The Law of Corporate Finance: General Principles and EU Law (eBook)

Table of Contents 5
1 Introduction 9
1.1 What Does Corporate Finance Law Mean? 9
1.2 Why Was This Book Written? 10
1.3 What Are the Themes of This Book? 11
1.4 General Principles and the Firm 16
2 The Nature of Corporate Finance Law 18
2.1 Introduction 18
2.2 Key Objectives of Corporate Finance Law 18
2.3 Corporate Finance Law and Efficiency 24
2.4 Comparison with Other Fields of Law 25
2.5 Key Tools and Practices in Corporate Finance Law 28
3 Management of Cash Flow: General Remarks 29
3.1 The Scope of Legal Considerations 29
3.2 Generic Ways to Manage Cash Flow 30
4 Management of Risk: General Remarks 35
4.1 Introduction 35
4.2 Legal Risk 37
4.2.1 Introduction 37
4.2.2 Different Categories of Legal Risk 38
4.2.3 The Effect of the EU on Legal Risk 40
4.2.4 Excursion: Directly Applicable Community Law 47
4.3 Management of Legal Risk 52
4.3.1 Introduction 52
4.3.2 Strategic Level 54
4.3.3 Operational Level 55
4.3.4 Transactional Level 68
4.4 Management of Risk by Legal Means 73
4.4.1 Introduction 73
4.4.2 Living with Risk 74
4.4.3 Transfer of Risk Through Incorporation 77
4.4.4 Community Law, Incorporation, Governing Law 88
4.4.5 Transfer of Risk Through Contracts 98
4.4.6 Mitigation of Risk Through Diversification 100
5 Agency, Risk, Transparency, Governance 102
5.1 Corporate Risk Management v Corporate Governance 102
5.2 Partly the Same Legal Tools 102
6 Management of Agency in General 104
6.1 Introduction 104
6.2 Behaviour Modification 106
6.3 Choice of the Scope of Agency 110
6.4 Alignment of Interests 111
6.5 Monitoring (Transparency) 114
6.6 Choice of Agents 114
6.7 Rules and Standards 115
6.8 Initiation and Ratification 116
6.9 Trusteeship and Reward 117
6.10 The Role of Legal Background Rules 118
7 Corporate Risk Management 120
7.1 Introduction 120
7.1.1 General Remarks 120
7.1.2 Financial Theory, Strategy, and the Firm 120
7.1.3 Corporate Risk Management as a Business Discipline 121
7.1.4 Costs, Risk Level, Compliance, Agency, Information 123
7.2 Strategic Risk Management 125
7.3 Operational Risk Management 128
7.4 Fundamental Organisational Measures 130
7.5 Excursion: Dealings with Third Parties 138
7.6 The Regulation of Corporate Risk Management 140
7.6.1 Introduction 140
7.6.2 Basel II and Ratings 141
7.6.3 Fair Value Accounting of Financial Assets 144
7.6.4 Basel II and the Governance of Banks 147
7.6.5 The MiFID and Risk Management 148
7.6.6 Disclosure of Risk 151
7.6.7 The Contents of Risk Management Policies 158
8 Agency and Corporate Governance 163
8.1 Introduction 163
8.2 Three-level Choices, Theory of Corporate Governance 169
8.2.1 General Remarks 169
8.2.2 First Level, Artificial Person 170
8.2.3 First Level, Organisation 171
8.2.4 First Level, Legal Organisation v Real Organisation 172
8.2.5 Second Level, the Firm as the Principal 173
8.2.6 Third Level, the Interests of the Firm 176
8.3 The Function of the Board 178
8.4 Particular Remarks: Extreme Cases 183
8.5 The Function of Stakeholders 187
8.6 Allocation of Value and Risk 188
8.7 The Role of Shareholders 189
8.7.1 The Interests of Shareholders 189
8.7.2 The Function of Shareholders 192
8.7.3 The Relative Importance of Shareholders 197
8.7.4 Should the Share Price Be Maximised? 199
8.7.5 What Does Making a Profit for Shareholders Mean? 200
8.7.6 What Are Shareholders Paid For? 201
8.7.7 How Can the Board Increase the Value of Shares? 203
8.7.8 Why Should the Firm Use Takeover Defences? 205
8.7.9 Why Are Shareholders Protected by Laws? 206
8.7.10 Should Shareholders Have Formal Powers? 208
9 Management of Agency in Corporate Governance 212
9.1 Introduction 212
9.2 Dealing with Different Agents: General Remarks 213
9.2.1 Agent Mix 213
9.2.2 Industries as Agents 214
9.2.3 The Firm as an Agent 215
9.2.4 Society at Large as an Agent 216
9.2.5 Shareholders as a Class as Agents 217
9.2.6 Individual Shareholders as Agents 220
9.2.7 Banks and Other Lenders as Agents 223
9.2.8 Customers and the Public as Agents 225
9.2.9 Managers as a Class as Agents 226
9.2.10 Individual Managers as Agents 237
9.2.11 The Board as an Agent 239
9.3 Community Law 244
9.3.1 Introduction 244
9.3.2 Separation of Decision Management and Control 247
9.3.3 Monitoring by the Board 252
9.3.4 Financial Reporting and Transparency 255
9.3.5 The Alignment of Interests, Financial Rewards 270
9.4 Controlling Shareholders’ Corporate Governance Tools 275
9.4.1 Introduction 275
9.4.2 Block-holding as a Corporate Governance Tool 276
9.4.3 The Board as a Corporate Governance Tool 292
9.5 Minority Shareholders’ Corporate Governance Tools 306
9.5.1 Introduction 306
9.5.2 Avoidance of Risk 308
9.5.3 Mitigation of Risk in Advance 308
9.5.4 Equivalent Treatment 311
9.5.5 Block-holding as a Corporate Governance Tool 312
9.5.6 Different Classes of Shares 320
9.5.7 Voting Caps 325
9.5.8 Exit Rights 325
9.6 “Good Corporate Governance” as a Tool 329
9.7 Outsourcing as a Corporate Governance Tool 332
10 Management of Information 337
10.1 Introduction 337
10.1.1 General Remarks 337
10.1.2 Information and Information Economics 338
10.1.3 Dealing with Information Problems 341
10.1.4 The Role of Legal Rules on Information 346
10.1.5 Corporate Finance Law, Information, the Firm 348
10.2 Information Management in Corporate Finance Law 350
10.2.1 Introduction 350
10.2.2 Information Delivery Chain 350
10.2.3 Legal Tools and Practices: General Remarks 354
10.3 Legal Tools and Practices: Investment in Information 354
10.3.1 General Remarks 354
10.3.2 Automation, Standardisation 355
10.3.3 Separate Decisions, Contracts 355
10.4 Legal Tools and Practices: Incoming Information 357
10.4.1 Introduction 357
10.4.2 Transfer of Risk 358
10.4.3 Intermediaries, Improving Information Quality 358
10.4.4 Creating Incentives 361
10.4.5 Screening of Potential Intermediaries 363
10.4.6 Identifying Good Intermediaries 365
10.4.7 Identifying Bad Incentives 368
10.4.8 Being Optimally Informed 370
10.4.9 Mitigating the Risk of Attribution of Information 372
10.5 Legal Tools and Practices: Outgoing Information 375
10.5.1 Introduction 375
10.5.2 Keeping Information Secret 376
10.5.3 Benefiting from Superior Information 393
10.5.4 Increasing the Perceived Usefulness of Information 397
10.5.5 Management of Reputation 403
10.5.6 Establishing or Restricting Communication 406
10.6 Analysis of Rights and Duties Relating to Disclosure 416
10.7 Community Law 417
10.7.1 Introduction 417
10.7.2 Main Policy Choices 418
10.7.3 Regulation of the Quality of Financial Information 427
10.7.4 Regulation of Intermediaries: General Remarks 440
10.7.5 Information Analysts Outside the Target 441
10.7.6 Information Analysts Inside the Target 456
10.7.7 Information Analysts Inside the Firm 467
10.7.8 Regulation of Outgoing Information Otherwise 468
References 472