Beruflich Dokumente
Kultur Dokumente
CORPORATE GOVERNANCE
Lectures on Company Law
Prof. Jukka Mhnen
October 2012
Corporate Finance
Aims
The structure of corporate finance
The distinction between equity and loans
Mezzanine finance: subordinated loans,
preferred shares
The annual accounts
Corporate finance
The doctrine of capital maintenance
Distribution of funds
Creditor protection: solvency and balance sheet tests
Literature
Kraakman et al (2009)
Seppo Villa: Creditor Protection and the Application of
the Solvency and Balance Sheet Tests under the
Company Laws of Finland and New Zealand
Theoretical basis
Mainstream corporate law paradigm
Kraakman et al. (2009)
End of history of corporate law
Henry Hansmann & Reinier Kraakman: The
end of history for corporate law. Georgetown
Law Journal, 439468 (2001)
Theoretical basis
Critique against mainstream paradigm
Adolf Berle & Gardiner Means: The Modern
Corporation and Private Property (1932)
Luh Luh Lan & Loizos Heracleous: Rethinking
agency theory: The view from law. Academy of
Management Review, 294314 (2010)
Mainstream paradigm
Emphasis on contracting and self-regulation
Basis on microeconomics: theory of the firm
Nexus of contracts theory
Principal agent theory
Shareholder primacy
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Critique
Managerialism
Expert management the corporate strategic centre in a
bureaucratic hierarchy
Stakeholder primacy
Duty of managers and directors to take into consideration the
interests of non-shareholder constituencies having stakes in
the company as important as those of shareholders
Director primacy
The board of directors a central, independent decision-maker
mediating competing stakeholder interests and allocating the
firm surplus among them
11
Important to remember
Long history of corporate law
Roman law: familia, peculium, societas, societas
publicanorum
Medieval law: societas, compagnia, commenda,
guilds
Early modern time: great companies
Dutch East Indian Company (VOC)
English East Indian Company (EIC)
Modern regulation
ca 1850-
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Fiction theory
Company a state-created legal fiction only, without
substantial reality or own free will
Public good
Basis: state concession
German variant: Friedrich von Savigny, Karl Puchta
U.S. variant: Darthmouth College v. Woodward (1819);
David Millon: Frontiers of legal thought I: Theories of
the corporation. Duke Law Journal, 201262 (1990)
Influence: Stakeholder primacy
14
Organic theory
Company a real entity having a separate
existence from its shareholders
Company a naturally occurring being
German variant: Georg Beseler, Otto von Gierke
U.S. variant: Ernst Freund: The legal nature of
corporations (1897)
Influence
Managerialism: Berle & Means (1932)
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Aggregate theory
Company formed by voluntary private contracting
Basis: contract theory
German variant: Rudolf von Ihering (interest theory)
U.S. variant: Victor Morawetz: Private corporations (1886),
Charles Beach: The Law of Private Corporations (1891)
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Aggregate theory
Influence
Shareholder primacy: Michael J. Jensen & William H.
Meckling: Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure. Journal of Financial
Economics, 305360 (1976); Hansmann & Kraakman (2001)
Director primacy: Margaret Blair & Lynn Stout: A team
production theory of corporate law. Virginia Law Review, 247
328 (1999)
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Comparative approach
Three legal families
Anglo-American
Continental European (French-Germanic)
Scandinavian
Harmonization of EU company law
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Comparative approach
Different views on the scope of company law
Relation to other branches of law
contract law
securities law
labour law
environmental law
tax law
administrative law
basic and human rights
four freedoms in the EC Treaty
Different kinds of corporate forms
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Comparative approach
Typical corporate forms
partnerships
limited partnerships
company limited by shares
private (ltd, GmbH, SARL, SAS, ApS)
public (plc, AG, SA, AS)
cooperatives
non-profit organizations
civil law foundations
cf. trust and its European counterparts
charitable companies
associations
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European harmonization
Changes in British company law
Convergence to Continental company law
Americanization of EU company law during
the last decade
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French-German system
Civil law
Emphasis on the legislator and jurisprudence
Inefficient role of courts as rule makers
Debt finance
Emphasis on creditor protection
Weak shareholder rights against directors
Strong dividend rights (substitution hypothesis: weak
shareholder protection is compensated by dividends)
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French-German system
Example: German Aktiengesellschaft (AG)
Two-tier system
Vorstand (board)
Aufsichtsrat (supervisory board)
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Scandinavian system
French-German basis
Legal realism
Courts as law-makers
Stronger role of equity financing than in French-German
system but weaker than in Anglo-American world
Modern legislation
Norway 1997
Sweden 2005
Finland 2006
Denmark 2009
25
Scandinavian system
Points to be remember
Multiple voting rights
Cf. Germany
26
Anglo-American system
Statutory law like in Continental and Scandinavian
countries
Common law: courts as law-makers
Codification of case law in statutory law
Equity financing
Strong role for securities markets
Strong investor protection
Strong shareholder rights against directors
27
Anglo-American system
UK: 2006 Companies Act
SME approach
Enlightened value maximization
US
State legislation
Fiduciary duties and business judgment rule
Corporate law competition: Delaware
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EU company law
4 Regulations
European Economic Interest Groupings (EEIG,
1985)
European Companies (SE, 2001)
IAS/IFRS Standards (IAS Regulation, 2002)
European Cooperative Societies (SCE 2003)
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EU company law
13 Directives
Old directives
Disclosure (1st Dir., 1968)
Capital (2nd Dir., 1977)
Merger (3rd Dir., 1977)
Annual Accounts (4th Dir., 1978)
Division (6th Dir., 1982)
Consolidated Accounts (7th Dir., 1983)
Auditors (8th Dir., 1984)
Branches (11th Dir., 1989)
Single-Member Companies (12th. Dir., 1989)
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EU company law
New directives US impact
Takeovers (13th Dir., 2003)
Transparency (2004)
Cross-border mergers (10th Dir. 2005)
Auditing (new 8th Dir, 2007)
Shareholders rights (2007)
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Britain 1855
France 1867
Germany 1871-91
Sweden and Finland 1895
U.S. States (New York, New Jersey, Delaware) end of the 19th
Century
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Main features
full legal personality
limited liability
recidual rights
separation of control and ownership
free transfer of shares
35
Legal personality
Enables
separation of corporate assets and corporate creditors
from shareholders assets and liabilities (asset
partitioning)
Protection of corporate assets from shareholders
creditors (entity shielding)
See Henry Hansmann & Reinier Kraakman & Richard
Squire: Law and the Rise of the Firm, Harvard Law
Review), 1333-1403 (2006)
36
Legal personality
Three elements
Protection of creditors from shareholders
Protection of company from shareholders creditors
Protection of corporate creditors from shareholders
creditors
Weak forms
Partnership
Strong forms
Limited liability company
37
Legal personality
State intervention necessary to achieve protection
of corporate assets from shareholders creditors
Transaction costs!
Negotiations between every shareholders and
every creditor
Moral hazard!
Free transfer of shares
Asymmetric information
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Pros
Reduction of potential creditor information costs
reduction of creditor monitoring costs
reduction of management agency costs
reduction of administrative costs of bankruptcy
Reduction of amount of inefficient bankruptcies
Protection of going concern value
39
Pros
Enables capital accumulation and investment
diversification
Increases transfer of shares
Cf partnership
Shareholders creditor
Right to corporate assets
Right to share
40
Cons
Debtor opportunism and moral hazard
Risk premium
Shareholders creditors!
Enforcement costs
A sophisticated bankruptcy system
Weak legal personality
41
Cons
Illiquid investments
Dispersed ownership
Free transfer of shares!
Exploitation by controlling persons
Opportunistic behaviour of controlling
shareholders and directors
Problem of private benefits
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Private benefits
Pecuniary private benefits v non-pecuniary private benefits
43
Legal tools
Fiduciary duties: directors and controlling
shareholders
Equal treatment
Derivative suits
Market for corporate control
44
Limited liability
Owner shielding
Shareholders protected from corporate
creditors
Not very important
Cf. partnership
Not necessary for free transfer of shares
Directors competence: agency
45
Limited liability
Not problematic for creditors
Contractual protection eg control covenants
Risk premium
Weak creditors and non-contractual creditors
Free-riding
46
Other
Recdual rights
Against opportunistic partial liquidation before
total liquidation
Separation ownership and control
Agency problem
Free transfer of shares
Legal personality
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Historical developments
Four basic models
manager-oriented
labour-oriented
state-oriented
shareholder-oriented
50
Manager-oriented model
United States ca 1930-1970
power vested with independent professional management
best possibilities to govern the company for the benefit of
the society
cf. corporate social responsibility
if no control danger of opportunistic behavior
principal agency problem
51
Labour-oriented model
the most important stakeholder: the employees
(=trade unions)
Germany after WWII
Mitwirkungsrecht
in AG supervisory boards (Aufsichtsrat)
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Labour-oriented model
EU
proposal for the 5th directive 1983
British resistance
see however directives attached to the SE and
SCE Regulations and cross-border directives
on employee participation
53
State-oriented model
direct government intervention on firms
governance
control vested with the state bureaucracy
instead of owners or management
France and Japan after WWII
54
State-oriented model
Tools
direct state ownership
regulation of foreign investments
licence systems and other restrictions for
competition
criminal and adminstrative law sanctions (cf.
private law sanctions)
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Why dominant?
US dominance in the global markets
weakening of German and Japanese economics
critique against state ownership
financial reporting by quarters instead of fiscal years
critique against public regulation from the 1980s
57
Shareholder primacy
Main idea shareholder primacy: the
shareholders have a special role among the
corporate stakeholders
emphasis on contracting and self-regulation
theoretical basis: principal agent theory
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Theoretical basis
Theory of the firm (Akerlof, Fama, Jensen, Meckling)
Agency theory
Principal-agent theory: problem of asymmetric information
Incomplete contracting theory: problem of transaction costs
Origins in large profit-making firms
How to govern the relationships between management and
shareholders?
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Corporate governance
How to solve the interest conflicts between
shareholders v directors and controlling
shareholders v minority shareholders
How the shareholders ensure that the directors
serve shareholders without opportunism?
How the minority can trust the controlling
shareholders?
65
Corporate governance
Problems to be solved
Information asymmetry: Efficient monitoring?
Transparency
Tools
Legal rules
Self-regulation
Shareholders decisions
Information duties
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Importance of information
Transparency rules
Balances information asymmetry between
principals and agents
Enables efficient markets for corporate
governance
68
Creditor protection
Primarily an insolvency law not company law
problem
Continental and Nordic company law: main
focus in company law efficient?
Change of focus in company law reforms:
Creditor protection shareholder protection
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Example: Finland
1978 Companies Act: State-oriented model
State-controlled firms
Licencing systems
Restrictions to foreign ownership
Employee representation: labour law
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Example: Finland
2006 Companies Act: Shareholder primacy
Investor protection
Freedom of contract
Creditor protection
Ex post protection of shareholders
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Director primacy
The company is a a nexus of firm-specific investments
complex productive activity involving many parties
where the resulting output is generally neither separable
nor individually attributable to original contributors =
team production
Purpose of the company
maximize total corporate returns
satisfy group-specific stakeholder returns so that
commitment to team production is sustained
75
Director primacy
The board mediates the competing interests of different
team members
The company itself the principal
Duty of the board to maximize the sum of all riskadjusted returns enjoyed by the team members
Directors fiduciary duties towards all risk-bearing
stakeholders: business judgment rule
Problems?
76
Stakeholder primacy
The board and the management balance the
needs of all corporate constituents =
stakeholder community
Communitarianism
Stakeholders representation rights
Problems?
77
Sustainable development
Economic responsibilities
Environmental responsibilities
Social responsibilities
Test of theories
Shareholder primacy
Director primacy
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Partnership
Limited partnership
Co-operative society
Private company
Public company
81
Background
General aspects
No limited liability parnership
(Kommanditaktiengesellschaft) problem for private
equity/venture capital
Basically same rules for both private and public companies
No GmbH/SARL/SAS corporation forms
All companies governed by the Finnish Companies Act of
2006 (FCA)
82
Background
History of Finnish corporate law
Partnerships and limited partnerships based on medieval
Continental practices
Partnership law codified in the Commercial Code of 1734
Limited partnership law codified in the Limited Partnerships
Decree of 1864
Now both codified in the Partnerships Act of 1988 (FPA)
83
Background
History
First Companies Decree of 1864 based on French Code de
commerce of 1807
Concession principle
Why?
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Changes in practice
However, not a revolution but more fine-tuning
Revising bad written law
Division rules
Codifying best practices
Fast and easy incorporation
New possibilities, e.g., for M&As
Triangular mergers
Change of corporate form
Company partnership
Company limited partnership
Company co-operative
92
Principle-based approach
Difficult principal agency problems solved used by
principles
Discretion of shareholders (FCA 1:9): freedom of
contract
Purpose of the company (FCA 1:5): shareholder
value
Equal treatment of shareholders (FCA 1:7)
Fiduciary duties (FCA 1:5)
Interpretation: Towards U.S. law
93
Discretion of shareholders
Right to deviate the default rules by using
articles of association
Not the mandatory creditor protection rules
Unanimous shareholders can
deviate non-mandatory law and articles of
association
act in writing instead of holding general
meetings
94
Shareholder value
Idea of enlightened shareholder value
maximization
Michael Jensen
Cf. The UK Companies Act of 2006
Exception when the company is on sale: Revlon
duties
Problem: How to implement corporate social
responsibility?
95
Fiduciary duties
Duty of care
Duty of loyalty
Business judgment rule
Clearest sign of direct U.S. influence in the FCA
96
Minority protection
Equal treatment of all shareholders
Right for derivative suit for all shareholder when
the principle is grossly violated
In other cases: 10 % minority
No right for indirect loss (no incentive for
opportunism)
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Minority protection
On the other hand: possibility to restrict the right of the
company to damages from directors, the CEO,
shareholders and auditors by a provision in the articles
of association (FCA 22:9)
Strict limitations for the provision
Adaptation of the provision requires shareholders
unanimity
Does not cover violations of mandatory rules of the FCA
(creditor protection rules)
Does not cover losses caused deliberately or through
gross negligence
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Corporate governance
One tier system as a general rule
Negative attitudes towards supervisory boards
Too negative? Alternative for board committees
American way in nominating board member candidates
for the general meeting
Nomination committee of the board
However, important exceptions use the Swedish model
Nominated by the controlling shareholders
E.g., the State-controlled listed companies
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Challenges
Still need for more flexibility for SMES
Problems from one law fits for all ideology still exists
How to interpret
the duty of loyalty?
the business judgment rule?
the solvency test?
Special problems in takeovers
What kinds of poison pills are applicable?
Interpretation of fiduciary duties of the directors of the
target company
Helsinki Takeover Code
102
Challenges
No clear doctrine on
piercing the corporate veil
fiduciary duties of the controlling shareholders
No case law yet
103
Challenges
But the most important one
No clear picture of the future of EU company law
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Managing director
Two- or three-tier management affects the
division of powers between the organs
responsible for the management
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Cooperatives
Approximately similar to a company
Meeting of the Members
The by-laws may transfer the powers to a body
called the Representatives
Default rule: one member-one vote
Board of directors
Managing director (optional)
Supervisory board (optional)