142 5 Equity and Shareholders’ Capital
For all such reasons, the legal capital regime protects the firm by creating equity
capital through those staggered constraints (see below). The legal capital regime is
designed to protect minority shareholders. Indirectly, it even protects creditors.^36
Although it is primarily a risk management and corporate governance tool,^37 it is
usually understood as a creditor protection mechanism – or a failed creditor pro-
tection mechanism (see below). However, the legal capital regime cannot be un-
derstood from the perspective of creditor protection only.
Legal capital regime v minimum capital regime v leverage ratio. A legal capital
regime can be distinguished from a mere minimum capital regime such as the
Basel II framework, and from a leverage ratio regime such as that applied to banks
in the US and in Switzerland.
The most fundamental difference between the legal capital regime applied to
limited-liability companies in some countries and the minimum capital regime ap-
plied to financial institutions relates to corporate governance. Whereas the legal
capital regime consists to a large extent of corporate governance rules, the mini-
mum capital regime only lays down constraints on governance.^38 It is a regime that
must be complied with, but the regime says nothing about corporate governance
issues such as internal decision-making.
Unlike the legal capital regime, the minimum capital regime is typically de-
signed to protect the financial infrastructure. On the other hand, even creditors,
shareholders, and the firm may benefit from the mitigation of corporate risk and a
reduction of systemic risk.
One of the failings of the Basel II minimum capital regime is that it does not
prevent extreme leverage.^39 In the future, this could be cured by the introduction
of a leverage ratio restriction designed to constrain the maximum degree to which
(^34) BGHZ 90, 381 (“Beton- und Monierunion”); BGHZ 119, 191 (WestLB). See also Dam-
nitz M, Degenhardt J, Faktische Geschäftsführung und kapitalersetzende (Bank-)Darle-
hen bei der AG, Wertpapier-Mitteilungen 31/2005 pp 583–591.
(^35) See Obergericht des Kantons Zürich, judgment of 19.1.1993; BGE, judgment of
2.3.2006, 5C.230/2005. For an introduction, see Stöckli U, Das kapitalersetzende
Darlehen im Konkurs einer Aktiengesellschaft, Der Schweizer Treuhänder 2007/9 pp
662–666.
(^36) See also Arbeitskreis Bilanzrecht der Hochschlullehrer Rechtswissenschaft (AKBHR),
BB 2002 p 2375, cited in Pellens B, Sellhorn T, Zukunft des bilanziellen
Kapitalschutzes. In: Lutter M (ed), Das Kapital der Aktiengesellschaft in Europa, ZGR,
Sonderheft 17. De Gruyter Recht, Berlin (2006) p 459.
(^37) See also Booth RA, Capital Requirements in United States Corporation Law. In: Lutter
M (ed), Das Kapital der Aktiengesellschaft in Europa, ZGR, Sonderheft 17. De Gruyter
Recht, Berlin (2006) p 720.
(^38) For the distinction between governance and constraint on governance, see Mäntysaari P,
Comparative Corporate Governance. Shareholders as a Rule-maker. Springer, Berlin
Heidelberg (2005) Chapter 2.
(^39) Mewling and puking, The Economist, October 2008: “A rule change in 2004, which al-
lowed the Wall Street firms to use the new calculations, showed that they continued to
be well capitalised on a risk-adjusted basis even as they drove their absolute levels of
leverage sky-high ... For three of the five broker-dealers, that had fatal consequences.”