NOTES PART 2

a business has to be structured within a defined legal framework - Regardless of place In every jurisdiction, the law provides a number of options from which to choose. The proprietors of the business has to choose. These may relate their decisions with issues such as limitation of liability flexibility of management structures privacy of financial data taxation sources of finance. In most countries recogni e forms of business organi ation, which can broadly be categori ed as follows!

a. b. c. d. e.

sole proprietorship partnerships of one form or another various types of company with limited liability. Before passing to the types of Companies Regulated by the La Companies"
a. b. c. ".

on Commer!ial

Sole Proprietorship (Tregtari, Physical person) #ole proprietorship is the simplest way of operating a business in "lbania. $"t %R&' (. no legal distinction between the owner and the business ). a sole proprietor has unlimited liability for the debts of his business *. procedures of registration are simple! first register as a physical person+under a business name by filing application in which the investor sets forth his data, address in "lbania, proposed business activity and specimen of the sole proprietors, signature -. register with the tax authorities

.oint ventures are also widely used by companies to gain entrance into foreign markets. /oreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter.

B. Joint ventures (Shoqri e thjesht) (. are foreseen by the &ivil &ode and the "lbanian legislation uses the term 0simple company1 ). are based on an agreement *. concluded by two ore more persons, physical ore judicial, -. independent entities 2. engaging in an economic activity for a short term. 3. joint ventures do not receive a legal personality! two companies might decide to create a new corporate entity for their joint venture and register it $under one of the explained forms below'4 alternatively, two companies may agree by contract to start a joint enterprise without registering or creating a new corporation4 the activity would be carried on through the two entities, rather than through a new corporation

Revolutioni es the old law Reflects the ac5uis of 67 6uropean 8aw, 9ermany, 6ngland The new 8aw %o. ::;( on 6ntrepreneurs and &ompanies ("Per Tregtaret dhe Shoqerite Tregtare")' regulates four types of business organi ation referred to by the generic term #!ommer!ial !ompany# $<sho5eri tregtare<', namely!
(. ). *. (. ).

the general partnership $sho5eri kolektive' the limited partnership $sho5eri komandite'

/ocus on them due to importance

*. -.

the limited liability company $sho5eri me pergjegjesi te kufi uara', the joint-stock company $sho5eri aksionare'

Entered into for!e on 2$ %ay 2&$& %ewly formed companies are subject to the law, even if the formation was already in progress at the moment the "&8 entered into force Those registered before will continue to operate under the old law problemati!

=owever, )*;+) states that they should bring their companies in line with "&8 within );(( > otherwise they will be dissol'ed and enter li(uidation) /our problems! (. ?hat happens if the company tries to bring the company in line but fails to do so@ ). =owever the creditors, good faith is protected even if the company is dissolved, because it is not erased from the register immediately $it enter li5uidation' *. 0Aissolved by law1 > members will not be willing, they will not re5uest li5uidationBany other person will -. Cnce the company has been dissolved is li5uidation unavoidable@ The "lbanian economy will face a major shock in the );((B.

T o different steps

The La *efault or apply if the #tatute or another contract does not contain a provision to the contrary effect Ex relations !et"een partners # default restriction + unless the ACL provides otherwise
(. ).

%andatory Rules members $ortake' cannot provide otherwise

"ny deviation from the default rules must be included in the #tatute The rules may be freely designed, <unless this law provides otherwise.1

Ex Art !"# ($) ACL% a&&ording to whi&h the provisions on withdrawal and expulsion of 'e'(ers 'a) not (e ex&luded or restri&ted ((ut widened) () the Statute* *. /reedom of contract only rules as to the legal relations between members. ,n relation to third parties- espe!ially !reditors- the ACL.s pro'isions are mandatory + again- only if the pro'ision does not stipulate other ise)

Aeciding the law to apply $jurisdictions'! #in!orporation theory# #real seat theory#

(. (. ). *.

-.

The law governing the company with reference to an objective factor, namely the location of the !ompany.s head offi!e freedom of !hoi!e for company founders allo s them to in!orporate their company in a jurisdiction e'en though the !ompany has no e!onomi! lin/s ith that 0urisdi!tion this solution may result in so-called #letter+bo1# companies, whose <presence< in the jurisdiction of incorporation consists of no more than a postal address $e.g. in the office of a lawyer', whereas all its business is conducted in one or more other jurisdictions. The company is go'erned by the !ompany la of its 0urisdi!tion of in!orporation

Art 2- of ACL states that the la appli!able The 3ead Offi!e- is the Statute does not pro'ide other ise

A) 4eneral Partnerships (Shoqri $ole$tive) (. all partners are jointly and severally liable, without limitation, for the amount of the partnership obligations. ). creditors of a general partnership at first have to claim against the partnership as a whole, and only if they have failed in this process they can turn and claim against a partner for the debts of the partnership. *. there is no minimum capital re5uired. -. each of the partners has authority to bind the partnership vis D vis third parties without notice. 2. unless the contrary is stipulated at the bylaws filed at the %R&, all of the partners are considered as administrators of the partnership. 3. the partnership is dissolved upon the death, bankruptcy, loss of a business license, or incompetence of a partner.

B. %i&ite' Partnerships (Shoqri $o&an'ite) (. both general and limited partners. ). limited partners are liable for partnership obligations only to the extent of their investment, while general partners have unlimited liability for partnership obligations. *. limited partners may not participate in the administration of the entity. -. the death of a partner does not immediately dissolve the limited partnership.

(. %i&ite' %ia!ility (o&panies (Shoqri &e prgjegjsi t $u)i*uar # Sh.p.$.) (. a minimum initial capital of only (;; "88 $approximately ;,:: 7#A, or ;,E) e' ). can be established by one or more partners, natural or legal persons, who will be responsible only to the extend to their contributions to the companyFs capital *. contributions can be in cash or any other assets, although contributions in services are not permitted. -. decisions regarding the overall management of the company - Gartners "ssembly, 2. day-to-day management - by administrators, who are appointed by the Gartners "ssembly. 3. "dministrators donFt need to hold shares in the company. E. 8imited liability companies may be transformed into partnerships or joint stock companies4 but only the 9eneral "ssembly, upon majority of H and approval of the last two annual financial statements can take this decision.

+. Joint Stoc$ (o&panies (Shoqri a$sionare # Sh.,.)

(.

). *. -.

2.

3.

a joint stock company must be founded with a minimum initial capital of (; million "88 $approximately ::.;;; 7#A or E*.;;; e', if it intends to offer its shares for sale to the public, and ) million "88 $approximately (:.I;; 7#A or (2.;;; e', if it does not. the capital is divided in shares the shareholders are responsible for losses only to the extent of their contribution strategic decisions are generally taken within the 9eneral "ssembly of #hareholders, which makes decisions at regular and extraordinary meetings. Cnly in the context of an extraordinary meeting may the shareholders amend the companyFs by-laws. the management system of a joint stock company may be of two kinds ! monistic or dualistic. Those companies which choose the monistic management system have a Joard of Airectors and "dministrators having both supervising and management functions. Ctherwise, those companies which choose the dualistic management system have in addition to the Joard of Airectors and "dministrators, a #upervisory Joard, which holds the supervising functions. the Joard of Airectors is charged with taking all basic management decisions in accordance with the bylaws of the company. It is supervised by the &ouncil of #upervisors, which has from * to )( members.

$)

Separate legal personality

The !ompany as a separate legal person distin!t from its members or shareholders 8egal Gersonality is borne in the moment of registration and means that! (. rights and duties in relation to third parties and in relation to its members ). court proceedings *. own property -. enter into the register of ownership "rt E "&8 states that a company may engage in any a!ti'ity that is not prohibited by la .

Restri!tion+ " legal person cannot enter into any family legal relationships. Also% a legal person cannot die and, therefore, it cannot dispose of property in a will, but it may well be the recipient of property left in a will by a natural person.

The "ultra vires< doctrine - the capacity of a legal person is limited to !arrying out the ob0e!ts determined in its Statute)

Legal persons are artifi!ial !reatures of the la )

"im! &reation - the simplification of legal relations.

If each member of the company was legal subject of the rights and duties arising from the business, it would be very impractical if the company has a large number of shareholders Koreover, separate legal personality allows for changes in the companyLs membership $e.g. by the transfer of shares in a .#&' without a direct effect on the companyLs legal relationships with third parties. Representation of the Company

7nlike a natural person, a legal person $being an artificial creature' is not capable of acting on its own. To conclude a contract it must rely on actions of natural persons. An important issue in !ompany la is to define hose a!tions 5in!luding unla ful a!tions6 are to be treated as those of the !ompany itself) "lready "rt *( of the &ivil &ode provides as a general principle that <the legal person acts through its organs provided by law, in the document of the establishment or in the #tatute< and that <the legal transactions performed by the organs of juridical personality, within their competence, are considered as performed by the legal person itself1. Aepending on the type of company the law defines different organs to represent the company!
(.

+n general partnership $sho5eri kolektive' > each partner is entitled to represent the partnership, and is also an organ of it. The li'ited partnership $sho5eri komandite' > the general partner is entitled to represent the company, the limited one may not.

).

*.

The li'ited lia(ilit) &o'pan) $sho5eri me pergjegjesi te kufi uar' > the general power to represent lies with the administrators $only natural person can be'. Relationships company - administrators ----general meeting ,oint-sto&. &o'pan) $sho5eri aksionere' > the general power to represent lies with the administrators.

-.

(lari)ication -hat happens i) the co&pany has t"o or &ore a'&inistrators.

In absence of any restrictions by law, the #tatute is free to determine the representation competences in case there is more than one administrator. 6very change in the representation has to be reported to the %R&.

Representation

,nternal %anagement

The company organs entitled to represent the company against third parties are the same as the organs entrusted with the management of the partnership or company, =owever rules may differ. 6x! Read Gage *( 7generali8ed third party prote!tion9 The legal representatives must respect the limitations of powers envisaged in the #tatute+ given by the competent organ+object of the company. If the legal representatives fail to comply with any limitations, the actions nevertheless are binding on the company as against third parties 6xception- if the company proves that the third party knew about the limitations or under the circumstances had to know. $ interpreted very narrowly'

"im! If each party had to check each time the limitation of power this would slow down the commercial transactions and give the opportunity to the company to escape from legal obligations if something is disadvantageous.

6xception! The <generali ed third party protection< approach does not afford any protection to the third party if <acts done by the legal representatives of a company ... exceed the powers of representation conferred to them by law.< In this case the good faith of the third parties is irrele'ant. The act will not be binding on the company, even though the third party was unaware because no-one can be allowed to argue that he did not know the law.

Transa!tions bet een the !ompany and !ertain persons related to the !ompany
a. b. c.

0conflict of interests1 the general partners of a partnership administrators all the members of Joard of "dministration+#upervisory Joard with

his spouse, parents, brother, sisters of his spouse his child, parent, brother, sister, grandchild or spouse of any foregoing, persons related $a relative of direct vertical or hori ontal lineage up to second level', adopter, adoptee, a spouses relative of first level d. an individual having the same hope as representative or supervisor

E1!eption" page :;)

#informed !onsent# of the persons giving the approval $partners, members, board of adm., supervisory board' , in that it re5uires the person who has an interest in the transaction to disclose the terms of the transaction and the nature and scope of his interest. The purpose of this important safeguard is to enable those who give the approval to assess the potential dangers of the transaction for the company. Liability of partners- members and shareholders < the most important issue The real 5uestion to be discussed in this context! hether and to hat e1tent the members or shareholders of the !ompany are also liable for the !ompany.s obligations in addition to the liability of the !ompany itself

This liability is a distinctive feature that characteri es the different types of companies under the "&8.
(.

4eneral partnership a. unlimited liability b. joint and several liability - means that every creditor of the partnership has the right to claim the entire amount of the debt due to him from any of the partners

The !reditor is free to !laim payment from any of the partners instead of demanding payment from the partnership- e'en hen the partnership is sol'ent4 the liability of the partners is not restricted to the situation where the creditor cannot obtain payment from the partnership. Jecause of the separate legal personality of the partnership a claim brought against the partnership alone does not automatically draw the partners into the court proceedings but only if this is done according to the civil procedure rules. If a creditor has obtained a judgment against the partnership, he cannot enforce this judgment against the partners on account of their personal liability for the obligations of the partnership, but he needs to obtain a separate 0udgment against every partner whom the creditor wishes to hold liable.
).

Limited partnership a. at least one partnerLs liability is limited to the amount of his contribution $limited partner', while the liability of at least one other partner is not limited $general partner'

" general partner in a limited partnership has the same status as a partner in a general partnership $"rt 23 $(' "&8', meaning that everything said in the previous section applies e5ually to him. " limited partner in a limited partnership is, in principle, personally liable to the creditors of the partnership in the same way as a general partner, but his liability differs in two respects!

a. b.

/irst, the personal liability is limited by the amount of his outstanding contribution #econd, the personal liability of the limited partner is excluded as far as the contribution has been paid to the partnership

*.

Limited Liability in LLC and =oint Sto!/

Kembers of a limited liability company as well as the shareholders of a joint-stock-company are not liable for the !ommitments of the !ompany. Only the !ompany itself- ith all its assets- is liable for its !ommitments)

The absence of personal liability for the companyLs commitments must not be confused with the e!onomi! ris/ that the member or shareholder bears due to his in'estment in the !ompany. If the company incurs losses, there will be neither dividends nor a profit. Jut the principle of #limited liability#- properly understood, limits this ris/ to the amount of the member.s or shareholder.s !ontributions- hether promised or already paid) If all the assets contributed by the members+shareholders have been swallowed up by losses incurred by the company, the company itself will be insolvent and the members+ shareholders will suffer a total loss of their investment4 but they ill not suffer beyond that.

>e tal/ed about + E!onomi! Effe!ts There are good reasons for this limitation of risk

The benefits to society accrue mainly because limited liability enables large businesses to operate ith !apital !ontributions from many in'estors) It may be hard to find investors who are willing to invest some of their wealth into companies where they are asked to assume unlimited liability for the commitments of the company that arise from delegated management decisions which shareholders cannot possibly monitor in any degree of detail $and where the amount of these commitments in absolute terms may be so high as to scare off small investor right from the start'.

"n explicit e1!eption from the principle of limited liability is contained in "rt (3 "&8, which, according to its title, seeks to counteract abusive behavior! That may be seen as amounting to #moral ha8ard# The article, in its first paragraph, provides that company members or shareholders,administrators and members of the Joard of "dministration, who perform or fail to perform one or more of the following actions are jointly and severally liable for company commitments to the extent of their total assets if they!

(. ). *.

abuse the company form for illegal purposes4 treat company assets as if they were their own assets4 fail, once they know or must have known of the companyLs inability to pay its debts, to take the necessary steps to ensure that the company, depending on the type of its business, has sufficient capital to meet its commitments as against third parties.

7nder "lbanian law, a limited liability company or a joint-stock company may be formed by a single person $"rt * $(' "&8' or become a single member company later in its life without being dissolved $"rt (IE $)' "&8'. "s regards limited liability companies, the rule that a company may have a sole member when it is formed and also when an its 5uotas come to be held by a single person is a re5uirement under 6uropean law.