1. ETH Zurich, Spring 2015 Law & Business Transactions Course Overview & Introduction Gérard 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) 18.02.2015G. Hertig2

3. I. Business Transactions 1.Economic Structures of Business Transactions 2.Incorporation and Limited Liability 3.Transactions with Creditors 4.Transactions within Group of Companies 5.Related Party Transactions 6.Managerial Compensation 7.Transactions with Employees 8.Insider Trading 9.Significant Transactions 10.Control Transactions 11.Takeover Bids 12.Regulatory Competition 13.Law in Finance 18.02.2015G. Hertig3 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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? 18.02.2015G. Hertig4 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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’ 18.02.2015G. Hertig5 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig6 Business Transactions / Legal Strategies / Performance Assessment / Introduction

7. 1.4 Group of Companies Purpose Transactions within groups and transactions with third parties Transparency and solvency issues Conflicts among owners 18.02.2015G. Hertig7 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig8 Business Transactions / Legal Strategies / Performance Assessment / Introduction

9. 1.6 Managerial Compensation What is compensation? Aligning incentives – Deferred compensation – Cash, equity and debt Reporting and monitoring compensation practices 18.02.2015G. Hertig9 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig10 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig11 Business Transactions / Legal Strategies / Performance Assessment / Introduction

12. 1.9 Significant Transactions Mergers and acquisitions (M&A) – Mergers – Transfer of assets Corporate divisions Voluntary liquidations and restructurings 18.02.2015G. Hertig12 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig13 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig14 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig15 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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? 18.02.2015G. Hertig16 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig17 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig18 Business Transactions / Legal Strategies / Performance Assessment / Introduction

19. IV. Introduction 4.1Transaction costs 4.3Incentives 4.4Conflicts of interests = Agency issues 4.5Mandates and legal options 18.02.2015G. Hertig19 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig20 Business Transactions / Legal Strategies / Performance Assessment / Introduction

21. 4.2 Incentives Rewards – Awards – Compensation Liability – Blame – Damages, fines and other monetary sanctions Extrinsic vs. intrinsic motivation 18.02.2015G. Hertig21 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig22 Business Transactions / Legal Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig23 Business Transactions / Regulatory Strategies / Performance Assessment / Introduction

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 18.02.2015G. Hertig24 Business Transactions / Regulatory Strategies / Performance Assessment / Introduction

25. 4.4.2 Standardization and Stickiness FrameworkNo OptionOpting-outOpting-in Default rule 432 No default rule 0-1 18.02.2015G. Hertig25 Business Transactions / Regulatory Strategies / Performance Assessment / Introduction