PRACTICAL CASE COMPANY FORMATION

Questions:

1. Write a legal opinion advising Marta, Peter and John about

creating a company analyzing, among others, the following:

- Suitable company legal form and its advantages and disadvantages

- Capital and stakes / shares of each member- Company name and
their protection on the market- Contributions and, where appropriate,
ancillary services -Transfer of stakes / shares and
its restrictions

The case is asking us what company legal form is the most suitable
for them. Well, Business organizations that are not companies
( partnerships ) are immediately excluded. Among the various types
of companies, we find the limited liability companies, the joint stock
companies, and a very rare limited partnership with shares. Now, the
total amount of contribution Marta, Pedro, and John, offer is up to
50.000 euros. The suitable form cant be then a limited partnership
with shares, or a joint stock company, as the minimum capital
required in both is 60.000 euros, as established in the article 4, 3 and
the article 3, 2 of the companies act. What remains is of course a
limited liability company, whose minimum capital is, as disposed in
the article 4, 1 of companies act, around 3000 euros. Theres no other
option than considering more convenient this particular company
form. Though, its useful to describe the several advantages, and
disadvantages of this specific corporate enterprise. Beginning with the
pros, we put in spotlight important features about the corporate
governance. In a limited liability company, the low amount of capital
needed, the reports, a lower number of members inside it compared to
an S.A, allow more flexibility in terms of decision-making, and
organization, unlike the more rigid aspects and formalities of a joint
stock company, due to the protection of investors. In the other hand,
the disadvantages are more related to the funding aspect, the financial
weakness of the limited liability company. The stakes of a limited
liability company do not offer in fact that liquidity, and attraction for
investors, compared to the financial strength that shares of a joint
stock company can favor. In other words, as the investors look for
more liquidity, a limited liability company is not the best option if we
want to attract funding, and investment.

For what concerns the capital, and the value of the stakes, its
necessary to make the convenient mathematical operations. The total
capital of the company they want to create rises up to 50.000 euros.
This capital is divided in stakes, or participaciones in Spanish. The
value of each stake depends mostly on how much a stakeholder has
contributed to the total capital of the corporate enterprise. Marta
provides 18.000 euros, Pedro provides a non-cash contribution ( a
manufacturing machine whose value is 22.000 euros ), and John with
10.000 euros without participating in the management. The values of
the stakes in percentage are the following: Marta would own a 36% of
the company, John a 20%, and finally Pedro a 44%. Subsequently, in
addition to the abbreviation S.L the company name can be either
objective, or subjective. Objective if the name is referred to the
economic activity performed, or to an imaginative word. Subjective if
the enterprise assumes the name or surname of at least one member.
As establishes the article 7 of companies act, corporate enterprises
cannot use a name which is identical to the name of an existing
company. The other aspect of a company formation is related to the
contributions, how they should be , according to business law. As
disposes the article 58 of companies act, contributions can be goods,
or rights subject to an economic appraisal., cash or non cash with the
prohibition of contributing with works or services. In the specific
case, theres no vulneration of the conditions a contribution must
comply with, as John and Marta contribute with cash, and Pedro with
a good ( a machine ). Now, this doesnt mean that the goods given by
the members automatically incorporate the capital of the enterprise.
There are some of them that do not form part of the capital. Especial
consideration is given to the ancillary services. The companies act, in
its article 86, disposes that the by-laws can include ancillary
commitments in addition to the contributions, with the description of
their content, and if they are to be provided cost-free or remunerated.
Under no circumstances these services will be part of the capital. Its
the contribution the capital is made of, not the ancillary commitments.
Finally, the transferable of stakes will be restricted in the case of
choosing the S.L form. In a S.L, unlike the S.A, stakes are not freely
tradable. Theres no free transfer of the stakes, there are conditions,
limitations that affect the transfer of them. The bylaws cannot even
modify this legal restriction, unlike what happens in S.A, in which
bylaws can modify the general legal rule of free-transfer of shares. As
the article 108 of the companies act establishes, all clauses of bylaws
that allow a free tradability of stakes will be prohibited.

2. Assess the advantages and disadvantages in the case of having a

shareholders agreement, in addition to the bylaws.

In case of having a shareholders agreement, the advantages of this

special contract between shareholders are various. According to some
previous legal studies, a shareholders agreement can favor a major
protection to shareholders, compared to the articles of association. A
shareholders agreement allows in fact to define conditions that are
vaguely regulated in the bylaw, or to establish limits to the
responsibilities with a higher efficiency. Secondly, it brings
confidentiality, privacy. A shareholders agreement cannot in fact be
accessible to third parties, like creditors, or non members. It also
favors more protection of minority shareholders against possible
abuses of the majority. It helps prevent situations in which substantial
changes, like the death of a shareholder, may affect the company, or
the financial interest of the members. Finally, it gives to shareholders
the possibility of limiting, controlling, restricting the powers of
directors, and it might fix important basis for decision-making, that
are not included in the bylaws. The disadvantages in the other hand
are due to the possible conflicts between what establishes the bylaw,
and the agreement. It could cause some confusion, and uncertainty,
especially for creditors, who seek to know whats really going on
inside the company. Another possible negative effect is related to
what some authors define as the binding effect This is due to the
fact that transferring shares doesnt automatically mean the transferee
will be bound by the terms of the agreement the previous shareholder
celebrated with the other. In better words, if a shareholder who signed
an agreement with another decides to transfer his shares, the person to
which the shareholder transfers his shares, will not automatically be
bound by the agreement of the ex-shareholder.

3. Select and attach forms in English of bylaws and shareholders

agreements that can fit the case.

-
http://www.investinspain.org/invest/wcm/idc/groups/public/document
s/documento_anexo/mde0/mjyw/~edisp/dax2014260328.pdf ( a
bylaws model )

http://www.uchastings.edu/student-life/organizations/docs/bylaws-
model.pdf ( a bylaws model )
http://www.nao-ontario.ca/wp-content/uploads/2012/05/Sample-
Shareholder-Agreement.pdf ( a shareholders agreement )

http://www.startupcommons.org/uploads/2/1/0/9/21090978/startup_fo
unders_sha_sample.pdf ( a shareholders agreement )

4. Specify the necessary steps to create a business in company form.

The steps to create a company are all regulated in the companies act,
in the title 2 ( formation of corporate enterprises ) . The first
procedure is the signing contract, or agreement between all the
founding partners, or shareholders. The shareholders, or founding
partners celebrate a deed of incorporation that includes the identity of
the partners or shareholders, the specific body corporate,
contributions, bylaws, and the identity of those initially entitled to
manage and represent the company. Simultaneously, elaborating the
bylaw company which contains default rules about the internal
organization, and provides informations like the company name, the
activity ( in this case producing and selling ties ), the capital,
directorship, and decision-making. The third step is the submit of the
deed of incorporation to the mercantile registry, within two months
from the formalization. This registration will mean the acquire by the
company of the specific legal status depending on the company form
chosen ( if an S.A, or S.L, or limited partnership with shares ). This is
not reason to exclude other formal requirements needed to create a
company, like the registration of the company name, the legalization
of company books, opening bank accounts, obtaining opening
licenses, or for example the submit of a declaration to start the
specific activity.