156 5 Equity and Shareholders’ Capital
procedures, and forces them to pay for expert reports and legal advice.^115 There
are also indirect costs caused by the time required for all necessary corporate
action, independent expert reports and other formalities.- Other ways to protect creditors. In addition, it has been argued that legal capital
is no longer an appropriate concept to employ in safeguarding the interests of
creditors.^116 According to this view, creditors can contract for core payment
terms (section 3.4.2) and credit enhancements (Volume II). The interest rate
that lenders charge is also compensation for the risk that borrowers will misbe-
have. Many say that covenants can restrict the freedom of corporate borrowers
to distribute assets to shareholders and that weak or involuntary creditors can
take advantage of those sophisticated lenders who impose a restriction on dis-
tributions to shareholders (covenants) and who monitor the borrower to ensure
compliance. The decrease in the company’s risk of insolvency will benefit all
creditors.^117 - Meaningless minimum capital requirement. The minimum initial capital re-
quirement is often regarded as meaningless, because it is unrelated to the debt
that a company may incur and to the sorts of business activities that a company
may pursue.^118 - Channelling of actions. One of the problems associated with a legal capital re-
gime is that it may become a means for channelling actions into particular
forms if it is not watertight.^119 The regime should therefore prohibit certain spe-
cific distributions and generally distributions with a similar effect.
The British Accounting Standards Board (ASB) and the Company Law Centre at
the British Institute of International and Comparative Law (BIICL) initiated a
study of the benefits of the European legal capital regime by a group of experts led
by Jonathan Rickford. The result of the study was that legal capital was costly and
superfluous and that the Second Directive should be repealed.^120 The British gov-
ernment has adopted this view and wants the Commission to act accordingly.
Modernisation of the European legal capital regime. The European legal capi-
tal regime was to some extent diluted by the adoption of Directive 2006/68/EC
amending the Second Company Law Directive.
The purpose of Directive 2006/68/EC was to contribute to the deregulation and
liberalisation of the legal capital regime. The Directive gave Member States more
(^115) Enriques L, Macey JR, Creditors Versus Capital Formation: The Case Against the Euro-
pean Legal Capital Rules, Cornell L R 86 (2001) pp 1184–1185.
(^116) Armour J, Legal Capital: an Outdated Concept? EBOLR 7 (2006) pp 5–27.
(^117) See Enriques L, Macey JR, op cit, p 1172.
(^118) Ibid, pp 1185–1186.
(^119) Armour J, Legal Capital: an Outdated Concept? EBOLR 7 (2006) pp 5–27.
(^120) See Rickford J, Reforming Capital: An Introductory Note, EBLR 15 (2004) pp 1029–
- See also European Shadow Financial Regulatory Committee (ESFRC), Statement
No. 21. Deregulating Corporate Finance in Europe, Financial Markets and Portfolio
Management 19 (2005) pp 407–409: “... the ESFRC recommends to repeal the Second
Directive as a whole rather than engaging in piecemeal efforts to modify some of its
provisions.”