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n SA Mercantile Law Journal = SA Tydskrif vir Handelsreg - The regulation of conflict situations relating to share capital
Transactions through which share capital flows into or out of a company, as well as those giving a return on share capital, have significant potential to cause conflict between different stakeholders. Conflicts may thus arise between creditors and shareholders; between controlling and minority shareholders; and between management and shareholders. The regulation of conflict situations between these parties, which may of course also arise from transactions unrelated to share capital, is a central concern of company law.
Theories of company law describe these conflict situations in different terms, and advocate different approaches to resolving them. Law and economics scholars, eg, view these conflict situations as 'agency problems' arising from the opportunistic and self-interested behaviour of market participants. They regard the law as useful to the extent that it succeeds in reducing overall transaction costs.
This article considers the regulation of share capital from two perspectives : the protection of creditors and the fair treatment of shareholders. I begin by clarifying the role of share capital against the background of modern theoretical perspectives on company law and distinguishing between the legal and economic functions of share capital.
I then identify the situations that give rise to share capital-related conflicts of interest between shareholders internally and between creditors and shareholders, and I outline the main approaches to the protection of shareholders and creditors. I show that the regulation of share capital is important to shareholders because their relative rights are determined by the share capital structure of the company. Although the conflict between shareholders and creditors derives from the role of share capital as a risk allocation device, creditor protection can be achieved without reliance on the size or structure of a company's share capital.
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