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General Points
Please, if you are not familiar with certain
terms used in class or in these slides, do not
hesitate to ask me to explain. You (& your
colleagues) will get much more out of class.
Also let me know when points mentioned are of
use to you in your day to day work or study- or you
have specific questions!
I can spend time on it when you ask me or, if more
complicated, I can deal with it later on.
GOALS
Goal of this module is to give non-lawyers (who
may be working in business in the future) an
introduction to the corporate law systems in the
US (and, if time permits, certain European
jurisdictions).
Goal also to clarify what types of company forms
exist and what it takes to set up a new company in
the various jurisdictions (especially useful for
future entrepreneurs or those working
internationally)
Basic comparative philosophical differences
between US law (and to a certain extent English
law) and various European legal systems will be
highlighted
United States
France
England & Wales
Germany
Italy
Poland
Merger
Tender offer
Auditors
Annual accounts
Directors meetings
Shareholders meetings
Worker participation
Commercial / Company register
Limited Responsibility
Ultimately, public policy to favor growth
23
25
WHY DELAWARE?
General Corporation Law
Incorporation in the US
Remember,
US corporate law largely province of the
states
Federal law totally silent until Depression
era Securities Act of 1933
Corp governed for corp law purposes by
law of state of incorporation, regardless of
business operations
31
Corporate Form in US
Agency issues
Dichotomy bt SHs and Directors / mgmt: Apparent
authority of principal. Principal could not deny the
validity of the sale
- leaseback where he had
apparent authority to bind the lessee because he
served as president, sole director, and sole
shareholder of a corporation. Carriage Realty P'ship v. AllTech Auto Auto., Inc., 2001 Del. Ch. LEXIS 144 (Nov. 27, 2001)
US state competition
Theories of state competition
The Race for the Bottom (but fails to
account for market forces)
The Race for the Top (e.g. positives of DE
law efficiency, but fails to account for antitakeover measures)
The Race for Predictability & Stability (but
what about a federal corp law system, in
order to truly maximize SH value?)
33
US state competition
Wish to maximize incorporations focuses
on corporate decision makers, not SH
value
Tempered by wish to avoid federal
intervention
What about resident SHs interests (e.g.
NY)? difficult bx giving priority would
just mean their state law would NOT
apply, as others go to DE, etc.
No coincidence then that DE has small SH
base (ergo smaller political impact)
34
EU incorporation
Most countries adhere to the sige rel
(real seat) view of incorporation
Others (UK, Eire, DK, NL) hold a more
open incorporation theory
EU incorporation
Is fear of a DE race to the bottom
justified?
Labor unions
Political systems
Courts
UNITED STATES S
Corporation
Corp organized under state law that has elected to be treated as a
subchapter S corporation under federal tax law, subject to special
requirements for obtaining & maintaining status
PROS:
personal liability of an S corp SH is limited to their contribution of
capital to the S corp, meaning that if someone sues business &
wins, they can attach a judgment against capital contribution of
SH(s), but not personal assets of SH(s) (unless corp veil is pierced)
no double taxation. S corps are pass-through entities if applicable
federal tax rules are followed (e.g., earnings and profits of S corps
must be distributed to SHs annually as dividends)
no business entity level tax, but S corporation must file informational
federal return (Form 1120S)
S corporation SHs can participate in mgmt of business
UNITED STATES S
Corporation
SHs can receive portion of their income as salary (it must be
reasonable salary) & any additional income above salary will not be
subject to self-employment taxes (a savings of over 15%)
CONS:
corporate formalities to conduct & maintain, such as organizational &
annual meetings, corporate minutes, etc.
All income must be distributed annually to SHs
Specific rules must be followed in order to maintain S corp status:
An S corp must be domestic corporation & not an ineligible
corporation (includes a financial institution, most insurance cos, etc.)
S corp cannot have more than 100 SHs
S corp cannot have SH who is not individual (certain narrow
exceptions apply)
S corporation cannot have nonresident alien as SH
S corporation cannot have more than 1 class of stock
FRANCE
Socit Anonyme (SA)- best-known form-- can be
private co or public co- we will consider private first
2 or 3 organ structure: SH meeting & BOD, or SH
meeting, Mgmt Board and Supervisory Board,
similar to German system (the latter optional)
Minimum 7 natural or legal persons to form; need
formal recording of formation
Minimum Euro 37k share capital
Different classes of share permitted
Transfer by simple agmt (subject to by-laws)
FRANCE
Socit Anonyme (SA)- private version,
contd
Stock exchange listing not possible
Sole liability of the company; in principle SHs
not liable beyond capital contributions thereto
Employee co-determination: only state co or if
employees own more than 3%
Amendment of articles of association, capital
increase/decrease only by extraordinary
general meeting of SH (w 2/3 majority);
changes to be registered w commercial
register
FRANCE
Socit Anonyme (SA)- private version,
contd
Cross-border merger currently impractical
Cross-border transfer of seat required
unanimous consent of SHs; co dissolved
unless convention exists btw France &
new host country
FRANCE
Socit par actions simplifie (SAS)
This is a new, simplified type of co, created by law of
Jan. 3, 1994
Main advantage is its flexibility re: setting mgmt powers
(apart this, functions as an SA)
Recommended vehicles for creating joint ventures
(JVs) in France or when planned to be held 100% by
parent co
No prescribed structure, except for appointment of of a
chairman; certain key decisions must be adopted
collectively by SHs
Need 1 or more natural or legal persons to form; need
formal recording of formation
FRANCE
Socit par actions simplifie (SAS)
Registration mandatory w commercial
register
Has own legal personality
Minimum Euro 37k share capital
Stock exchange listing not possible
Sole liability of co; SHs not liable in theory
beyond capital contributed to co.
No complusory employee codetermination
FRANCE
Socit par actions simplifie (SAS)
To amend by-laws, increase/decrease
share capitla majority rule set in by-laws;
changes registered w commercial register
Cross-border mergers currently impractical
Same other general considerations as w
SA
FRANCE
Socit responsabilit limite (SARL)
Does not acquire full legal existence & cannot
enter into contracts in own name
May be created w 1 SH, in which case it is an
EURL (Entreprise unipersonelle responsabilit
limite)
Sole liability of the company (key consideration to
use it)
Mandatory registration with trade & company
register
2 organ structure: SH meeting & manager(s)
No minimum share capital
No employee co-determination
FRANCE
Socit responsabilit limite (SARL)
supermajority to amend articles or vary
share capital
FRANCE
Socit Anonyme (SA)- public version
(Listed)
2 or 3 organ structure: SH meeting & BOD, or
SH meeting, Mgmt Board & optional
Supervisory Board
Need 7 or more natural or legal persons to
form; need formal recording of formation
Registration mandatory with
companies/commercial register
SA has its own separate legal identity
Minimum share capital of Euro 225k
FRANCE
Socit Anonyme (SA)- public version
Different classes of shares permitted; transfer of
shares by simple agmt
Listing on a stock exchange possible
Sole liability of SA, SHs not liable beyond shares
Employee co-determination: compulsory only in
state cos or if they own 3% or more of share (when
an issue?)
To amend articles of association or vary capital,
need 2/3 majority of extraordinary general meeting
(SHs)
FRANCE
Socit Anonyme (SA)- public version
Such amendments must be registered w
commerical register
Cross-border merger currently impractical
Cross-border transfer of seat requires
unanimous SH consent, but SA dissolved
unless convention in place
GERMANY
The Stock Corporation (Aktiengesellschaft AG)
3 organ structure: general meeting of SHs, BOD &
Supervisory Board
1 or more natural or legal persons to form; fromal
recording of formation
Minimum Euro 50k share capital (reqd by EU
Directive)
Different classes of shares admitted; transfer by
simple agmt
Listing on a stock exchange possible
Sole liability of AG, SHs not liable in principle for
more
GERMANY
The Limited Liability Company (GmbH
Gesellschaft mit bescrankter Haftung)
key form in Germany for most small/medium
businesses
2 organ structure: SH meetings & Mgmt
Board; Supervisory Board optional, but
employee co-determination may make it
mandatory
1 or more natural or legal persons to form,
formal recording of formation
Registration mandatory
Has own legal personality
GERMANY
Limited Partnership with Share Capital
(KG a.A. Kommanditgesellschaft mit
Aktien)
GmbH & Co. KG (Limited Partnership with
a Limited Liability Company as General
Partner)
Basis is a typical limited partnership KG
Kommanditgesellschaft)
ITALY
The Joint Stock Corporation (SpA
Societ per Azioni)
3 organ structure: SH meeting, BOD & Board
of Statutory Auditors; alternative systems of
corporate governance
1 or more natural or legal persons to form;
need formal recording
Mandatory registration w commercial register
Has own legal personality
Minimum legal capital of Euro 120k
ITALY
Partnership Limited by Shares (Sapa
Societ in accomandita per azioni)
Has 2 classes of SHs: general partners (soci
accomandatori), who are jointly & severably
liable for all obligations and are cos Ds, and
limited partners (soci accomandanti), liable
only up to capital subscribed & who cannot
be Ds
Form seldom used
Other agircultural companies & cooperatives
also exist
ITALY
Limited Liability Company (Srl Societ a
responsabilit limitata)
2 organ structure (SH meeting & BOD); Board of
Statutory Auditors optional, but mandatory if capital
equal to or greater than Euro 120k
1 or more natural or legal persons to form it; formal
recording of formation
Registration mandatory w commercial register
(companies register of local chamber of
commerce, industry & artisanry)
Srl has own legal personality (compare to French
Sarl)
ITALY
Branches of foreign companies
Art. 2508 of Civil Code provides for possibility of
foreign cos establishing 1 or more branches in Italy
Need to file various co documents (minutes of SH
meeting approving branch, appointment of branch
manger, address, memorandum & articles of
association) w notary, who registers them w
commercial companies register
Docs become public in Italy
Branch is not a separate entity from parent co
(liable 100%)
POLAND
Limited Liability Company (sp. Z o.o.
spolka z ograniczona odpowiedzialnoscia)
The basic type of incorporated co in Poland
Note on shelf companies possible to
acquire, but often prior traders need due
diligence, not regulated by Polish
Commercial Companies Code
2 or 3 organ structure: SH meeting & mgmt
board mandatory, supervisory board only
mandatory when more than 25 SHs & share
capital exceeds PLN 500k
POLAND
Joint Stock Company (S.A. spolka akcyjna)
3 organ structure: general meeting of SHs, BOD
and Supervisory Board (wide German influence)
1 or more natural or legal persons to form, except
that a sole SH sp.Zo.o. Cannot establish an SA
Registration w commercial register mandatory
SA has own legal personality
Minimum PLN 500k share capital (appr. Euro
133k)
Different classes of shares permitted, transfer
shares by simple agmt
POLAND
Joint Stock Company (S.A. spolka akcyjna)
Listing on a stock exchange possible
Sole liability of SA, SHs not liable beyond
contributions
No mandatory employee co-determination
To change articles or invrease/decrease share
capital, need notarial Sh resolution, to be
reigistered w register court (version of commercial
register)
Cross-border mergers & transfer of seat not
possible (latter = liquidation)
Societas Europaea
Statute allows cos incorporated in different
EU Member States (States) to merge or form
a holding company or joint subsidiary while
avoiding legal & practical constraints due to
27 different legal systems
Registered office of SE designated in
statutes must be place where it has its
central administration, that is to say its true
centre of operations. SE can easily transfer
its registered office w/i EU w/o dissolving the
company in one State in order to form new
one in another State
SE a few examples
For example, Subaru France cld form an
SE, Subaru SE w Subaru Germany, or an
SE, Subaru-Peugeot SE w Peugeot Spain.
Also a holding SE or joint sub SE cld be
formed by 2 cos of the same State if each
had for at least last 2 yrs an establishment
situated in another State
Thus Ford France or SEAT France cld
form a sub SE or holding SE if they had
branches in another State (e.g. Czech
Republic)
Societas Europaea
None of above advantages currently available
under national laws in force
Offers cos a Euro flag, valuable in publicity terms
w customers, clients, suppliers, creditors, etc.
Removes psychological problems w reincorporation
Text of SE Regulation contains 70 articles, not c.
300 of 1970 or 1975 versions
Represents great improvement in flexibility &
simplicity
More open to SMEs, bx of share capital Euro 120k
(previous proposals had ECU 500k or ECU 250k)
Societas Europaea
For non-EU multinationals, no longer fortress
Europe
Access opened to them (w central admin &
strategic decision centres outside EU) so long
as they are registered in an EU State & have
a real link with a Member States economy =
simply means an establishment in EU
Some commentators believe, beyond
efficiency & productivity gains , may
strengthen EU firms against hostile take over
bids
Increased TRANSPARENCY of EU financial
mkts
SE Worker Representation
Current battle over character of evolving European
system of corporate governance. Issue is
fundamental choice btw 2 different conceptions of
the firm: the shareholder model, where purpose of
firm is to maximise value in interests of SHs, and
stakeholder model, where firm has responsibility to
broader range of stakeholders
Worker groups argue for EU to use its existing
legal framework to develop a co go regime which
focuses on society: they say an important EU
contribution to realising corporate social
responsibility is establishment & maintenance of
well-balanced corporate governance framework-focus on SE & employee co-determination
SE Worker Representation
Council Directive complementing Statute for a European
company w regard to the involvement of employees in the
European company:
Directive set up standards of employee involvement, guaranteeing
autonomy of social partners & at the same time a degree of existing
rights of employees provided by different natl regimes of
participation rights
Several participation models are possible: first, a model in which
employees participate in supervisory board or administrative board,
as case may be;
second, a model in which the employees are represented by a
separate body; &
finally, other models to be agreed btw Mgmt or Admin boards of
founder cos & employees or their representatives in those cos, the
level of information & consultation being same as in case of second
model
SHs may not approve formation of SE unless one of models of
participation defined in Directive chosen.
SE Worker Representation
Under this EU Directive on worker
involvement, creation of SE wld require
negotiations on involving employees of cos
concerned
If impossible to negotitate, standard principle
annexed to Directive apply (SE mgrs to give
regular reports, w consultation & info:
strategy, bus plans, sales, production, M&A,
implications for workers, closures, layoffs,
etc.)
Worker participation in SE
In some cases where negotiations fail & where cos
involved in creation of SE previously subject to codetermination, the SE wld be obliged to have
standard principles to help them participate
Applies to SE created as a holding co or JV, when
majority of employees had rights, prior to the SE,
to participate in co decisions
If SE created by merger, standard codetermination principles apply when 25% plus of
employees had participation rights bf merger
(political hot potato blocked agmt on Directive
until Nice Summit 2000)
Arcelor , Braun-Melsungen,
DaimlerChrysler, EADS, Eurotunnel ,
Fortis, Hypo Real Estate , Linde AG ,
Mazaars , Neumann Partners GmbH ,
SAP , SEB, Suez , TeliaSonera, WAZMediengruppe
Freedom of Establishment
Building on 1963 Van Gend en Loos decision,
which established the EU legal order as a new &
autonomous legal order in its own right, ECJ
confirmed that:
the rule on equal treatment w nationals is one of
the fundamental legal provisions of the
Community. As a reference to a set of legislative
provisions effectively applied by the country of
establishment to its own nationals, this rule is, by
its essence, capable of being directly invoked by
nationals of all the other member states (Jean
Reyners v. Belgium- 1974).
EU incorporation theory
As stated earlier, most countries adhere to
the sige rel (real seat) view of
incorporation
While others (UK, Eire, DK, NL) hold a
more open incorporation theory more like
US
FREEDOM OF
ESTABLISHMENT
In Hughes de Lasteyrie case, ECJ viewed provision was
likely to restrict exercise of right, having at very least
dissuasive effect on taxpayers wishing to establish themselves
in other EU State, because they are subjected, by mere fact of
transferring their tax residence outside France, to tax on a
form of income that has not yet been realised, & thus to
disadvantageous treatment compared w person resident in
France
Such hindrance can be allowed only if it pursues legitimate
purpose that is compatible w EC Treaty & is justified by
imperative reasons in public interest
Measure, inferring general intention of tax evasion from mere
transfer of tax residence to another Member State, cannot be
justified by imperative reasons in the public interest: it is
disproportionate in relation to the objective sought
Thank You
Contact information
Should you have any additional questions,
please feel free to contact me at:
patrick.omalley@interpresas.com
www.interpresas.com
Patrick J. OMalley 2008