ETH Zurich, Spring 2015 Law & Business Transactions Course Overview & Introduction Gérard Hertig.

ETH Zurich, Spring 2015

Law & Business TransactionsCourse Overview & Introduction

Gérard Hertig

G. Hertig 2

Course Overview

• Scope: This class discusses various business transactions (Section I) from a legal perspective, taking into account their economic function.

• Objective: Making participants familiar with the strategies adopted by lawmakers and the implications in terms of compliance and enforcement (Section II).

• Assessment: Graded semester performance (Section III)

• This class: Introduction to transaction costs, infrastructures, incentives, agency issues, mandates & legal options (Section IV)

18.02.2015

G. Hertig 3

I. Business Transactions1. Economic Structures of Business Transactions2. Incorporation and Limited Liability3. Transactions with Creditors4. Transactions within Group of Companies5. Related Party Transactions6. Managerial Compensation7. Transactions with Employees8. Insider Trading9. Significant Transactions10. Control Transactions11. Takeover Bids12. Regulatory Competition13. Law in Finance

18.02.2015

Business Transactions / Legal Strategies / Performance Assessment / Introduction

G. Hertig 4

1.1 Economic Structure of Business Transactions

• Small number of economic challenges underlie all deals• Corporate loans• Joint ventures• Venture capital•Mergers

• Contractual response: Solve problems without making things worse

• What are the economic challenges?18.02.2015


G. Hertig 5

1.2 Incorporation and Limited Liability

• Firm = Nexus of contracts• Legal personality • Separate patrimony– Impact for transaction counterparties– Role of managers and owners

• Limited liability– Protecting owners– ‘Piercing the veil’

18.02.2015


G. Hertig 6

1.3 Transactions with Creditors

• Debtor opportunism• Coordination among creditors• Protecting weaker creditors• Vicinity of insolvency issues– Solvent and insolvent firms–Bankruptcy vs. Restructuring

18.02.2015


G. Hertig 7

1.4 Group of Companies

• Purpose • Transactions within groups and

transactions with third parties• Transparency and solvency issues• Conflicts among owners

18.02.2015


G. Hertig 8

1.5 Related-Party Transactions

• Pervasive conflicts of interests among firm counterparties

• Related parties as a special value diversion case– Senior managers– Controlling owners

• Disclosure and approval• Fiduciary duties and prohibitions

18.02.2015


G. Hertig 9

1.6 Managerial Compensation

• What is compensation?• Aligning incentives– Deferred compensation– Cash, equity and debt

• Reporting and monitoring compensation practices

18.02.2015


G. Hertig 10

1.7 Transactions with Employees

• Treating employees like managers?• Role of unions• The codetermination experience• Employees as stakeholders– Debt and equity holders– Role of pension funds

18.02.2015


G. Hertig 11

1.8 Insider Trading

• Protecting the integrity of capital markets• Insiders and material information• Restrictions and prohibitions • Targeted transactions– Trading on non-public price-sensitive

information– Short-term trading

18.02.2015


G. Hertig 12

1.9 Significant Transactions

• Mergers and acquisitions (M&A)– Mergers– Transfer of assets

• Corporate divisions• Voluntary liquidations and restructurings

18.02.2015


G. Hertig 13

1.10 Control Transactions

• Shift of control issues• Acquiring control in a firm with no

controlling owner– Shifting control away from the board– Directors – Shareholders conflict of interest

• Acquiring control from a controlling owner– Transferring control from one owner to another– Controlling SH – Minority SH conflict of interest

18.02.2015


G. Hertig 14

1.11 Takeover Transactions

• M&A vs Takeover bids• Voluntary and mandatory bids• Rules governing takeover bids– Board neutrality– Timing and equality– Takeover defenses

18.02.2015


G. Hertig 15

1.12 Regulatory Competition• Providing choice within or across jurisdictions– Race to the bottom– Race to the top

• Choice of law considerations– Contractual freedom– Mandatory underpinning

• Choice of forum considerations– Judicial systems– Arbitration

• Innovation effects• Taxation considerations

18.02.2015


G. Hertig 16

1.13 Law in Finance

• Central role of law in finance– Contractual underpinning– Reliability in times of crises?

• Financial infrastructures are rule bound– Code is law– No space for standards?

• Financial instruments Covenants – Standardization issues– Banks vs markets?

18.02.2015


G. Hertig 17

II. Legal Strategies, Compliance & Enforcement

• Legal strategies– Use substantive law to mitigate conflicts of interests– Regulatory strategies: Dictate substantive terms– Governance strategies: Facilitate control of one party over

the other• Compliance– Comply with procedural and substantive law– Ex ante rather than ex post– Organization, conformity and monitoring

• Enforcement– Enforcement agents and sanctions– Probability to be detected, prosecuted and sanctioned

18.02.2015


G. Hertig 18

III. Performance Assessment• Graded semester performance • Suggestions: Write a 1’000 to 1’500 words

– Comment upon a paper – Summary and critique of a US, French, German, Italy UK or US case related to one of the to be discussed issues (e.g. related party transactions) and present it during the related class

• Your choice has to be pre-approved at least 15 days prior to the related class

• You may ask for my comments on your outline, presentation and /or first draft

• A final version of the paper/summary-critique has to be filed in before July 31, 2015

18.02.2015


G. Hertig 19

IV. Introduction

4.1 Transaction costs

4.3 Incentives

4.4 Conflicts of interests = Agency issues

4.5 Mandates and legal options

18.02.2015


G. Hertig 20

4.1 Transaction Costs

• Doing business– Search and information costs– Bargaining costs– Drafting, negotiating and implementing a contract– Policing and enforcement costs

• Law can reduce these costs– Duty to inform– Standard clauses– Burden of proof

18.02.2015


G. Hertig 21

4.2 Incentives

• Rewards – Awards– Compensation

• Liability– Blame– Damages, fines and other monetary sanctions

• Extrinsic vs. intrinsic motivation

18.02.2015


G. Hertig 22

4.3 Agency Issues

• Principal and Agent– Debtor and creditor– Shareholder and manager– Controlling shareholder and minority shareholder

• Moral hazard issues• Adverse selection issues

18.02.2015


G. Hertig 23

4.4.1 Mandatory Provisions

• Parties cannot depart from rule or standard• Motivation– Efficiency (e.g. minimize transaction costs)– Social considerations (e.g. protection of weaker party)– Politics

18.02.2015

Business Transactions / Regulatory Strategies / Performance Assessment / Introduction

G. Hertig 24

4.4.2 Default Rules and Legal Options I• Default rules– Binding if parties do not make a different choice– Standardization advantages: Established case law– Network effects and reputation considerations

• Opt-out options– Standardized alternative in the presence of default– Statute and self-regulation

• Opt-in options– Standardized possibility in the absence of default– Statute and self-regulation

18.02.2015


G. Hertig 25

4.4.2 Standardization and Stickiness

Framework No Option Opting-out Opting-in

Default rule 4 3 2

No default rule 0 - 1

18.02.2015


ETH Zurich, Spring 2015 Law & Business Transactions Course Overview & Introduction Gérard Hertig.

Documents

Transcript of ETH Zurich, Spring 2015 Law & Business Transactions Course Overview & Introduction Gérard Hertig.