Foundations of Business Law

simplest form of ADR

• Parties attempt to settle a dispute informally, with or without attorneys
• Attorneys advise clients to try to settle before proceeding to trial
• Negotiations are allowed before, during and even after a trial

• Neutral third party acts as mediator and works with both sides to facilitate resolution
• Talks with parties separately and emphasizes points of agreement to help evaluate
• Mediator may propose solution but doesn’t make decisions resolving the matter

• Preferred form for business partners, employers vs. employees, parties in long-term relationships

- Jurisdiction: which court has authority to hear a case

• domestic disputes: place of jurisdiction is domicile of defendant
• contractual relationships: choice of jurisdiction clause

- Applicable law:

• international context: international private law sets rules for place of jurisdiction and applicable law
•  no international context: Swiss law applies

• Lower courts: first trial
• Appellate courts: (courts of appeal) cantons highest court, does not conduct new trials where evidence is submitted and witnesses examined
• Big cantons have special courts (commercial or labour)

1. First trial in lower court

2. Party not agreeing with lower court’s ruling files appeal

3. appellate court reviews records and challenges lower courts findings

• Federal Supreme Court is the highest judicial authority

• Federal Criminal Court, Federal Administrative Court, Federal Patent Court are below

- court fees: depend on cantonal fee and amount in dispute--> imposed on losing party and if no winner: relation percentage of amount in dispute

- attorney fees: hourly rate depending on cantonal fee schedules and amount in dipsute

Contingency fee agreement: Attorney only gets paid if he wins the case ( not allowed in CH)

1. Court must decide first whether it has jurisdiction and if it’s the appropriate venue

(forum shopping= hunting for an advantageous place of jurisdiction)

2. Characterization of cause of action in to legal categories

3.Each legal category has one or more choice of law rules to determine which competing law is applied to each issue. Questions on applicable law:

• Court will apply law of the forum to all procedural matters
• Evaluates factors that connect legal issues to laws of potentially relevant states and applies substantive laws with greatest connection

4. When applicable law is decided, law must be proved before forum court and applied to reach a judgement

5. Successful party must enforce judgment involving the task of securing cross-border recognition of judgme

CPIL: applies when a legal dispute has a foreign element and then determines place of jurisdiction and applicable law (Assessment)

- Sole partnership, General Partnership, Corporations, Limited Liability Company

• Number of owners
• Minimum capital
• Entry in Commercial Register
• Liability
• Management (of business according to the law)
• Corporate Bodies (if any)
• Sharing of profits and losses
• Taxation

- anyone doing  business without creating a separate business organization has a sole proprietorship

- Sole proprietors with annual revenues > 100’000 CHF need to be in commercial register

Adv:

• Proprietor owns entire business; has right to all the profits and makes all decisions
• Starting a sole proprietorship is easier and less costly than other forms
• More flexible; the proprietor can sell, transfer all or part of business to another party at any time
• Proprietor pays only personal income taxes on profits, which are reported as personal income on his personal income tax return

Disadv:

• Proprietor alone bears losses or liabilities incurred with business activities
• Proprietor has unlimited legal responsibilities for all obligations
• Any business debts can be satisfied by owners personal assets
• Lack in continuity; when owner dies the business automatically dissolves
• Raising capital is limited to personal funds and funds of those willing to give loans

• Two or more natural persons combine efforts and resources for a common goal
• Generally applies to a business / project with a limited time period or if a business does not fit any other legal forms (example: construction consortiums, start-up phase companies, students organizing a party)
• Do not operate under own business name and have no legal personality
• Contractual relationship with no formalities
• Partners have “intent to associate”; common interest meaning equal rights, joint ownership, share profits and losses
• Are not in commercial register and therefore not a commercial business

- General Partnership, Limited Partnership

• Co-owners have joint control over its operations; to some extent also the right to share in business’s profits
• Partner owes others and partnership fiduciary duties, like duty of loyalty (accounting for any property, profit or benefit, refrain from competing in business) and the duty of care (refrain from negligent, reckless or intentional misconduct)
• Profits and losses are shared equally between partners

- Adv:

• Can be organized quite easily and inexpensively
• Offers tax advantage “pass-through”entity (informational tax return with tax authorities; firm itself pays no taxes)
• Greater capital contributions than in sole proprietorship

- Disadv:

• Like sole proprietorship; personal liability of partners for obligations
• Partners have joint, several and unlimited liability; third party may sue all partners even if the respective partner has nothing to do with the cause
• Also lack of continuity; if a partner dies, partnership dissolves

• Consists of one or more general partners (liable to the full extent of personal assets for debts of partnership)
• Consisting also of one or more limited partners (contribute only assets, are liable only up to contributed amount)

• has its own legal personality, can be owned by one or more natural persons or legal entities; purchase of a share of stock, a person becomes shareholder (owner)

• has three bodies: general assembly, board of directors, auditing body (external auditor)

• Every member of board has fiduciary duties (care and loyalty)
• Board members that are members of other boards are obligated to fully disclose potential conflict of interest
• Board members are liable for damage caused by their intentional, negligent failure to perform duties
• Corporation, individual shareholders and creditors (in case of bankruptcy) may sue board members

• Corporation acts through board of directors, shareholders have no right or responsibility to manage
• Shareholders have ownership rights (dividends)
• Participation rights (voting rights)
• Rights for their protection (inspection of corporate books and information)

• Bearer shares are transferred by transferring share certificates
• Shares registered in owner’s name must be endorsed or assigned depending on provisions of the article of incorporation (limits on total holdings or on foreign ownership) /transfer of registered shares (requires registration of new owner in share register of company

• A holding company holds the majority of voting shared of a daughter company
• Holding company is reduced to controlling and influencing business and management of owned company; it doesn’t actively participate in operating business
• Holding company is established in low tax or no tax offshore jurisdiction

Adv:

• Limited liability of shareholders to the amount of their investment in company’s stock
• Shareholders are not personally liable under certain limited condition (“piercing the corporate veil”)
• Death of an owner hardly ever is reason to dissolve the company
• Companies’ profits are either passed on to shareholder in dividends, or retained to yield higher profit in future (retained earnings)

Disadv:

• Corporate profits are taxed at corporate rate, dividends paid out are taxed at separate rate meaning “double Taxation” since any distributed profits will eventually be taxed twice

• Legal entity, own legal personality of one or more natural persons or legal entities
• Owners (members) of an LLC can decide how to operate the various aspects of the business by forming an operative agreement relating to management, sharing profits, transfer of membership interests
• If nothing else is agreed upon, LLC is managed by its members
• The LLC has some features of the corporation (limited liabilities of the members) and also of the partnership (direct management and control by members)
• Every member has to vote for each of his quota and the transfer of quotas must be recorded in writing and published in commercial register
• Start-up capital is 20'000, which makes the LLC a form suited for SME’s and family owned businesses

- Adv:

• Liability of its members is limited to the amount of their investments, although the LLC can be held liable for any loss or injury caused by wrongful acts of members; members themselves are not personally liable
• LLC is founded by filling the articles of organization (business name, it’s address, names of registered agent and members) with the responsible governmental authority

-Disadv:

• In the US. State LLC statutes are not uniform; different from Switzerland, an LCC has the same tax advantages like partnerships, no double taxation

• In case of cash contribution, share capital is transferred to a blocked account to be held in name of the company until the company in registered.
• If the contribution is made in kind, written contribution agreement and a specific founders report need to be filed with Commercial register
• Also, an auditor has to examine the founders report
• starting capital = 100'000

• Founders adopt the articles of incorporation, subscribe to all initial shares, elect members of initial board & the auditors and have minutes of meeting notarized

• At initial meeting, board of directors determines corporations internal structure (chairman, officers etc.)
• Board of directors consists of one or more individual

• Registration must be prepared and signed by all board members and signatories and sent to commercial register with notarized minutes of meeting and additional required information
• Information includes:
•  corporation’s legal address
• Statement of acceptance of office and duties by the board members and auditors
• Disclosure off the initial capital contribution of the founders
• Major assets to be acquired
• State of non-violation of the statute on Acquisition of Real Estate by Foreigners
• Corporation becomes a legal entity when it is entered in the Commercial Register

• Board of directors is responsible for preparing annual report to shareholders
• It contains annual financial statements (profit and loss statement, balance sheet and notes)
• Report on the course of the business
• Financial status of corporation
• Listed companies: further duties (e.g. disclosure of shareholdings, corporate governance obligations etc.)

• Corporations that meet certain criterias are subject to a full scope audit
• Corporations with less than 10 fulltime employees are dispensed from duty to be audited if shareholders agree

• Shareholders meeting must be held annually within 6 months after closing of business year
• Shareholders vote on approval of annual report and financial statements, pass resolutions on agenda and elect directors and auditors for statutory term

• Corporate shares or obligations listed on stock exchange are subject to an annual listing fee
• Fee is usually paid for several years in advance as part of initial listing fee

• If a firm wants to do business with permanent presence in more than one location/more than one country, it has to choose to found a certain business form in foreign location (subsidiary) or to establish a branch

• Subsidiary is legally independent from main business form in home country (parent company); branch office is merely a dependent division of main business form
• Branch differs considerably from the business forms --> bank only grants credit if business asking for it can offer sufficient security
• If business is a branch, no special guarantee is needed as debts are automatically the debt of company holding the branch
• If business is subsidiary, banks needs separate guarantee by the patent company

- law of nations > facilitating international cooperations and giving it predictable patterns, Governs relationships between states and international entities as individual or group

(Human rights, fight against terrorism, environmental regulations, trade & development, int. criminal law)

- national law > legal dispute between private parties has a foreign element, and determines the applicable law and the place of jurisdiction

(Swiss Code of Private International Law CPIL)

- Law of supranational organizations > Nations explicitly submit their right to make judicial decisions on a set of common institutions

 (EU>sovereign nations pooling their authority through system of courts and political institutions)

Choice of law clause: determines Swiss Code of Obligations as applicable law for all disputes about contract

Jurisdiction clause: determines place of jurisdiction

• Sovereign, independent countries that pooled some of their sovereignty in order to gain strength and the benefits of size
• Community with shared institutions
• Between the fully federal system found in the United States and the loose, intergovernmental cooperation seen in the United Nations
• Based on the rule of law
• 28 Countries, 24 languages

• The four-fold freedom: single market guarantees free movement of goods, capital, services and people within EU’s member states; objective of European Economic Community (EEC)

• 1992 Maastricht Treaty set to create Economic and Monetary Union and turns EEC into EU

1. Court decides whether it has jurisdiction (procedural jurisdiction)

2. Characterization into legal categories (procedural or substantive law)

3. Legal category has one or more choice of law

4. Applicable law applied to judgment

5. Successful party must enforce judgment to secure cross—border recognition