Corporate Governance and Financial Management
Case 2C explains important decisions in capitalist companies, especially financial statements, capital, reserves, exit rights, and the end of the company.
Financial Statements and Approval Process
The financial statements are the company’s annual accounts. They are prepared by the directors but approved by the General Meeting. They include:
- The balance sheet
- Income statement
- Statement of changes in net worth
- Cash flow statement
- Notes
The directors also prepare the management report and the proposed distribution of earnings. The General Meeting approves the accounts and decides what to do with the profits.
Bylaw Amendments and Auditing
Any amendment of bylaws must be approved by the General Meeting. Bylaws are the internal rules of the company; if the company changes important elements such as the registered office, corporate purpose, or capital, the bylaws must be amended.
The auditor is an independent person or firm that checks the financial statements. The auditor verifies whether the accounts show a true and fair view of the company’s net worth, financial position, and earnings. Auditors may be appointed by the General Meeting or by the Companies Registrar.
Social Capital, Equity, and Reserves
Social capital is the amount contributed by partners or shareholders, while equity represents the company’s net worth. Social capital is a component of equity. A company can increase or decrease its social capital, but this decision must be approved by the General Meeting. If the capital changes, the bylaws must also be amended.
Reserves are profits kept by the company instead of being distributed. The legal reserve is mandatory and protects creditors. The company must allocate 10% of yearly profit to the legal reserve until it reaches 20% of social capital. After that, the General Meeting may decide whether to distribute profits as dividends or keep them as voluntary reserves. Restricted reserves cannot be freely used or distributed, while unrestricted reserves can be used more freely.
Exit Rights for Partners and Shareholders
The exit of partners or shareholders refers to the right of a member to leave the company. This may happen when the company adopts important decisions and a partner does not vote in favor. Examples include:
- Change of corporate purpose
- Extension of the company term
- Company reactivation
- Creation or amendment of ancillary commitments
- Changes to the rules on transfer of stakes in a Limited Liability Company
The bylaws may also add other causes for exit.
Dissolution, Liquidation, and Extinction
Dissolution is the decision to start closing the company. It may be decided by the General Meeting or by the courts. Causes include:
- Interruption of activity
- Completion or impossibility of the corporate purpose
- Governing body deadlock
- Serious losses
- Capital below the legal minimum
- Excessive non-voting shares or stakes
- Causes established in the bylaws
Liquidation is the process of selling assets, paying debts, and distributing what remains, carried out by liquidators. Extinction is the final disappearance of the company when its cancellation is registered in the Mercantile Register.