Overview Study Material Foundations of Business Law Literature 2016-2017 All Mandatory Literature

Overview Study Material Foundations of Business Law 2016-2017 (Supplement)
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Table of Contents
PREFACE ........................................................................................................ 1
TABLE OF CONTENTS ..................................................................................... 2
A. SUPPLEMENT 1: ARTICLE: SALE OF SERVICES AND GOODS (BUSINESS

LAW) ............................................................................................................. 3
B. SUPPLEMENT 2: BUSINESS FORMS IN THE US ....................................... 10
C. SUPPLEMENT 3: ARTICLE: CONFLICT OF INTEREST OF DIRECTORS

(CORPORATE GOVERNANCE & LAW) ............................................................ 12
D. SUPPLEMENT 4: OUTLINE & CONCEPT DEFINITIONS IN CORPORATE

CRIMINAL LIABILITY .................................................................................. 14
E. SUPPLEMENT 5: ARTICLE: INDICTING CORPORATIONS REVISED

(CORPORATE CRIMINAL LIABILITY) ........................................................... 22
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A. Supplement 1: Article: Sale of Services and Goods (Business Law)
In the case of a sale of goods or services, the applicable law depends on the parties to the
contract. In most countries, a distinction is made between B2C contracts and B2B
contracts. The provisions from the following article are from UK law, but the legal rules are
mostly similar between countries.
Business to Business Transactions

B2B transactions are governed by The Sale of Goods Act and the Supply of Goods and
Services Act. The Sale of Goods Act (applicable to a sale of goods) protects purchasers
in the case that the seller does not have the right to sell the goods. In the case that the
goods are sold by description, an implied term applies that the goods must correspond to
that description. Businesses are obliged to ensure that the goods they sell are of
satisfactory quality and fit for their purpose. If goods are sold by sample, an implied term
applies that the quality of the goods will correspond to the sample.
In the case of a sale of goods, along with a service, The Supply of Goods and Services
Act 1982 applies. It includes identical provisions as the Sale of Goods Act. Additionally,
there are implied terms that the service has to be carried out with reasonable care and
skill, within reasonable time and at a reasonable price.
The Acts above apply to both B2B and B2C contracts. However, in B2B situations, court is
often reluctant to intervene. Besides, liability for most sections of the Acts can be excluded
through the terms and conditions of a B2B contract. Theoretically, within a B2B contract it
is possible to exclude liability for fitness for purpose, conformity with description and even
for satisfactory quality. Liability for the case that the seller does not have the right to sell
the goods cannot be excluded in any contract. If liability is excluded in terms and
conditions, these terms and conditions have to satisfy the reasonableness test.
The reasonableness test states that the term must be fair and reasonable to be included
in the contract, judged by the known circumstances at the time the contract is entered.
The party seeking to enforce the term has to show that it was fair and reasonable. In the
case of B2B contracts, the reasonableness test includes additional factors such as the
bargaining positions of the parties, whether such terms are usual in the sector and whether
the goods were adapted to the special wishes of the customer. In general, an exclusion
clause which attempts to leave a business customer without remedy for a serious breach
of contract runs the risk of unreasonableness.
Business to Consumer Transactions

In the B2C sector, the Consumer Rights Act 2015 replaced the Sale of Goods Act, the
Supply of Goods and Services Act and the Unfair Terms in Consumer Contracts Regulations
Act. The new single set of rules applies to all consumer contracts for goods, services and
digital content, including sale, hire, hire-purchase and work contracts. Contracts between
businesses and consumers cannot be used to exclude liability for complying with the
Consumer Rights Act. Therefore, it is not possible to exclude liability for fitness for purpose,
conformity with description and satisfactory quality within B2C contracts. The Consumer
Rights Act applies where there is an agreement between a trader and a consumer for the
supply of goods, services or digital content, where the agreement is a contract.
A consumer is defined as ‘an individual acting for purposes that are wholly or mainly
outside that individual's trade, business, craft or profession.’
A trader is defined as ‘a person acting for purposes relating to that person's trade,
business, craft or profession, whether acting personally or through another person acting
in the trader's name or on the trader's behalf’. This includes public sector authorities and
government departments.
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Definitions of the Contracts

The Consumer Rights Act applies to the following contracts; a sales contract, a contract for
the hire of goods, a hire-purchase agreement and a contract for the transfer of goods.
A contract is a sales contract if (a) the trader transfers or agrees to transfer ownership
of the goods to the consumer, and (b) the consumer pays or agrees to pay the price.
A contract is a contract for the hire of goods if (a) the trader gives or agrees to give
the consumer possession of the goods with the right to use them under the terms and
conditions of the contract and if (b) the contract is not a hire-purchase agreement.
A hire-purchase agreement is a credit agreement transferring the possession of goods,

where the creditor remains the legal owner until the sums due under agreement are paid.
A contact is a hire-purchase agreement if (a) the goods are hired by the trader in return
for periodical payments by the consumer and (b) ownership of the goods will transfer to
the consumer if the terms of the contracts are complied with and the consumer exercises
an option to buy the goods.
In most cases, hire-purchase agreements involve and independent finance company

buying the goods from the trader and the consumer hiring them from the finance company.
If a consumer buys a used car under a hire-purchase agreement, a dealership sells the car
to a finance company, which will be the legal owner of the car until the consumer pays the
final instalment. The finance company will then extend an invitation to the customer to buy
it for a small fee.
A contract is a contract for the transfer of goods if (a) the consumer provides or agrees
to provide consideration otherwise than by paying a price, or (b) the contract for any other
reason is not a sales contract or a hire-purchase agreement.
The Rights
The same rights, as stated in the Consumer Rights Act, imply to all contracts mentioned
above. These implied terms, including satisfactory quality, fit for purpose, goods be as
described, matching a sample and matching a model seen cannot be excluded in a
consumer contract. As the rules also include digital content, all products, both physical and
digital, must meet the same following standards:
Satisfactory quality: Goods must be of a quality standard that a reasonable person would
regard as satisfactory. It covers several matters including appearance and finish, absence
of minor defects, durability and safety. Price, description and advertisements are all
considered.
Fit for purpose: When a consumer indicates, or it is obvious, that goods are intended for
a particular purpose, and a trader supplies them to meet that requirement, the goods
should be fit for that specific purpose.
Match the description or sample: When a consumer relies on a description, model or

sample, the supplied goods must conform to it.
Correct Installation: When installation has been agreed on as part of the contract, goods
are deemed not to conform to the contract if the installation is incorrect. In this case,
consumers have the same remedies as for defective / non-conforming goods.
Digital content is defined as ‘data which are produced and supplied in digital form’. If
digital content does not conform to the criteria, consumers have the right to repair or
replacement of any faulty content purchased. If that does not fix the situation, the
consumer can ask for a price reduction which can be up to 100% of the original cost.
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The retailer has to compensate any device or other content damaged as a result of the
faulty digital content downloaded, where damage would not have occurred if ‘reasonable
care and skill’ had been exercised in the provision of the content. This also applies if the
content was free of charge.
Remedies for breach of contract

Consumers have the legal right to reject goods that do not comply with the terms of the
Consumer Rights Act, such as unsatisfactory quality, unfit for purpose or goods not as
described. Alternatively, a customer can require repair or replacement. In the case that
repair or replacement fails, the consumer has a right to price rejection or ultimately
rejection of the goods.
After the supply of the goods, the consumer has a 30-day period to reject them, unless
the expected life of the goods is shorter than 30 days. This right does not apply in cases
where the only breach relates to incorrect installation of goods. When a customer rejects
goods, a refund can be claimed. This is a full refund, or in the case of hire, a refund for
any part of the hire that was paid but not supplied. The consumer is also released from all
his outstanding obligations under the contract, such as future instalments. A refund must
be given without undue delay, and in any event within 14 days of the trader agreeing that
the consumer is entitled to a refund.
In the case of breach of contract outside the 30-day period to reject, the retailer is to be
given one opportunity to repair or replace any goods or digital content. The trader must
do this at no cost to the consumer, without causing significant inconvenience and within
reasonable time. In principle, a consumer can choose whether he wants goods to be
repaired or replaced. However, if either one of these options is disproportionally more
expensive to the trader, the consumer cannot choose this option.
If after the one attempt at repair or replacement, the goods still do not meet the necessary
requirements, the consumer does not have to give the trader multiple opportunities to
repair or replace, even though he can do so if desired. If the remedy fails, the consumer
is entitled to further repairs or replacements, a price reduction or the right to reject.
A price reduction has to be an appropriate amount, depending on all the circumstances of
the claim. It can be any amount up to the whole price. If a consumer rejects the goods
and returns them, he is entitled to a refund. This refund may be reduced to take account
of any use the consumer has had from the goods.
Burden of proof
It is up to a consumer to prove that goods do not conform to the contract at the time of
delivery if they want to exercise their short-term (30 days) right to reject. Outside the 30-
day term the burden of proof shifts. Goods are presumed not to conform to the contract in
the case that a consumer seeks to exercise his right to repair or replacement or price
reduction within 6 months of delivery. It is then up to the trader to prove otherwise. If
more than 6 months have passed, the consumer again has to prove that the defect was
there at the time of delivery.
Exceptions – when consumers cannot make a claim

A consumer cannot claim for defects (a) that were brought to his attention before the sale
or (b) in the case the consumer examines the goods before purchase and any defects
should have been obvious. Additionally, consumer cannot claim for damages he causes, if
the goods sold are used for a purpose they were not fit for, or if he simply changes his
mind about the goods. Finally, a consumer has no rights to claim for faults that appear as
a result of fair wear and tear.
Consumers can expect goods not to fail prematurely, even if the life expectancy is several
years. However, a consumer cannot bring a claim to court more than six years after the
breach of contract, usually the date of delivery.
5
Other Consumer Contract Rules

Unfair contract terms: traditionally, the concept of freedom of contract implied there
was little protection for the less favourable party in an unfair contract. The introduction of
the Consumer Right Act does cover the use of unfair terms in consumer contracts, making
it easier to challenge hidden fees and charges. The fairness rules apply to both negotiated
and standard term contracts. Unfair terms and notices are not binding on a consumer but
they can choose to rely on them.
Terms may be deemed unfair in the case that:

• They are contrary to the requirements of good faith; i.e. they have to be designed,
negotiated and entered into with the consumer in a fair and open way;
• They cause a significant imbalance between the rights of the retailer and consumer
to the consumer’s disadvantage
Provided that terms which specify the main subject matter or the price are transparent (in
plan and intelligible language) and prominent (presented in such a way that the average
well-informed consumer would be aware of them), these terms are not subject to an
assessment for fairness. In addition, attempting to mislead a consumer about his rights is
an offense.
The Consumer Contracts Regulations 2013 provide consumers with a 14-day cooling-
off period for most ‘distance contracts’ (those made via the internet) and ‘off-premises
contracts’ (made at home). They also forbid traders from making hidden charges.
The supply of Services

The supply of a service has been incorporated into the Consumer Rights Act 2015.
However, in the case of B2B contracts, older separate legislation still applies. Implied terms
that apply in both cases include that the service will be performed with reasonable skill and
care; the price will be reasonable if not agreed, and the service will be performed within a
reasonable period if not agreed. Under the current legislation, consumers receive more
protection than businesses, for instance the right to require a trader to perform the service
again at no additional cost if it is inadequate.
There is no standard definition of a service, however, if you are selling your skill or
expertise then you are likely to be providing a service. Examples of supply of services to
consumers are a hairdressing salon or a decorating business for private homes. If you act
as a consultant to other businesses, you are providing a service but not to a consumer.
This means you are bound by the older legislation.
Consumer protection rules for services imply that a trader must perform the service with
reasonable care and skill. The standard of care is that to be expected of a reasonably
competent person in that trade or profession. Besides, anything said or written by the
trader that influences a consumer’s decision to enter the contract will be treated as an
implied term to the contract. If the price is not agreed upon beforehand, it has to be
reasonable, and the service must be carried out within reasonable time.
In general, when the contract is for the supply of goods as well as the provision of services,
the implied terms for sales of goods apply to the exchange of the goods (sufficient quality,
fit for purpose etc). Additionally, the implied terms for service contracts apply to the supply
of the service (the person doing the work must meet the standard of a reasonably
competent professional exercising reasonable care and skill).
If a service does not satisfy these criteria, a consumer is entitled to the following remedies;
a trader should either repeat the inadequate element of the service or perform the whole
service again, at no cost and within reasonable time without causing significant
inconvenience. Or, in cases where this is impossible, the consumer can claim a price
reduction, which can be up to 100% of the cost.
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Although a consumer has the statutory right to the remedies mentioned, this does not
exclude him from seeking other remedies such as damages or specific performance as long
as they do not recover twice for the same loss. In case a dispute with a consumer
concerting goods or a service cannot be settled directly, Alternative Dispute Resolution is
now available.
The Passing of Risk

Passing of risk means the passing of liability for the loss and/ or damage to the goods
from the seller to the buyer. It is crucial to know when the ownership of property passes
from the seller to the buyer in law. It is at that point that the risk of loss and damage to
the goods passes to the buyer.
The ownership of the goods, also referred to as ‘the property in the goods’, can pass from
the seller to the buyer at any time, and does not require the transferring of the possession
of the goods, nor the transferring of the payment of the sale price. The basic legal principle
is that property (i.e. ownership) passes when parties intended it to pass. These intentions
can be extracted from the terms of the contract or the parties’ conducts and circumstances.
If the intention of the parties cannot be determined, the Sale of Good Act contains rules
for determining the time at which the property in the goods was intended to pass to the
buyer, and therefore the risk passes to the buyer. There are 5 rules, and which rules apply
depends upon whether the goods are specific or unascertained.
Specific goods are ‘goods identified and agreed on at the time a contract of sale is made.’
For example, the contract for a specific second-hand car is made in the dealer’s showroom.
Rules 1-4 apply to the sale of specific goods.
If goods are not specific, they are unascertained. This means that ‘they have not been
identified at the time the contract was concluded.’ Identification takes place after the
agreement is made. For example, a contract for a specified quantity of coal out of a much
larger bulk of coal. Rule 5 applies to the sale of unascertained goods.
Rule 1: Where there is a contract for the sale of specific goods in a deliverable state:
• The property passes at the time the contract is made. It is immaterial whether
payment or delivery or both are postponed
Rule 2: For specific goods which a seller has to put in a deliverable state:
• The property in specific goods does not pass where the goods are not in a
deliverable state at the moment the contract is created. Property only passes when
the seller did what had to be done to put the goods in the deliverable state, and the
buyer is informed of this.
Rule 3: For specific goods in a deliverable state where action needs to be undertaken by
the seller to ascertain the price:
• When it is not clear how much the buyer has to pay, the property will not pass until
the seller has ascertained the price. ‘If the seller is bound to weigh, measure, test
or do some other act or thing for the purpose of ascertaining the price’, the property
will only pass until this is done and the buyer is informed of this.
Rule 4: When goods are delivered to the buyer on approval or on sale or return or other
similar terms:
• The property in goods passes to the buyer when he gives his approval or acceptance
or does any other act adopting the transaction;
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• If he does not give his approval or acceptance but keeps the goods without giving
notice of rejection and a time has been fixed for the return of the goods, the
property in the goods passes on the expiration of that time. If no time has been
fixed, the risk will pass on the expiration of a reasonable time.
Rule 5: Where there is a contract for the sale of unascertained goods:
• The goods must comply with the contract description and must be in a deliverable
state. However, no property in goods is transferred unless the goods ascertained
(identified). The seller sets aside or marks the goods which are intended to be used
for the contract. There is no final commitment at this stage, as the seller can undo
this again.
• For the transferring of property in unascertained goods you need unconditional
appropriation. Besides ascertaining goods, appropriation is attaching the goods to
the contract. Appropriation is where both parties, seller and buyer agree that
those goods are the contract goods, it is a bilateral agreement. The contract is
allocated to the particular goods and this cannot be undone. Delivery to the buyer
or the buyer’s carrier (such as a train or ship) as agreed upon in the contract,
amounts to unconditional appropriation.
Express Terms for Passing of Risk

Experienced commercial business will make sure that intentions with regard to passing of
property in goods is clear in the contract. Where goods need to be transported, it is
common practice to make use of INCOTERMS. INCOTERMS (International Commercial
Terms) is a universally recognized set of definitions of international trade terms. They
define the roles of the buyer and seller in the arrangement of transportation and other
responsibilities, and clarify when the transferring of ownership of merchandise takes place.
They are used in conjunction with a sales agreement. Examples of INCOTERMS include;
EXW; Ex Works – Title and risk pass to the buyer from the seller’s door. The buyer pays
for all transportation and insurance cost, and the risk passes to the buyer as soon as the
goods are picked up at the factory door of the manufacturer. Used with any mode of
transport
FOB; Free on Board – Title and risk pass to the buyer once goods are delivered on board
of the ship by the seller. Used with transportation over water
With regard to the passing of risk, there is more legislative protection for consumers than
there is for companies. In consumer contracts, the goods remain at the trader’s risk until
they come into the physical possession of the consumer, or a person identified by the
consumer to take possession of the goods. It is therefore the trader’s responsibility to
ensure that goods are not lost or damaged in transit, or to pay for appropriate insurance.
International Sale of Goods Transactions

In 1980, the UN introduced the United Nations Convention on Contracts for the
International Sale of Goods (CISG). It has been adopted by over 80 countries. It is uniform
law, designed to be applicable in the same way in all contracting states. Certain major
countries like the UK have not signed up as they prefer their own law. CISG only applies
to international transactions between different Contracting States. However, sometimes
CIGS might apply even though the parties do not have their place of business in a
contracting state ‘when the rules of private international law lead to the application of the
law of a Contracting State’. For example, when a French and Indonesian party choose
French law as the law of the contract, the CIGS applies as France is a member state, even
though Indonesia is not.
8
The Convention strictly applies to international trade only, and only deals with non-
consumer sales. It focuses on goods, services are not covered. Besides, certain goods like
aircraft, ships or electricity are excluded from the Convention. The validity of the contract
and the effect of the contract on the property in the goods sold fall outside the Convention’s
scope.
The CIGS deals with:

• The formation of the contract. Tough a contract under CIGS is concluded by the
exchange of offer and acceptance, other rules differ significantly from English law.
For instance, the parol evidence rule (which preserves the integrity of written
documents) does not apply in the CISG;
• Freedom of form of contract, though Contracting States may request a written form
from the involved parties;
• Goods are fit for ordinary purposes and correspond with statements on quality and
description in the contract;
• Obligations to both parties of the contract. The buyer’s obligations include payment
of the price and taking delivery of the goods. The seller’s obligations include
delivering the goods in conformity with the contract, and transferring the property
in the goods;
• CIGS also provides common rules regarding breach of contract and corresponding
remedies. The disadvantaged party may claim damages, require performance or
repudiate the contract in the case of fundamental breach. Again, differences
between CIGS and UK law exist, as in UK law, the right of the aggrieved party to
enjoy specific performance is not a given; but is decided upon in court.
9
B. Supplement 2: Business Forms in the US
Except for minor differences, the following US business forms are very similar to those
common in the UK and Europe.
Individual /Sole Proprietorship

Unincorporated business, owned by an individual. The owner has the right to the residual
profits and has decision control over the business. Income is passed through to the owner’s
personal tax returns. Unlimited liability applies, meaning the courts view the company and
the owner as the same legal person. The owner’s personal assets are at risk in legal
disputes regarding debts and other claims against his company.
A main advantage of this business form is the absence of an agency problem, as the owner
is the top manager. A disadvantage is the relatively weak position in raising capital.
Therefore, large investments are seldom done by sole proprietorships. They are
commonplace in sectors that have many small businesses. In order to reduce liability and
risk of losing personal assets, many individual proprietorships incorporate, for instance as
an S corporation (limited liability company). High legal fees and restrictions are the main
barriers against corporation.
General Partnership
Unincorporated businesses, with two or more co-owners. Profits and losses are equally
shared amongst partners, unless stated otherwise in a partnership agreement.
Disagreements in the ordinary course of the partnership are often decided by the majority
of partners, whereas extraordinary matters often require the consent of all partners.
Income from the business is passed through to the owners’ personal tax returns. Important
is that each partner is jointly and separately liable for the obligations of the partnership as
a whole.
Joint partnerships have an advantage over individual proprietorships in raising capital,

however they are still disadvantaged compared to most corporations. Inter-manager
conflicts are reduced by shared interest. However, as the number of partners and the size
of the organization grow, incentives to free ride on each other’s efforts increases. As a
general partnership is unincorporated, there are no fees and regulations associated with
incorporation. However, partners are exposed to unlimited liability. Therefore, forming a
Limited Liability Partnership (LLP) can be interesting. LPPs and general partnerships
share basic characteristics, except that individual partners are shielded from certain
liabilities in an LLP.
Large service organizations such as accounting, consulting or law firms often organise as
LPPs. S Corporations are not a viable alternative as the number of shareholders is
restricted. C Corporations would expose partners to double taxation and increased
regulation and requirements. Professional service firms do not make large investments in
physical assets, as they rely mostly on human capital. Therefore, the costs of organizing
as a C corporation are larger than the benefits.
Limited Partnership
Unincorporated form of business, similar to a general partnership. In a limited partnership,
‘limited’ partners contribute capital and share in the profits, while one or more ‘general’
partners manage the business. Income is passed through to the partners for tax purposes.
General partners are personally liable for the partnership’s debts. Limited partners incur
no liability with respect to partnership obligations beyond their capital contributions.
10
Corporations
By filing appropriate paperwork and fees, corporations come into existence and the
company becomes a separate legal person. The main advantage of corporations are the
decreased liabilities of the involved people.
S Corporation
Created as a program to help small businesses. Restrictions on the number and type of
shareholders were made to make this form unattractive to large firms. The shareholders
and the board of a small S corporation are often the same people. Income and losses are
passed through to shareholders and taxed on personal level only, this double taxation is
avoided. Only certain built-in gains and passive income are taxed on the entity level.
Shareholders have limited liability, but lenders often require owners / managers to
guarantee the loans to the company with personal assets.
C Corporations
C corporations are the standard corporations. Earnings are taxed at the corporate level
and again at the personal level when distributed to shareholders. C Corporations are not
subject to significant restrictions on the number and types of stockholders, unlike S
corporations. Thus, most large corporations that raise significant amounts of capital from
external shareholders are C corporations.
Closely held corporations

Closely held corporations can be organized as either S corporations or C corporations,
depending on the number of shareholders and tax considerations. Closely held corporations
enjoy capital-raising advantages relative to proprietorships and partnerships, as capital
can be raised from non-manager investment such as family, friends, or business
associates. Incorporation also provides limited liability.
Agency conflicts are less common within closely held corporations, as top management
usually owns a large part of the company, decreasing the interest gap between
management and the owners. They also face fewer external reporting requirements and
are subject to fewer regulations than publicly traded corporations.
Closely held corporations are common as a form for medium-sized businesses. When a
founder develops a business, and wants to transfer it to the next generation after
developing and corporation, a closely held corporation offers many advantages. Some of
the founder’s offspring will take an active part in the day to day management of the firm,
while others may not. Non-management stockholders maintain voting and legal rights that
help to protect their interests.
Publicly Traded Corporations

Stock is sold to and traded among the public. Publicly traded corporations are often
organized as C corporations. Significant advantages in raising large amounts of capital
exist. At the same time, greater agency problems and owner-manager conflicts exist than
in more concentrated forms of organizations. Large publicly traded companies are defined
by a separation of control and ownership.
11
C. Supplement 3: Article: Conflict of Interest of Directors (Corporate

Governance & Law)
This article sheds light on conflicts of interest, secrecy and inside information of corporate
directors in their functions. It also considers useful prevention techniques and remedies. It
focuses mostly on continental Europe and European Union Law.
The duties of a company’s directors can be divided into two groups: duty of care and duty
of loyalty. The duty of care stems from the laws of negligence and a director’s task to fight
negligence. The duty of loyalty originates in fiduciary principles. The duty of loyalty is highly
developed in Anglo-American countries, whereas very little attention is given to this
principle in Europe and Asian counties. The main explanation for this is the so-called trust
analogy. The strictness of duty of loyalty in common law results from the equation of the
duties of the company directors with the duties of trustees by the courts of equity. In civil
law systems, the tradition of trust is often missing, and the duties of directors were
developed separately under company law. A degree of path dependency led to the current
distinctive differences in law.
This is further illustrated by the fact that in the US and the UK, the duty of directors is
owed to the shareholders. This is a clear-cut relationship. The principals are shareholders
and the directors are their agents. In many European countries however, the duties of the
directors are owed to the enterprise instead of the shareholders. In such a loose
relationship, concrete duties and trust concepts are more difficult to conceive. This looser
relationship and less strict duty of loyalty is often cited as the main reason why the two-
tier board system became popular in Europe, as it compensates for the looser relationship
between directors and shareholders. However, mostly due to the continuous influence of
US American law on European law, recently both systems have been converging as ideas
flow into European law.
Conflicts of interest often arise in the financial world, where the agency problem is already
evident in many organizations. This article analyzes conflict of interest in an objective way,
but always as arising from a concrete conflict situation. According to the author, conflicts
of interest exist everywhere, but as such are hardly concepts to be accorded legal
consequences. For example, in a two-tier board system in which the supervisory board
only has a part-time function, directors often assume positions within multiple supervisory
boards. This naturally leads to a conflict of interest, but is no solid ground for legal
consequences.
The concept of duty of loyalty is used as a standard of behavior to which the director is
required to obey by company law, and if violated, the consequences will be sanctions and
other remedies. It is used as a protection of the company and its shareholders, but
meanwhile also as protection of competition and the market. The duty of loyalty has been
substantiated by courts and research since the 19th century. The author distinguishes a
number of common problems and solutions that stem from conflicts of interest:
• Fraud: stealing, granting and receiving bribes and kick-backs, degrading the
company;
• Loans and credit to directors: often heavily restricted or even prohibited by law;
• Self-dealing: taking advantage of his position in a transaction and acting for his
own interests rather than for the interests of shareholders or clients;
• Competition within the company: directors are forbidden or restricted to cause
competition within their own firm;
• Corporate opportunities: directors may not use business opportunities that arise
from their company for themselves;
• Wrongful profiting from position: directors are not allowed to use their position
for self-interest;
12
• Remuneration: linking salaries to actual performance, to prevent paying without

performance. Supervisory board often has duty to keep remuneration of
management board directors in line with their performance;
• Ongoing duty of loyalty: post-contractual duty of loyalty; in general, there is no
general rule guiding the duty of loyalty after a director has stepped down;
• Takeovers: lead to large conflict of interest for board members in the target
company;
• Management buy-outs: management not only has to decide whether to accept
an offer, but even make the offer themselves;
• Groups of companies: often lead to conflict of interest between the parent
company and its subsidiaries.
Company laws all around the globe include the obligation of board members to keep
company secrets confidential, otherwise the company could not do business. There is often
a special legal rule on keeping company secrets confidential. If there is no such rule, then
the duty of secrecy follows from the duty of loyalty. The obligation of secrecy extends far
beyond and includes any confidential information the director may get from and about the
company. The duty of secrecy does have its limits. For example, enclosing information to
interested buyers or bidders in the company’s general interest is permitted. Unfortunately,
board secrecy is often not observed as a matter of practice and secret information on
planned lay-offs, possible mergers and other projects often leaks.
Insider information has also been a problem for company law and still remains a
complicated part of regulation in capital markets. There is a duty of directors under
company law not to engage in insider transactions and not to disclose any inside
information unlawfully to third parties. This extends to all companies, not just publicly
listed ones.
The author suggests several procedural prevention techniques for conflicts of interest:
• Disclosure: Conflicts of interest have to be disclosed before taking up a
directorship, and other board members have to be notified of all relevant facts when
one seeks permission for transactions that might be subject to conflicts of interest.
• Consent: A consent requirement prevents actions by sole directors that negatively
affect the company. Often the requirement is the consent of the chairman of the
board, or all members of the board, or the supervisory board as well as the
management board.
• Organizational duties: Adequate organization of the company, for instance by
forbidding becoming the director of a board of a competing company, or by involving
independent directors and auditors.
The following remedies are available for companies in the case of unlawful behavior in case
of conflicting interests:
• Nullity, prohibition against voting: often used as a first step, a company can
easily require a director to abstain from voting.
• Liability for damages and disgorgement of profit: the usual sanction for a
breach of duty of care.
• Stepping down or dismissal: when conflict of interest is grave and more
permanent instead of situational, the best solution for a director is to step down.
He may even be legally required to do so.
• Disqualification: if duty of loyalty is gravely or permanently violated, a director
may no longer be fit to be a director. Supervisory authorities can use this sanction.
Initially, private enforcement of the duty of loyalty is required, thus the company itself is
responsible for the enforcement. This is often done by the remaining board members, who
are required to speak up against the malefactor. If the thresholds are too high for private
enforcement, shareholders may convince public authorities to step in. They have the
power, for instance, to require disqualification from directors in the baking company.
13
D. Supplement 4: Outline & Concept Definitions in Corporate Criminal

Liability
Vocabulary & Concepts

For an elaborate overview of the definitions of all concepts relating to corporate criminal
liability, please refer to the article posted on BlackBoard. The next section will explain
(corporate) criminal law in more detail.
Criminal Law Explained

Sources
Common law: a common law crime is one created and enforced by the judiciary in the
absence of a statute defining the offense.
• UK: criminal law is largely laid down in statutes which either embody or modify the
common law. These statutes are in turn interpreted by a substantial body of case
law.
• USA: federal criminal law is governed entirely by statute – there are no federal
common law crimes. States retain common law crimes either by ‘retention statutes’,
statute, or by adopting comprehensive criminal codes. The most important is the
Model Penal Code.
Basic principles of criminal law

Most crimes require a criminal action (or omission) and a criminal state of mind at the time
of that action (or omission). These are called the actus reus and the mens rea, respectively.
Actus reus: the act/omission the law seeks to prevent. It consists of all the elements of
the offense other than the mental element. When the crime is a result crime rather than a
conduct crime, causation must be shown.
Mens rea: a reprehensible state of mind. The mens rea required can vary from crime to
crime, but there are 3 states of mind in English law, which separately or together can
constitute the necessary mens rea for a criminal offense:
• Intention (distinguish intention from motive, as motive is irrelevant to criminal
liability). The test for intention is subjective: did this particular defendant intend to
commit the crime at the time, not what a reasonable person would have intended
in the same circumstances. Intent may be direct or oblique:
- Direct intent means done on purpose; the consequence was intended.
- Oblique intent means the consequence is foreseen by the defendant as
virtually certain, although it is not desired for its own sake, and the defendant
goes ahead with his actions anyway.
• Recklessness: taking an unreasonable, unjustifiable risk; the test is subjective.
• Negligence: falling below the standard of the ordinary reasonable man, and either
doing something he would not do, or not doing something he would do. In general,
it does not matter that the defendant was unaware that something dangerous might
happen, if the "reasonable person" would have realized the risk, and taken steps to
avoid it. Gross negligence is usually required for criminal law.
Crimes of basic (general) intent are those for which the mens rea can be either intention
or recklessness.
Crimes of specific intent are those where the definition of the crime requires not only the
doing of an act, but the doing of it with a specific intent or objective. Only direct or oblique
intent will suffice as mens rea.
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Note: the names given to the mental states in the USA vary, depending upon whether the
state in question has implemented the Model Penal Code (MPC). The MPC has four types
of mental states: purpose, knowledge, recklessness and negligence. The MPC does not use
the terminology of general intent and specific intent.
Strict liability crimes are crimes where no mens rea needs to be proved. These are
statutory offenses, normally of a low level of criminality, for example selling sub-standard
food. Strict liability crimes like pollution can entail high fines. Strict liability crimes often
involve vicarious liability. These offenses are typically ones where a company can be held
vicariously liable for the wrongful behavior of its employees. The concept of vicarious
liability is far more restricted in criminal law than in tort. It applies to cases of delegation
but most importantly to strict liability offenses.
USA: distinguishes between a felony (serious crime) and misdemeanor (less serious
crime). Felonies are punishable by death or imprisonment exceeding one year;
misdemeanors are punishable by imprisonment for less than one year or only by a fine.
UK: distinguishes between indictable offenses (serious crimes) and summary offenses
(less serious crimes).
Parties to crime
Principal: the main perpetrator of the offense. If there is more than one principal, they
are referred to as joint principals. Note: innocent agent; a principal may not always carry
out the actus reus himself. He may use another who could be an innocent agent.
Secondary participation (accomplices or accessories); there are 4 kinds of secondary
participation: aiding, abetting, counselling, and procuring. Accessory after the fact: person
who assists the principal after the crime.
The company as defendant

A company may be a party to a crime in several ways. The principle that is applicable
depends upon whether the offense is one that requires mens rea or not.
UK law:
• Vicarious liability: where no mens rea is required, in particular strict liability offenses,
for example pollution.
• Directly: where the offense does require mens rea, for example fraud. To hold the
company liable there must be an individual who can be identified for legal purposes as
the company, and that person’s mens rea is then taken to be also the mens rea of the
company. Under the English doctrine of identification, only a key person in the company
can be equated with the company itself, as its ‘brains’.
Note: the doctrine of identification is the general principle in English law for holding a
company liable for crimes requiring mens rea. There are exceptions to this rule, such as
the crime of corporate manslaughter: where death has been caused by criminal negligence
the principle of identification does not apply (see below).
USA law:
• In federal law in the US, corporate criminal liability is based upon the doctrine of
respondeat superior. If the agent has carried out the actus reus with the required
mens rea, his mens rea can be ascribed to the company regardless of his rank within
the company, as long as he acted within the scope of his employment and he intended
to benefit the company.
• Many states rejected the doctrine of respondeat superior, opting instead for using the
Model Penal Code (MPC). The MPC requires that to hold the company accountable, the
crimes should have been carried out by senior officers of the company; the ‘inner circle’.
• The use of an aggregation test has been recognized in American federal case law:
where no single individual had the mens rea but it can be put together from the
collective knowledge of a group. This is particularly relevant to holding a company
liable.
15
It was at first rejected in UK law, but that has changed and it is now used in the UK
crime of corporate manslaughter. It is also referred to as the doctrine of collective
knowledge.
Inchoate offenses cover the preparatory stages of other criminal offenses. There are 3
inchoate offenses: incitement, conspiracy and attempt.
Crimes of violence
Traditionally, there have been two limits on corporate criminal liability:
1. The offense must be punishable by a fine;
2. Some crimes were seen as too human, such as bigamy, rape and murder.
However, the scope of corporate liability is increasing. In the USA, corporations can now
be found guilty of manslaughter. The agent of the company (an individual) and the
company itself may both be held liable for the offense in this case.
Homicide: the unlawful killing of a person. The major categories are murder,
manslaughter and causing death by dangerous driving.
Murder (UK):
The actus reus is the unlawful killing of a human being under the Queen’s peace. Mens rea
is “malice aforethought”. Nothing less than the intention to kill or to cause grievous bodily
harm (which then leads to the death of the victim) will be malice aforethought. Case law
makes clear that if there is no direct intent, the oblique intent must be formulated in terms
of ‘virtual certainty’; that death was foreseen as ‘likely’ or ‘probable’ is sufficient for
manslaughter but not for murder. As only intent is the right sort of mens rea for murder
(recklessness is not enough), murder is an offense of specific intent.
Murder (USA):
Where the common law definition still applies, it is phrased as: ‘an unlawful killing of a
human being with malice aforethought’. Malice aforethought exists if the defendant has
any one of the following states of mind: intent to kill (express malice), intent to inflict
grave bodily harm, reckless indifference to an unjustifiably high risk to human life (implied
malice) or intent to commit a felony. Intentional use of a deadly weapon authorizes a
permissive inference of intent to kill.
Modern statutes in various states in the USA often divide murder into degrees. Under such
schemes, all murders are second degree murders unless the prosecution proves a
prescribed circumstance which would make it first degree murder.
There are two kinds of manslaughter: voluntary manslaughter and involuntary

manslaughter.
Voluntary manslaughter: the defendant has the necessary mens rea and actus reus for
murder but certain kinds of extenuating circumstances partly excuse his behavior. The
three main kinds of voluntary manslaughter are murder reduced to manslaughter on the
grounds of loss of control (formerly called provocation), a suicide pact, or murder reduced
to manslaughter on the grounds of diminished responsibility (see defenses).
Involuntary manslaughter: an unlawful homicide where the necessary mens rea for
murder is not present. There are two main kinds: unlawful, dangerous act manslaughter
and manslaughter by gross negligence.
• Unlawful act manslaughter (also referred to as constructive manslaughter):
here the criminal set out to commit a less serious offense but has in the process
killed a person. The defendant must have been behaving dangerously. For example,
someone is accidentally killed during an arson attack intended to destroy the
premises of a rival business.
16
The law imposes liability for the killing even though the person did not have the
mens rea for the manslaughter but only for the lesser offense. In the USA, if a death
is caused while carrying out a felony act (such as arson), this is seen as a first-
degree offense and is classed as murder, not manslaughter. It is called felony
murder.
• Gross negligence manslaughter: requires the performance of a lawful act done
with extreme, and hence criminal, negligence:
1. There must be a duty of care towards the victim;
2. There has been a breach of that duty;
3. This breach caused the victim’s death;
4. And the conduct must justify a criminal (rather than only civil) liability. The
negligence must be gross.
Corporate manslaughter
Under English law, the specific crime of corporate manslaughter has been created by the
Corporate Manslaughter and Corporate Homicide Act 2007. Companies are no longer
charged with the common law crime of gross negligence manslaughter, but instead with
corporate manslaughter. The doctrine of identification does not apply to this crime.
An organization will be guilty of the new offense if the way in which its activities are
managed or organized are so grossly negligent that a death has been caused because of a
gross breach of a duty of care to the deceased. An example of a breach of a duty of care:
a company can be held responsible for death resulting from a road accident caused by a
defective vehicle, where gross negligence led to the lack of maintenance of the vehicle
concerned.
Has there been a general management failure? This allows for an aggregation test.
However, a substantial part of the failure within the organization must have been at a
senior level. Corporate manslaughter can lead to the company being fined. The corporate
manslaughter offense applies only to companies and other entities acting as employers,
like a partnership. Any individuals working for the company who have the mens rea of the
offense could also be charged with manslaughter. An individual would have to be charged
with the common law crime of gross negligence manslaughter, for which they can be
imprisoned.
Non-fatal offenses against the person: offenses where no death has occurred.
Assault and battery: assault and battery actually mean two different things in law but
the word ‘assault’ is often used to cover both.
• Assault: actus reus is causing the victim to expect the infliction of violence, mens
rea is that of basic intent, the test being subjective.
• Battery: actus reus is the unlawful application of force to the body of another,
mens rea is that of basic intent, the test being subjective.
Statutory assaults are aggravated assaults. The most serious forms of aggravated
assaults cause grievous bodily harm (GBH) on another person. Actual bodily harm
(ABH) is defined by the law as “An injury more than merely trivial and includes a hurt or
injury which is calculated to interfere with the health or comfort of the victim”.
USA: Most statutes define certain acts as aggravated batteries and punish them as
felonies. They will be seen as aggravated batteries, for example, where a deadly weapon
is used, serious bodily harm has been caused, the victim is a child, woman or police officer.
The terms grievous bodily harm and actual bodily harm are also commonly used in the US.
However, the MPC refers to serious bodily injury rather than grievous bodily harm.
17
Criminal offenses against property

Property offenses can be divided into two categories: those that require fraud and those
that do not. In addition to the ‘standard’ offenses against property, there are also specific
corporate offenses for which companies or their employees may be found guilty.
Note: both the agent of the company (an individual) and the company itself may be held
liable for the same offense.
Non-fraudulent property offenses

Theft: a person is guilty of theft if he dishonestly appropriates property belonging to
another with the intention of permanently depriving that other of it. The actus reus has
two elements; the act of appropriation of property and the circumstance that the property
belonged to another. Mens rea has two elements: dishonesty and intention of permanently
depriving that other of the property. It is a crime of specific intent so recklessness is not
sufficient.
USA: some of the states in the USA still use the old term ‘larceny’ rather than theft. Larceny
can be either grand or petty depending on the value of the stolen property.
Larceny: a taking and carrying away of tangible personal property of another by trespass
with the intent to permanently (or for an unreasonable time) deprive the person of his
interest in the property.
Handling stolen goods: receiving stolen goods, knowing them or believing them to be
stolen. Actus reus is receiving stolen goods or arranging to do so. Mens rea is knowing or
believing the goods to be stolen and behaving dishonesty.
Burglary: entering premises with the intent to steal or do harm. The actus reus is trespass,
entry in building or part of a building. The mens rea consists of two elements: intention or
recklessness with respect to entry of the premises and intention to commit the ulterior
offense. Aggravated burglary is with a weapon.
Blackmail: with a view to gain or to cause loss for another, making an unwarranted
demand with menaces. The actus reus is a demand supported by menaces. The mens rea
is intent to make the demand with menaces with a view to a financial gain or causing a
financial loss. Modern definitions refer to either extortion or blackmail.
Criminal damage: without lawful excuse destroying or damaging any property belonging
to another intending to destroy or damage any such property or being reckless as to
whether such property is destroyed or damaged. The actus reus is the destroying or
damaging of property belonging to another. The mens rea is either intention or
recklessness. The test for recklessness is subjective.
Fraudulent property offenses in the UK

Until 2006, in the UK there was no such crime as fraud. Statute only covered particular
instances of fraud, so there were various fraudulent offenses. But there was a problem:
offenses requiring deception made it necessary for a human being to have been deceived.
In the computer age, this caused difficulties.
The Fraud Act 2006 established a single statutory offense of fraud. The Fraud Act 2006,
introduced a streamlined offense of fraud, which can be committed in three ways:
By false representation:
The defendant:
• made a false representation;
• dishonestly;
• knowing that the representation was or might be untrue or misleading;
• with intent to make a gain for himself or another, to cause loss to another or to
expose another to risk of loss.
18
A representation can be expressed or implied from the defendant’s conduct. In corporate

dealings, any representation (whether made under a company prospectus, a share sale
agreement, investment agreement or otherwise) could be prosecuted as a false
representation if made dishonestly with the necessary intent.
By failing to disclose information:

The defendant:
• failed to disclose information to another person;
• when he was under a legal duty to disclose that information;
• dishonestly intending, by that failure, to make a gain or cause a loss.
There are various situations in which a person may have a legal duty to disclose
information. The legal duty may derive:
• from statute (such as the provisions governing company prospectuses);
• from the fact that the transaction in question is one of the utmost good faith (such
as a contract of insurance);
• from the express or implied terms of a contract;
• from the custom of a particular trade or market; or
• from the existence of a fiduciary relationship between the parties (such as that of
agent and principal).
By “abuse” of position.
The defendant:
• occupies a position in which he is expected to safeguard, or not to act against, the
financial interests of another person;
• dishonestly abuses that position; and
• intends, by means of the abuse of that position (i) to make a gain for himself or
another, or (ii) to cause loss to another or to expose another to a risk of loss.
Examples of relationships that give the defendant such a position are that of:
• director and company;
• agent and principal;
• employee and employer, or between partners.
The prosecution must establish the mens rea of dishonesty and that it was the intention of
the accused to make a gain or cause a loss to another from the fraudulent action. The
actus reus does not require that a gain or loss was actually made. The victim does not
have to rely on, be deceived by or even be aware of the fraudulent activity. What counts
is the defendant’s frame of mind, not the victim’s state of mind.
The Act also creates two new offenses, mainly aimed at tackling frauds committed via
technology, which were difficult to prosecute under the old law: obtaining services
dishonestly and possessing articles for use in frauds.
Company officers may be found liable for fraud under the general provisions of the Fraud
Act or under specific corporate provisions elsewhere, for example the director’s personal
liability for fraudulent trading laid down in the Insolvency Act or for false accounting
in the Theft Act.
Fraudulent property offenses in the USA

With respect to fraud, there are federal and state fraud statutes. Some states still use the
old terms embezzlement and false pretenses.
Embezzlement: (grand embezzlement is a felony, petty a misdemeanor) generally

requires the fraudulent conversion of property of another by a person in lawful possession
of that property. In embezzlement, the misappropriation of property occurs while the
defendant has lawful possession of it.
19
For example, the treasurer of a non-profit organization pulls several thousands of dollars
out of the organization's bank account and uses it to pay off his gambling debts.
False pretenses (grand and petty): obtaining title to the property of another by an
intentional (or knowing) false statement of past or existing fact, with intent to defraud the
other. Here title is obtained under false pretenses.
Bribery is a criminal offense either to offer a bribe or receive one. There are various
international conventions dealing with bribery and corruption. The US has bribery
regulations at both the federal and state level. The UK Bribery Act 2010 makes paying and
receiving bribes offenses. Commercial bribery and the bribery of foreign officials are
specified offenses.
It also introduces a new corporate offense: failure of commercial organizations (either

companies or partnerships) to prevent bribery, where the bribery took place with the
intention to obtain a business advantage. This is a strict liability offense for companies and
partnerships. The introduction of this new corporate criminal offense places a burden of
proof on companies to show they have adequate procedures in place to prevent bribery.
Commercial organizations will fall under this Act either because they are incorporated in
the UK or because they carry out business or part of their business in the UK. An individual
found guilty of bribery can be jailed for 7-10 years. A commercial organization found guilty
of failing to prevent bribery could receive an unlimited fine.
Insider trading/dealing
A person commits the criminal offense of insider dealing if they have inside information
and:
• that information is price-sensitive in relation to shares;
• they deal in those shares, or encourage someone else to deal in those shares or
pass inside information to another person;
• the dealing takes place on a regulated market or through a professional
intermediary such as a broker.
The offense applies both to:

• "primary" insiders, i.e. those persons who acquire privileged information in the
course of their employment, profession or duties, for example, directors or
professional advisors if they have information as an insider;
• “secondary insiders”, those persons who knowingly receive privileged information
from a "primary" insider whether directly or indirectly, such as receiving
information from a family member or a friend of the director.
Offenders can be imprisoned and/or fined. This is also a ground to disqualify a person from
being a director for up to 15 years.
Offenses to deal with hacking

Computer misuse
In the UK, this is governed by the Computer Misuse Act 1990. It introduced 3 new criminal
offenses:
1. Unauthorized access to computer systems;
2. Unauthorized access with intent to commit or facilitate the commission of a serious
crime (such as theft or fraud);
3. Unauthorized modification of computer material (this covers the use of worms, viruses
and logic bombs).
The Data Protection Act 1998 also makes it possible to criminally prosecute hackers for
unlawfully obtaining, disclosing and procuring the collection of personal data.
20
Phone hacking
The same law that regulates phone tapping and other forms of covert information gathering
covers hacking into messages on mobile phones. In the UK, it is a criminal offense to
intercept phone calls unless it is done by a member of the police or intelligence agencies
who have a warrant to do so. Under this Act, a corporate body can face criminal prosecution
if it ‘connived’ or ‘consented’ to the commission of the offense, or if it is proved that the
hacking was attributable to ‘any neglect on the part of a director, manager, secretary or
other similar officer of the body corporate’.
General Defenses
Infancy: children (in the UK under the age of 10 years) cannot be held criminally liable.
Insanity: the defense must show that at the time of the act the defendant was under such
a defect of reason, from disease of the mind, as not to know the nature and quality of the
act he was doing or, if he did know, that he did not know it was wrong (the M’naghten
Rules). If insanity is established, the verdict is ‘not guilty by reason of insanity’.
Diminished responsibility: a defense applying only to murder – where a person is

suffering from such abnormality of mind as to substantially impair his mental responsibility.
If successful, it reduces a conviction for murder to one of manslaughter.
Automatism: rare situations where the defendant is not legally insane, but for some
reason he is unable to control what he is doing.
Mistake: strictly speaking not a defense, but a mistake or an accident can negate liability
if it negates mens rea.
Consent: again, not a true defense but if the victim consents, then a part of the actus
reus is usually but not always missing.
Intoxication: technically speaking, if the defendant does not have the necessary mens
rea because he is intoxicated with alcohol or drugs, this should lead to an acquittal. For
policy reasons, voluntary intoxication is not a defense to crimes of basic intent. In crimes
of basic intent, the mens rea is then assumed. In crimes of specific intent, it may be a
defense but not if it can be shown that the intoxication did not prevent the defendant from
having the intent.
Private Defense: covers self-defense and the defense of others, defense of one’s
property, preventing crime and assisting a lawful arrest. The defendant may use only
necessary and reasonable force.
Loss of Control: may reduce a charge of murder to one of manslaughter. There is no

requirement that the loss of self-control be sudden. The defense of Loss of Control
requires that a person of the defendant's sex and age, with a normal degree of tolerance
and self-restraint and in the circumstances of the defendant, might have reacted in the
same or similar way. This is a question for the jury to decide. It replaces the former law of
provocation.
Duress: where the defendant is forced by someone else to break the law either by the
threat of serious harm or by duress of circumstances (similar to necessity).
Necessity: there is no general defense of necessity, but there is a limited defense similar
to duress of circumstances where the defendant was faced with a choice of two evils.
21
E. Supplement 5: Article: Indicting Corporations Revised (Corporate

Criminal Liability)
This article sheds light on an interesting case in which Arthur Andersen, a large US
accounting firm, was indicted and convicted by a federal judge of obstruction of justice by
destroying documents related to the accounting work it did for Enron Corporation. As a
result, Andersen went out of business. This paper critically evaluates the decisions that
were made in this case, and the overall benefit or loss to the general public that resulted
from this case.
In August 2001, Enron warned Andersen that an accounting scandal may have been going
on, and events began to accelerate. A Houston-based Andersen partner urged Andersen
personnel to comply with the document retention policy, stating that all documents
regarding the case should be destroyed under the company’s regular retention policy. As
long as documents were destroyed in the course of normal policy, the company could not
be blamed as it followed its own policies, and the destroyed files would not have been
valuable anymore to reveal the accounting scandal.
In November, authorities served their subpoena and gained access to the remaining
documents that had not yet been shredded. Within a month, Enron filed its bankruptcy.
Andersen was sued in March 2002 for ‘obstruction of justice on the grounds that it
knowingly, intentionally and corruptly persuaded its employees to shred Enron-related
documents’. Because of vicarious liability, the prosecutor’s only burden was to prove that
any one of Andersen’s 28,000 US employees, beyond reasonable doubt ‘acted knowingly
and with intent to cause or induce another person or persons to withhold or destroy any
record or document with intent to impair the object’s availability for use in an official
proceeding’.
Besides, the agent who committed the act didn’t have to be a high-level or managerial
individual. The partnership could be held responsible for the acts of agents who were
subordinates or low-level employees. The fact that the agent’s act was illegal, contrary to
the partnership’s instructions did not relieve the partnership from responsibility. The
destroying of the documents was judged to be illegal even though it fell within the
partnership’s retention policy, as there was the intention to prevent the documents from
being used in an official proceeding against Enron. Therefore, the company was considered
guilty and sentenced to stop auditing public companies, effectively closing its business.
One of the most controversial aspects of the case, brought up by the author, is the fact
that public benefits from prosecuting Andersen criminally were minimal if they existed at
all. No one was sent to jail, and the fine the company had to pay was relatively small
compared to its turnover. However, the prohibition of doing business was sufficient to kill
the company, one of America’s largest accounting firms. An immediate result was that
85,000 people in 85 countries lost their job. This comprises not only partners and
managers, who may relatively easily start in another company, but also naturally
thousands of lower-level employees and shareholders. Administrative staff and similar
supporting personnel had a very hard time finding new employment or permanently stayed
unemployed. This process was visible for all of Andersen’s offices, many of which were
located far away from the headquarters where the scandal took place. The author argues
that overall, the case against Andersen hurt the general public instead of representing its
general interest.
One of the author’s arguments against criminal prosecution of the company is that
condemnation of one person for the actions of another does more harm than good,
especially in corporations. Corporations exist of many component parts, and when all parts
are blamed for the actions of one component part, unnecessary harm is done. For example,
over 90% of the people affected by the case were absolutely innocent.
22
Besides, if the individuals who were responsible for the scandal would have been removed
from the organization, Andersen would not have been the same Andersen whose agents
committed the crime, and the corporation would have been excluded from legal conviction.
The article presents the statement that civil sanctions generally provide more sophisticated
and fairer means of deterring and punishing corporate misconduct. Punitive civil sanctions,
rather than criminal punishment, is more suitable for companies for three reasons. First,
monetary sanctions are appropriate. Economic sanctions on the civil side can be tailored
to the particular offense much more accurately than in the case of criminal law. The array
of government sanctions on the civil side is much larger and subtler. It includes license
suspension, exclusion from government programs, independent monitors, and more.
Secondly, corporate claimants are relatively abundant. In civil law, claimants can act as
prosecutors and sue a company for its misconduct. Resources on the criminal side are
much more limited, and white-collar investigations often take years of time to complete.
Third, there are many specialized agencies for public enforcement, who have much more
sophisticated sense of law enforcement priorities in their specialty area. They can go after
misconduct that makes an actual difference rather than focusing solely on instances that
make an appealing case for a jury in a criminal trial.
Despite the advantages of civil sanctions, corporate criminal prosecutions may occasionally
be necessary. An example of this could be when the corporate system itself helps produce
criminal behavior, and it is deeply woven into the standards of the organization. Corporate
criminal liability identifies the corporate organization itself as the responsible party and
points to the need for reform at the corporate level. In situations like these, suing
individuals is arbitrary and unfair if truly everybody is reproducing the bad practice.
Besides, indictment of corporations may be a fair tool to keep as an option when
prosecutors and defense lawyers agree that corporate conviction makes more sense than
the conviction of individuals.
The negative consequences of the prosecution of Andersen were disproportional to the

offense and show the result of linking criminal conviction with civil sanctions. In the
Andersen case, excluding the company from doing its core business directly killed the
company. This sentence had results that were devastating compared to the offense that
was committed by a couple of individuals within the company. The factor that plays a role
here is the coupling of automatic and thorough civil sanctions that follow criminal
convictions for certain offenses. This coupling is often found in the government contracts
area, where convicted companies are debarred from contracts with the government. It is
impossible to balance the disrupting personal and financial consequences inflicted on
innocent employees and shareholders against the incremental value of indicting the
corporation and its officers.
In the federal court of the Fifth Circuit, which includes Texas, Louisiana and parts of
Mississippi, the rules of respondeat superior, which imply vicarious liability, are
incorporated from civil cases into criminal cases without any significant modification. This
led to the judge’s decision to convict Anderson. The author argues that there is no reason
why the doctrine of respondeat superior should have been imported into criminal law in its
totality. On the civil side, the purpose of the doctrine is clear. If an employee, in the course
of duty, injures a third party on behalf of an employer, that injured party should be able
to obtain economic compensation from the employer on whose behalf the conduct
occurred. However, on the criminal side, the consequences stretch way beyond this original
scope. It makes no sense to enable a jury to convict an entire organization on the basis of
conduct of a lower-level employee. Similarly, convicting an organization on the basis of an
employee’s conduct where it was contrary to a genuine corporate policy makes no sense,
as it implies that the corporate structure is not to blame for the unlawful actions.
23

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TABLE OF CONTENTS ..................................................................................... 2

A. SUPPLEMENT 1: ARTICLE: SALE OF SERVICES AND GOODS (BUSINESS

B. SUPPLEMENT 2: BUSINESS FORMS IN THE US ....................................... 10

C. SUPPLEMENT 3: ARTICLE: CONFLICT OF INTEREST OF DIRECTORS

D. SUPPLEMENT 4: OUTLINE & CONCEPT DEFINITIONS IN CORPORATE

E. SUPPLEMENT 5: ARTICLE: INDICTING CORPORATIONS REVISED

A. Supplement 1: Article: Sale of Services and Goods (Business Law)

Business to Business Transactions

Business to Consumer Transactions

Definitions of the Contracts

A hire-purchase agreement is a credit agreement transferring the possession of goods,

In most cases, hire-purchase agreements involve and independent finance company

Match the description or sample: When a consumer relies on a description, model or

Remedies for breach of contract

Exceptions – when consumers cannot make a claim

Other Consumer Contract Rules

Terms may be deemed unfair in the case that:

The supply of Services

The Passing of Risk

Rule 5: Where there is a contract for the sale of unascertained goods:

Express Terms for Passing of Risk

International Sale of Goods Transactions

The CIGS deals with:

B. Supplement 2: Business Forms in the US

Individual /Sole Proprietorship

Joint partnerships have an advantage over individual proprietorships in raising capital,

Closely held corporations

Publicly Traded Corporations

C. Supplement 3: Article: Conflict of Interest of Directors (Corporate

• Remuneration: linking salaries to actual performance, to prevent paying without

D. Supplement 4: Outline & Concept Definitions in Corporate Criminal

Vocabulary & Concepts

Criminal Law Explained

Basic principles of criminal law

The company as defendant

There are two kinds of manslaughter: voluntary manslaughter and involuntary

Criminal offenses against property

Non-fraudulent property offenses

Fraudulent property offenses in the UK

A representation can be expressed or implied from the defendant’s conduct. In corporate

By failing to disclose information:

Fraudulent property offenses in the USA

Embezzlement: (grand embezzlement is a felony, petty a misdemeanor) generally

It also introduces a new corporate offense: failure of commercial organizations (either

The offense applies both to:

Offenses to deal with hacking

Diminished responsibility: a defense applying only to murder – where a person is

Loss of Control: may reduce a charge of murder to one of manslaughter. There is no

E. Supplement 5: Article: Indicting Corporations Revised (Corporate

The negative consequences of the prosecution of Andersen were disproportional to the

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