Legal, ollLlcal and ollcy LnvlronmenL of Lhe MarkeL (LL)

Irom Crad|e to Grave:

When do bus|nesses |nteract w|th governments?
1echnlcal noLe

Macle[ klsllowskl, h.u., M..A., M.8.A., LL.M
klsllowskl[ceu.hu
Cfflce 203




2 1echnlcal noLe


CLu 8uslness School rofessor Macle[ klsllowskl lrom Cradle Lo Crave

!"#$%&' #))#*+,"&)-.
LxcerpL A: !onaLhan Macey, CorporaLe Covernance: romlses kepL, romlses 8roken, selecLed pages,
LxcerpL 8: ConsLance L. 8agley, Cralg L. uauchy, 1he LnLrepreneur's Culde Lo 8uslness Law, selecLed
pages
LxcerpL C: 8ay AugusL eL al, lnLernaLlonal 8uslness Law 3
Lh
ed., selecLed pages

Introduct|on
8uslnesses lnLeracL wlLh governmenLs aL every sLage of Lhelr llfe cycle. 1o reallze Lhe scope and
lmporLance of Lhese lnLeracLlons, however, we need Lo deflne Lhe word 'governmenL' a llLLle dlfferenLly
from how Lhe word ls used ln a popular parlance. lor a pollLlcal analysL, 'governmenL' ls noL only a
councll of mlnlsLers, or even cenLral admlnlsLraLlve apparaLus. lL ls raLher Lhe enLlre lnsLlLuLlonal
sLrucLure of a sLaLe, whlch execuLes cerLaln unlque powers over sLaLe's clLlzens. MosL governmenLs
comprlse leglslaLlve, execuLlve and [udlclal branches.
1hls broader undersLandlng of Lhe concepL of governmenL ls lmporLanL especlally when we wanL Lo puL
buslness-governmenL lnLeracLlons lnLo a more sLraLeglcally sophlsLlcaLed perspecLlve. 1hlnk abouL a
publlcly Lraded company whose upcomlng merger ls expecLed Lo be banned by a naLlonal anLlLrusL
regulaLor. Managers of Lhls company should conslder varlous response LacLlcs: Lhey can lobby Lhe
regulaLor Lo change lLs lncllnaLlon. 1hey can lobby members of parllamenL Lo puL pressure on Lhe
regulaLor. 1hey flnally can walL for Lhe unfavorable declslon and appeal lL ln courL. lrom a sLraLeglc
perspecLlve, managers should choose a LacLlcs LhaL maxlmlzes Lhe chance of success. laced wlLh such a
cholce, managers wlll be lll advlsed Lo puL Lhe parllamenL, Lhe regulaLory agency, and Lhe courL lnLo
separaLe concepLual boxes.
WlLh Lhls broad vlew of governmenL and governmenLal relaLlons ln mlnd, we wlll, durlng our flrsL
sesslon, go Lhrough a llfe cycle of a corporaLlon and dlscuss Lhose momenLs, when lL crosses paLhs wlLh
governmenLal agencles of varlous klnds. 8ecause, however, Lhe educaLlonal quallLy of Lhls flrsL sesslon
resLs parLlcularly heavlly on your conLrlbuLlon Lo Lhe dlscusslon, ln Lhls noLe l ouLllne lLs baslc sLrucLure.
l also puL forward some quesLlons and lnclude Lhree shorL readlngs as food for your LhoughL.

1. Incorporat|ng your company
lor managers, conLacLs wlLh governmenL precede even Lhe very esLabllshmenL of Lhelr buslness. Cn
Lhe one hand, Lhe process of esLabllshlng a buslness as a legal enLlLy (commonly referred Lo as
%&*/01/0#)%/&) ls conducLed under Lhe conLrol of governmenLal agencles, especlally Lhe 8eglsLry
CourL. Cn Lhe oLher hand, however, Lhe legal form LhaL Lhe enLlLy Lakes Lo a large exLenL
deLermlnes Lhe naLure and lnLenslLy of !"#"$% lnLeracLlons wlLh governmenLal apparaLus.
As Lhls laLLer aspecL ls, from a pracLlcal vlewpolnL, more lmporLanL, we wlll spend mosL of our Llme
analyzlng lL. 1he flrsL sLep here ls Lo be aware of whaL opLlons a manager has ln Lerms of a range of
posslble legal forms of buslness. 1he paleLLe of opLlons ls deLermlned by naLlonal corporaLe laws,
and lL varles slgnlflcanLly from counLry Lo counLry. 1he Lable below presenLs Lhe ma[or forms
exlsLlng ln Pungary and 8omanla:
1echnlcal noLe 3


lrom Cradle Lo Crave rofessor Macle[ klsllowskl CLu 8uslness School

Pungary 8omanla
rlvaLe and publlc company llmlLed by shares
(ZrL. and nyrL.)
!olnL sLock company (SA)
LlmlLed llablllLy company (kfL) LlmlLed llablllLy company (S8L)
arLnershlp llmlLed by shares (SCA)
LlmlLed parLnershlp (bL) LlmlLed parLnershlp (SCS)
Ceneral parLnershlp (kkL) Ceneral parLnershlp (SnC)

lor our class dlscusslon, please Lry Lo come up wlLh a slmllar llsL descrlblng legal forms of 23-%&"--
#--/*%#)%/&- (whlch ls a generlc Lngllsh expresslon for buslness organlzaLlons, such as companles or
parLnershlps) ln your counLry. Also, please Lhlnk abouL organlzaLlons you worked for: ln whaL legal
form are Lhey organlzed?
When Lhlnklng abouL boLh your counLry's general Lypes of buslness assoclaLlons and organlzaLlon(s)
you worked for ln parLlcular, please conslder Lhree followlng lssues:
Who are Lhe owners of a buslness assoclaLlon? WhaL are Lhelr powers? 1o whaL exLenL are
Lhey responslble for llablllLles of Lhe buslness enLlLles?
WhaL ls Lhe mlnlmal caplLal needed Lo esLabllsh buslness enLlLy of a glven klnd?
WhaL are Lax lmpllcaLlons of organlzlng your buslness ln a glven legal form?

2. Corporate Governance
CorporaLe Covernance - Lhe way ln whlch rlghLs and responslblllLles are shared beLween dlfferenL
corporaLe acLors" (8lowfleld and Murray 2008, 36) - ls a ma[or managerlal Loplc on whlch we can
Louch only very brlefly. ?eL CorporaLe Covernance lssues and challenges are lmporLanL Lo us as Lhey
ofLen Lrlgger buslness-governmenLs lnLeracLlons.
1o prepare for our dlscusslon on Lhose Loplcs, Lhlnk abouL a governance sLrucLure of Lhe buslness
organlzaLlon you worked for. WhaL are formal and real cenLers of power and responslblllLles for
ma[or sLraLeglc declslons?
1hen, read LxcerpL A (from !onaLhan Macey's book) LhaL you wlll flnd aLLached Lo Lhls 1echnlcal
noLe. 1he LexL should help you Lhlnk abouL Lhe lnsLances when governmenLs can and (llkely)
lnLervene ln corporaLe governance maLLers.

3. Lnter|ng |nto contracts
8ead LxcerpL 8 (8agley & uauchy book). 1ry Lo come up wlLh an example of a complex conLracL ln
whlch you or a company you worked for was a parLy. Lxamples may lnclude buylng or selllng an
4 1echnlcal noLe


CLu 8uslness School rofessor Macle[ klsllowskl lrom Cradle Lo Crave

aparLmenL, renLlng offlce space, hlrlng ouLslde consulLanLs, or selllng goods your company
produced.
WhaL are Lhe Lhlngs LhaL wenL or could have gone wrong? Pow were Lhose Lhlngs correcLed/dealL
wlLh by Lhe parLles? uld governmenLal lnsLlLuLlons ([udlclal, execuLlve) need Lo lnLervene? lf so, ln
whaL clrcumsLances and ln whaL capaclLy?

4. Dea||ng w|th a 'regu|atory state'
Modern economles cannoL be run solely by Adam SmlLh's 'lnvlslble hand.' As Cllver Wllllamson, Lhe
2009 nobel rlze wlnner ln economlcs noLes, areas of markeL lmperfecLlons or fallures need Lo be
'paLrolled' by a neL of |nst|tut|ons. Among Lhose lnsLlLuLlons are varlous governmenLal agencles
empowered Lo regulaLe speclflc sectors of econom|es, such as flnanclal servlces or
LelecommunlcaLlon, or parLlcular types of market fa||ures (anLlLrusL agencles, envlronmenLal
proLecLlon agencles eLc.). nowadays, Lhe neL of regulaLory lnsLlLuLlons ls so Lhlck LhaL
admlnlsLraLlve lawyers ofLen use expresslons such as 'regulaLory sLaLe' or 'regulaLory branch of
governmenL' Lo descrlbe Lhese lnsLlLuLlons.
1o geL a beLLer sense of a sLraLeglcally effecLlve approach Lo buslness lnLeracLlons wlLh Lhe
'regulaLory sLaLe,' we need Lo know a llLLle more abouL speclflc problems wlLh free markeL LhaL
[usLlfy governmenLal regulaLlon ln Lhe flrsL place. We wlll spend mosL of Sesslon 2 dlscusslng Lhose
lssues, and you wlll geL a nlce prevlew of LhaL dlscusslon once you geL Lo Lhe readlngs asslgned for
Sesslon 2. We wlll also focus on a number of speclflc areas of regulaLlon laLer ln Lhls course.
lor now, ln order Lo offer you a more or less compleLe plcLure of buslness-governmenL lnLeracLlons
LhroughouL Lhe llfe cycle of a buslness assoclaLlon, leL me llsL Lhe baslc areas of governmenLal
regulaLlon LhaL exlsL ln vlrLually every developed economy:
4a) Ant|-trust regu|at|on
4b) Lnv|ronmenta| protect|on regu|at|on
4c) Customer protect|on regu|at|on
4d) Labor r|ghts regu|at|on
4e) Secur|t|es market regu|at|on (regu|at|ng compan|es ||sted on a stock exchange)
4f) Workp|ace hea|th and safety regu|at|on
4g) 1e|ecommun|cat|on regu|at|on
4h) I|nanc|a| serv|ces regu|at|on (banks, |nsurance compan|es, |nvestment funds etc.)
4g) Ut|||t|es regu|at|on (e|ectr|c|ty, water supp|y etc.)
1hls ls buL a small sample. noL surprlslngly Lhen, sLraLeglzlng lnLeracLlons wlLh regulaLors wlll be a
ma[or focus of our course.


1echnlcal noLe S


lrom Cradle Lo Crave rofessor Macle[ klsllowskl CLu 8uslness School

S. ay|ng taxes
lllllng Lax reLurns ls perhaps Lhe mosL regular way ln whlch buslnesses lnLeracL wlLh governmenLs.
?eL durlng our class dlscusslon we wlll focus on Lhose buslnesses and buslnesspersons, who. don'L
lnLeracL wlLh Lhelr governmenL Lhls way - who don'L pay Laxes and Lhereby declde Lo [oln Lhe ranks
of Lhe shadow economy.
reparlng for Lhls parL of our dlscusslon, please Lhlnk abouL a buslness you know LhaL operaLes ln
Lhe shadow economy. Conslder sLraLeglc moLlvaLlons guldlng managers' declslon Lo 'go unofflclal:'
whaL are Lhe advanLages? WhaL are Lhe downsldes? WhaL are Lhe rlsks? Conslder also Lyplcal ways
ln whlch Laxes are avolded (all or some of buslness LransacLlons, and lf some - whlch ones).

6. Dea||ng w|th |nte||ectua| property r|ghts
1echnlcally speaklng, lnLellecLual properLy ls one of Lhe areas of governmenLal regulaLlon. 8uL lL has
some speclflc characLerlsLlcs LhaL warranL separaLe LreaLmenL. MosL lmporLanLly, lL does noL
operaLe on Lhe basls of a governmenLal agency LhaL 'paLrols' a glven economlc area. lnsLead, as Lhe
name suggesLs, lnLellecLual properLy ls based on concepLs analogous Lo physlcal ('real') properLy,
wlLh a prlvaLe parLy - a person or a buslness assoclaLlon - belng able Lo acqulre and (for a llmlLed
Llme) keep a property r|ght Lo a glven porLlon of lnformaLlon, knowledge or forms of arLlsLlc
expresslon.
LxcerpL C (from 8ay AugusL eL al. book) offers a prellmlnary descrlpLlon of four ma[or Lypes of
lnLellecLual properLy rlghLs:
CopyrlghLs,
aLenLs,
1rademarks, and
know-Pow.
Colng Lhrough Lhls readlng wlll prepare you well for our class dlscusslon.

7. Inso|vency
8ankruptcy proceed|ngs are Lhe acLlons Laken when an lnsolvenL buslness assoclaLlon seeks a
moraLorlum on lLs obllgaLlons Lo reorganlze lLs acLlvlLles or Lo geL llquldaLed. lL's lmporLanL Lo add
LhaL preclse Lermlnology dlffers from counLry Lo counLry: ln some legal sysLems, 'bankrupLcy' ls
undersLood solely as a proceedlng LhaL normally leads Lo Lurnlng an lnsolvenL company around. ln
oLhers, mosL noLably ln Lhe unlLed SLaLes, bankrupLcy ls an overarchlng Lerm LhaL lncludes Lwo sub-
Lypes: reorgan|zat|on and ||qu|dat|on. ln our class, l wlll follow Lhe laLLer Lermlnologlcal convenLlon.
8ankrupLcy proceedlngs are usually conducLed under Lhe overslghL of a bankrupLcy courL, an
lnsolvenL buslness assoclaLlon seeklng bankrupLcy proLecLlon wlll auLomaLlcally become LlghLly
supervlsed by a governmenLal body (Lhe courL), LogeLher wlLh lLs buslness's credlLors.
6 1echnlcal noLe


CLu 8uslness School rofessor Macle[ klsllowskl lrom Cradle Lo Crave

Moreover, many Luropean legal sysLems prescrlbe relaLlvely broad crlmlnal penalLles for managers
gullLy of mlsmanagemenL - even when no ouLrlghL fraud was commlLLed. 1he 2008-2009 flnanclal
crlsls demonsLraLed yeL anoLher lmporLanL way ln whlch governmenLs lnLervene ln companles
faclng lnsolvency: when a company ls deemed 'Loo blg Loo fall,' l.e. when lLs llquldaLlon ls predlcLed
Lo cause Loo much collaLeral economlc or soclal damage, governmenLs (or, Lo be preclse, Lhelr
execuLlve branches) are ofLen wllllng Lo 'save' Lhe company by offerlng preferenLlal loans or even
by purchaslng large percenLage of company's sLock (whlch means effecLlvely naLlonallzlng lL).

Excerpt A
Jonathan Macey, Corporate Governance: Promises Kept, Promises Broken
Excerpt B
Constance E. Bagley, Craig E Dauchy, The Enrepreneurs Guide to Business Law
Excerpt C
Ray August et al., Internatonal Business Law 5th ed.