How long do companies last? Why do companies go bad and why do they often fail or close? Are companies set up to last forever?

Actually, a company can last for perpetuity, though few are that resilient. We can learn much about companies and company law by examining how and why companies close or go bad. Companies close for a variety of reasons.

Usually, a combination of reasons, and not just one, would cause a company to fail or to risk failure. It may result from poor corporate governance or some fraud or wrongdoing, but again it need not. Recent and not-so-recent instances of real companies closing down or facing financial difficulties include Enron, Pan-Am, Volkswagen, Boeing and Parmalat, SVB and Credit Suisse.

This article will refer to a few recent cases very briefly. Each involves a different story and set of circumstances. Each offers an interesting and practical case study.

GALA

Local media recently reported that the well-known local brand for domestic appliances and ancillary stuff which was highly successful in the sixties and seventies has decided to close down. Sales were held at their numerous outlets throughout Malta before they are shut.

One imagines that the huge competition from so many other operators in this area was a contributing factor. Frank Borda, the creator and brains behind this business passed away a few months ago, so a problem of succession may have arisen. The heirs may have held divergent views as to the direction the business should undertake. Frank Borda and Sons Limited is a private company and need not, unlike public listed companies, disclose significant information to the market. Other reasons may not yet have been disclosed.

SVB / First Republic Bank/ Credit Suisse

These have been strange days for US banks and others. Several US banks have found themselves in financial difficulties resulting from the loss of public confidence resulting in runs for withdrawal of deposits. The once great Silicon Valley Bank (SVP) was on the brink of bankruptcy before being bought up by another US bank, First Citizens Bank, for a relatively minor amount. The same factors brought down another bank, the First Republic Bank, which was saved from total bankruptcy by a take-over from JPS Morgan.

Like companies, strong brands might not last for ever

But the most spectacular ending was that of the old and venerable Credit Suisse, a Swiss Bank which had a massive business portfolio. Initial attempts to bail out the bank failed, and it was, at the behest of the Swiss authorities, eventually taken over by its greatest national rival, UBS. There are many lessons here, not only relating to banking decisions and risk-taking, but also about the regulators possibly lowering their guard.

Burger King

Several Burger King outlets have been closed overseas. This company, well-known for its Whopper, has suffered from a reduction in its market which seems to be moving elsewhere for its fast food, partly emigrating towards Asian street food and to supposedly healthier offerings. Tastes and perceptions change, and the market has its own reasons and motivations, often unpredictable and difficult to pre-empt. Sometimes, customers just walk away and move on. Like companies, strong brands might not last for ever.

Blackberry

A recent article in The Economist described how this much-loved and popular mobile phone company rose to greatness, but then gradually declined within a period of a few years. This decline was primarily due to the agility and ability of its rivals, such as Samsung and Apple, to hijack its business with their innovative products. The company seemed unable to fight off these powerful challengers and to match the flashy marketing of their new products. Blackberry, the phone that everyone wanted, has now been switched off.

Lessons and stories

It should be clarified at the outset that the closure of a company need not be due to sinister reasons at all but may be caused by market forces including fickle fashion and consumers moving on. A company may be closed simply because there is no need for it anymore, or the shareholders may have decided to call a stop, even though it may still be solvent.

Businesses may find themselves unattractive due to lack of parking space, lower public visibility, competition, loss of key senior staff, and the opening of more convenient and better-equipped shopping stores or malls in the vicinity.

Behind the closure of any company of significance may lie a series of interesting lessons to be learnt. This is what company law is like in practice, in the real world. And while companies are not necessarily meant to last forever, some companies last long while other enjoy a short lifetime. The underlying causes may be quite different. Each narrates a different story.

Dr David Fabri served as Head of the Department of Commercial Law at the University of Malta and still lectures on company and co-operatives law at the University of Malta. Following his publication Studies in Financial Services Law, he is currently finalising his second publication Studies in Maltese Company Law (Including Co-operatives) due this coming September.