Understanding Corporations: Characteristics, Shareholder Rights, and Share Transferability, Dispense di Diritto Commerciale

Scarica Understanding Corporations: Characteristics, Shareholder Rights, and Share Transferability e più Dispense in PDF di Diritto Commerciale solo su Docsity! What does corporation mean? Corporations are vehicles through which economy produces most good or services. The Italian civil code does not explicitly express the meaning of corporation, but it is possible to extrapolate it through several articles. One of them is art. 2247 Italian Civil Code in which there is a clear definition of the company agreement which must follow some principles: contributions, economic activity and profit orientation. A company could be public or private – also known as closed. A public corporation has many shareholders because shares are publicly traded, this means that the investment is liquid and there are several investors interested in it. A closed corporation, by contrary, has few shareholders – generally not more than five – because the investment is illiquid, trades are not publicly traded and for this reason there is no market for shares. A closed corporation can be a Limited Liability Company and Joint Stock Corporation. The former means that the owners have a quota inside the company, proportionally to their contribution, the latter means that the company issues shares in order to increase its share capital. A public company must assume the Joint Stock form, because it is a listed company. Closed corporation represent the majority into the European market and they play an important role because they improve SME’s – small and medium enterprises – conditions. The general principle of “freedom of contract” stands for the possibility to start a business at any time, and “freedom of establishment”, provided by the art. 49 TFEU, which stands for the possibility to establish into any member state of the European Union which can be extended to legal entities – companies – thanks to the art. 54 TFEU. What is the difference between SME, Startups and Closed Corporations? Starting from the meaning of small and medium enterprises, this term is related to the company’s size, which means: number of employees, total assets and total revenues. For this reason, the term SME is just related to the size of a company, it is not a type of corporation and for this reason, when a company is incorporated, it cannot choose to be a small or medium company. Being a SME is a consequence of what I have said above. By contrary, Start-ups and closed corporations are forms that a company can assume. A Start-up is a company with an innovative purpose and at the beginning of its life, a closed corporation is a company which is not listed - no market for shares - and few shareholders. Closed corporations could be startups and startups are, most of the time, closed corporations. What are the basic characteristics of a closed corporation? Despite differences in all national legislations, all jurisdictions have developed a similar corporate business model. The basic characteristics of a closed corporation are: legal entity, limited liability, transferability of shares, management board, profit orientation and equity ownership. Legal entity means that the corporation is “someone” that differs from the persons who formed it. This comports the creation of the entity shielding which protects the assets of a company from the shareholders’ personal creditors. The so-called entity shielding is based on two basic rules: priority rule and protection from liquidation. The former means that the company’s creditors are over the shareholders’ personal creditors. The latter means that individual participants cannot force the dissolution of the company or its liquidation to pay their personal debts. To conclude, a company to be effective as a contracting party needs to be represented by its directors who act in the name of it. This rule is called “authority”, the authority to buy and sell in the name of the firm and enter contracts. Limited liability means that company’s creditors cannot attach shareholders’ patrimony. This form of protection is called owner shielding which means that the firm’s creditors have no claim against the shareholders and their personal assets. Limited liability is a strong form of owner shielding, the other side of entity shielding, as a component of legal personality. These rules create a regime of “asset partitioning” where business’ assets are a pledge as a security to the corporation’s creditors. Conversely, shareholders’ personal assets are a guarantee for their personal creditors. Transferability of shares stands for the shareholders’ right to transfer their shares. The general principle is the fully transferability of shares, but most of the time companies set some clauses on the transferability, such as the consent clause, which means that shares can be traded under specific conditions. Centralized management under a board structure means that companies take decisions under a board structure which could be formed by internal shareholders or external persons. This system of rules is called corporate governance and it is a really complex field, focused on management board and its relationships with owners and employees. Profit orientation means that companies and partnerships share a common profit-making purpose: they perform an economic activity to earn profits and to distribute such profits to the members. This aim is different from other types of activity, like non-profit companies or cooperative companies which follow the mutual benefit purpose. Equity ownership means the owner has the right to control the company and the right to receive the firm’s net earnings. Generally, the right to participate, receive earnings and control are proportionally to their contributions. What are the sources of commercial law? The sources of commercial law can be contractual, noncontractual and not contained in the articles of association. The relationships among the participants in a corporation are contractual with the corporation’s charter – the basic terms of the relationship among the firm’s shareholders and between the shareholders and other managers, and the articles of association which create a set of rules that represent the first source of corporate law. Sometimes, it is possible to register a contractual incompleteness when parties may not be able to provide rules for all future scenarios during the life of the company and charters may become obsolete and they are often hard to emend. Default rules could be opt-in and opt-out provisions, the former become a part of the company’s charter if the shareholders opt to include them, the latter become automatically part of the company’s charter without a discussion. An example of opt-in provision could be the art. 2342 Italian Civil Code which is related to the contributions, unless otherwise in the articles of association, contributions shall be made in cash. Mandatory rules may not be opted out of, or contracted by agreements. It is compulsory to follow some rules, like provided by the art. 2368 Italian Civil Code about the general meetings, saying that the meeting adopts resolutions by an absolute majority, unless a higher majority is needed. What are the shareholders’ powers, rights and duties? Powers: The most important shareholders’ power is related to taking decisions. Even if a company has a management board, it is important to note that the last decision is always taken by the company’s owners, especially when the decision has important consequences into the company. While directors are responsible for day-by-day decisions, shareholders have the ultimate control over the company. It is also possible to have two different types of control, the direct and indirect one. The former means that shareholders design about the operations directly, the latter means that shareholders decide to dismiss the board if they do not agree on managers’ decisions and to remove them. Rights: the most important right is to receive information. Owners have an active role into the company, a discussed issue is if owners have the right to receive information if they play an active role into their company. In Germany, for example, there is the right to receive information: managers have the duty to provide shareholders with all the info about the company’s affair. In Italy – art. 2476 Italian Civil Code – only shareholders who do not have an active role in their company, and who do not sit into the board, have the right to receive information. Duties: the most important duty is that of loyalty, meaning that a shareholders must be loyal with the company and other shareholders. In Germany, for example, shareholders have a duty of loyalty towards the company and other shareholders – Treupflicht. There can be other two duties, duty of confidentiality and duty to inform other shareholders about certain circumstances. Possible oppressions between shareholders? Oppression by the majority: Majority shareholders are the supreme decision makers and thanks to this, they can limit the transferability of shares through many “instruments”, such as consent clauses. Other ways to oppress minority are appropriation of opportunities, termination of minority employment excessive remuneration of shareholders, dilution of equity because of new issue of shares. Oppression by minority : minority shareholders may be able to block unnecessary disadvantages caused by the majority, through different ways such as veto right, block of dividend or super majority or unanimity. 50:50 oppression: conflicts in equally participated closed corporation face a different problem, the so-called decisional deadlock. The consequences of this problem can be the dissolution of the company, in the extreme case, or trying to find a new agreement. There are two types of approaches to face this issue: the paternalistic approach by the policy maker and the bargaining principles. The former needs the legislator intervention, while the latter is about some procedures, like shoot-out. In continental legislation, EU member states, except UK, there are specific rules about conflicts. In case of abuse of voting right by the majority shareholders, the oppressed part has the right to challenge shareholders’ resolution and the sue for damages. This procedure is called unfair prejudice remedy. Unfair prejudice claims typically arise when majority shareholders, who in many cases are also directors, use or abuse their power to promote their own interest to the detriment of the company.