Chapter 1
Describe some reasons for incorporating an enterprise
- limited liability
- shares
- separated management
- taxes, no income tax, only taxation on profits
Explain the differences between and the respective functions of default and mandatory rules
- default rules can be overruled, just standards for different fields, can be overwritten when needed
- mandatory rules are definite rules and cannot be overwritten by each company but are easier to circumvent
Is the company run for the benefits of its shareholders only?
- depends on the view. if shareholder view yes.
What are the functions of a business register?
- open-sourcing important information about a business
- freely accessible to anyone.
- address
- people in charge
- current directors
Explain some core differences between partnerships and companies
- companies: limited liability, partnership: unlimited liability
- partnership: easier to form, no initial investment
- taxes: partnership taxed solely on individual incomes
- company taxed on company level plus individual income
What is a silent partnership? What is a partnership under civil law?
- silent partners are not in business register
- only participation is money
- partnership under civil law: people that do something together
Explain the core characteristics of a company
- delegated management
- legal personality
- limited liability
- transferability of membership
- investor ownership
Why do we have different company forms in Austria and Germany?
- to support different kinds and sizes of business ventures and risks
What is a group of companies?
- multiple companies belonging to the same holding
What are hybrid company forms?
- not allowed to invent new company forms
- GmbH & Co KG
Explain the role of the EU’s freedom of establishment in company law
- founding company operating solely in austria in e.g. Lituania
Do we have a ‘European company law’? If yes, to what extent?
- there are directvices and guidelines on how different forms should be in each country
- details are to be defined in each country separately
Explain the concept of principle–agent conflict
- agent acts on principals behalf, agent has more knowledge and might profit off of principles lack of knowledge. principal might be damaged
Are there principal-agent conflicts between shareholders and management?
- yes
Is there a principal-agent conflict between majority and minority shareholders? Why?
- parent company forcing guidelines on subsidiary
- parent company forcing subsidiary to buy from parent at increased prices
Chapter 2
Why does a company pose dangers to the creditors? Are there advantages as well?
- insolvency
- creditors cannot access assets outside of company
- parent companies / private funds of people
- assessment is easier
- no competition with private creditors
- shareholder power comes from single entities
Explain the function(s) of accounting
- keeps track of monkey
- taxation based on accounting results
- comparability between companies
- protecting creditors
What does creditor self-help mean? Can all creditors help themselves?
- professional creditors more than private creditors
- self-help in from of extra contractual clauses
- e.g. all future payments are due instantly when leadership changes
What does ‘piercing the corporate veil’ mean?
- wife of owner coincidently uses a porsche which is owned by company
- using company assets for private matters
Does (minimum) legal capital help creditors?
- yes, liquidity. larger buffer from insolvency
Why are contributions in kind dangerous for creditors? What countermeasures has the legislator taken?
- value of contribution in kind can be lower than what is stated
- can also be due to missing knowledge of contributer, still, the damage is done
What does the concept of capital maintenance mean?
- only profits distributed to shareholders
- dividends only payed when profits have occured
- reserved capital (different for each business line) needs to be secured
- initial investment are not to be distributed to shareholders
Do you see a problem if a parent company sells goods to its subsidiary above the market price? What are the consequences?
- siphoning off of assets
- illegal due to endangering creditors and shareholders
Who brings a claim for the repayment of hidden distributions in practice?
- individuals or during insolvency process
What does it mean if a company is insolvent?
- either the due liabilities cannot be paid (second test)
- or the equity in accounting is negative (first test)
- except if the company can still operate normally, then the company is not insolvent
What are the aims of insolvency proceedings?
- first way is to reach a settlement with the creditors to keep the business running and pay back at least some of the debt
- if no settlement is formed the company is liquidated and the rest of the funds is distributed to creditors
How does an insolvency proceeding function?
- if settlement can be formed (at least 20% over 2 years) with > 50% creditors and > 50% creditor capital then the company will be restructured and will try to be profitable again
- managers loose power over company and capable people take over the company (insolvency administrator)
- if above 30% over 2 years managers can stay in power
Will shareholders and/or directors be liable for the company’s debts in insolvency?
- normally not, because Limited Liability
- except if grossly negligent decisions were formed
- directors will then be sued privately, not part of main insolvency case (tort law)
Chapter 3
Recap central issues of the principal agent conflict between managers and shareholders
- see unit 1
What are the differences between the one tier and the two tier board structure? Are there similarities?
- both have a board of directors
- one-tier: monitoring is done by employees
- two-tier: monitoring is done by supervisory board
What is the purpose of board level employee representation? How does it work?
- individual employees part of supervisory board
- they cannot be fired for their representing roles
- offering protection for employees that fear layoffs based on feedback
Are independent directors a good idea? What does independence mean?
- independance … not financially or familiary dependant on other directors
- true independence is not measurable, it is an internal state of mind
- is a good idea because less biased
- bad idea because typically have less domain knowledge about core business
-
- less interest in companies success
-
What does it mean that directors ‘represent’ the company? How does representation work?
- forming contracts
- buying/selling assets
- hiring / laying off staff
- acting on behalf of company
Who appoints and removes members of the board of supervisors?
- shareholders or employees or both
Explain the rules for appointing directors in an AG or a GmbH What about their removal?
- AG → appointed by supervisory board if exists, otherwise Shareholders
- GmbH → Shareholders
- removal = appointing
Can minority members of a GmbH ensure that they can appoint (some) directors? Is this possible for shareholders in an AG?
- they cannot → GmbH can only do so with a supervisory board
- shareholders in an AG can do so in a tier-one structure
- suing is also a possibility to defend against injustice
Explain the effects of removal of a director on the director’s employment or service contract
- director can’t just be terminated. director and board of supervision negotiate a termination package
How are managers remunerated?
- either by executive compensation → even if no profits
- or by performance compensation (dividends, bonus) → only if profits
Can shareholders of an AG or directors of a GmbH give directions to managers?
- no, but managers have incentive to listen to shareholders as their job may be endangered otherwise by shareholders
What is the role of the board of supervisors in an AG? Can it give instructions to managers?
- board of supervisors can veto decisions from board of directors and need to be consulted for large decisions liker mergers
- instructions only if board of directors “asks” for it in form of a committee
Should directors’ liability be strict or lenient? Analyse the effects of liability rules.
- should only be liable for negligent action (or inaction)
- lack of success is not fault of manager and risk-taking should be encouraged to explore different business ventures, securing long-term success of company
What is the business judgment rule?
- judges cannot accurately judge core business decisions for a lack of knowledge
- mostly managers are given free reign over their judgement in core business decisions as long as they have informed themselves sufficiently
Who gets compensation for damage under which circumstances: the company or the share- holders directly?
- if there is damage to a company, the shareholders or the company can be compensated
Chapter 4
Explain the differences between rules and standards
- rule: exact wording needs to be met
- standard: spirit needs to be met
What is the duty of loyalty?
- “do not cause me harm by more competition”
- standard
How does one determine the profits of a company? Who is responsible in an AG and in a GmbH?
- Accounting, profit and loss statement to be exact
What is a pre-emptive right in company law?
- existing shareholder can buy new shares if new shares are issed, mostly with a discount. Shareholders keep same relative percentage
What is the principle of ‘one share – one vote’? Can you deviate from it?
- one share = one vote
- double shares, double voting rights
- deviations:
- one member, one vote
- no voting rights → preferential shares
- voting rights caps → 40% shares, but capped at 10% voting rights
How can a shareholder attend an AG’s general meeting? Does he/she have to appear in person?
- only in person, no digital meetings
- 28 days before
Why is shareholder presence at general meetings low? How does the law try to increase this presence?
- cumbersome process, Rational Apathy of minority shareholders, Pension Funds after Wall Street Rule
- digital meetings and other forms of non-present vote casting
- proxies → give away decision to someone else
- proxy advisors → get a recommendation what to vote
- pressure → not voting is illegal
How can members in a GmbH take resolutions?
- written resolutions outside of general meeting or during general meeting
- meeting can also be digital
Can shareholders or members challenge resolutions? Can they do so because the resolution is ‘unfair’ in substance?
- yes they can
- during general meeting and afterwards in court
What is a special investigation in company law?
- when feeling that something is off shareholders (with at least 10% combined) can order special investigation to uncover violations
What is a related party transaction?
- Tunneling or hidden distributions
- e.g. higher salary to director shareholder
Explain the different types of shares in an AG and the way to transfer these shares
-
shares → with 1:1 voting rights
-
preferential shares → no voting rights
-
capped shares → capped voting rights
-
member-voting shares → no additional voting rights with additional shares Types of Shares
-
traded on capital market
How do you transfer membership in a GmbH?
- shares → entry in Business Register after selling parts of company
- notary action required
Are shareholders anonymous? What about members in a GmbH?
- minority shareholders in a AG, yes
- shareholders no, members in a GmbH → Business Register
Describe different methods for restricting the transfer of shares/a membership
- not publicly listed, contract to not sell shares for time period
What is a squeeze-out?
Squeeze-Out
when majority shareholder controls more than 90% of shares, can therefore control the company on it’s own without ever listening to the minority shareholders
minority shareholders can be kicked out of the company but need to be adequately compensated for the shares they own (current share price)
Link to original
Chapter 5
Explain some reasons for M&A
- reduction in costs
- e.g. just one marketing and HR department
- unification of business interests
- restructuring within group
- retirement
What is an asset deal?
- transferring some the assets → Asset Deal
How does a share deal work?
- all (or at least majority of) shares are sold to acquirer
- throw enough money at it and it’s mine
- hostile takeover possible here
- funds are given to previous shareholder e.g. a holding company
- control is now within another entity’s hands
How do you transfer property in the assets in an asset deal? Is the passing of property an issue in a share deal?
Do contracts pass automatically to the acquirer in an asset deal? Do you have to worry about the company’s contracts in a share deal?
- Asset Deal → no, consent of all 3 parties needed
- Share Deal → all of contracts are still upright, except for Personal Legal Relationship
Explain the concept of ‘successor liability’
- the acquirer is liable for at least 5 years of predecessors liabilities (default rule)
- no magical “reset” of all liabilities just because of Merger Deal deal
Compare the liability situation of the acquirer in an asset deal and in a share deal
What is takeover law?
Please explain the concept of a merger
What are the core issues of creditor protection in a merger?
What are the core issues of shareholder protection in a merger?
Can you merge a company across the border?
- yes although more complicated
- national company laws of both countries need to be matched and agreements need to be made to satisfy both jurisdictions
- easier within EU for mostly similar national company laws
What are the core issues in a division?
- all liabilities are transferred but none of the assets may be transferred
- creditors have no right to veto
- all other companies in conglomerate are liable for new companies liabilities limited by assets transferred
- contract with creditors to circumvent
- court can issue safeguards
- all other companies in conglomerate are liable for new companies liabilities limited by assets transferred
- shareholders need supermajority of 75% (proportional) or 90% (disproportional)
Describe different pricing mechanisms in an M&A-deal
- locked-box agreement
- prices fixed at closing of deal
- completion account mechanism
- prices is fixed, but price can still be changed (up or down) while deal is happening
- earn-out-clause
- fixed price of acquisition is lower and payed immediately
- later on, if company is successful, another payment will be made
- good for acquirer: only has to pay if profitable
- risk for previous owner: might not be profitable under new management
What is a due diligence?
- making sure that everything is correct
- checking all contracts
- researching into company