Class
Introduction to Law
What is law?
- Law in the Objective sense
- system of rules regulating human co-existence enforced by public authorities
- cf. customs, ethics
- enforced by administrative or judicial authorities
- Codified politicsw
- at least to some extent… (general legal principle)
- system of rules regulating human co-existence enforced by public authorities
- Law in the subjective sense
- Law in the objective sense grants enforceable subjective rights (=law in the subjective sense)
- e.g. human rights, damage refund
- Not every law grants enforceable subjective rights
- e.g. Road Traffic Act (StVO)
- Law in the objective sense grants enforceable subjective rights (=law in the subjective sense)
→ Law in the objective sense is codified politics → Law in the subjective sense
Types of law
- public law (including penal law) - private law
- e.g. tax law vs. contract law
- substantive law - procedural law
- e.g. contract law vs. civil procedure
- mandatory rules - default rules
- e.g. usury vs. law on warranties
- mandatory rule has to be followed. Obliged to follow. Mandatory contract law, for example, says you have to follow the law and can’t change it in contracts
- with default rules, the company an change the contract for customers
- common law - civil law
- e.g. (predominance of) judge-made law vs. statutory law
- common law
- Anglo-Saxon countries like UK/USA/Canada/Australia follow common law.
- Rule made on president/by Judge-made. The binding of this law applies to further laws/similar cases. It’s called prejudice
- civil law
- is primarily found in continental Europe like DE/AT. Rule made on civil letter.
- “Statutory law. Law in the books”
- is written down in the books
wontfix get notes for the rest of differentiations
Law and business
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law as a barrier or impediment to private enterprise… pursuing other aims
- law regulating behavior (e.g. environmental law, supervisory law)
- requirement of business license (commercial law)
- → protect Stakeholders and environment
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law as enabling factor for business activity
- reduction of transaction cost via contract law
- intellectual property rights
- company law
- → helps businesses
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functioning legal system as a motor for economic development
- creation and protection of property rights
- Mortgages as basis for loan agreements (e.g. when buying a house, the house is used as collateral)
- all persons are accountable to the same laws → “rule of law”
- “law in the books” and “law in action”: enforcement
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balance between different interests
- private and public interest
- e.g. freedom of conducting business ↔ consumer/creditor/ stakeholder protection
- private and public interest
Case Studies
Case Study 1 - Company Law
Goal
understanding and answering legal questions for the intermediate exam
Case Study
wontfix add pic from slides → Sub stands for subsidiary → Sub B - 25% are Free floating/on the stock market. Mostly anonymous and we don’t know who owns them - 75% are Owned by Subsidiary A → Sub A - 100% owned by Holding
When a customer has a contract, its better to have it with Sub B, so they can seize the assets. When doing business with holding, it is more difficult.
When Yellow gets bought by blue:
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Buys Holding: buying keys to garage and therefore getting contents of it
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Buys Sub B: buying contents of garage
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Price should be the same
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Before buyer owns 100% of target company
Buying the Business
new company gets created: SPV (special purpose Vehicle). The subsidiary is right underneath holding. its only purpose is to buy the target company
Where does the money come from?
- Bank provides 500m EUR to buy Sub B. Bank will not agree to lend money to SPV because its an empty shell. Doesn’t have any assets. Bank will only be willing to lend money to Sub B because it has assets
- Money gets transmitted to SPV
Purchase
- target company moves ownership from seller to SPV
- Seller gets 500m EUR
- target company is now part of holding
- SPV owes Sub B 500m EUR → debtors
- Sub B owes Bank 500 m EUR → debtors
→ not unusual to finance a big deal with a bank loan because of financial effects: because if the company had to get the money, they would have to pay taxes (KeSt). When they have to pay back the loan, it isn’t “taking money out of the business” so, there are no Taxes. Another benefit is that they don’t have to take as much risk. Bank has all the risk
→ Usually bank loan is worth about 80%. This is called a leveraged buyout
→ Free floating shareholders are getting “scammed” since they now are a debtor without any decision
After purchase
- down-stream merger. SPV and Target Company merge so one disappears
- now target company owes debt to Sub B
→ this is also called a debt push down
Analysis
of (legal) position of parties
- holding company and its shareholders
- are happy
- bought company successfully and grew empire/shareholders have more companies and diversified
- bank
- they’re fine
- they just want their money back
- huge loan so they bear a lot of risk. We can assume that the bank made its research and risk management accordingly
- the bank has no claim against other companies in the structure
- target and its creditors’
- shareholders have limited liability, so it doesn’t affect them as much.
- The situation has worsened.
- Creditors have to face the fact, that debt load of target company has increased
- (minority) shareholders of Sub B
- unhappy
- creditors of Sub B
- not every creditor is as sophisticated as a bank. Like trade creditors or employees. These creditors are in the spotlight and suffer from this. They’re in the spotlight from a legal and government perspective
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mandatory bid when buying more than 30% of a company. Shareholders have to have the option to sell shares. Here, shareholders of target company
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Minority shareholders and creditor protection is very important!
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STUDY FOUND that countries with high creditor protection have higher capital markets
- in the EU: Sweden has the biggest Capital market. They have a lot of listed companies (>1000). Austria has in comparison 60-70. In Austria, a lot of funding is provided by bank loans. They don’t need equity financing because they have the Hausbank system. The Austrian economy also mostly consists of SME’s. Because of bank loans they arent listed on capital markets