Business Law - Companies (Prof. Smirne)

SPA.

• There is one board, which includes:

o Independent managers perform control duties (so-called Management Control Committee)

o Managers who run the company

• It is a very efficient model (because it is the same body doing both tasks of managing and

checking/controlling) and allows information sharing, because the controllers sit in the same

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position (quick/efficient like American Style)

22 Cultural parenthesis: Aristoteles’s idea of the best way to govern (according to him is the monarchy). Montesquieu’s

division of power’s idea. 12

Lecture Four

Share Capital and Loans – different ways to finance the company:

Here we talk about how we finance a company; there are several ways for a company to be financed:

1. Capital and Reserves: they constitute the company’s resources (capital is what makes the company

works)

2. Securities: the other way to finance the company is borrowing money from people, that is to issue

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certificates (securities ) attesting the ownership of:

a. Stocks

b. Bonds

Stocks:

Also called shares or equity securities, they are the counterpart to shareholders’ contribution

(consideration) to the company’s capital (allotted shares).

The general rule is that they provide a patrimonial and personal right:

✓ Dividend

✓ Vote and pre-emption

Bonds:

Also called debt securities, they are the counterpart to creditors’ loans to the company, which is the debtor.

The most famous bonds are the US treasury bond in the United States, BOT or BTP in Italy, BUND in

Germany. 24

The general rule is that they provide just the patrimonial rights, no voting or pre-emption right is provided

for creditors:

✓ Interest

Differences between the two:

One of the main differences is that the debtor (the company), even if has not the money to pay off the loan

(economically incapable), is still liable and obliged to pay the debt. On the contrary, the company can also

decide not to distribute dividends that year, so the patrimonial right of the bond is always there, while the

one of the share is not.

Hybrid between Shares and Bonds:

Distinction has become blurred, for instance:

1) Saving Shares (no voting rights): they have no voting rights, so they keep only the patrimonial right

(dividends). There are some bylaws that allow you to get super patrimonial right, to compensate

for the fact that you cannot vote. It is typical for someone that wants to invest and not manage. If I

have a saving share, I will be shareholder, but similar to a bondholder because I do not have the

right to vote.

2) Convertible Bonds: it is a bond that can be converted into a share. Why would I want to convert my

bond into a share? Surely, not for patrimonial reason, as shareholder do not always get dividends

while bondholders always get interest. Therefore, it is a matter of voting: it is probably riskier, but

at least I will have a voice that will be heard (hopefully) and I can prevent some troubles in the

23 Different from security, which means a guarantee, a collateral.

24 In this context, the pre-emption right is the right for already existing shareholder, to subscribing new capital in case

of capital increase. 13

company to happen (maybe). However, dividends are based on that profit year, while interest is

not; so, there can be a strategy in becoming a shareholder.

cannot be redeemed until all other

3) Perpetual Subordinated Bonds: it is a very risky security;

creditors have been paid off. So, you are the last getting paid (if there is the remaining

money). It is a hybrid because it is the closest situation between a shareholder and

bondholder. It is similar to having a share, but you get periodical interest.

Equity Securities:

Private Limited Company (LTDs):

✓ Same word (share) has a different system compared to a public company (PLCs); in Italian we can

call it “quota”. Since my “quota” can be greater than another one, my vote can count more than

another person with the other (more personal than PLC).

✓ Special economic or administrative rights can be attributed to a shareholder, for instance one

shareholder could count more in the voting or one shareholder could be give the “veto” power. For

example, I can write your name in the bylaw and your power (even if maybe you have a small

quota): personalistic kind of power. These kind of rules, that can be changed, are called default

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rules; you will not find them in the civil code as you have personalized them . N.B. there is a limit,

you cannot break them as a rule.

✓ It is possible to contribute work or services to the company. Remember consideration in kind (to

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contribute to company’s capital with something that is not cash ). So, it is a contract, I am

contributing with my work in exchange for some shares: in order for the contract to work, there

should be a balance:

o Independent valuer’s report: a document made by a person who is in charge to evaluate

the service/work.

o Personal guarantee (bank or insurance)

First problem is because it is not easy to evaluate (hence, independent valuer’s report). The second

problem is that services/works are not enforceable (so, there must be a monetary equivalent, i.e. the

guarantee). Once I give my contribution, the company just take it; how does the company protect itself if I

do not provide my service? I am not obliged to go to work, so they stipulate a guarantee.

Public Limited Company (PLCs):

Here you can have several kinds of shares, where the personalistic rights that we’ve found in the s.r.l, are

now applied to shares themselves and are not linked to the shareholders’ names anymore.

• It is NOT possible to contribute work or services to the company.

• Classes of shares: equal treatment of shareholders with each class.

o A special resolution of the general meeting (or the company’s bylaws) decides upon their

introduction.

o A class meeting must approve resolutions affecting rights of the said class.

• 27

Normally, no multiple voting rights .

• It is possible to have shares with no voting rights (e.g. saving shares).

25 On the other hand, we’ve mandatory rules, that cannot be changed (like in criminal law).

26 Cash is easy to evaluate, while kind is not easy to (first problem).

27 Recently Italy has introduced multiple voting, which is a typical Anglo-Saxon feature. N.B. FCA moved to Netherland,

which has a Business Law partly Anglo-Saxon and so multiple voting, that allows to control better your company.

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Lecture Five

Increase and Reduction of Capital – Capital Maintenance:

Capital maintenance is not easy, is technical, but gives you a deep view of the heart of your company which

is capital. Share capital is the resources you keep in the company; however, you can increase or decrease it.

Contrary to reserves, share capital require a very rigid process to be changed.

Real/Nominal modifications: are we changing (increasing or decreasing) only the company’s capital or also

its assets?

• Nominal modification of Share Capital: I am not changing the company’s assets, even if I am

increasing the capital, the company remain as rich as before, I am just playing with the balance

sheet (I move resources from one side of the balance sheet to the other); so, normally I am moving

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resources form reserves to capital and vice versa .

• Real modification of Share Capital: I am changing the company’s assets, so if I am increasing it I am

making the company richer.

If I want to change (increase or decrease) the share capital, I have to change the bylaw, because it is there

where it is written the amount in the capital; so, as when we want to create new classes of shares, we0ve

to go to a notary and then change bylaws (internal rules of the company) following the 3 steps.

Increase of Capital:

All shares need to be fully paid in before a new capital increase can be enacted (no shares outstanding).

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Both nominal and real increase can be delegated to Management ; limitations:

• For a maximum of 5 years

• Within a maximum amount

Nominal Increase of Capital:

It is the capitalization of reserves: so, when you transform reserves into capital.

Quality has changed, quantity not and the purpose is that I am promising to keep more higher value in the

company.

Here new shares are given to old shareholders, not to new ones; they are given to the owners of reserves.

How does this reflect itself on shares? (PLC hypothesis)

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A. Issue of new shares (bonus shares) , with the same characteristic as the old ones.

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B. No issue of new shares but increase of par value of existing ones (no increase needed if the shares

have no par value).

28 So, the quantity has no changed, it has changed just the quality.

29 Remember that in Italy managers are forbidden to be a shareholder; in US it is not, there are super-power

managers. In Italy, however you can delegate something, like in this case (linked to financing the company).

30 Because you are getting new shares without paying: resources were already in the company.

31 Par value is the nominal value, the one written on the share, but the market value can be different.

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Real Increase of Capital:

There is a contribution in cash or in kind, with usual rules.

Shareholders (and holders of convertible bonds) have preferential rights of subscription (pre-emption

rights): ratio of pre-emption rights, to keep the balance of power unaltered inside the company.

That’s because otherwise, the old shareholders (maybe interested) will find that they have less power and

less percentage of capital, because the company took money before from other people and not from its

shareholders.

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Pre-emption rights:

• Can be suppressed with special majority (it is a default rule, but since it is an important right, you

need a special majority to change it).

• Don’t exist in case of contributions in kind (because it is not cash, we should ask the same condition

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to the other shareholders, but in kind is something maybe unique) .

• Can more easily be suppressed if shares are allotted to employees.

We’ve talked also about crowdfunding, so collecting money from the crowd; however, after that, you can

choose to let people become lenders or shareholders. If they are supposed to become shareholders, you

probably will go trough a real increase of share capital.

Real Reduction of Capital:

The company is becoming poorer. Normally originated by optional reasons (I can choose to reduce it,

normally).

Typically, shareholders think that the company’s assets exceed what is required by the company to achieve

its objects.

E.g. my company produce earrings and cosmetics, once become obsolete, I cannot pursue the second

anymore, but I’ve pumped in the company money to pursue both; so, I can act a real reduction of capital,

because can be not so efficient to have more money there. I can allocate them in a place w