152 5 Equity and Shareholders’ Capital
- The 1984 Revised Model Business Corporation Act (RMBCA) follows a simp-
le balance sheet rule (there is a solvency test and a balance sheet test according
to which assets must be at least equal to liabilities after a distribution). - Both Delaware and New York follow simple surplus rules (shares have a par
value; a corporation may pay dividends to the extent that assets exceed liabili-
ties plus stated capital). - California follows a percentage test (no par value, two alternative tests, a cor-
poration may pay a dividend to the extent of retained earnings or to the extent
that remaining assets will equal at least 125% of liabilities and current assets at
least equal current liabilities after the dividend). - Massachusetts has no balance sheet rules whatsoever.
Insolvency rule in the EU? The US-type equity-insolvency test is not part of
Community law but Member States are free to adopt it. For example, the Swedish
Company Act and the Finnish Company Act lay down a legal capital regime com-
plemented by an equity-insolvency test.^104 A narrower equity-insolvency test
complements the traditional legal capital regime under the German GmbHG (as
amended by the MoMiG).^105
Benefits of the European legal capital regime. The European legal capital re-
gime for public limited-liability companies brings many benefits.^106
- Approximation of laws. The European legal capital regime belongs to the most
important ways to approximate Member States’ corporate governance rules in
the area of company law. - Separation of management and control. One of the main reasons for adopting a
legal capital regime is to increase separation of management and control
through shareholders’ increased veto rights and information rights. - Transparency. The purpose of European and financial reporting standards is to
increase transparency and the reliability of financial information. The legal
capital regime can further improve the quality of financial reporting by giving
shareholders better incentives to monitor the balance sheet. Increased monitor-
ing should increase transparency and therefore also the reliability of financial
reporting. Many are nevertheless of the opinion that the quality of financial in-
formation is bound to be compromised if the amount of distributable assets de-
pends on the balance sheet. - Reduction of non-controlling shareholders’ perceived risk. Shareholders’ in-
creased veto rights and information rights can reduce non-controlling share-
(^104) Chapter 13 § 2 of the Finnish Company Act of 2006; Chapter 17 § 3 of the Swedish
Company Act of 2005.
(^105) § 64 GmbHG. For the relationship between the balance sheet and restrictions on distri-
butions, see Joachim Hennrichs, IFRS und Mittelstand – Auswirkungen der GmbH-
Reform und Zukunft der Kapitalerhaltung, ZGR 2008 pp 361–380.
(^106) See also Lutter M (ed), Legal Capital in Europe. ECFLR/Special Volume 1, November
2006; Ferran E, Principles of Corporate Finance Law. OUP, Oxford (2008) p 182.