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Managing Cash Flow and Control Risks of Financial Contracting

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The Strategic CFO

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Abstract

This chapter studies financial contracting from the perspective of the firm. It is assumed that the firm can be regarded as the principal and that it tries to control the behaviour of its investors. The purpose of the chapter is, therefore to study some customary legal ways for the firm to reduce agency costs and manage risk in its dealings with investors. It is further assumed that the characteristic finance-related legal problems of a non-financial firm relate to the availability and cost of funding and the exit of investors rather than the performance of its own financial investments. The chapter focuses on the most typical strategic questions inherent in funding and exit: the funding mix; the availability of funding; leverage; share ownership structure; and the decision whether to go public or private.

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Notes

  1. 1.

    Mäntysaari, P (2010a, Section 1.1).

  2. 2.

    See, for example, Williamson OE (1985, pp. 171–195). In neoclassical economics, which describes the firm as a production function, the firm as such does not really exist: it is just a means of transforming inputs into outputs. Fama EF (1980, pp. 288–307 at p. 290).

  3. 3.

    For the three levels of rationality, see Williamson OE (1985, p. 44): The strong form contemplates maximizing. Bounded rationality is the semistrong form. The weak form is organic rationality.” For the firm’s rational decision-making, see Mäntysaari, P (2011, Section 4.3).

  4. 4.

    Mäntysaari, P (2010a, Section 8.3).

  5. 5.

    Alchian, AA (1950, pp. 211–221), Mäntysaari, P (2010a, Section 8.2.6).

  6. 6.

    Mäntysaari, P (2010c, Section 9.2).

  7. 7.

    Mäntysaari, P (2010c, Section 2.4, pp. 16–17).

  8. 8.

    Mäntysaari, P (2010c, Section 2.4).

  9. 9.

    Mäntysaari, P (2010c, Section 5.6.2, p. 170, Section 5.10.2, pp. 224–227, Sections 8.3, 12.4.2, and 20.5.2).

  10. 10.

    Mäntysaari, P (2010b, Section 5.6.2, pp. 182–184).

  11. 11.

    Mäntysaari, P (2010b, Section 5.6.2, p. 184).

  12. 12.

    Mäntysaari, P (2010b, Section 5.6.2, pp. 180–182); Mäntysaari, P (2010c Section 4.3).

  13. 13.

    Welton v Saffery, [1897] AC 229; Mäntysaari, P (2005, Sections 4.5.3 and 5.5). For the role of block-holding, see Mäntysaari, P (2010c, Section 18.1, p. 504) and Mäntysaari, P (2010a, Section 2.7.3).

  14. 14.

    For the regulation of corporate risk management, see Mäntysaari, P (2010a, Chapter 7).

  15. 15.

    Tirole, (2006, pp. 99–100); Mäntysaari, P (2010c, pp. 4–5).

  16. 16.

    see Mäntysaari, P (2011, Section 9.4).

  17. 17.

    Mäntysaari, P (2010c, Sections 3.2 and 10.2.2).

  18. 18.

    Bebchuk LA (2005, pp. 833–914).

  19. 19.

    Mäntysaari, P (2010c, Section 5.4).

  20. 20.

    Articles 25 and 29 of Directive 77/91/EEC (Second Company Law Directive).

  21. 21.

    Mäntysaari, P (2010c, Section 5.11.4).

  22. 22.

    Mäntysaari, P (2010c, Section 5.6.5, p. 179).

  23. 23.

    Mäntysaari, P (2010c, Sections 5.3 and 5.4).

  24. 24.

    Bratton WW (2006, pp. 39–87); Mäntysaari, P (2010b, Section 11.6.2, pp. 319–326).

  25. 25.

    Mäntysaari, P (2010c, Section 8.1).

  26. 26.

    Mäntysaari, P (2010c, Section 2.4).

  27. 27.

    Mäntysaari, P (2010a, Section 6.3).

  28. 28.

    Mäntysaari, P (2010c, Section 9.2).

  29. 29.

    Mäntysaari, P (2010c, Section 5.1, pp. 131–132).

  30. 30.

    Article 16 and recitals 39 and 40 of Directive 2008/48/EC (Consumer Credit Directive).

  31. 31.

    Mäntysaari, P (2010c, Section 4.2, p. 95).

  32. 32.

    For a list of structural takeover defences, see Article 10(1) of Directive 2004/25/EC (Directive on takeover bids); Mäntysaari, P (2010c, Chapter 18).

  33. 33.

    For example, Articles 7 and 23(3) of Directive 78/855/EEC (Third Company Law Directive); Mäntysaari, P (2010c, Section 5.11.4).

  34. 34.

    Directive 2004/25/EC (Directive on takeover sids).

  35. 35.

    Article 15 of Directive 77/91/EEC (Second Company Law Directive).

  36. 36.

    Article 19(1) of Directive 77/91/EEC (Second Company Law Directive) as amended by Article 1(4) of Directive 2006/68/EC.

  37. 37.

    For the “equity technique” and the “legal capital regime”, see Mäntysaari, P (2010c, Sections 5.1–5.4).

  38. 38.

    Mäntysaari, P (2010c, Section 10.2).

  39. 39.

    Mäntysaari, P (2010c, Section 9.2).

  40. 40.

    For English law, see Section 178 of the Insolvency Act 1986; Liquidators of SSSL Realisations (2000) Ltd v AIG Europe (UK) Ltd [2004] EWHC 1760 (Ch); Transmetro Corporation Ltd v. Real Investments Pty Ltd (1999) 17 ACLC 1314. For German law, see §§ 108–111 InsO.

  41. 41.

    For German law, see § 103 InsO.

  42. 42.

    Mäntysaari, P (2010b, Section 5.5).

  43. 43.

    Generally, see Mäntysaari, P (2005); Bebchuk LA (2005, pp. 833–914).

  44. 44.

    Bratton WW (2006, pp. 39–87); Mäntysaari, P (2010b, Section 11.6.2); Mäntysaari, P (2010c, Section 4.3).

  45. 45.

    MBCA § 6.40; § 64 GmbHG; Chapter 13 § 2 of the Finnish Company Act of 2006; Chapter 17 § 3 of the Swedish Company Act of 2005.

  46. 46.

    Mäntysaari, P (2010a, Section 8.7.2).

  47. 47.

    Directive 77/91/EEC (Second Company Law Directive). See also Mäntysaari, P (2010c, Section 5.4); Enriques J, Macey J (2001, pp. 1174–1183).

  48. 48.

    Directive 78/855/EEC (Third Company Law Directive).

  49. 49.

    Directive 2005/56/EC (Directive on cross-border mergers).

  50. 50.

    Mäntysaari, P (2010c, Sections 5.11.4 and 5.6.5).

  51. 51.

    Mäntysaari, P (2010c, Section 17.4 and Chapter 18). For the limited powers of shareholders to decide on management matters, see Bebchuk LA (2005, The Case for Increasing Shareholder Power, Harvard Law Review 118, pp. 833–914).

  52. 52.

    Mäntysaari, P (2005, Chapter 6).

  53. 53.

    Article 9(2) of Directive 2004/25/EC (Directive on takeover bids). In contrast, the City Code on Takeovers and Mergers applied in the UK market strictly prohibits management from employing any defensive tactics that would have the effect of frustrating an actual or anticipated bid.

  54. 54.

    Articles 15–24 of Directive 77/91/EEC (Second Company Law Directive). See also Mäntysaari P (2010c, Section 10.2.2).

  55. 55.

    Mäntysaari, P (2010c, Section 5.9).

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Authors and Affiliations

  1. Department of Accounting and Commercial Law, Hanken School of Economics, Helsinki, Finland

    Petri Mäntysaari LLM (Professor)

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  1. Petri Mäntysaari LLM
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Correspondence to Petri Mäntysaari LLM .

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Editors and Affiliations

  1. und Recht i. Gr., EBS Business School, EBS Universität für Wirtschaft, Gustav-Stresemann-Ring 3, Wiesbaden, 65189, Germany

    Ulrich Hommel

  2. EquityGate Advisors GmbH, Mainzer Str. 19, Wiesbaden, 65185, Germany

    Michael Fabich

  3. EquityGate Advisors GmbH, Mainzer Str. 19, Wiesbaden, 65185, Germany

    Ervin Schellenberg

  4. Ackeranlagen 7, Schwäbisch Hall, 74523, Germany

    Lutz Firnkorn

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Mäntysaari, P. (2011). Managing Cash Flow and Control Risks of Financial Contracting. In: Hommel, U., Fabich, M., Schellenberg, E., Firnkorn, L. (eds) The Strategic CFO. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04349-9_10

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  • DOI: https://doi.org/10.1007/978-3-642-04349-9_10

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