Does Corporate Law Matter-Legal Capital Restrictions on Stock Distributions (original) (raw)

Aspects of the regulation of share capital and distributions to shareholders

2008

It is in the area of the regulation of a company's share capital and distributions to shareholders that the inherent conflict between creditors and shareholders, and the fragile balance among shareholders internally, intersect. The share capital of a company underlies its corporate structure and represents not only its initial own funds from which creditors can be paid, but also the relative equity interests of the shareholders. The balance between shareholders can be disturbed by capital reorganisations through increase, reduction or variation of share capital or through disproportionate contributions by, or distributions to, shareholders. Share repurchases are particularly risky in this regard. Creditor interests are affected when their prior right to payment is endangered by distributions to shareholders. This study analyses the South African Law relating to share capital and distributions against the background of a comparative study of the laws of England, New Zealand, Delaware and California, as well as the provisions of the American Model Business Corporations Act. Two main approaches to creditor protection are evident. The capital maintenance doctrine, which is followed in England and Delaware, protects creditors by emphasising the notional share capital of the company as a limit on distributions. In contrast, the solvency and liquidity approach focuses on the net assets of the company and on its ability to pay its debts. New Zealand, California and the Model Business Corporations Act represent this approach. Regulatory responses to shareholder protection range from insistence on compliance with procedural requirements to minimal statutory intervention in the internal affairs of companies, instead relying on general principles of fairness and good faith. There is little correlation between a particular system's approach to creditor protection on the one hand, and to shareholder protection on the other. England, New Zealand and South Africa prescribe specific formalities, while the American approach is more relaxed. South Africa is a hybrid system. Its transition from capital maintenance to solvency and liquidity has been incomplete and its protection of equity interests is relatively unsophisticated. A number of recommendations are made for an effective and coherent approach that will safeguard the interests of creditors and shareholders alike.

2 The Nature of Corporate Finance Law 2.1 Introduction

This volume will focus on the most abstract principles of corporate finance law. This chapter will explain the definition of corporate finance law presented in the preface. The nature of corporate finance law can be explained on the premiss that the law of corporate finance is regarded as an autonomous discipline. The law of corporate finance has a distinctive character which is based on the unique nature of the tasks it undertakes. 2.2 Key Objectives of Corporate Finance Law For the firm, the law of corporate finance has one distinct objective separating it from other areas of law. The law of corporate finance should help the firm to make decisions regarding its finances in a rational way. 1 While corporate finance provides a framework that helps to make sense of the behaviour of all firms from an economic perspective, the law of corporate finance can help to make sense of the behaviour of all firms from a legal perspective. Perspective of the firm. In the law of corporate finance, the starting point should be the firm. The choice of the perspective of the firm helps to better explain corporate reality. This does not prevent investors from benefiting from corporate finance law in the same way as firms do. First, firms invest in all kinds of things themselves and can often act in the capacity of investors. Second, an investor-even a private person can be regarded as a " firm " when making investment decisions. All investors can thus use the information provided by corporate finance law when making their own investment decisions. The same can be said of funding and exit decisions. Context. The law of corporate finance is applied in the context of investments, funding, exit, and certain existential questions. All firms from small businesses to large multinational companies weigh up alternative investments and alternative ways to obtain funding. The firm will also study different exit alternatives either in 1 The rational choice theory is the prevailing theory of decision-making in microeconom-ics and much of the other social sciences that have been influenced by economics.