Business Law - Companies (Prof. Smirne)

Business law: company (Smirne) Università degli Studi di Torino

Business and management, 2nd year

Lecture one

We are going to deal with fictitious entities such as company, which are "società", so entrepreneurs with more than one or two people. The other part of the course will go through partnership (società di persone). Here company is intended not just as a listed company, but also companies which are not (società di capitale).

In this course, we will afford Italian business law in English. The exam will be on the computer, multiple choice, and then an oral part (one question with this professor and one with the other professor).

Types of business

So, we have three types of business:

• Sole trader: one person only doing business, one person decides, one person gets profit, one profit bears the losses. You do have the right to gain a profit while an employee has the right to get a wage. The sole trader is the only one risking his home.
  • Without employees
  • With employees
• Partnership (società di persone): relevant personal factor
  • Simple partnership – società semplice (ss)
  • General partnership – società in nome collettivo (snc)
  • Limited partnership – società in accomandita semplice (sas)
• Company (società di capitale): relevant capital factor
  • Private limited company (Ltd) – in Italian Srl
  • Public limited company (Plc) – in Italian Spa
    • Listed
    • Not listed
  • Partnership Limited by shares – società in accomandita per azioni

The difference between the first type of business and the last two is that in partnership and company there are more than one person risking their home, risking everything. While in the first case, just the sole trader risks and gains profit. This is sophisticated law, not even Romans invented it. This came with the specialization of work, so came up new needs and therefore new answers. These rules are trying to prevent (if possible) or solve conflicts.

In corporation, the more you invest, the more you risk and therefore you count more: majority principle (brutal and fair). In this way, you can prevent conflicts, you can buy it. In cooperative companies, nobody cares how many shares you have, how much capital you've invested, the rule is, one head one vote. In this way, you cannot just buy things, you have to convince the others.

In Italy, we've a very peculiar thing, we've three types of partnerships: società semplice in reality does not have a real translation in English because there do not exist. Here most of the decision are taken unanimously, because it is two or three people. In a company what matters is the capital, so who has more capital is able to take decision. It allows people that do not even know each other to make business together.

Private and public can refer to a state-owned company or not. But for public, here we mean a company designed for a large number of investors (public). A private is designed for a small number of investors (so the internal rules, designed to solve conflicts, do not work very well when there are many investors, like more than ten).

Private limited liability company is the simplest form of company (Ltd). Public limited company (Plc) are not always listed (shares sold in a public stock exchange). For example, Ferrero and Barilla are not listed, shares are not to be found freely in a market. If you want some shares you go there, and you ask. The last type of company is very articulated and difficult, so we will not go through this one.

Company analysis

About each type of company, we will analyse:

• Number of members of that type (max-min number)
• Who has managerial power
• Profit and losses distribution
• Liability

We have two main sources for answers (in Italy):

• Civil Code (1942): inspired by French Model and German Model, the Italian one was the third one, it was more modern, it is not just a mixture between the two.
• Company law reform: the civil code was reformed in 2003 by the legislative decree

As we've seen there are others form of entrepreneurs:

• Cooperative companies (economic but not lucrative goal)
• Consortia (to cooperative the work of entrepreneurs): we remain independent entrepreneurs, but we cooperate.
• Associations or foundations (no profit) if they act as entrepreneurs.

Europe

In Europe, we have several business types:

• European Economic Interest Grouping (EEIG): for cooperation between enterprises and professionals of at least two different member states (similar to consortia).
• Societas Europea (SE): to incorporate under one judicial activities spending in more than one-member state. There are more or less 2000 of this company in the EU; it is a public limited liability company (Plc). They must be formed starting from already existing national entities. It gives the opportunities to use the same laws everywhere in the European Union. They must have a minimum share capital of 120000 euros. Moreover, registered office and central administration must coincide, to prevent abuse of law.
• European Cooperative Society (ECS): minimum share capital of 300000 and entities forming it must come from more than one Member State.

Creation of a company

In Italy, there are two forms of company creation:

• Simultaneous incorporation (common): first, a formal deed is executed by a notary, to sign a formal document; then the notary prepares the documents and performs two controls: a control of regularity of documents (formal control – are all the signatures valid, are all the people interested in front of me and eventual authorization to sign) and a control of legal abidance (substantial control – are the rules you're writing on the company according to the law?)
• Incorporation by public subscription (rare): it is only for public limited company; someone has an idea but do not have the finance to realize it, they are called promoters, they start scouting for investors. Potentially it is a risky situation, because of the investments in a company which is not been created yet. So, the law is particularly protective here and therefore there is bureaucracy. The project has to been written and unchangeable, so you need a notary to stipulate a formal deed. Moreover, you can create the company only if you reach the investment written in the project. The purpose of this form of company's creation is resourcing pooling.

Therefore, there are three steps that lead to the valid creation of a company:

1. Singing the deed prepared by the notary, who signs it himself
2. Formal and substantial control by the notary
3. The notary registers the company in the Register of Enterprises

The company does not exist until registered: constitutive notice; so, until the three steps have not been performed the company is not born yet and after they have all been taken, the company is born and acquires "legal personality". It is important to understand when the company is born in order to start performing your business correctly, otherwise you cannot maybe rent a building in its name and other stuff; so, it's important to perform step number three quickly, which in Italy it is possible, because notaries perform the process electronically (it is accessible to everyone in the world at a ridiculous cost).

Keep in mind we have several kinds of authorization: to sign, to register or to run the company. So maybe without the authorization, you can register the company, but you cannot operate in such business. E.g., you can't use the world "Bank" if you are not an authorized financial intermediary. E.g., can a company which sells cars, sells cars insurances? Yes. The deed is signed on paper, can also be signed electronically even if it is complex because you need digital sign.

Lecture two

Remember that also in the U.S. Corporate/Business Law is not a Federal matter, so if we think that Europe is a mess, because we have 27 different Business Law, in the U.S. is even worse because there are 50. In particular Delaware, which has no standards, no strict law regarding business, so it is very attractive to businesses (costs are low, and they have optimal courts). In the U.S., moreover, managers have more power than shareholders (here in Europe is the contrary), so in Delaware managers are not so liable and therefore they decide to go there.

Creation/Modify a company

Mind that the three steps we've seen to form a company are used also to modify a company. Therefore, when you want to change the most important things in a company, you have to go to a notary.

In this case, when it is about changing something, the notary has not an idea about what shareholders want to decide/do; so, it is more difficult.

1. There will be the intervention of a notary that takes minutes of the General Meeting
2. He will then check the formal and substantial validity of what the assembly decided
3. If the controls are passed, the minutes are inserted into the Register of Enterprises

Note that here the step one and step two could not coincide.

Documents in company creation

What are the documents that are present when you create a company?

• Deed of incorporation: it is a photo of what happened that day in front of the notary, its importance, as time passes, is only that of a historical fact: it is therefore unmodifiable, as all the facts are (atto constitutivvo).
• Bylaws: rules of the company, made to last and therefore modifiable, with the system above seen (statuto).

In the bylaws, I find the object laws, I can find the company name for example. The two documents complete each other, and the bylaws prevail in case of conflict. However, you can change of course name or place of business (like FCA move to Netherland or Finmeccanica change its name to Leonardo). Companies do need to change, business is adaptive, otherwise you're going to die.

In the Deed we have some essential elements:

• Name of shareholders
• Name of the company
• The field in which the company wants to operate: object clause
• Share capital
• Management organ
• Control organ

In the Bylaws, I don’t find the name of the shareholder, so I don’t need the notary to change the shareholder of course (you can buy shares in the stock exchange); the name of the shareholder is in the deed (which cannot be changed) which is a historical fact: they are rules.

Mind that the name of the company is also present here and you can change it like the field (but you need a notary to change rules!), while changes of ownership usually do not need a notary because are names and you can do it on the stock exchange.

Capital-Reserves

Capital-Reserves are the resources of the company, the money that I put in a company have different paths, they can be reserves or capital:

• Capital is representative of a value that has to be kept in the company.
• Reserves can instead normally be distributed to shareholders.

Both capital and reserves are an investment in a company, in order to have back more money, the difference is that in the first case you cannot have them back in an easy way. So, capital is a more binding form of investment, because I cannot have it back; it has nothing to do with the quantity of the investment (qualitative approach). In reality, capital usually cannot be given back during the company life, in fact when the company is closed/sold you can have back your money with maybe interest, it is called liquidation. Otherwise, you can perform a Real Reduction of Capital: the capital.