kenny and Peggy got injured (case of a tort) by McBride (author of the accident but has no money). The defendant is the Arrow Bar: negligence. They are trying to pierce the corporate veil and recover also from the shareholders of the bar, which didn’t have a dram-shop insurance (protects bar from being liable for accidents caused by customers who became intoxicated inside the establishment). They are working on the assumption that the owners abused of the corporate form:

• Personal grant in favor of the corporation.
• The company has little assets, not enough
• Company is an alter ego of the actual owner. The owners are hiding

Walkovsky v. Carlton case

A third party gets hit by a car owned by a company, specifically a group of companies (2 cabs for each company). The owner has created this complicated structure to pay only the minimum cost of insurance: he is using corporate law for his own benefit. The judge is not willing to recognize this fraud. The problem with this doctrine is that there aren’t bright-line standards. On civil law systems, piercing is based on minimum legal capital.

Class 6

MVS Shares in US. Rationale: offer different sets of rights which attract different investors. Help in reducing the cost of raising capital. The disadvantage is exacerbating agency problems: losing the proportionality between power and risk. Stock exchanges requirements changed over time: before, only the principle of one vote-one share was allowed. Then, MVS were admitted.

Under current NYSE rules, MVS can be issued only before the IPO. If MVS are in place before going public, the investors are protected in advance, they know the rules of the game before. In Italy, at least 50% of shares needs to be regular shares, limited voting shares should be the minority. It’s a compromise between the need to attract different investors and the principle of proportionality between power and risks. Max 3 votes for MVS: before 2012 it was not possibile but then the Civil Code was modified. EU countries have never been too strict on OSOV, so 2 more plausible reasons behind this new legislation:

• Fiat-Chrysler: they left Italy for the Netherlands (mainly for the lower tax burden) but also because the company, which had become a global company, needed more flexible rules concerning capital and MVS. After that, the Italian Legislator changed the rule
• Regulatory competition across Europe

Loyalty shares

They reward long-term relationship. Capital raising.

Ex. 1: Book value= difference between assets and liabilities. Increase in assets of the company and net value. But Susan’s position is diluted. She now owns half of the shares she owned before without losing money. Before: 10% x 4000$ = 400$ Now: 5% x 8000$ = 400$. If then assets change by 700 : 5% x 7000$ = 350$ she loses money.

To protect her, preemptive rights: right to buy shares on a pro rata basis (proportionate on the % of capital she owns). In some cases these rights can be excluded because they are against the interests of the corporation. US approach: power is more allocated to BOD.

Opt-in rules: can be included only if present in the articles of incorporation.

Mondadori case

- Common stock outstanding: full voting rights to elect the BOD. - Preferred shares: limited voting rights, to issue new shares, change bylaws. Unevenly spread across the 2 main shareholders. Berlusconi was the controlling shareholder because he had the majority of the common stock (60%), De Benedetti owned 100% of preferred stock + 40% common = 0.7 of outstanding shares but not many rights attached. De Benedetti can determine a capital increase to dilute Berlusconi because he has voting rights in extraordinary decisions. He decides to issue 100 common shares on a pro rata basis. At the end, Berlusconi owns 90 and De Benedetti owns 110. Last resort for B: veto right, separate voting on decision that might adversely affect the rights of a class of shares. Example of conflicts between different classes of shareholders.

Class 7

Europe vs US shareholders’ corporate power. The balance is more on the side of BoD in US. This is not surprising, in US more dispersed ownership structure. In Europe, fewer shareholders with larger blocks of shares, less passive, more involved in the decision-making process. Shareholders in the US have in practice less power than in theory. Many rights belong to the BoD (scouting, initiatives of mergers) because they have more business knowledge, shareholder’s can just vote the agreement or not.

Thompson’s theory

He reconsidered voting rights of shareholders. There are separate areas in which these rights are exercised: some areas where voting is permissive, not crucial or necessary for company lives vs areas where voting is required. In US, since the balance is shifted to BoD, voting is a mechanism to correct decisions that are made elsewhere: SH voting plays a less important role according to this theory. Directors orchestrate democracy in a company, they convene the general meeting. Intermediaries hold the shares: banks, funds etc. Legal owners: always changing hands, they usually have the right to vote. Beneficial owners: really own the equity and receive the dividends record.

Another mechanism to determine who has the right to vote at SH meeting: date. A date is established to determine which are the SH according to the date of the meeting. In some cases, some people are admitted but are no more shareholders, if they have sold. Older method was closing transfer books: no stock transfers between close of the books and meeting. Under Italian law, complicated system of dates for noticing general meetings. MBCA: abstentions are not counted. Other system: abstentions are counted as vote against.

Proxy voting: delegating voting power. Solicitation process is expensive.

Class 8

High protection of minority shareholders in Europe. Provisions such as proxy voting to increase informed participation. EU Directive 2017: to have specific classes of investors engaged. SHs’ proposal (rule 14A): procedural matters. The more requirements, the lower the facilitation to shareholders. Policymakers need to strike a balance between protection of shareholders and facilitation of managers. (these rules need not to be learnt by heart for the exam).

Lovenheim v. Irquois Brands

A guy with 2k shares of a public company is concerned in how a company is managed about the import of pâté de foie gras. He disagrees about the practice, the BoD doesn’t want to discuss this because it cares only about profitability. The question is: what is significant? Economic significance or also ethical and social?

CA v Afscme

About amending the bylaws to get the BoD to reimburse shareholders for reasonable expenses incurred in effort of nominating candidates, in order to lower the cost of presenting a list of candidates. Voting system: how are votes counted. You can shift form plurality voting to majority voting by amending the bylaws.

How are votes cast

• Straight voting:
• Cumulative voting: cumulate your votes on a specific election while disregarding the previous elections.

Proxy access can be achieved by bylaws amendment, it’s offered to active shareholders as an instrument to have relevant candidates nominated. Short slate is the second alternative way, the cost of proxy solicitation is even lower. Italy: mandatory to adopt slate voting, usually presented by shareholders but it’s also possible they are proposed by BoD. At least one member of the board should come from the second minority slate: minimum protection for minority SHs. Through bylaws amendments, it’s possible to change and require higher protection or reduce the amount of shareholding requested for proposing amendments.

Class 9 Governance models & Board’s role

Telecom Italia is an example of a company where minority voting creates more problems than opportunities. The board is split (10 v. 5 directors). Planning to hold another meeting to revoke some directors. Why different CG models are available in different regions and how the role of the board can influence corporate governance.