Summary: Corporate Law Notes

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  • 1 What is corporate law?

    This is a preview. There are 15 more flashcards available for chapter 1
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  • What is the prime function of corporate law?

    To provide enterprises with a legal form that includes the five basic legal characteristics, making transactions easier and lowering coordination costs
  • What is the function of a corporate charter? (Contract)

    Sets out the basic terms of the relationship among the firm's shareholders and the firm's directors/other managers
    - Can become a medium for creditors and employees
  • What is the gap-filling effect of corporate law?

    Contracts/ charters have the disadvantage of being for long periods of time. So they do not move with environmental/economic changes 
    - This is why corporate law adopts default rules for changes in circumstances
  • What is achieved by a legal personality?

    This makes it possible for corporations to operate as a single contracting party
  • Which three foundational rules form the basis for an effective and efficient "legal personality"?

    1. Entity shielding - firm's assets are protected from personal creditors
    2. Authority - delegated management
    3. Procedure - firm sues, not the individual owners
  • What is the difference between private and public limited liability corporations?

    Private: transferable shares, but not freely transferable (not traded on a public market)
  • Explain the following sentence: "It is far easier for the owner of a corporation to transfer her shares than it would be for a sole proprietor to transfer her contracts"

    Transferability of shares: corporations legal personality assure its contractual counterparties that the bundle of contracts will be kept together, even when the owners switch. It then adresses free transferability of all contracts "bundle assignability)
  • What is the difference between strong entity shielding and weak entity shielding?

    Strong: both rules apply
    Weak; only the priority rule applies 
  • What are unlimited liabilities and partnership with pro data liability?

    Unlimited liabilities: risk is depending on how business has been done in the past 

    Partnership with pro data liability: owners are liable for firms' debts to a fraction of their profit share
  • What is asset partitioning?

    Business assets are pledged as security for business creditors and personal assets are pledged as security for personal creditors
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