Introduction: Why Transystemic Business Associations Law

Business Associations Readings

Prof Janda, Winter 2005

INTRODUCTION: WHY TRANSYSTEMIC BUSINESS ASSOCIATIONS LAW?

January 6, Class 1: Introduction and Review of Teaching Methodology

Sainte Fare Garnot, Rémy

PART 1: THE FORM AND FUNCTION OF CORPORATE LAW: CORPORATE LAW AS THE CONSTITUTIONAL LAW OF MARKET ACTORS

Parallel VanDuzer Readings: Chapter 3, Parts C-F & Chapter 4 Part C

January 11, Class 2: What is the role and function of corporate law?

Eisenberg, Melvin A.

Eells, Richard

January 13, Class 3: What is the relationship between state law and the corporation’s internal rules?

Millstein, Ira M.. and Katsh, Salem M.

Romano, Roberta

PART 2: THE THEORY OF THE FIRM: WHY FIRMS, WHY CORPORATIONS AND WHY SEPARATION OF OWNERSHIP AND CONTROL?

Parallel VanDuzer Readings: Chapter 3 Part G, Chapters 1 & 2.

January 18, Class 4: Why are there firms rather than a web of individual contracts?

Coase, R.H.

January 20, Class 5: What are the different legal forms of business association?

INTRODUCTION: WHY TRANSYSTEMIC BUSINESS ASSOCIATIONS LAW?

January 6, Class 1: Introduction and Review of Teaching Methodology

This text illustrates one way in which comparative law enters into the practice of a transnational business enterprise. Read it with a view to thinking about how a transystemic approach to business associations could improve the conceptual apparatus of the jurist and practitioner.

Sainte Fare Garnot, Rémy

« Des juristes au service d’une entreprise industrielle opérant au plan international », L’Entreprise et le droit comparé, (1994) Société de législation comparée, France, 51

Three problems in integrating legal dimension in the practices of business associations:

Informing the people concerned;
persuading them:
Translating the rules into operational terms

 practical approach to law of business associations

Lawyers, specialists in the law of one country (one in which envisaged investment will take place) can provide an initial “panorama” of the principal difficulties and opportunities presented by the situation. Lawyers get the technical information they need to do their job from the engineers, business managers etc.

What about an international business?

Corporate lawyer often faces methods/ concepts from foreign law systems. To accomplish his/her goals, they will often have to use “other” law.

Utility of comparative methods: source and catalyst

To be efficient/effective, one cannot get blocked in one’s own universe. Lawyer who can use only one law system will be handicapped in context of international business. A well-practiced and effective technique in one system which has become a reflex won’t necessarily work in another. There’s a real need for pure creativity. One must take advantage of the freedom being able to draw from different legal systems allows for.

Indispensable complement: the organizational method

For a project to be successful, always have to begin by clearly defining objectives. This is necessary to figure out what actions to take; make legal choices (because there’s always more than one option). All individuals involved must discuss the objectives so nothing’s implicit/unclear, allowing risk to be calculatable. This allows the transposition of actions to the legal domain.

Defining objectives is also an effective technique which allows for the verification of the coherence of the proposed solutions.

Conclusion

The business association is aware of the risk it undertakes by existing; it looks to law for security. Business lawyers must explore, discover, and evaluate, but they can’t limit themselves to researching legal systems. They must adapt to the business world and in this task, the comparatist will distinguish himself.

PART 1: THE FORM AND FUNCTION OF CORPORATE LAW: CORPORATE LAW AS THE CONSTITUTIONAL LAW OF MARKET ACTORS

Parallel VanDuzer Readings: Chapter 3, Parts C-F & Chapter 4 Part C

January 11, Class 2: What is the role and function of corporate law?

The first two readings explore corporate law as the constitutional law of market actors. This analogy gives shape to the course, which will consider the corporation as a locus of governance and authority.

Eisenberg, Melvin A.

The Structure of the Corporation – A Legal Analysis, Introduction (1976) Little, Brown and Company, BostonToronto, 1

“Corporate law is constitutional law; that is, its dominant function is to regulate the manner in which the corporate institution is constituted, to define the relative rights and duties of those participating in the institution, and to delimit the powers of the institution vis-à-vis the external world.”
general principles governing legal structures of corporations not well articulated; however, there is a more/less standard “pyramidal” image (a.k.a. received legal model) (bottom: shareholders, who choose middle: BoD, which selects top: officers). According to this model BoD manages corp’s business and makes policy, which is carried out by officers acting as agents. Shareholders thought to decide on major corporate actions including fundamental changes.
BUT this doesn’t fit the normal agent-principal relationship: “Under the received legal model of the corporation, however, the officers are agents not of the shareholders but of the board, while the board itself is conceived of not as an agent of the shareholders but as an independent institution. For example, while the authority of an agent can normally be terminated by his principal at any time, directors are normally removable by shareholders only for good cause shown. Similarly, while an agent must normally follow his principal’s instructions shareholders have no legal power to give binding instructions to the board on matters within their powers.”
The received legal model does not work in either a normative or descriptive way.
descriptively, it is insufficient because it doesn’t accurately describe what any of the parties do – eg the Board does not typically manage corporate business or set policy; similarly there are modern “fundamental changes” (business combinations other than mergers, corporate divisions) which do not require shareholder approval.
normatively it is insufficient, as it fails to recognize the fundamental differences between closely- and widely-held corporations. Also, the model is insufficiently articulated to provide useful guidance on how to understand the actual allocation of power between shareholders and management.

Eells, Richard

The Government of Corporations, 15 (1962) The Free Press of Glencoe, New York, 252

Corporate Governance as Compromise

Dynamics of corporate governance: constant process of resolving the competing claims of the various contributors to the enterprise, internal (all levels of employees and directors) and external (stockholders, creditors, customers, suppliers, competitors, general public).
Directors and managers must weigh contributor-claimant interests – bargained compromises
Ideally: general interest for the corporate community (analogous to “public interest”) that is not identical with the bargains struck at the level of top corporate command

The Public Interest and Corporate Community Interest

Important sources for the norms of equity and fair dealing beyond the limited arena of interest conflict and bargaining, within the corporate community itself (incl shareholders)
Consider two relationships:
Between stockholders and the corporate governing group (we focused on in class)
Between employees and the managerial elite

Decision making as institution building; want social institutions that serve human values fundamental to a free society and do (or undermine) this through corporate policy

Stockholding and the Institution of Private Property

Two (extreme) positions: shareholders are too well treated, as they do nothing and make money, and; management’s responsibility is precisely maximizing share value.
Underlying question: what kind of property rights in shares are there?
Private collectivism: wide dispersion of ownership, and rights of owners attenuated because of collective control at a managerial centre
Separation of ownership and control: necessary for the emergence of corporate enterprise
Merging of private capital into the great private collectivities, the corporation
Most shareholders care about the value of their shares, and not about corporate governanc
A shareholder’s confidence that his place within the system is secure can be restored only be appropriate action in the private governments of these enterprises
Common ownership and management of capital aggregations in the corporation, because of the governmental structure of corporate enterprise, led to wider separation of ownership and control than in other forms of pooling such as partnerships and limited partnerships. The important traditional rights of a property-owner to manage and control his private property was thus lost
The share certificate is not even a claim against an aggregate of capital in a specific corporate enterprise, but merely a claim against a financial institution which has a claim against someone who has a claim against someone (pension fund, profit-sharing trust, investment company, mutual fund)… eventually who has a claim against the corporation.
“passive recipient” shareholders: they’ve lost the traditional sense of responsibility over the use of their property; “true capitalists,” people who invest their own money in their own enterprise, are a thing of the past.
Movement to society in which power, and not ownership is the organizing principle
Another issue: shareholders are often not individuals, but aggregate holding

Employee Freedoms

freedom of inquiry, of utterance, of association (think collective bargaining), religion
constitutionalism is moribund when practical safeguards are neglected. Need safeguards in the private sector too (not just freedom from encroachment by government)
Also need to conceptualize freedoms as the development of personal attributes
Eels advocates having company policy to this effect, i.e. framing employee freedoms in a positive sense
Potential problems: legal bars (corporation does not want to be sued in libel because of something an employee said); economic rewards (intellectual property); political activity
The corporation is a new kind of community within the greater community

Conclusion

Corporate governance in its dynamic aspects and with respect to the internal affairs of a company involves the formulation of policies whose norms are only partly drawn from compromise
Other formative influences: external influences that condition “deals” – institutional demands of a free society operate on corporate policy-makers who take the long view
Private property as a social institution

January 13, Class 3: What is the relationship between state law and the corporation’s internal rules?

The corporation is both given its constitution and gives itself its constitution. These readings explore the relationship between state law and the corporation’s internal law. Roberta Romano, in particular, canvasses the "market" among jurisdictions for the chartering of corporations and thus how state law can be seen as a product catering to corporate preferences.

Millstein, Ira M.. and Katsh, Salem M.

The Limits of Corporate Power – Existing Constraints on the Exercise of Corporate Discretion, 1 MacMillan Publishing Co., Inc., New York, 1 (1981)

the business corporation is a legal creature which evolved to enable investors to share the large-scale risks related to large business ventures like RR; had further advantage of limited liability for corporation’s debts and obligations. Initially business charters granted only by act of state legislature; general incorporation statutes were passed in late 19th C. State corporation laws set forth procedures and formalities for corporate action – describe duties and liabilities of BoD, shareholders, etc. Federal standards are overlaid on state corporation law and influence the processes of corporate management and decision-making: e.g. federal securities law.
STATE LAW -- General Corporation Law of the State of Delaware – most popular among large corporations; has had large effect on enactment, implementation and revision of corporate laws in other states. Historically had minimal restrictions on corporate management but recently case law has restricted. NY is second most popular state for incorporation despite “restrictive” statute – management discretion is limited in favour of shareholder and creditor interests. The Model Business Corporation Act (MBCA) has been adopted in substance in 35 states and is major point of reference – is liberal towards management discretion but is more responsive to shareholder interests.
“All state corporation statutes follow similar lines insofar as they establish that corporations are chartered by the state and are free to act only in accordance with their organic charter and the state’s statutory requirements.” (p 14)
Corporate Formalities – “State corporation laws are almost exclusively concerned with the creation and internal governance of the corporation; in particular, with the relationship of shareholders to management.” Certain actions (intended to limit management’s ability to unilaterally alter corporation’s basic structure and scheme of governance) have always been exclusive to shareholders:

oelection of directors – generally have to be elected by shareholders at annual meetings.

oadoption of bylaws – historically job of shareholders, now commonly adopted by directors.

omerger, consolidation, or other “Organic” changes – in all states, shareholder approval is required to merge/consolidate with another corporation; to sell all/most of the corporation’s assets; to dissolve the corporation; to reduce its capital; or to amend its certificate of incorporation. Most states provide opportunity for shareholders that dissent to importance changes that would affect their rights and preferences to obtain the appraised value of their shares in cash.

onondelegable board responsibilities – the BoD cannot delegate to a committee matters including initiating amendments to the certificate of incorporation or adopting an agreement of merger or consolidation; transactions “outside the normal course of business” are also non-delegable.

odisclosure requirements – constrain management of corporations in significant ways: contracts between a corporation and one/more of its directors may be void/voidable unless proper advance disclosure is made to the corporation. The scope of areas in which disclosure is required has been expanding. Currently includes notice of all meetings of shareholders (if special meeting must include purpose); annual franchise tax reports, etc. “These requirements, along with the other filing and notice obligations… are intended to insure that the shareholders, and in certain instances the state of incorporation, are aware of actions taken or proposed to be taken by the corporation.”