Corporate Finance Lab

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hermes

[EU case law]
[recente cassatie] [nieuwe wetgeving]

“Laboratory: a place equipped for experimental study in a science or for testing and analysis; broadly: a place providing opportunity for experimentation, observation, or practice in a field of study”

The Proprietary Aspects of Organizational Law

Internal arrangements about the entitlements in relation to the company’s assets are binding upon third parties. This feature is known as the proprietary dimension of company law. Some of the most import ones:

Entity shielding. Shareholders of a legal entity do not have a direct formal claim in rem on the assets of the company. The legal entity hangs as a veil between the shareholders and the corporate assets. German scholars refer to this feature as the Trennungsprinzip. The formal link in rem between the company’s assets and the shareholder is cut.

Limited liability. Company creditors are forced to accept that shareholders are not liable for the company’s debts. This feature, commonly known as limited liability, allocates the separate personal assets of the shareholder to that shareholder’s personal creditors, thus excluding the company’s creditors (“owner shielding”).

Proprietary restrictions to shares. As a result of entity shielding personal creditors of a shareholder cannot seize the company’s assets. They can, in principle, seize and execute the shares held by their debtors. Here again, arrangements relating to the rights embodied in those shares will limit the rights of the personal creditors of the shareholders to seize the shares and of the purchaser of the shares in an execution sale. While shares are separate assets, their legal regime depends in large part on the company law applicable to the company that has issued the shares, in particular where it concerns the rights vis-à-vis the company.

Capital lock-in. Shareholders are prevented from pulling out their initial contribution in order to protect the going-concern value of the company (“capital lock-in” or “liquidation protection”). Capital lock-in is very valuable, as it allows for the company decision-makers to develop a long-term strategy. This feature, which is closely linked to, but different from, entity shielding, is comparable to a contractual agreement not to liquidate a jointly owned property during a certain period of time. Contractual arrangements not to liquidate, however, can be superseded in case of insolvency of one of the co-owners or they are subject to mandatory time-limits in order to protect creditors of the co-owners. The corporate capital lock-in on the other hand has in principle a binding effect on third parties, including the personal creditors of the shareholders.

Partnerships

In most jurisdictions partners in unincorporated associations have rights in rem. As a consequence, the unincorporated association is great tool to discover and study the proprietary aspects

Bankruptcy Governance

Creditors have some ‘governance rights’ over the assets of their debtor (whether it is a natural person, a company or another entity). They can attach those assets if their claim is, or threatens to become, unsatisfied.

Bankcuptcy can be seen as a collective way of organizing these rights over creditors. Bankruptcy triggers a “collective seizure” of on behalf of all creditors and on all the assets of the debtor. The interests of all creditors are pooled in one estate, managed by a neutral trustee. This collective way of enforcing creditors’ rights enables the trustee to sell, if desirable, assets as a going concern. Moreover, the collective procedure reduces the risk that business specific to the company (e.g. know how) would get lost. A specialized trustee with extensive powers and capabilities solves the information problem and the rational apathy of individual creditors.

This collective governance-mechanism creates its own bankruptcy governance issues: the agency problem of the trustee (how is she paid? what are the rights of the creditors in the governance of the estate? when is the trustee liable towards the estate or individual creditors) and the tensions between the different classes of creditors (unsecured vs secured creditors; creditors in estate vs creditors with an administrative expense of the estate.

Corporate Groups

The corporate group is arguably the most commonly used ‘form’ to conduct a business. While corporate groups come in many shapes and forms, they all share an intrinsic duality: from an economic perspective they are “one”, from a legal perspective they are “plural”.

The corporate group is the invisible man of the law. While very present in business life, the corporate group remains as a legal phenomenon often invisible. Legal rules typically focused on single entities. The (often implicit) assumption of many legal rules or analyses still is that one business is conducted by one single entity. The ubiquity of corporate groups challenges this entity-centrism. The invisible man must be made visible.

Government Guarantees

Government guarantees are frequently used as an alternative form of economic interventionism (as opposed to, for instance, direct or indirect subsidies). They can have substantial financial consequences for the beneficiary as well as for the government itself.

Guarantees backed by the government are frequently used because they allow for a relative easy and accessible means to quickly intervene. The main advantage of a guarantee is its immediate and visible effects (such as an increase of credit-worthiness). Furthermore, the technique of a guarantee does not involve an immediate expense for the government. On the contrary, government guarantees typically involve some form of remuneration for the government.

The downside of a guarantee – actual payments to the beneficiary – is uncertain and typically in the future, often when other politicians are in charge and have to deal with the negative consequences. Opportunistic political decision-makers are tempted to reap the immediate advantages of a guarantee (“I saved this business or bank”), but they do not internalize possible adverse effects on public finances many years down the road. Because of the long-tail effects of guarantees, usual political control mechanisms (such as elections, no-confidence motion,…) do not work.