International Executive MBA

PROGRAM UNITs SYLLABUS

Business law

SYLLABUS

Business law
(3rd semester)
Lecturer:
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International Executive MBA

Tom Chud, LL.M, Ph.D.

Learning objectives: The aim of this module is to provide a general overview of main issues of the different branches of business law, including company law and contract law, and the related areas of capital markets, competition law and international trade law. In order to do this, a problem oriented approach to the key areas of business law in the European and international perspective will be provided. As a result, capability will ensue to compare basic features of business law in different countries and identifying legal contexts of various situations in order to tackle them validly. Abstract of the program unit: The core of the module consists in making acquaintance with the main European jurisdictions/USA and becoming familiar with some crucial and most-intriguing concepts concerning the capital corporations. This will be done against the backdrop of corporate governance analysis and requires some insight hereinto, namely into the interplay of interests of the key actors (shareholders, management, creditor, employees). As a general principle, the comparative approach is used, with focus being on certain, not all, issues that come to the fore in business management. In this way, the student will be able also to properly understand the main corporate relations with a special focus to those present in the capital markets. Nonetheless, the life of corporations takes place also through the obligations entered into in the course of trade. Therefore it is necessary to take a brief look at the basics of contract law and some distinguishing features of law of tort as it applies in the commercial sphere, including competition rules. During the lecture, supplementary issues of current interest will be covered such as the Czech proposal for a Corporate law now debated in the Parliament and recent developments of EU law, the proposal for regulation on Common European Sales Law (2011), new EU directives, and by way of example the case-law of the European courts and briefly also the practice of the Commission in the field of competition. The methodology used will proceed from basic to more specialized facts so as to develop an overall picture and an ability to explore the details rather than the instant detailed knowledge. Outline: Overview of the business law and its branches Business and corporate law in major jurisdictions (USA, UK, Germany, France) Capital markets regulation Basics of contract law, in particular in international trade Czech Business Corporations Bill EU Competition law cartels, abuse of dominant position Recent development in EU law related to business
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Key terms: Concept of economic activity in EU law and entrepreneur in Czech law for the latter the features include a sustained activity aimed at gaining profit whereas in the European context every offering of goods or services on a market already represents an economic activity, regardless of the way it is financed (C-41/90 Hfner & Elser, T319/99 FENIN). This has implications for the applicability of various branches of business law to the activity in question, most notably of competition law. Apart from the purely market-oriented businesses there are those that have apart from their market also some public or general interest function. As such they may be subject to heavier public regulation, typically with the network enterprises (telecommunications, energy sector, postal sector). Forum shopping or shopping of jurisdictions occurs in an internal market where freedom of establishment is in principle guaranteed in any state but the applicable rules as regards some specific matters, e.g. taxation, subscribed capital, administrative burden, labour market etc. are different. Founders of a company may then decide to incorporate the company in a particular state which provides more legal advantages rather than another. This is the case in EU in some respects and leads to what is called race to the bottom among the member states, competing as to the minimal requirements for founding and running a company. Mandatory rules. Most of the rules in business law are non-mandatory (default rules) which means they are applicable only insofar as the articles, bylaws or contracts do not provide otherwise. Nevertheless, some of the legal rules are mandatory. They are typically those stemming from the transposition of European directives and often those providing for a level of protection of the weak party that would not be achieved if things were left for the relevant parties to determine. For example, in the case of the management board, German law states that neither articles nor bylaws may provide that a member or members of the management board may overrule a majority. Next, in some EU jurisdictions, but not in the US, a reduction of capital entailing distribution of assets cannot take place without
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International Executive MBA

safeguarding the interests of the companys creditors in some way either in advance or pro futuro. Notarised acts are those that in the continental legal tradition require, in order to be valid, that a document be produced by a notary which testifies on the existence and contents of such an act. Typically the adoption of and amendments made to the articles of association in a business company. Law of obligations comprises the law of contract as well as the delict law (law of tort in the common law jurisdictions), depending on the cause that gives rise to the obligation. Whereas delicts involve liability of the agent for an act that contravenes an existing obligation, in the contract ale the parties must be in agreement (concurrence of wills) as to what the obligation should be. In contract law, the issues dealt with include the question of validity certain enumerated conditions called vitiating elements can make the contract void. Contracts generally are discharged by performance, i.e. by fulfilling what has been agreed. In contrast to the law of contract, the other branch of business law which has even more peculiar aspects is the corporate law. While the law of obligations concerns what is done, in the corporate law the accent is on who is the doer. Internationally, a wide is made of the Vienna convention on the Contracts for the International Sale of Goods which is considered the de facto contract law in Europe. However, a recent proposal of the European Commission aims at a somewhat more paradigmatic set of rules, including model forms for cross-border trade. Concept of liability in business law includes the strict liability (for products, but there are other cases in some jurisdictions). This is special feature of business law in relation to other law branches where mens rea (guilty mind) is required. Also the standard of care is somewhat higher for those who conduct business due to presumed duty of care on their part. It coexists with the negligence principle in some matters and jurisdictions. Furthermore, the stricter position of subjects in business transactions may be summarised as the rule of due diligence, presuming that the agents are competent professionals who exert due diligence while entering
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International Executive MBA

into obligations and managing the company. This imposes some particular duties on the managers which may be more or less detailed in written law (e.g. Germany) but also may provide them with certain range of liberty as to the ways to fulfil them (see business judgment rule in USA). Corporate law are rules relating to the formation, functioning and winding-up of business entities. Includes determining the role of the organs if not precluded from doing so by the mandatory rules of law The commercial register (companies register) keeps record of facts about a company as well as the documents relating thereto (statutes, the appointment of persons representing and/or managing the company). Its existence and some of the rules regarding the publication have been harmonized in the recast First company directive (2009/101/EC). The disclosure of the facts and documents enables third parties to see whom they are dealing with. In most countries such a register also serves as an institution incorporating the company, i.e. endowing it with legal personality. Shelf company is a company founded and incorporated, but not doing any business, which is designed to be sold as a product. The capital and personal company: the former category (with public and private limited liability companies as its main forms) derives its name from putting together of a certain capital for the purpose of doing business; the grouping of investors then acquires legal personality but as such is liable only to the extent of the capital. On the contrary, the latter are characterized by its members and generally take the form of partnership. They may or may not have legal personality and involve unlimited liability of its members. Private and public company are two generic kinds of limited liability corporations depending upon whether they are offering their shares for acquisition publicly. The private are also called closely held companies because the holders form a close circle (as opposed to open-ended companies). The differences in legal rules covering

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International Executive MBA

the two often consists in the facultative character of some elements for private companies which are obligatory with the public ones. The concept of agency is used by theorists when describing the relations within a corporation; it refers to acting on behalf of another person, called the principal. When the agent prejudices the interests of the principal as defined by law or contract, he is liable for it. In strict legal use in the continental tradition it usually stands for just the contractual form, called proxy. However, between the corporate constituencies, agency has a quasi-contractual character. There are two main levels of conflict caused by such agency, first the duty of the directors to act on behalf of shareholders, and second, obligation of the company towards the creditors, employees and consumers to heed their legitimate interests in its business conduct and not to overexploit their dependence. The detailed rules designed to preserve and balance these interests constitute much of the business law. The statutory organ (also legal representative) means those who are empowered by articles (or law) to bind the company in the relations with third parties. Vis--vis the shareholders another concept of managerial responsibility is applied, namely that of fiduciary duty. It translates sometimes as good faith on the part of directors, which in turn includes loyalty, due care and implies that appropriate information channels exists for the managers to make competent choices that have repercussions on the position of the shareholders. The duty is owed primarily to the corporation itself and its interests. Usually it is deemed there is no breach of the duty if the conduct stands the business judgement test (see below). Business judgement rule is a concept originating in the US case-law and applying to the management taking decisions, understood here narrowly as a sub-category of action. If a conflict arises as to whether decisions caused damage to the company and even though the decision taken may have caused the damage in the final count, the decision-makers may find refuge in the presumption, which the law accords to them, of being motivated in their conduct by a bona fide regard for the interests of the corporation. In the German version of the rule, such person must prove to have
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reasonably believed, based on appropriate information, to act in accord with the interests of the company and thus to be stripped of liability. This reflects the idea that risks are inherent to decisions. However, the interpretation of non-negligence and due care which are inseparably connected with such an assessment varies from state to state cf. very lax Delaware case-law as opposed to some stricter EU continental jurisdictions. Articles of association (or statutes in continental tradition and in European directives, sometimes also called the charter) is the basic document describing the governance of the company and its inner functioning, adopted by the founders and amended in matters of importance by the shareholders meeting. (Corporate) bylaws are internal rules of a company stemming from the fact that it is a corporation. They are designed to provide guidance in the life of the company if not precluded from doing so by the mandatory rules of the applicable law in the country and the articles with which they have to be in accord. The bylaws may not be known to third parties and therefore they are not binding on them but if they are known they may be an important factor in their dealing with the company (e.g. takeovers). Securities are a general category of financial instruments embodied in a certificate or non-certificated, that is in electronic or "book entry" only form. Once listed (see below), they are dealt with in the financial market as regulated in the EU by MiFID (Markets in Financial Instruments Directive 2004/39/EC the investment firms) and the Transparency directive (2004/109/EC the issuers). More specifically, shares represent the equity capital in a company (their issuers are regulated by other, more particular, directives such the Prospectus Directive, Market Abuse Directive). In EU law, all shareholders who are in the same position must be treated equally but that does not exclude the existence of preference shares. These normally carry the right to a preference payment of dividend and preference repayment of capital on the winding up of the company and may also be convertible, giving their holder the priority subscription option.

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International Executive MBA

Redeemable (UK) and reimbursed shares (France): if the articles provide for it, some shares can be issued as redeemable, that is they may be repurchased by the issuer on a specified date. Conversely, the reimbursed shares where the articles so provide, the shares in a private company may be reimbursed out of profits. Such actions de jouissance (reimbursed shares) continue to be in possession of its holder, and embody the same rights as before, but do not serve as a claim to the par value on winding up of the company. Case law of the Court of Justice of the EU relating to the golden share goes against introducing or maintaining of rules attributable to the state which limit the principle of equality of shareholders (cf. case C-483/99 Commission v France and C503/99 Commission v Belgium services of general economic interest, C-112/05 Volkswagen voting rules favouring minority state shareholder, and C-98/01 Commission v UK British Airports limiting the possibility of acquiring voting shares and requiring consent to the disposal of the company's assets). Quoted (listed) companies are those whose shares are admitted to trading on a national-based stock-exchange. In the EU, companies with quoted shares must observe some stricter obligations, e.g. as to the general meetings (directive 2007/36/ES), disclosure requirements (prospectus directive 2003/71/EC and transparency directive 2004/109/EC). Analogous obligations exist in other countries with major capital markets. The limitation of bearer shares in the public procurement contracts bearer shares are legal in CR but are not considered transparent for payments made from public purse. This brings into focus the public procurement rules which are harmonized at EU level in directive 2004/18/EC and 2004/17/EC. They include qualification criteria and detailed procedure for the award of a public contract above the threshold. The two key requirements are those of transparency and nondiscrimination. Powers of the shareholders general meeting generally include decisions on changes in governance structure (typically amendment of articles, alteration of
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International Executive MBA

companys capital, appointment of managers and liquidators and some others) or such cases that would involve the conflict of interests if left to other bodies, provided that routine management of the company is done by the board. However, there is some flexibility to the scope of its agenda. While the principle of delegated decisionmaking implies that powers remain (exclusively) to other bodies (the managers, supervisory board where it exists, or a shareholder committee), it is in principle possible for example in the UK that the general meeting overrides any decision of the board (latent power). This is rarely used as it is easier to remove the board as a whole. On the other hand, usually what the general meeting does is to ratify certain decisions whose initiator it is not (distribution of profits, appointment of auditors). Appointment right serves as one of the main powers of the shareholders concerning corporate governance strategies. However, independent practice of proposing shareholders candidates and having them voted on is more developed in the European countries and very rare in the US. Removal right is a safeguard for the shareholders vis--vis the board enabling them to call it off without cause. Again, it is construed in different ways: in most of US jurisdictions it is optional and can be excluded in the articles whereas in main European states it cannot be waived. Protection of minority shareholders one of the principles of limited liability companies. Every shareholder is entitled to protection as any other member against unfair conduct from the company. In addition to this, the so-called derivative action enables the minority shareholders to sue the director(s) on behalf of the company where the general meeting fails to take action against director responsible for a breach of duty. Minority shareholders with a qualified number of shares (EU states must not exceed the 5 % limit for this purpose), also have the right to put items on the agenda of a general meeting and propose draft resolutions, in some countries even the right to call the general meeting itself. The rules designed to eliminate the conflict of interest are multiple and differently shaped in various jurisdictions. In general, they require those charged with management of a company to avoid a situation in which they have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company,
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International Executive MBA

including the exploitation of any information or opportunity. This rule also requires the directors (and sometimes also other persons, e.g. shareholders with significant proportion of shares) to disclose to the general meeting or (in the two-tier system) to the supervisory board all transactions (at least, as in the proposed Czech BCA, upon request by a shareholder). Thus, as in France, property transactions, loans etc. between such persons and the company (outside the agreed terms of the appointment) are subject to this rule and may be prohibited, while all other agreements among these persons are subject to approval either by the general meeting or supervisory board (depending on who concludes the agreement). An exception is usually provided for the transactions made in the course of normal business entered into on the usual terms where the company is a bank, on the investment exchange and in some other cases. On the other hand in UK, the arrangements under which a substantial asset is acquired by either of the parties concerned are prohibited and voidable at the instance of the members, unless approved by them. The same applies also to contracts where the abovementioned parties are indirectly interested. Thus in Germany, an analogous regulation disallows the managers to engage in the same branch of activity as their company without the consent of the supervisory board (similarly in Czech BCA). Acting utra vires means transgression of the powers of agency vested in a director or other member of the companys organ. According to the recast First directive, acts done by the organs of the company shall be binding upon it even if those acts are not within the objects of the company, unless such acts exceed the powers that the law confers or allows to be conferred on those organs. Some jurisdictions add that if it is proven that the third party knew that the act was outside those objects or could not in view of the circumstances have been unaware of it, it cannot be binding on the company. Another case of ultra vires may arise when power is conferred by the statutes on a single person or on several persons acting jointly: such a provision may be relied on against third parties on condition that it relates to the general power of representation. That means that acts not respecting the conferred limit (e.g. by a single representative when at least one more is required) are done ultra vires.

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International Executive MBA

The external experts (in the capacity of so-called trustees) used on several occasions are the last instance guarantee that the conduct in question is being based on true face of affairs. That has implications for both creditors and shareholders. In the first place, the category of experts includes auditors who examine the annual accounts obligatorily for some companies. Next, specialized evaluating experts are called for example to assess non pecuniary contributions to the companys capital, to examine the draft terms of a merger or division, and sometimes also evaluate any special advantages granted to the shareholders, managers or other persons. Thus, the independence and impartiality of such experts are imperative and usually entail the absence of any employment-like link to the company and involve even appointment by a court. Single-tier and two-tier boards express two type-structures of business governance. Whereas in the first case (common in English speaking countries) the board exercises both executive and supervision function, in the second (typical for Germany) the two are separately vested in the management board and the supervisory board. Some jurisdiction enable just one these options, others (France, BCA in the Czech Republic) give the choice to the company. Compulsory reading: Reinier Kraakman - The anatomy of corporate law (a comparative and functional approach) Oxford University Press 2nd ed. 2009, ISBN 0199260648, chapters 1 to 6 and 9. Mads Andenas and Frank Wooldridge, European comparative company law, Cambridge University Press 2009, ISBN 978-0-521-84219-8, chapters: 3. Formation of companies, 4. The types of business organization 5. Share (or equity) capital and loan capital 6. Management and control of companies, 9. Groups of companies and 11. Investor protection. Generally just passages relating to UK, Germany and France, other chapters optional. Peter Nayler, Business Law in the Global Marketplace, Elsevier, Oxford 2006, ISBN 0 7506 6005 8, pages 34-47 and chapters 3, 5 and 7. Gabril Moens, John Trone, Commercial Law of the European Union, Springer 2010, ISBN 978-90-481-8773-7, Chapters 6 and 13.
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International Executive MBA

Further recommended reading: The remaining chapters of items listed above. Mads Andenas, EU Company Law and the Company Laws of Europe, International and Comparative Corporate Law Journal, Volume 6, 2008, Issue 2, pp. 7-41. Bernard Bishop, European Union Law for International Business. An Introduction, Cambridge University Press 2009, ISBN-13 978-0-511-69089-1. Stefan Grundmann, Florian Mslein, European company law, Intersentia, 2007, ISBN 978-90-5095-641-3. Janet Dine, Company Law (Palgrave Law Masters) Palgrave Macmillan Ltd.; 2001, ISBN 0333948017. Draft Czech Business Corporations Act (BCA) and selected passages of the draft Czech Civil Code available only in Czech at: http://www.psp.cz/sqw/text/tiskt.sqw?O=6&CT=363&CT1=0 and http://www.psp.cz/sqw/text/tiskt.sqw?O=6&CT=362&CT1=0 United Nations Convention on Contracts for the International Sale of Goods (CISG 1980) Act No 256/2004 Coll. on business on the capital market, available at: http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/legislation/leg_capital_mark et/download/act_256_2004.pdf Europe The Principles of European Contract Law, proposal for a regulation on Common European Sales Law (COM(2011) 635 final) USA: Model Business Corporation Act American Law Institute Principles of Corporate Governance Sarbanes-Oxley Act of 2002 Uniform Commercial Code For a comparative perspective in the main European states and USA see: Frank Dornseifer (Ed.) Corporate Business Forms in Europe. A Compendium of Public and Private Limited Companies in Europe, Sellier, Mnchen 2005, ISBN-10 3935808-31-3.

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International Executive MBA

Luca Cerioni, EU Corporate Law and EU Company Tax Law, Edward Elgar Publishing Limited 2007, ISBN 978 1 84542 774 0, Part II and Appendices Angela Schneemann, The Law of Corporations and other Business Organizations, 5th ed., Delmar Cengage Learning 2010. Du Plessis et al., Principles of Contemporary Corporate governance, 2 nd ed., Cambridge University Press 2011 Topics for seminary papers: 1. Corporate law: the relation of EU directives to national law and the relation of federal and state law in the United States 2. New Czech drafts: Business Corporations Act and Civil Code main features and changes as to the present 3. Company forms compare one type of business entity across European states 4. Mergers, divisions the relevant directives and basic duties (recast-Third, Sixth and 2005/56/EC) 5. Law shopping in the EU/worldwide: the choice of corporate seat and the CJEU cases Daily Mail and Cartesio 6. Concept of fiduciary duty and business judgment on the part of directors Delaware cases Transunion, Caremark, Disney, Goldman Sachs 7. Capital markets main features of the EU and US regulation 8. Competition law cartels definition, concurrence of wills, restriction of competition by object and by effect, what is horizontal and vertical restriction 9. Abuse of dominant position, merger control regulation explain one case of Commission opposition to the merger, or how to avoid an abuse of dominant position 10. One tier and two tier system of public companies across the EU and US 11. Publicity and transparency in corporate law: the recast-First directive, Transparency directive (2004/109/EC), disclosure duties 12. Protection of principal in corporate relations: shareholders, creditors, the Second directive and directive 2007/36/EC 13. Sarbanes-Oxley Act of 2002 and its implications for the 2006/43/EC directive 14. Takeovers, squeeze-out the aim and contents of the directive 2004/25/EC
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International Executive MBA

15. A company and a partnership: commonalities and differences 16. Shares in the public and private company: the difference in their transfer, admittance to the capital market 17. investor protection and market abuse directive 2003/6/EC scope and basic prohibitions 18. Corporate ownership structure in different countries as a determinant of corporate rules 19. Contract law Vienna convention on the Contracts for the International Sale of Goods, proposal for a regulation on Common European Sales Law.

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