Company Law Rules Research Articles

The Flexibility of Company Law: The Lessons of the Hungarian Law Reform

Until 2013, the substantive rules of Hungarian company law were regulated by various company acts. When Hungary adopted a new Civil Code in 2013, it included, for the first time in Hungarian legal history, the substantive rules of company law. One of the most controversial novelties of the new company law rules was the provision that gave unprecedented freedom to company members to deviate from the company law rules of the Civil Code, as long as the Civil Code does not expressly prohibit the deviation or it does not manifestly prejudice to the rights of creditors, employees or a minority of the members of the legal person or hider the supervision of the lawful operation of the legal person. This article analyses this provision from a comparative perspective. The analysis compares the English, American, German and Hungarian solutions and finds that there are significant differences regarding the right of the parties to determine the company’s articles of association. Building on the findings of this comparison, the article argues that a more enabling regulatory approach could facilitate the pursuit of interests beyond the narrow interests of company members, using the example of corporate purpose and employee participation.

Changes and Reactions in the Fundamental Issues of Hungarian Company Law – Contributions to International Trends in Legal Regulation, Liability and Corporate Governance1

Throughout the first decades of the 21st century there have been numerous traditional and modern impacts on Hungarian company law. As a result of the codification of Hungarian civil law, the Civil Code of 2013 incorporated the previously effective substantive legal regulations of company law. Prior to this, Hungarian company law had undergone several modifications, beginning with the change of regime in 1989, through the years of its preparation to join the European Union, and during the initial phases of digitalization. Some more recent influences are, on the one hand, either international in origin (for instance: corporate governance, compliance), or, on the other hand, approaches taken from the legal debates on company law, which have evolved with the development of the law. Modern results demand both reconsideration and synthesis, in order to enable company law to fulfil its duties and achieve its purpose. Company law, corporate governance, mandatory and default rules, liability of director, liability of member, Hungary, Hungarian Civil Code, comply or explain, invalidity of memorandum of association, business association.

Why Should Company Law Be Renewed From Time to Time?

Is it necessary to renew the regulation of company law from time to time? On the one hand, company law reacts with its regulative environment, therefore the constant amendment, improvement of its rules seems reasonable. Yet, on the other hand, the core of company law is pure and stable, and there is no need to reinvent it. Hungarian company law has always been subject of constant modifi cations, yet we regard only three instances for its true renewal. The fi rst was the coming into force of the fi rst Act on Business Associations in 1988, which served as the means for the creation of market capitalism and thus led to the political changes that followed. The second was the coming into force of the Civil Code in 2014, which implemented a mainly default approach in the regulation of legal persons, a clear principle providing a wide range of freedom for legal entities in their internal affairs. The third, however, was not a planned and designed renewal, as it was forced by the new coronavirus pandemic. The rules to apply in the crisis overwrote even some of the hard-core rules of company law for the sake of fl exibility and simplicity – is it going to be the next trend in the course of renewal?

Trustworthy AI and Corporate Governance: The EU\u2019s Ethics Guidelines for Trustworthy Artificial Intelligence from a Company Law Perspective

AI will change many aspects of the world we live in, including the way corporations are governed. Many efficiencies and improvements are likely, but there are also potential dangers, including the threat of harmful impacts on third parties, discriminatory practices, data and privacy breaches, fraudulent practices and even ‘rogue AI’. To address these dangers, the EU published ‘The Expert Group’s Policy and Investment Recommendations for Trustworthy AI’ (the Guidelines). The Guidelines produce seven principles from its four foundational pillars of respect for human autonomy, prevention of harm, fairness, and explicability. If implemented by business, the impact on corporate governance will be substantial. Fundamental questions at the intersection of ethics and law are considered, but because the Guidelines only address the former without (much) reference to the latter, their practical application is challenging for business. Further, while they promote many positive corporate governance principles—including a stakeholder-oriented (‘human-centric’) corporate purpose and diversity, non-discrimination, and fairness—it is clear that their general nature leaves many questions and concerns unanswered. In this paper we examine the potential significance and impact of the Guidelines on selected corporate law and governance issues. We conclude that more specificity is needed in relation to how the principles therein will harmonise with company law rules and governance principles. However, despite their imperfections, until harder legislative instruments emerge, the Guidelines provide a useful starting point for directing businesses towards establishing trustworthy AI.

Taking Directors Seriously: A Silver Bullet for Triggering the Creditors’ Interest Duty—Part II

Directors of solvent companies owe a fiduciary duty to shareholders qua the company. If a company becomes technically insolvent, the duty switches to the company’s creditors. This is uncontroversial. However, the duty is also said to switch some point before, i.e., in the ‘vicinity of insolvency’. Therefore, directors must be able to make decisions which do not prejudice shareholders, in a way that is free from exposure to claims by creditors. This uncertainty stems from the case law, where the rules of company law have been confused with the policies underlying insolvency law. The two bodies should be considered separately despite their interrelationship in practice. Doing so reveals the proper and fair function of the duty. Its application should be limited to cases of technical insolvency only. While special cases may be made for irresponsible or negligent risktaking by directors, this should be the exception – not the rule. This article is the second of two parts examining this issue, focussing on the current trigger for the duty and exploring possible solutions. Company law, insolvency law, directors’ duties, fiduciary duties, agency costs

Taking Directors Seriously: A Silver Bullet for Triggering the Creditors’ Interest Duty—Part I

Directors of solvent companies owe a fiduciary duty to shareholders qua the company. If a company becomes technically insolvent, the duty switches to the company’s creditors. This is uncontroversial. However, the duty is also said to switch some point before, i.e., in the ‘vicinity of insolvency’. Therefore, directors must be able to make decisions which do not prejudice shareholders, in a way that is free from exposure to claims by creditors. This uncertainty stems from the case law, where the rules of company law have been confused with the policies underlying insolvency law. The two bodies should be considered separately despite their interrelationship in practice. Doing so reveals the proper and fair function of the duty. Its application should be limited to cases of actual insolvency only. While exceptions may be made for cases of irresponsible or negligent risk-taking, this should be the exception – not the rule. This essay is the first of two parts, and examines the emergence of the duty and possible justifications. company law, insolvency law, directors’ duties, fiduciary duties, agency costs

Further Legal Determinants of External Finance in Scotland: An Intra-UK Market for Incorporation?

Previously in this journal the author reviewed Scots law's corporate debt finance rules from a transaction cost perspective. Recent research has identified that use of the Scottish corporate vehicle has significantly dropped for companies listing on the London Stock Exchange, even for those companies with headquarters in Scotland. This article explores whether this could be said to be caused by differences in company law rules between English and Scots law. It identifies that there are low transaction cost differences when it comes to known differences, but that Scots law is at a disadvantage when it comes to implicit differences (for example, the nature of a share) and uncertain company law differences from English law (for example, whether the Duomatic principle, or any other equity-based English company law principle, applies under Scots law). The framework for a market for company law exists intra-UK. As such, it seems possible that the reduction in use of the Scottish form arises because of higher transaction costs when using the Scottish form. This represents a methodological development for company law more generally – an atomisation approach, distilling company law into its component private law aspects.

General Principles of EU Corporate and Insolvency Law

Over more than forty years, the European Union (formerly the European Community) has enacted a large number of directives aimed at harmonising company law rules across Member States. Nevertheless, differences across Member States persist with regard to company law rules. Member States’ regimes share a core of fundamental features: shareholders are not liable for the company's debts; companies have a separate legal personality; and the capital investment is commodified through the vehicle of freely disposable shares. Beyond these fundamental elements, it is more uncertain whether other general principles, having legal relevance, exist throughout the EU. By looking at national company law regimes and EU harmonising directives, this work has isolated only two principles that seem sufficiently general, common, and fundamental. The first principle is the unrestricted powers of directors to act on behalf of the company: this principle is based upon the German tradition and has been extended to public companies of all Member States by the First Company Law Directive of 1968. The second principle is equal treatment of shareholders who are in the same condition: this is a general duty that all companies’ bodies should respect when they make decisions that affect shareholders. Such a principle, however, is not a rigid equality rule, as differentiated treatment might still be justified in the interest of the company. However, its status within case-law of the European Court of Justice it is still unclear: on the one hand, the Court has denied that this duty is a general principle of EU law, with the consequence that it only applies within the scope of the specific provisions entailing this rule; on the other hand, other decisions of the Court seem to follow an opposite logic. Concerning insolvency law, it is much more controversial whether general principles exist within the EU legal order. Insolvency proceedings are country-specific, as most of their rules have a re-distributive impact on a broad range of stakeholders of the company, such as employees, creditors, and customers. Therefore, insolvency regimes are strictly related to political balances and national social security policies. The only common denominator of Member States insolvency regimes seems to be the duty to treat creditors equally and respect pre-insolvency entitlement and creditor ranking. Nevertheless, there is also an intricate web of exceptions to this principle, which vary broadly across jurisdictions and aim at protecting specific classes of creditors.

Payment of (Extraordinary) Dividends: What if the Company Law Rules are Breached?

This article on payment of dividends focuses on situations where the company law rules on this subject are breached. The reason for this is that, in practice, lawyers, auditors, and others dealing with company law sometimes encounter situations where a company has paid dividends to its shareholders, but the company law rules on payment of dividends are breached. This is especially true with regard to extraordinary dividends, which is why the article focuses on such dividends. However, situations do occur where a company has paid ordinary dividends to its shareholders, but the company law rules on payment of such dividends are breached. Drawing on the Consolidated Company Law Directive (CCLD), the article starts by discussing the requirements for paying dividends. Next, still drawing on CCLD, it discusses the consequences of paying dividends if these requirements are not met. Finally, it explores the differences between CCLD and the European Model Companies Act (EMCA) with regard to payment of dividends. The article points to a number of ways in which the CCLD provisions on payment of dividends could be improved. Such improvements are necessary in order to maintain the important balance between creditor and shareholder protection. Company Law, Consolidated Company Law Directive (CCLD), European Model Companies Act (EMCA), Dividends, Extraordinary Dividends, Interim Dividends.

Mandatory and Default Rules in Polish Company Law

Company law regulations provide opportunity of individual shaping some of companies’ and partnerships’ rules of operation. Proper determination of those regulations which may be modified by adopting different rules in articles of association (company statues, partnership agreement) is important as far as legal safety of corporate regulations is concerned. Abusing or misunderstanding of company law regulations may lead to invalidity of contractual arrangements that would infringe mandatory regulation of company law. The article provides a general view on the principle of freedom of shaping company articles of association in Polish company law as well as ways of distinguishing between mandatory, semi-mandatory and default rules in Polish company law. Apart from general remarks and indications helpful in understanding Polish law, it also provides specific examples of company regulations in Poland and references to company law rules in other European countries.

Trustworthy AI and Corporate Governance – The EU’s Ethics Guidelines For Trustworthy Artificial Intelligence from a Company Law Perspective

AI will change many aspects of the world we live in, including the way corporations are governed. Many efficiencies and improvements are likely, but there are also potential dangers, including the threat of harmful impacts on third parties, discriminatory practices, data and privacy breaches, fraudulent practices and even ‘rogue AI’. To address these dangers, the EU published its 'Ethics Guidelines for Trustworthy AI’. The Guidelines produce seven principles from its four foundational pillars of respect for human autonomy, prevention of harm, fairness and explicability. If implemented by business, the impact on corporate governance will be substantial. Fundamental questions at the intersection of ethics and law are considered but, because the Guidelines only address the former without much reference to the latter, their practical application is challenging for business. Further, while they promote many positive corporate governance principles, it is clear that the Guidelines' general nature leaves many questions and concerns unanswered. In this paper we examine the potential significance and impact of the Guidelines on selected corporate law and governance issues. We conclude that more specificity is needed in relation to how the principles therein will harmonise with company law rules and governance practices. However, despite their imperfections, until harder legislative instruments emerge, the Guidelines provide a useful starting point for directing businesses towards establishing trustworthy AI.

The application of the German model of company law to the banking sector: A private law measure to avert systemic risk

Since bank failures and its systemic and contagion effects have become an issue, various ex-ante and ex-post solutions have been contemplated and put forward to tackle the bank failure or and to manage its consequences. Among the ex-ante measures to tackle and avert the excessive risk-taking by banks, regulatory intervention through mandatory capital adequacy as exemplified in the Basel Accords, has been popular. However, even the most recent arrangements for implementing the capital adequacy standards have not been very successful leading to regulatory failures. Bank failures not only inflict costs and losses to the shareholders and depositors of the bank, the managers of which take excessive risk, but also the contagion effects mean the losses are extended to the banking system and the society at large. In this paper, we are proposing an ex-ante private law mechanism through the reform of company law rules to stop excessive risk-taking by the bank managers, and therefore avoiding the systemic risk which has far more ramifications for society as a whole. The solution we are proposing is rather a corporate governance scheme under which a two-tier management regime consisting of a supervisory board and management board. As it has been the feature of German company law, the supervisory board allows stakeholders of the bank including depositors and central banks, employees and creditors, to participate in the management of the company and control the executive members of the board in terms of the level of risk-taking. This ex-ante mechanism as a private law measure is theoretically more effective and less costly compared to regulatory schemes.

Privredna društva i privredno sudstvo

The company law rules governing commercial companies, being a special sphere of substantive law, are not and cannot by themselves constitute a closed regulatory system. Practical legal life of numerous substantive institutes of company law is possible only within the complete legal surrounding and in delicate cooperation between substantive and procedural regulation. At this moment, the Serbian legal scene is characterized by an evident gap between legislative aspiration which covers the sphere of substantive provisions governing commercial companies (Law on commercial companies) aimed at following the trends of the company law regulation in the leading European countries and harmonised regulation within this sphere on the level of EU and regulation which covers the procedure of enforcement of those institutes in practice, both contentious and extra contentious, both judicial and arbitration. Of course, this does not mean that regulation of substantive law institutes, especially the institutes which have their procedural side, is always fully acceptable and exemplary in all their aspects. In this article the author critically discusses, before all, shortcomings of Serbian companies' regulation which governs substantive law institutes having corresponding procedural aspects: arbitrability of internal company disputes (companies' members - members, members - board of directors, companies' members - company) and special companies' actions that are recognized and regulated by law (arbitrability of derivative action, arbitrability of individual action, arbitrability of class action); shortcomings of existing substantive legal regime of derivative action, which are the main reason of the scarce presence of this type of action in judicial practice; shortcomings of existing legal regime of individual action (especially on the level of covering the zone of reflective losses), as well as the shortcomings of legal regime of the class action as a kind of collective action (especially of its legal effect on non-participants in the procedure before courts or arbitration) and, finally, representative actions. The author draws the conclusion that it is necessary to review the substantive regulation in order to remove any possible ground for interpretation that internal companies' disputes are not arbitrable (capable of being resolved by arbitration under the arbitration agreement). In the same vein, the author submits that it is necessary to thoroughly modify the existing procedural regulation, in order to make procedural aspects of company lawsuits more straightforward and indisputable (litispendancy objection and res iudicata objection - the need to establish only the objective identity of the subject-matter of the disputes, procedural costs related to derivative actions, legal effect of class action on non-participants in litigation or arbitration procedure, practical aspects of representative legal actions and so on). Finally, the author proposes the introduction of the possibility for alternative competence of public notaries for numerous extra-contentious procedures which can now be brought only before commercial courts. As an argument in favour of this proposal, the author puts forward that, at present, public notaries are competent to perform various non-contentions procedures (this could partly compensate for their almost complete non-justifiable exclusion from the sphere of company law, which is the current approach taken by the Serbian public notary law).

Company Law, Connecting Factors and the Digital Age – A New Outlook

Usually connecting factors in company law play a decisive role with regard to the corporate governance model of a company and with regard to the level of protection of stakeholders. Their importance generated a long-lasting debate on which connecting factor is “better” and which one is compatible with internal market rules. However, technological developments and digitalisation shed a different light on this discussion. In order to understand how the current developments impact the discussion on company law connecting factors, it should first be clear what is really understood by connecting factors in the jurisprudence of the Court of Justice. It is important to understand the relationship between substantive company law rules and those on conflict of laws. The outcome of the above analysis allows to add the digitalisation/new technologies factor into the equation. In this context, a closer look is given at the use of artificial intelligence applications in company law and the operation of a decentralised autonomous organisation within a blockchain network. It allows to question the effectiveness and usefulness of traditional connecting factors.

A Rule-based Comparison and Analysis of Ten Case Studies

Drawing on data derived from ten hypothetical case studies, we adopt a rule-based comparative evaluation of the company laws of twelve different jurisdictions. The ten case studies examine topics relating to directors’ duties and liabilities generally and in the context of takeovers, the protection of creditors, including the relationship between creditors and a company, and the law governing shares, shareholders’ rights and protection and the flexibility of company law. Each of the corporate law issues raised by the ten case studies are addressed by national reporters appointed in respect of the US (Delaware), UK, Germany, France, the Netherlands, Italy, Spain, Poland, Finland, Latvia, South Africa and Japan. This paper compares and contrasts the formal company law rules recognised by each of these twelve countries as applicable in respect of the ten case studies, as well as the effects and consequences of the application of those rules. The value in the comparative assessment of the form and function of the relevant company law rules in each of the twelve jurisdictions under review lies in the additional light they can cast on four of the most enduring debates in comparative company law. These concern the propositions that: (i) the pressures exerted by the increased pace of globalisation, international competition, interest groups, and imitation will inevitably lead to the convergence of company law rules (in terms of form or function) across all jurisdictions in the world, and in particular, assimilation to the US model of corporate law and governance (“the convergence proposition”); (ii) the patterns and structures of shareholder ownership (dispersed/outsider v concentrated/insider) of public joint stock companies in a country's main stock exchange will influence the nature and strength of the shareholder protection rules applicable in that country (“the patterns of share ownership proposition”); (iii) countries have a preference for a shareholder primacy model of corporate governance over that of a stakeholder or director primacy framework (“shareholder primacy proposition”); and (iv) the civilian legal origin of a country will influence its company law rules to such an extent that it will be inferior to a country that has its origins in the common law with regard to the level of (a) investor protection, (b) financial development, (c) access to finance, (d) government ownership and regulation, (e) security of property rights and (f) contract enforcement (“the legal origins proposition”). The authors seek to demonstrate what a careful analysis of the form and function of each of the legal rules operative in the twelve jurisdictions can reveal about the strength of each of these propositions. The conclusions are drawn that there is a lack of evidence for the legal origins, patterns of share ownership, and convergence propositions, but some available for the shareholder primacy one. The broader economic and legal policy implications of these findings are subsequently examined and conclusions drawn.

The Polbud-Case and New EU Company Law Proposal: Expanding the Possibilities for Cross-Border Conversions in Europe.

On 25 October 2017, the European Court of Justice ruled in the Polbud-case that a cross-border conversion is permitted on the basis of the freedom of establishment, even if the converted company does not conduct any economic activities in the new home Member State. On 25 April 2018, the European Commission proposed new company law rules to enable companies to make best of business opportunities in the EU’s Single Market and to ensure that cross-border conversions, mergers and divisions are accompanied by adequate safeguards against abuse. This directive explicitly refers to the Polbud-case. In this article the Polbud-judgment is discussed in the broader context of cross-border conversions. Furthermore, the proposal of the European Commission is discussed and the antitax abuse provision thereof.

Posljedice nedozvoljene konkurencije privrednom društvu

The company is a stratified entity in which more interests of different groups of subjects are incorporated, starting from the interests of the founders themselves or owners of the company, i e. shareholders, across interests of employees and managers, to the interests of third parties which are in legal relations with company. In such a constellation of relationships, the interest of the very company as a separate legal entity is highlighted and should be superior to all other interests. As a result, certain categories of subjects, and especially those who are in a position to manage or significantly influence on the management of a company, must also to comply with the statutory duties towards the company, including the prohibition of competition. The goal of establishing this prohibition is the protection of the company's interests and, consequently, the other interests that can be incorporated under the interest of the company. In this way, company is protected from the reduction of business opportunities through unfair competition by related persons and thus from down­sizing possibility of increasing assets, too. Therefore, in addition to the general rules of the law on obligations about compensation of damages, special company law rules can be applied and the consequences can be divided on property (such as compensation of damage or accounting for profits) and status one (like exclusion of a member from the company or removal of responsible person, i e. termination of contractual relationship, as well as prohibition of performing competitive activities). On an autonomous basis, company may also foresee cases of exclusion from the duty of competition or can give consent for that exclusion in each individual case or, at least, eliminate the property consequences of the violation of the prohibition in relation to the responsible persons.

Dopuszczalność „złotej akcji” w polskim systemie prawa spółek

The admissibility of the “golden share” in Polish stock companyThe present article is devoted to admissibility of the “golden share” in Polish stock company. The current legislation does not explicitly allow or prohibit the existence of this statutory instrument. The article considered the possibility of granting such special privileges both as a shareholding privilege and as a personal right granted to a shareholder. The admissibility of these concepts has been assessed on the basis of the rules and common rules of company law, as well as the concepts incompatible with them has been criticised. In addition, the issue of statutory “gold shares” of the State Treasury, which grants the relevant minister a right to object to the specific decisions of the company, is outlined. Regulations and concepts under the current and previous law has been compared, as well as the above solutions were compared with the general rules and principles of company law.

Market Soundings: The Interaction between Securities Regulation and Company Law in the United Kingdom and Italy

Before deciding on operations involving share issuance or sale, companies or shareholders may seek to disclose information to selected investors, in order to gauge their opinion on the envisaged market operation. Despite such “market soundings” risk violating the prohibition of insider trading, selective disclosures have been partially accepted in several European jurisdictions. Market soundings have been eventually regulated in the MAR, which clarifies under which circumstances they are allowed and the position of the involved parties. This article analyses the rules on market soundings in the MAR with regard to issuance in the secondary market and accelerated bookbuildings. In this context, the question arises of whether harmonised rules on market soundings are compatible with national company law regimes. To address this issue, it will be assessed how Italian and English company law regimes react towards selective disclosures. It will be shown that a tension may still exist between uniform rules on market abuses and national company law rules, mostly with regard to directors’ duties and liabilities.

When arbitration clause and oppression claim collide

The question regarding the position of arbitration clauses within the context of shareholders’ protection under company law rules has been dealt with in a decision from the United Kingdom, Exeter, which upheld the inalienable right of the members to bring an oppression claim despite the presence of an arbitration agreement. The issue was recently revisited in several common law jurisdictions – United Kingdom, Malaysia, Singapore and Hong Kong with mixed results. The article discusses this development to clarify the scope, breadth and limits of the arbitration clause within company law.