Tutorial 2
Recap week 1
Divide all case law in outbound and inbound.
Kornhaas  insolvency procedure in Germany was allowed because the center of interest
was there. In the insolvency directive art. 3 it says this.
Also almost all of the shares and the registered office and a branch were in Germany.
Study questions for the lecture
In what way and on which levels can employees be involved in company matters?
German company law does this by requiring that a certain number of labor representatives sit
on the supervisory board.
What are the advantages and disadvantages of such involvement?
Is employee protection only a matter of labor law or also company law? If so, in what way?
Which stakeholders in your opinion fall within the ambit of company law and therefore
deserve protection by company law rules?
Study questions for the tutorial
What kind of issues are regulated in the US at the federal level and what kind of company
law related issues are regulated at the state level?
Federal law focuses on disclosure in the contexts of securities offerings, takeovers, annual
and quarterly meetings of shareholders, as well as combating fraud in connection with such
activities.
2 levels: federal and state level
State level is about regulating company law.
 interstate commerce clause gives the federal congress the power to regulate company
law, but they have not done that yet, because companies are seen as creatures of state law.
Exceptions? Crisis and …-case
Most important sources:
Model Busnisess act
Delaware …  most companies are registered there. Most laws are optional, so there’s a lot
of freedom to make rules.
EU:
States use incorporation or real seat theory for companies coming outside of the EU.
 not allowed for EU companies, because of Inspire Art-case
What is the interstate commerce clause? What does it entail and what is its influence on
company migration in the US?
A provision in the constitution which vests the federal congress with the power to regulate
commerce among the states.
What is the internal affairs doctrine?
The internal affairs doctrine is a longstanding choice of law principle which recognizes that
only one state should have the authority to regulate a corporation’s internal affairs – the
state of incorporation.
What is the relevance of the Vantagepoint case?
Examen is a Delaware corporation that did majority of business in California.
Examen wanted to merge with another corporation
The merger required shareholder approval. Vantagepoint (a shareholder) opposed the
merger
Conflict of laws: difference between how votes would be counted under Delaware and
California law
Vantagepoint had enough share to veto the merger under California standard, but not under
Delaware standard
Examen sued to determine what law should apply
Delaware law follows internal affairs doctrine, which states that the law of a state of
incorporation should govern any disputes regarding corporations’ internal affairs
California law exercises power over corporations that are ‘pseudo-foreign’ because they
conduct most of their activities or have a majority of their shareholders in the state but are
incorporated in another state.
The Supreme Court affirmed with the trial court that the Delaware internal affairs doctrine
should apply. The issue about voting and mergers involves the relationship between a
corporation and its shareholders. Therefore it is an internal affair.
 the company was duly established, so these rules should apply. California wanted to add
another layer of rules, but the court denied that.
Re-incorporation: you change the applicable law. Usually in the US you make a new
company and transfer all the assets to this new company. This can also be done by a merger.
In the EU this can be done by cross-border merger and conversion.
Regulatory competition: the law is offered as a product. It can attract users and compete
with other states.
Delaware effect:
Race to top/ race to the bottom: it leads to negative effects, it leads to good effects (there’s
an invisible hand. better regulation,
Main difference EU and US  the EU can regulate. The EU is a supervisory organization
which gives guidelines which than can be incorporated in national law.
Agency costs:
Control directors with rules and standards
Rule: something to do or not to do
Standard: open ended measure  do something to your best ability.
3 ways to supervise and monitor:
Germany has two tier board structure; this is mandatory in the AG and in GmbH companies
with over 500 employees. Shareholders appoint the supervisory board. The Board of
Directors is appointed by the supervisory board. In companies with over 2000 employees,
half of the supervisors should be elected by employees.
UK: one tier board executive and non-executive directors  companies act art. 160, 168
US: one tier board  p. 368 (election)
Aktiengesetz par. 93 is a standard
Par . 88 is a rule
Fiduciary duty: duty that a trustee of the company has. Basically, that you do your job well,
e.g. duty of care, skill. It’s the legal obligation of the beneficiary.
What is the role of the BoD and the supervisory board?
Board of directors:
- Day to day business
- Representation
Supervisory board:
- Appointment and removal of directors
- Supervision
- Approval of certain transactions
Which board models can be distinguished?
One-tier board structure  no director has specific, supervisory duties over any other.
Two-tier board structure  certain directors fulfill a supervisory role and others perform a
management role
How does the German system of employee board level representation (or codetermination)
work?
Co-determination, or employee representation on the board of a company, is a way of
protecting labor interests by inserting persons with contacts and duties to the employees on
the administrative organ of a company. Here the composition of the board is itself seen as a
protection.
5 regimes of co-determination:
1. Co-determination pursuant to the Montan Co-Determination Act
2. Co-determination pursuant to the DrittelbG
3. Co-determination under the Co-Determination Act 1976
4. MgVG provides for a special co-determination regime for the surviving company in a
cross-border merger.
5. Co-determination under the SEBG and the SCEBG
Does the UK also have employee board level representation?
Do the German rules of codetermination hinder the freedom of establishment?
In what way is directors’ behavior regulated? And what is the difference between a rule and
a standard?
A standard prescribes how a person should act or fulfill a function or task, and it operates as
an open-ended measure against which the quality of performance can be assessed ex post.
A rule names something specific that the management must do or not do.
To whom do directors owe their duties under the various company laws?
In Germany, a director’s duties of care and loyalty run directly to the company.
UK: a director’s duty is owed to the company. Courts traditionally found that the interest of
the company was best understood as the aggregate of the shareholder’s interest.
What are the duties of directors?
Day to day business
Representation
Managers have to act in accordance with the standards of due care (duty of care) and loyally
(duty of loyalty)
What does the duty of loyalty entail?
The director cannot make a decision for the company which damages the company while
benefiting the director himself
What does the duty of care entail?
A director has the duty to exercise reasonable care, skill and diligence.
 this means the care skill and diligence that would be exercised by a reasonably diligent
person with (a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the director in relation to the
company, and (b) the general knowledge, skill and experience the director has.
What standards of loyalty and care must directors meet?
Who appoints the BoD in the various jurisdictions?
Germany:
UK:
What is the enlightened shareholder model and in which jurisdiction is it used?
Directors have to act in principle in the interest of the shareholders, but also in the interest
of other stakeholders
Example: UK
What distinguishes the role of the board from that of other professionals and does it require
a different judicial standard of review?
What is the business judgement rule? And in which countries is it applicable? (Germany, The
UK, Delaware?) and what are the differences?
the business judgment rule is a “presumption that in making a business decision the directors of a corporation
acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of
the company.
US and Germany, have it.
Burden of proof in Germany is with the directors, in the US with the claimants. In the US
there is a presumption, this is not in Germany. This leads to the presumption. You can read
this in par. 93(1)
Disney
Facts?
Oritz (president)
Contract 5 years without cause?
 130 million $
Ovitz contrary to his fiduciary duties?
Eisner
Rules?
Breach of duty of good faith
 he was in bad faith
High threshold to hold director liable:
 Actual intent to do harm to corporation
 Gross negligence
 why? No risks
Reasoning?
Business judgement rule  the judge will assume directors have taken a decision in good
faith.
No bad faith, so no breach of fiduciary duties because he was not fit for the role.
CASE 1
Part 1
Apocalypso board: Emma, Allen, Spock
Conflict of interest
She’s making use of business opportunities
Germany
Duty of loyalty  hold her knowledge and capabilities in benefit of the company
Standard: par. 93
Rule: par. 88 (prohibition of competition)
UK
Standard: par. 175  duty to avoid conflicts of interests, par. 177
Rule: par. 172  duty to promote the success of the company
US
Standard: good faith, loyalty
Rule: art. 144
Part 2
Germany
Standard: risk
Rule: businesses judgement rule (par. 93)
UK
Standard: there is no business judgement rule in the UK, put a pseudo form of it
Rule: par. 172
US
Standard: good faith/ loyalty
Rule: business judgement rule