Commercial Law Terms: Everything You Need to Know
You need to have at least a fair understanding of these terms if you are a business owner or hold a decision-making position in a company.3 min read updated on February 01, 2023
Commercial law terms can be confusing and intimidating, but you need to have at least a fair understanding of these terms if you are a business owner or hold a decision-making position in a company. Adequate knowledge of commercial law terms can help you make better-informed business decisions and conduct transactions with greater confidence. Unfamiliarity with such terms, on the other hand, can lead to risky business moves, unfavorable contractual terms, and adverse legal consequences.
What Is Commercial Law?
Commercial law refers to the extensive body of law that governs business and trade between individuals and organizations engaged in business. This field of law covers aspects of public and private law and both contentious and non-contentious work. It includes elements of several major legal fields, such as:
- Company law.
- Agency law.
- Contract law.
- Intellectual property law.
Commercial law firms are dedicated to meeting the legal needs of entrepreneurs, businesses, banks, and developers in all aspects of their operations. The work of a commercial attorney may involve any legal aspect that relates to the running of a business. Following its recent codification in the Uniform Commercial Code (UCC), commercial law has been adopted by almost every state.
Commercial Law Terms
- Accredited investor – An accredited investor is someone who purchases securities from an issuer and does not have to comply with the securities law requirement when the issuer prepares and files a prospectus.
- Arm's length – In general, this term refers to the closeness of relationships between taxpayers. People who are related to one another are regarded as non-arm's length with one another. An arm's length price means a price that is charged in similar transactions between parties who are unrelated.
- Authorized capital – Authorized capital is the classes of shares and the number of shares per class that a corporation is allowed to issue. It is stated in a company's articles of incorporation, which also specifies the conditions, rights, privileges, and restrictions that apply to each class of shares. For instance, the articles may state that the holders of Class A preferred shares will receive an annual dividend of $10 per share.
- Corporate governance – Corporate governance is the framework of rules and practices that governs the administration and control of a corporation.
- Mutual fund – Mutual fund refers to a pool of funds from a large number of investors who own securities and other assets. It is managed by a professional manager who charges a fee in accordance with the objectives set by the fund.
- Piercing the corporate veil – Piercing the corporate veil refers to a court's decision to disregard a corporation's separate existence, enabling a creditor to directly enforce its claim against one of the corporation's shareholders. Piercing the corporate veil for a particular purpose does not impact the company for other purposes.
- Strategic alliance – Strategic alliance refers to a wide array of relationships that involve greater or lesser formality and degrees of cooperation among the participants of an alliance. An example of a strategic alliance is a partnership or joint venture. The term may also mean an agreement to share information, market products jointly, and conduct research and development together.
- Prospectus – Issuers of securities and other security sellers in some cases are required to file a prospectus with securities regulators to permit the issuance of securities to the public. There are exemptions to this requirement, such as an exemption for a private issuer's securities.
- Thin capitalization – Thin capitalization means a high debt-to-equity ratio. If a corporation is heavily capitalized by debt, it is regarded as thinly capitalized. In some situations, a corporation thinly capitalized by non-residents is ineligible for a full deduction of interest expense.
- Par value – Par value refers to a provision in the articles of incorporation that was meant to specify the issue price of a corporation's shares. However, in many circumstances, the issue prices of shares are above the par value.
- Hold harmless clause – A hold harmless clause is a provision in an agreement stating that one or both parties agree to refrain from holding the other party accountable for any damage, loss, or legal liability. The purpose of this clause is to give the parties indemnity on a unilateral or reciprocal basis.
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