Riassunto Law Economics

Introduction

Business and company law (based on economic principles) covers: proprietors, partnerships, companies as well as bankruptcy and insolvency. We will deal with Italian law, German, UK and US law. The reason is that these countries belong to two legal families. The meaning of legal families was given by René David who said that “comparative studies aimed at systemizing jurisdictions, finding common origins to identify main characteristics and justify differences. Originally, the distinction between legal families was very sharp.

• The Roman-German or civil law family: Legal systems deriving from Roman law: Italy, France, Germany, other continental European countries as well as China and Japan (since in the 20th century they were under the influence of Western Europe). Their codes are based on the French/German code. The role of Universities is fundamental to develop legal principles, since from the 12th century the role of Roman law was expanded and developed. During the 20th century Roman law was studied again and the legal principles were further developed and laid the basis for modern codes. The main sources of law are written statutes (and codes); legal doctrines. A source of law is where a legal rule comes from.
• The common law family: First Laws of England, then also of colonized countries, like the USA and Australia, India. The historical development is from judge-made law (case law) and legal precedents. Written laws play a minor role as a source of law. Difference between Common law and Equity law: Equity law has been a system of legal doctrines and procedures which developed side by side with the common law and having originated in doctrines and procedures evolved by the Court of Chancery in its attempts to remedy some of the defects of the common law. So equity law was a modification, a supplement to the common law. Indeed, company and trust law was developed by the Court of Chancery. However, in the 19th century (1873-1875) there was a fusion between common law and equity law so that now they are a unified system. In principle, common law was more similar to Roman law, while equity law was totally different. Nowadays we don't find these differences anymore. In 1066 Hastings and William wanted a common system throughout England and he developed this system thanks to judges, this is why judges are so important, because they unify the country and play a major role. Equity law developed after the common law, which was very strict, and based on equity principle.
• Other families:
  • The soviet law family: Countries originally used to belong to the Roman-German family but after the Marxist-Leninist revolution have adopted new rules. After the 1980s, however, those countries are getting back to their original legal tradition (civil law).
  • Muslim law: Religious influence on legal norms
  • African legal system: Customary law/legal pluralism

Legal families and European company law

The European Union is a common source of law for all European countries, belonging to both families. In company law especially, the influence of European legislation has been very strong since 1969. There are, in fact, directives (to be implemented in each country) and regulations (directly binding in each country) used to harmonize national laws just on certain aspects of company law. Issued by the European Parliament. There have been more or less 15 directives issued by the EU Parliament which cover the matter of company law. This is a reason why now differences are less sharp. Topics dealt by European laws: publicity, capital requirements, mergers, balance sheet, financial statement, branches. Traditionally, there are no corporate governance issues (no rules on the distribution of powers within the corporation). *Remember: proprietors and partnerships DO NOT have directives: Just companies have directives.

Legal families and globalisation

In the wake of globalization, differences of legal families are becoming less sharp, at least with reference to business and company law. In civil law countries, indeed, case law is becoming relevant to interpret rules. Legal doctrine plays a fundamental role in American law and it is starting playing an important role also in UK. So there is a mutual convergence to the most efficient model especially with reference to companies, while for individual traders and partnerships this convergence is not happening. This is because companies have interests worldwide, while single traders and partnerships do not.

Sources of business and company law in Italy

Formal sources:

1. Civil Code dated 1942; originally there was the commercial code in Napoleon years
2. Special legislation: bankruptcy and insolvency law 267/1942; Legislative decree of financial markets 58/1998 dealing with listed companies and financial markets.
3. Regulations, issued mainly by the Stock Exchange Authority e.g., CONSOB

Substantial sources:

4. Legal doctrine (interpretation of laws)
5. Case law (judges, and what they believe)

In 2004, the Civil Code has been amended to implement European Union Directives, most importantly, the reform on company law. Also, bankruptcy law has been amended subsequently.

Sources of business and company law in UK

Even though laws should be made by cases, there are in fact many acts implemented, and those acts are sources of law.

• The insolvency act 1986
• Partnership act 1890
• Limited partnership act 1907
• Limited liability partnership act 2000
• The companies act dated 2006 (huge reform) in force since November 2008

Case law, but has lost some importance; legal doctrine.

Sources of business and company law in US

Since the US is a federal system, we have state laws and federal laws; state laws are issued by the Parliaments in every state while the federal laws are issued by the American Congress or by federal authorities, such as SEC. Partnerships, incorporations are regulated by state laws. *Remember: partnerships can choose under which state they want to be regulated. Securities/stock exchange are regulated by federal law. However, there is the Uniform Partnership Act (UPA) and Model Business Corporation Act that simplify things: they are not binding but voluntarily adopted by States to have uniform laws. Another source of law is obviously case law; legal doctrine.

Sources of business and company law in Germany

• The commercial code (HGB) 1897 and later amended
• The German Plc. Act (AktG) 1965
• Further special legislations regulating some topics about companies

Legal doctrine; case law.

Chapter 1

Who are the people involved in a business?

1. Owner of a business: One who shares the fundamental of risk, reward, control, liability.

The sole proprietorship is a business owned directly by one individual, called a sole proprietor. We know that business law applies when a business venture is an ORGANIZATION, and can we define the sole proprietorship an organization? Since a sole proprietor has no formal elements of co-ownership, it is usually not thought of as a “business organization” in a legal sense. The fact is, however, that a business owned by a sole proprietor may be large and complex, involving many people other than the owner, money from the bank is borrowed, profits are generated: so these kinds of sole proprietorship can plainly be an organization in the non-legal sense of the term. The concept of organization is equivalent in ALL jurisdictions.

Other participants

• Employees
• Suppliers
• Lenders

Elements needed to form an organization

• Owner
• Employees
• Raw materials
• Know-how
• Equipment
• Capital

The sole proprietor: Italian Law

"Imprenditore- Civil Code art. 2082 commerciale" (commercial entrepreneur or sole proprietor) = business activity whenever organization is prevalent over the individual who owns the business. In common law we would not have a codification of the concept of organization. In this case it turns out that Italian is more precise. "Formally art. 2082 it is an entrepreneur who professionally exercises an economic activity organized in order to produce or exchange goods or services.” “Professionally” means having the intention to run the activity time after time. “Economic” means when it generates profit. ORGANIZATION = ENTERPRISE under Italian law.

No-profit organizations are organizations but business law applies. What is an organization? The article of the Civil Code 2195 gives a list of business activities (but not a comprehensive list: it means that if an activity misses in the list, it still might be an organization. This list is only for example): industry, trade, transportation, banking and insurance, supporting activities. We added also: sports club, touristic agencies, construction activities, private education, finance.

What shall we look at to determine whether an activity is a business activity or not? If the organization is prevalent. Under the Italian law there are three DIFFERENT sole proprietors that must not be confused since there are some special duties and requirements that apply only to sole proprietors:

• "Imprenditore commerciale" = sole proprietor, art. 2082/2195, therefore business law applies.
• "Imprenditore agricolo" = agricultural proprietor, art. 2135 = farming, breeding animals, taking care of forestry BY THE SAME PERSON, then secondary, derived activities supporting to or consequential from primary activities: sale, transformation. Even if for the imprenditore agricolo some of the features are similar to ones of the commercial entrepreneur still the provisions are different.
• "Piccolo imprenditore" = small proprietor, art. 2083 = small farmer, the artisan, and the owner of a business who mainly works by himself or being helped by members of his family.

The sole proprietor: duties and requirements

(So just for imprenditore commercial or commercial entrepreneur)

1. Publicity: Duty to register with the REGISTRAR OFFICE (at Chambers of Commerce), in the GENERAL SECTION (there are two sections, the other one is called special section. The difference is that when comm. entrepreneurs register in the General they can enforce what is registered). Here, once facts or acts are registered, they are automatically enforceable vis-à-vis third parties (even if third parties are not aware). However, if no registration has been made to enforce them, the owner shall prove the third party was aware.
2. Accounting: Duty to keep books, accounts, and BALANCE SHEET.
3. They may be declared BANKRUPT in case of insolvency.
4. Legal representatives: Institore, procuratore, commesso. Just upon appointment (they DO NOT need to confer power of attorney) they have the power to represent and bind the sole proprietor vis-à-vis third parties.
5. Restrictions: Special legislation

* Power of attorney = people that can act on behalf of someone else. Commercial entrepreneurs do not need to give someone the power of attorney because by law those people are legal representatives of the commercial entrepreneurs. We use power of attorney also to register restrictions.

INSTITORE: It is also called the owner's “alter ego” and is the person to whom all representation and managerial powers might be delegated by the owner. If someone is appointed institore it means that he/she AT LAW has the same powers as the owner EXCEPT for the power to sell real estate or establish mortgage over it. Any limitation to powers at law shall be registered at the Registrar Office to be enforced vis-à-vis third parties.

PROCURATORE: Has more limited power: not managerial power, only power to enter into contracts on behalf of the owner.

COMMESSO: Even more limited powers.

Small and agricultural proprietors - duties and requirements

• No duty to keep books, accounts, and balance sheets
• No bankruptcy in case of insolvency
• No legal representatives at law: Just ordinary representation under the Civil Code. (So here we need the power of attorney).
• Registrar office, in SPECIAL SECTION: This registration is just for statistics, no effects to evidence facts or acts to third parties. So these proprietors must notify facts or acts to third parties.

* REMEMBER: agricultural proprietors registration is useful to notify facts or acts to third parties, just like commercial entrepreneurs. So they will register in the SPECIAL SECTION, but it is as if they were registered in the general section. So agricultural proprietors shall register a change in the power of attorney.

* Small proprietors can give power of attorney to a person that shall represent him/her vis-à-vis third parties. To limit this power of attorney, the small proprietor should amend the power of attorney and then notify this to the third parties, since there is no document that can prove this limitation.

Professionals

Professionals are NOT commercial entrepreneurs. Their activity is called Intellectual activity and other sections of the Civil Code apply (self-employment work). Art. 2222 “contratto d’opera” = Prevalence of his/her own work, self-employed, no subordination. Art. 2229 = intellectual professions. Personal responsibility of contract execution. Only in special cases, as Art 2238 says, professionals are counted as commercial entrepreneurs, and is when in the activity there are elements organized as an enterprise, for instance private hospitals, big law companies. Protected professions: professions that require a specific exam to be registered in an ALBO, like lawyers, notaries, accountants. In the past these people couldn’t set up companies, now they can. So in professional activities business law DOES NOT apply: professionals shall not declare bankruptcy, do not have to register. Any special requirement may be provided by each category/association.

Owners and creditors

Creditors are usually banks, suppliers, employees: in general, people who expect to receive money from the owner. There are two classes of creditors: GENERAL CREDITORS and SECURED CREDITORS. A secured creditor is one whose claim is secured by specific property, and who has a first claim to the proceeds of the sale of such property. General creditors, instead, are all the other creditors.

Liability for debts: Personal liability is associated with business. This means that if a sole proprietor becomes insolvent, he/she is liable with ALL the assets, both business, and personal assets. So, business creditors can seek recovery from the business assets as well as the personal assets. Personal creditors can seek recovery both from personal assets as well as business assets. In the event of bankruptcy, there is no distinction whatsoever between personal and business assets nor between personal and business debts. All assets are in the same pot and all creditors share the same pot. However, secured creditors have a privilege over unsecured creditors. THIS PRINCIPLE APPLIES TO ALL JURISDICTIONS. In Italian law, this concept is codified in art. 2740 “the debtor is personally liable with all present and future assets.” This is a general provision that applies to ALL DEBTORS (even to business owners).

It is possible to avoid personal liability for business debts by executing a NONRECOURSE LOAN. Such loan would ordinarily be secured by a specific property: the lender would agree that in case of nonpayment its sole recourse would be to sell the property and apply the proceeds to the debt. This is a potential device for limiting loss to the amounts initially invested in the business, however, this arrangement would be very unusual in the case of a sole proprietor.

Debt and Equity: The EQUITY in business is the difference between the value of the business and the amount of the debt. The use of debt creates financial LEVERAGE for the equity. The greater the debt, the greater the leverage. The greater the leverage, the greater the potential gain and losses for the equity and the greater the risk of loss for the debt. The effects of leverage result from the facts that the lender has a fixed claim (amount of loan + interest); the return on the investment or business financed by the debt is uncertain; the borrower has a residual claim (what is left after the debt is satisfied).

• If the rate of return on investment is greater than the rate of interest, leverage will work in favor of the owner, but if the rate of return on the total investment turns out to be less than the rate of interests, then leverage will work against the owner.

Creditors, and especially general creditors, may be concerned with how well the business is carried out. The business goes bad and the owner is not able to repay the debt, credits will lose money! So creditors share the RISK OF DEFAULT; the degree of the risk will of course depend on the total value of the business as compared to the amount of the debt. As the risk rises, general creditors will become more and more concerned with how the business is run and are likely to want increasing degrees of CONTROL. As risk rises, the bank is also likely to demand a higher interest rate- that is, a higher return on its investment in the business.

Owners and employees

In small businesses, it is unlikely that there will be a written contract spelling out the mutual rights and obligations between owner and employee. Even though not spelled out in writing, however, a set of rights and obligations does exist. The term of this implicit agreement can be found in part in common law doctrines of agency and contract. In some settings, union rules or contracts may be of considerable relevance, but an individualized written agreement would be unusual. Negotiation of an individualized agreement would take time and might call for services of a lawyer. The time and the cost spent for those legal services are called TRANSACTION COSTS. There might be also the problem of INFORMATION COSTS that is too high when the parties are unaware of the opportunities for the written agreement that vary the contractual terms. In general, employment relation...