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Company Law - W1 - Different business models and intro to companies

Isla Duguid Company Law University Englisch 89 Karten

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  1. 1Forms of business1. Sole trader
    2. Partnership
    3. Limited partnership
    4. Limited liability partnership
  2. 2Why businesses are set up- Businesses are generally set up to make a profit.
    - A business generates income by selling products and/or services.
    - In order to sell the products and/or services the business will incur certain expenses.
    - Provided the income generated exceeds the expenses of the business, it will make a profit.
    - Once a business has made a profit, a proportion of that profit is likely to be given to the owners of the business, and the rest will be retained in the business in order to help it grow
  3. 3Why does a business need to raise finance1. to purchase premises from which to operate, plant and machinery, stock or raw materials, computer hardware and software in order to be able to manufacture and sell goods, or provide a service;
    2. to employ staff to make the goods
    3. and/or provide the services to customers;
    to obtain the advice of professional advisers from time to time, particularly accountants; and
    4. to expand and grow, which it may do by acquiring other businesses, carrying out marketing activities eg advertising and investing in new premises and equipment.
  4. 4How do businesses raise finance?1. the owners of the business may invest in it by making contributions of capital to the business;
    2. outside investors may be prepared to make a capital contribution to the business in order to share in its future profits;
    3. the business may borrow money, for instance, from a bank; and
    4. As already mentioned, a proportion of the profit that the business has generated is likely to be retained within the business to help it grow, rather than being distributed to the owners and investors in the business.
  5. 5Key considerations when forming a business1. Costs - how much does this business model cost to set up
    2. Risk - will the participants in the business have personal liability for debts of the business
    3. Structure - does the business model provide a clear organisational structure? Is this flexible?
    4. Formalities - are there legal formalities that must be followed in running the business? How flexible is this business model regarding formalities?
    5. Privacy - to what extent is information about the business required to publicly disclosed?
    6. Finance - how can the business raise capital?
    7. Tax
    8. Time
  6. 6Sole traders – key characteristics- No set up costs - there are no formalities, the sole trader can start trading straight away
    - A sole trader is not a separate legal entity - contracts are formed between the individual themselves and third parties
    - Unlimited personal liability - the sole trader’s personal assets such as their home and cars are potentially liable to be sold to meet the debts of the business
    - No formal structure - the individual can choose how they wish to run their business
    - No Companies House filing or procedural requirements for running the business
    Complete privacy - no need for publicly filed accounts
  7. 7Partnerships – key characteristics- No set up costs - there are no formalities, the partnership can start trading straight away. Partnerships can be formed without any formal agreement or even intention.
    - A partnership is not a separate legal entity. Contracts are formed between third parties and the partners in the partnership as individuals
    - Unlimited personal liability - partners have unlimited joint (in contract) or joint and several (in tort) liability for the debts and obligations of the partnership incurred while they are partners. This means that their personal assets such as their houses may need to be sold to meet the debts of the business
    - There are no Companies House filing or procedural requirements for the running of business
    - Complete privacy - no requirement for publicly filed accounts etc.
    - Partnerships are governed by the provisions of the Partnership Act 1890 (PA 1890)
  8. 8Partnership – formation- Can be created without any formalities
    - This is because s1(1) PA 1890 defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view to profit’
    - There does not need to be any intention to form a partnership - two or more people working together with a view to profit automatically form a partnership
    - Section 2 PA 1890 - list of rules for determining the existence of a partnership
    - Factors to consider include whether profits/losses are shared, whether a loan is made from one partner to another, whether property is held jointly.
    - Evidence of profit sharing will be prima facie evidence of a partnership but not necessarily conclusive evidence.
    - A loan of money by one party to another does not of itself create a partnership
  9. 9Does a partnership exist?- No one factor alone will suffice to create a partnership. Necessary in all cases to consider all the facts
    - Examples from case law:
    - If there is an agreement to share losses as well as profits, this makes the existence of a partnership more likely
    (Northern Sales (1963)
    - Limited v Ministry of National Revenue (1973)).
    - Case law has also held that if the person is not being 'held out' as a partner this makes the existence of a partnership less likely.
    - In Walker v Hirsch (1884) a clerk lent money to the partnership, was paid a fixed salary and took 1/8th of the profits and of the losses, but was never held out as a partner. No partnership was found to exist.
  10. 10Terms of the partnership – PA 1890- Although a partnership can be formed without any required formalities, it is advisable to have a partnership agreement drawn up by a solicitor as otherwise the partnership will be governed by the default provisions of the PA 1890. These include the following:
    - Section 24(1) Profits and losses: Partners are entitled to share equally in the profits of the business, and must share equally in the losses of the business, even where the parties have contributed to the capital unequally. There should therefore be an express provision in the agreement setting out a profit sharing ratio, otherwise both profits and losses are shared equally.
    - Section 24 (6) Remuneration: Partners are not entitled to a salary
    - Section 24 (8) Decision Making: Decisions arising during the ordinary course of the business are decided by a majority, except for any change to the nature of the partnership business which requires unanimity
    - Section 25 Expulsion: a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this
  11. 11Partnership Agreements- The partners' mutual rights and obligations can be varied at any time by their unanimous consent (s19 PA 1890).
    - This means that partners can themselves draw up a partnership agreement setting out how they wish their partnership to run.
    - It is important in a modern partnership that partners seek legal advice and enter into a binding partnership agreement governing the terms of their relationship.
    - Partners will wish to vary the default provisions of PA 1890 as these are not suitable for a modern business.
    - Typically, a partnership agreement will deal with the following key principles as well as other more practical details:
    1. Profit sharing ratio
    2. Salaries
    3. Decision making - eg are certain partners able to make decisions on particular issues alone or in small committees?
    4. What happens when a partner leaves the partnership
    5. How new partners may be appointed and how partners may be removed.
  12. 12Limited Partnerships (LP) – Key Characteristics- A LP has two different types of partners:
    1. Limited partners who have limited liability. These limited partners must not be involved in the management of the business (often called ‘sleeping partners’ e.g. passive investors). If they do become involved in management, they lose their limited status and become general partners with unlimited personal liability
    2. General partners who run the business and have unlimited liability (as in a trad partnership)
    3. There must be at least one limited partner and one general partner
    - LPs governed by the Limited Partnership Act 1907 (as amended). LPs must be registered at Companies House but have no requirement to file accounts
    - LPs are not commonly used for general business but often used for investment vehicles. They are popular joint venture business structures where an investor (limited partner) puts money into a business run by the general partner.
    - Note that on 6 April 2017 a new sub-category of limited partnership called a private fund limited partnership was created. These are now commonly used for investment vehicles
  13. 13Limited Liability Partnerships (LLP) – Key Characteristics- LPs were introduced by the Limited Liability Partnership Act 2000 (LLPA 2000).
    - The key difference between LLPs and sole traders, partnerships or LPs is that an LLP has a separate legal personality - it can own property and enter into contracts on its own behalf.
    - However, for tax purposes it is treated as a partnership and the members are taxed as partners, each being liable to pay tax on their shares of the income or gains of the LLP. This is referred to as 'tax transparency'
    - Section 2(1)(a) LLPA 2000 states that two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP. A 'person' in this context can be a company as well as an individual.
    All partners in an LP have limited liability. Their liability to third parties is limited to the amount that they have agreed to pay under the terms of their partnership agreement.
  14. 14Limited Liability Partnerships (LLP) – Key Characteristics ContinuedLPs are registered at Companies House in the same way as companies and are required to file annual accounts and other information. LPs are in effect a hybrid between a traditional partnership (with procedural flexibility) and a company (with limited liability). Many law and accountancy firms are LLPs.
    The organisational structure of an LLP is very flexible and should be decided between the partners in a formal written Members' Agreement.
  15. 15Limited Liability Partnerships (LLP) – Key Characteristics Limited Liability Partnerships Regulations 2001- In the absence of any such agreement Regulations 7 and 8 of the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) contain default provisions as follows:
    a) Members share equally in capital and profits.
    b) An LP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP.
    c) Every member may take part in management but no member is entitled to remuneration for managing the LLP
    d) No person can become a member or assign their membership without the consent of all existing members.
    e) Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires the consent of all the members.
    f) There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members' Agreement
  16. 16Company procedureAs you have already seen, much of the day-to-day business of a company is carried out by the directors and, where the company has a managing director (as almost all do), the managing director will have authority to enter into all routine commercial contracts on behalf of the company.
    From time to time however, it will be necessary for specific authority to be given to a director (perhaps in connection with the execution of documentation on behalf of the company in respect of an especially important transaction).
    Alternatively, a matter may need to be approved by the company's shareholders.
  17. 17Board Meetings (Meetings of directors)Board resolutions can be passed by directors, without great formality, at a Board Meeting (BM)
  18. 18Board Meetings (Meetings of directors) Notice- In the case of Browne v La Trinidad (1887) 37 ChD 1, the court held that reasonable notice of the BM was necessary, and that this would be whatever notice is usual for the directors to give.
    - Therefore, if all of the directors are in the same building, the meeting could be called almost immediately, if such notice is customary for the directors.
    - If the directors are in various buildings or in other parts of the country, then a couple of days' or even a couple of weeks' notice may be required.
  19. 19Board Meetings (Meetings of directors) Quorum- Directors may not validly make a decision on company business unless a minimum number of directors entitled to vote are present at the time the meeting takes place.
    - Art 11(2) MA requires a minimum of two directors to be present for the meeting to be quorate (unless the articles provide otherwise).
  20. 20Board Meetings (Meetings of directors) VotingBoard resolutions are passed by majority vote on a show of hands. Each director has one vote. As we saw, the chairman may have a casting vote to prevent deadlock, depending on whether this is provided in the company's Articles
  21. 21Company Procedure Matters to be referred to the shareholders- There will need to be a referral to the shareholders of the company in the following situations:
    a) where a matter is outside the powers of the directors and must be approved by a resolution of the shareholders; or
    b) where a matter is within the powers of the directors but requires the prior approval of the shareholders before the directors can be authorised to act.
    - An example of the first type of situation would be the making of amendments to a company's articles of association.
    - Section 21 CA 2006 provides that amendments to articles of association are to be made by a special resolution of the company's shareholders.
    - An example of the second type of situation would be the making of a loan to a director of the company.
    - Under s 197 CA 2006 a company may make a loan to a director, but not without the prior approval by a resolution of the shareholders.
    - Once the shareholders have given their approval the matter will be referred back to the Board and the Board will actually make the loan to the director, on behalf of the company.
  22. 22General Meetings (Meetings of Shareholders)- If a shareholder resolution is required then there must be a shareholders' meeting - GM.
    - It is the board's responsibility to convene (ie call) general meetings.
    - The board must decide when the GM is to take place.
    - Section 307 CA 2006 prescribes minimum notice periods for GMs. For private companies, 14 clear days' notice is required for the calling of a GM (s 307(1) CA 2006).
    - To convene the GM, the board must inform the shareholders of when (and where) it is taking place, by giving notice to the shareholders.
    - The directors must approve the form of the notice of the GM (to confirm that it complies with the relevant statutory requirements) and then they must authorise its circulation to the shareholders.
    The quorum for a GM is generally two shareholders (s 318(2) CA 2006) (although this is one for single member companies (s 318(1)).
  23. 23The meaning of the word ‘notice’- You should note that the word 'notice' is used above to bear two distinct meanings and that the expression 'notice of a GM' can, therefore, depending on its context, refer either to:
    a) a document sent by the directors to the shareholders, announcing that a GM will take place; or
    b) a period of time, which elapses between the directors' act of calling a GM (by circulating the notice document to the shareholders) and the GM itself taking place.
    - After the GM has taken place, a second BM will be necessary, to enable the directors to implement the matter on which the shareholders have voted.
    - The net effect is that, if a company wishes to put into effect any change or business decision of a type for which shareholder approval is needed, there will be a sequence of three meetings (BM, GM, BM).
  24. 24Sequence of meetings - summary1. BM - a BM is held to decide on the issues to be considered at the GM. to resolve to convene the GM, to approve the form of notice for the GM and to authorise its circulation. The notice of the GM will set out the wording of the resolutions to be put before the shareholders. The notice of the GM is then circulated to the shareholders by the company secretary (if the company has one) or by the directors.
    2. GM - on the day appointed, the GM will take place and the shareholders will vote on the resolutions set out in the notice.
    3. BM - a further BM will be held and the directors will be informed as to how the shareholders voted at the GM and whether the resolutions were passed. The directors will then authorise the company secretary (if there is one), or one of the directors (if there is not), to deal with the post-meeting matters.
    4. Post meeting matters (PMM) - the post-meeting matters will then be carried out by the company secretary (if the company has one) or a director (if not). This means that copies of the relevant documents will be filed at Companies House
  25. 25Short notice GMs= GMs may be called on less than the usual amount of short notice if sufficient members agree.
    - Section 307(5) CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by a majority in number of the members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM.
    - This percentage may be increased to up to 95% by a provision in the company's articles of association but there is no such provision in the MA.
    - Therefore, where companies have few shareholders, it is often possible for meetings to be held at short notice. If all the shareholders are available at the time the directors decide to convene a GM, the following sequence of events may be possible. All of this can be done in well under an hour.
  26. 26Written resolution procedure for private companies Board ResolutionsArt 8(2) MA allows directors to take decisions in the form of a directors' written resolution provided the prescribed procedure is followed.
    This is uncommon in practice.
  27. 27Written resolution procedure for private companies Ordinary and special resolutions- Under s281 CA 2006 only private companies may pass a shareholders' resolution by way of a written resolution.
    - Section 282 CA 2006 states that a written ordinary resolution can be passed by a simple majority of the total voting rights of eligible members.
    - Sections 283 CA 2006 state that a written special resolution can be passed by a majority of members representing not less than 75% of the total voting rights of eligible members.
    - Section 284 CA 2006 states that, where a company has a share capital, every member has one vote in respect of each share held by him when voting on a written resolution.
    - Section 288 CA 2006 provides that resolutions to remove a director or auditor from office may not be passed by way of written resolutions.
  28. 28Post-meeting - dealing with documentation- Copies of all resolutions affecting the company's constitution must be sent to the Registrar of Companies within 15 days of their being passed
    - All special resolutions must be filed as they form part of a company's constitution (ss 17(b) and 29(1)(a) CA 2006), as do a few particular ordinary resolutions specified by the relevant provisions of the CA 2006.
    - Copies of any amended articles must also be filed (s 26(1) CA 2006), together with various company forms.
    - The CA 2006 refers in numerous places (e.g. s 87(1) CA 2006) to requirements for notice of certain events and/or decisions to be given to the Registrar of Companies.
    - The directors will also be responsible for updating the statutory books, e.g. the registers of members and directors, and the BM and GM minute books. If the company has a company secretary he/she will update the statutory book
  29. 29Why is it important to follow the correct procedures?- If the correct procedures are not followed, then resolutions purportedly passed at meetings may be invalid.
    - For example, if written notice for GMs is not given in the proper form to all those entitled to it, then any resolutions are invalid, unless the error is accidental.
    - Similarly, if a meeting is not quorate, then resolutions will not be validly passed, nor will they be valid if the incorrect type of resolution is used.
    - There may also be criminal sanctions. For example, ss 248(3) and (4) CA 2006 state that if a company fails to record minutes of meetings in the relevant statutory books, every officer in default is liable to a fine
  30. 30Formation of a companyA client wishing to start a business through the medium of a company can either incorporated a new company from scratch or purchase and then convert an existing shelf company to conduct its business
    Incorporation from scratch = by submitting relevant information to Companies House/ online
    Shelf company conversion = purchase of shelf company followed by formalities to enable necessary changes
  31. 31Incorporation from scratchTo incorporate a new company from scratch, an application must be made to the Registrar of Companies to have the new company registered at Companies House
    This method was trad. Slightly slower than purchasing a shelf company. But now possible to incorporate a company online and many law firms are increasingly making use of this facility rather than using the shelf company procedure.
    Incorporating a new company from scratch advantage: ensuring company is tailor-made to meet your client’s requirements from the outset
  32. 32Incorporation from scratch s 9 CA 2006- the following must be delivered to the Registrar of Companies at Companies House for a company to be registered:
    a) A copy of the company’s memorandum;
    b) Articles prescribing regulations for the company (if the company
    does not intend to use the Model Articles (MA);
    c) The fee - required fee for incorporation can be found on the Companies House website.
    d) An application for registration (form IN01) stating the company’s proposed name, whether the company’s registered office is to be situated in England and Wales; Scotland or Northern Ireland, whether the liability is limited and whether the company is public or private.
  33. 33Incorporation from scratch s 9 CA 2006 An application for registration (form IN01 What does it includeApplication must contain:
    Statement of capital and initial shareholdings (s 10 CA 2006) = where the company is to have a share capital and is not a company limited by guarantee
    A statement of the company’s proposed officers (directors, company secretary) (s 12 CA 2006)
    If the company is to be limited by guarantee, details must be given of the guarantee (s 11 CA 2006)
    It must also contain a statement of compliance stating that the requirements of CA 2006 have been complied with (s 13 CA 2006)
  34. 34Incorporation from scratch s 9 CA 2006 certificate of incorporationOnce the Registrar of Companies has approved the application for incorporation of the company, the company is sent a certificate of incorporation authenticated by the Registrar’s official seal.
    Certificate sets out:
    a) Name of the company (can be changed at later date);
    b) Company’s registered number. Will never change and must therefore be used when drafting any legal agreements to which the company is a party to ensure the company can be correctly identified following any future changes to its name; and
    c) Date of incorporation
    - The company becomes a legal entity (s 16(3)) from the date of incorporation set out in the certificate of incorporation (s 15 CA 2006)
  35. 35Purchasing a shelf company- Traditionally more common for a solicitor to purchase a shelf company on behalf of the client than to incorporate a new company from scratch.
    - Position changing due to online incorporation services
    - Shelf company is one that has been set up in advance by a company registration agent or law stationer. Many firms of solicitors also operate an in-house service that sets up shelf companies for sale to clients
    - Traditionally, greatest advantage of using shelf company method to set up a company has been that it can be done quickly, as avoids need to draft and submit incorporation documentation.
    - With the advent of online incorporation services, difference in speed between converting a shelf company and incorporation from scratch is negligible.
    - However, conversion of a shelf company retains the advantage of being an available option all the time on every day of the year, whereas online incorporation can only take place during Companies House opening hours
  36. 36Client will likely have to make some, or all, of the following changes to the shelf company to meet their requirements:1. Name - most shelf companies will have a name that has no connection with your client - will need to be changed to a name selected by your client. Under s 77(1) CA 2006 a company's name can be changed by a special resolution of the shareholders or by any other means provided by the company's Articles
    2. Articles - it is common for a shelf company to have been incorporated with MA. You will need to consider whether the company's existing Articles need to be amended, in accordance with s21(1) CA 2006, to meet the specific requirements of your client. A company may as a general rule alter its Articles by special resolution.
    3. Registered office - substitute your client's chosen address for the first registered office in accordance with s 87(1) CA 2006.
    4. Members, directors, and the company secretary - representatives of the company registration agent or law firm will have become the first member(s) and company secretary of the company.
  37. 37Client will likely have to make some, or all, of the following changes to the shelf company to meet their requirements: Members, directors, and the company secretaryIt is therefore essential that:
    the share(s) held by the subscriber is/are transferred to your client;
    your client's representatives are appointed as director(s) and the company secretary ; and
    the first director(s) and company secretary resign from their positions.
  38. 38Constitutional Documents- CA 2006 came into force on 1 October 2009.
    - Prior to this, companies were governed by the principles of the Companies Act 1985 (CA 1985).
    - In practice you will deal with many companies incorporated prior to CA 2006 therefore it is important to understand some of the provisions of CA 1985 which still affect those companies.
    - CA 1985 required companies to have two constitutional documents: the Articles of Association and the Memorandum.
    - Under s 17 CA 2006 the memorandum no longer forms part of the company's constitution - it is only required as part of the procedure to register a company at Companies House. The memorandum of a company incorporated under CA 2006 simply amounts to a declaration on the part of the company's subscribers ie that the first members of the company wish to form a company and agree to become members of that company (s 8 CA 2006).
  39. 39Memorandum- Under the Companies Act 1985 (CA 1985) the memorandum was a more complex document and formed part of the company's constitution.
    - Companies could set out constitutional restrictions in their memorandum and were required to include an objects clause setting out the purposes for which the company has been formed. Acting outside of this purpose was described as acting ultra vires or outside the company's capacity.
    - Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company's Articles. So the ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles.
    -
  40. 40Articles of AssociationAll companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company.
  41. 41Articles of Association Examples of the types of provisions which are included in the Articles of a companya) the number of directors required to transact business (both to form a quorum at board meetings and to take decisions at board meetings);
    b) the method of appointment of directors;
    c) the powers of directors;
    d) how board meetings are to be conducted
    e) any special rights attaching to shares;
    f) how shareholder meetings are to be conducted; and
    g) how and to whom shareholders may transfer their shares.
  42. 42Relationship between CA 2006 and the Articles- A company's Articles must be interpreted in the light of relevant legislation. There is considerable scope for overlap between the procedures set out in CA 2006 and those that may also be contained in the company's Articles. The Articles must comply with the minimum provisions of CA 2006 (this is known as the Legality Test).
    - A company may in certain circumstances provide a procedure in its Articles which is more onerous than that contained in CA 2006.
    - s 154(1) CA 2006 provides that a private company must have a minimum of one director.
    - There are some CA 2006 provisions which override anything in a company's Articles.
    An example of this would be s 321 CA 2006 (the right to demand a poll vote at a general meeting). cannot be removed in the Articles.
    There are also powers available to companies by default under the provisions of CA 2006 unless the Articles provide otherwise, for instance, the power of a private company to issue redeemable shares.
  43. 43Form of Articles (3 choices)1. Model Articles (MA) / Table A
    2. Amended MA
    3. Tailor made Articles
  44. 44Model Articles (MA) / Table A- The Secretary of State has prescribed MA for different types of company (under s 19 CA 2006). If a new company does not register Articles at Companies House, s 20(1) CA 2006 provides that the relevant MA will constitute the company's Articles in default.
    - There was a similar provision under the CA 1985. For companies incorporated under the CA 1985 the default Articles were known as Table A. In practice, you may encounter older companies with Table A Articles.
  45. 45Amended MANot all of the provisions contained in the MA are suitable for all companies. Many companies therefore choose to adopt the MA as their Articles, but elect to exclude, or modify the effect of, some of its provisions.
  46. 46Tailor made ArticlesThe third option available to a client is to instruct a solicitor to draft Articles which are tailor-made for the particular company concerned. Law firms often have a precedent form of Articles that can be adapted for this purpose.
    However, generally this is a very time-consuming process and therefore costly for the client, although the end product can often be more useful to them in the long run. Most small companies will prefer to adopt MA subject to certain amendments.
  47. 47Amending the ArticlesOnce a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006). A special resolution is a decision of the shareholders.
    Section 22 CA 2006 permits the entrenchment of specific provisions within a company's Articles, though this occurs relatively rarely in practice. An entrenched provision of a company's Articles is one which can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with. Entrenched Articles can nevertheless always be amended by the agreement of all of the members, or by a court order (s 22(3) CA 2006).
    There is a great deal of case law relating to the alteration of a company's Articles. The basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656.
    In Shuttleworth v Cox [19271 2 KB 9 the court held that an amendment to the Articles is not valid if no reasonable man could consider it to be for the benefit of the company.
  48. 48Amending the Articles Sidebottom v Kershaw, Leese & Co LtdThe defendant company had altered its articles by introducing a provision which gave the directors power to buy out, at a fair price, the shareholding of any member who competed with the company's business.
    The plaintiffs, who were minority shareholders and who carried on a competing business, unsuccessfully challenged the validity of the alteration.
    The Court of Appeal found that the alteration was initiated in good faith and bona fide in the interests of the company and therefore
    allowed this to stand to protect the company.
  49. 49Amending the Articles Re Charterhouse Capital LtdThe amendment of a company's articles to permit the shares of a minority shareholder to be compulsorily acquired under a takeover offer was held to be valid as it was consistent with the terms of a shareholders agreement. It was not open to challenge on other grounds such as unfair prejudice.
    The Court of Appeal held that the amendment was no more than a 'tidying up exercise' which had been consistent with the initial bargain of the founding members, which included the appellant himself.
    In the absence of any finding of bad faith, improper motive or irrationality, there was no basis for the challenge to the validity of the amendment.
  50. 50Legal effect of the ArticlesThe nature of the contract established by the Articles of a company is set out in s33(1) CA 2006, which provides that the provisions in the company's Articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions.
    Whatever form the company's Articles take, therefore, they will be binding on both the company and its members and enforceable.
    The predecessor to s 33(1) CA 2006 (namely s 14 CA 1985) has been the subject of a large amount of case law. The generally established rule is that the Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members (Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881 (Ch)).
  51. 51Articles as a contract between the company and its membersCourts have been willing to prevent a company from infringing its members' rights in breach of the Articles by granting an injunction. Each member, acting in his capacity as a member, is similarly obliged to the company to comply with the Articles. However, a member may not enforce any rights contained in the Articles against the company that are not relevant to his capacity as a member.
    Rights contained in the Articles that would probably be enforceable by members under s 33 CA 2006 would be the right to vote or the right to receive a final dividend once it has been declared (ie approved by a resolution of the shareholders).
    Eley v Positive Government Security Life Assurance Company (1876) 1 Ex D 88 (CA), a member of the company who had inserted a right into the company's Articles for him to be employed as the company's solicitor for life could not enforce this provision (under a forerunner of s 33 CA 2006) as this was not a right which he held in his capacity as a member, but rather in his capacity as the company's solicitor.
  52. 52Articles as a contract between members themselvescourts have acknowledged that the forerunners to s33 CA 2006 provide that the Articles constitute a contract between the members themselves, as well as between the company and its members, there is conflicting authority as to whether one member may enforce the Articles against another member directly (Rayfield v Hands or only through the company itself, ie by requiring the company to enforce the provisions against the member (Welton v Saffery)
    Facts of Rayfield v Hands would suggest that, if a member accepts a personal obligation to another member through the Articles (eg to transfer shares), that member can enforce the right against the other member directly.
    Otherwise the courts appear to be of the opinion that members will only be able to enforce provisions contained in Articles through the company itself.
    If a member is likely to wish to enforce rights against other members, he/she should be advised to enter into a shareholders' agreement.
  53. 53Board and shareholder resolutionsSince a company is an artificial person, it is unable to make decisions or carry out company business itself
    Decisions are made on behalf of the company by its directors and shareholders
    Decisions of the directors are taken by passing Board Resolutions in Board Meetings (BM)
    Decisions of the shareholders are taken by passing Shareholder Resolutions, either in a meeting of the shareholders (a General Meeting (GM)) or in writing
    Two different types of shareholder resolution: Ordinary Resolutions and Special Resolutions
  54. 54Directors: Board ResolutionsThe standard day to day decisions of the company are taken by its board of directors in board meetings.
    Unless the power to take a particular decision has been delegated by the board to a particular director or committee of directors, a decision of the board of directors of a company must be taken in accordance with the procedure set out in the company's Articles.
  55. 55Procedure for passing a board resolution at a BMArt 7(1) MA provides that any decision of the directors can be made by majority decision at a meeting of the directors.
    This is the usual procedure for directors' decision-making.
    Decisions at BMs are taken by majority vote on a show of hands. For example, if there are four directors participating in the BM, at least three must vote in favour of a resolution for the board resolution to be validly passed.
    On the other hand if two of the directors vote for the resolution and the other two directors vote against it there will be deadlock.
    Art 13 MA provides that in the event of a deadlock the chairman of the BM (if appointed under Art 12 MA) will have a casting vote.
  56. 56Chairman of the BoardThe chairman is chosen by the directors from amongst themselves (Art 12 MA).
    Therefore, using the same example, if a resolution fails because there are equal votes, ie two for and two against, the chairman has considerable power. They can tip the balance.
    Furthermore, in a company with only two directors, a chairman with a casting vote is effectively able to take decisions alone.
    For this reason the company's members may decide to amend the Articles by removing the chairman's right to a casting vote in some circumstances
  57. 57The quorum necessary for a valid BMThe number of people required to attend a meeting in order for the meeting to be valid is known as the quorum.
    If a sufficient number of people attend the meeting then the meeting is said to be quorate.
    Art 11 MA confirms that no proposal may be voted on at a BM unless a quorum is participating in the meeting.
    Art 11(2) states that the quorum for a directors meeting may be fixed from time to time by a decision of the directors but it must never be less than two and, unless otherwise fixed, it is two.
  58. 58Alternative procedure: unanimous decision of the directorsArt 8 MA makes provision for directors to make decisions, by unanimous agreement, without having to hold a BM.
    Such a decision requires all the directors to indicate to each other that they share a common view on the matter and they can indicate this 'by any means' so this can include, for example, a written resolution or a telephone conversation (but note that a written record of the decision must be kept - Art 15).
    However since it is easy to hold a BM under the MA, in practice the preferred procedure for decision-making by directors is by resolution in a BM.
  59. 59Companies with one directorThe requirements in the MA as to decision-making by directors do not apply to companies with only one director. In such companies the sole director can take decisions on their own (Art 7(2) MA)
  60. 60Shareholder ResolutionsSome fundamental decisions cannot be taken by the directors until they receive authorisation from the shareholders to do so, for instance:
    the making of changes to the company's constitution;
    the approval of certain transactions between the directors and the company; and
    the formal declaration of dividends.
    There are two types of shareholder resolution under the CA 2006 requiring different voting thresholds. These are:
    ordinary resolutions; and
    special resolutions.
    Where the CA 2006 does not specify the type of resolution to be used then an ordinary resolution is sufficient unless the company's Articles require a higher majority (s281(3) CA 2006).
  61. 61Types of Shareholder ResolutionsOrdinary Resolutions: ordinary resolution of the members of a company means a resolution that is passed by a simple majority (more than 50%) of votes are cast in favour of the resolution) (s 282(1) CA 2006)
    Special resolutions: under s 283(1) CA 2006, a special resolution requires a majority of not less than 75%
  62. 62Voting on a show of hands and voting on a pollShareholders may vote at a GM on a show of hands or on a poll.
    When the shareholders vote on a show of hands each shareholder who is present at the meeting will be entitled to one vote, regardless of the number of shares held by that shareholder (provided the share has voting rights under the Articles).
    When the shareholders are voting on a poll, every shareholder has one vote in respect of each share held by them (s 284 CA 2006).
    The votes are counted out of the shareholders who are present and voting at the meeting
  63. 63The right to demand a poll voteThe right to demand a poll vote is very important and will make a significant difference when the shareholders are not in agreement over a resolution.
    Section 321 CA 2006 sets out the conditions that must be met in order for a shareholder to be entitled to demand a poll although these conditions may be relaxed by a provision in the Articles and in fact they are relaxed in the MA (see Art 44 MA).
    This is an example of a situation in which the Articles of a company may not include provisions more onerous than those contained in the CA 2006
  64. 64The right to appoint a proxyA member of a company is entitled to appoint another person as their proxy to exercise all or any of their rights to attend and to speak and vote at any GM, in their place (s 324 CA 2006).
  65. 65Quorum for a GMAccording to s 318(2) CA 2006 the quorum required for a GM is two qualifying persons, and qualifying persons include proxies and representatives of corporate shareholders.
    As you know, a company can hold shares in another company. In fact very many companies have corporate shareholders because they are subsidiaries within a group of companies.
    Section 323 CA 2006 provides that if a corporation is a member of a company, it may by resolution of its directors authorise a person or persons to act as its representative at any meeting of the company.
  66. 66Single member companiesUnder s 318(1) CA 2006 where a company has only one member, one qualifying person present is sufficient to constitute a quorum for a GM
  67. 67Written resolutionsUnder s 281 CA 2006, private companies may also pass a shareholders resolution without holding a General Meeting by using the written resolution procedure (subject to s 288 CA 2006).
    When votes are cast in writing, the relevant majority is counted out of all the shareholders entitled to vote on the resolution (rather than those present and voting at the meeting as for votes cast at a general meeting).
    Note that a written resolution is a method of voting, not a type of vote.
    Shareholders must always vote by ordinary or special resolution, but they may do this either at a meeting or (for private companies), in writing as a written resolution.
    There are two resolutions that may not be passed as written resolutions (s 288(2), which are:
    Removal of a director under s 168, and
    Removal of an auditor under s 510.
    For both of these resolutions, the person concerned has the right to address the shareholders in general meeting.
  68. 68Who are the key stakeholders in a company?Directors (together, ‘the board’)
    Shareholders (or ‘members’)
    Persons with Significant Control (‘PSC’) (usually shareholders holding over 25% of shares)
  69. 69ShareholdersOwners of a company are its shareholders, or members
    Shareholders invest money (share capital) in the company in return for a share in the ownership of the company, evidenced by a share certificate
    Shareholders’ rights such as voting rights and right to a dividend are set out in the Articles (sometimes also in the shareholders’ agreement)
    Membership begins when the member’s name is entered into the company’s register of members (s 112(2) CA 2006). The first shareholders of the company are its subscribes under s 8 - so called as they subscribe to the company’s memorandum of association
    A shareholder does not need to be a human being. Company has a separate legal identity and can amongst other things, own property in its own name. A company can therefore own shares in another company
    Section 1159 CA 2006 gives the definition of a subsidiary
  70. 70SharesShare is often described as a ‘bundle of rights’. By investing in the share capital of any company, the investor (shareholder) becomes a part owner of the company and will often have voting rights in shareholder meetings
    Several different classes of share that a company may issue to shareholders
    Different classes of shares may carry different rights and entitlements.
    All rights and entitlements in relation to shares of all classes are set out in the company’s Articles
    The most common type of share is known as an ordinary share
    Ordinary share - usually entitles its holder to vote at shareholder meetings and to receive a share of the profits and surplus assets of a company after it is wound up (if there are any)
  71. 71Nominal or par valueShares in a limited company having a share capital must have a fixed nominal value.
    Common nominal values for ordinary shares are 1p, 5p or £1. The nominal (or 'par') value of a share is the minimum subscription price for that share. It represents a unit of ownership rather than the actual value of the share.
    A share may not be allotted/issued by a company at a discount to its nominal value.
    A share may however be allotted/issued for more than its nominal value, and the excess over nominal value is known as the 'premium'.
    The market value of a share (i.e. the amount at which a share may be traded between shareholders) will often be much higher than the nominal value of the share.
  72. 72Issued, paid-up and called-up sharesThe total amount in value (nominal and premium) of all shares in issue at any time is known as the 'issued share capital'.
    This is the amount of share capital that will be shown in the company's accounts.
    It is not always necessary for shareholders to pay the full amount due on their shares immediately.
    The amount paid is known as the paid-up share capital'.
    The amount outstanding can be demanded by the company at any time. Once demanded. The payment has been 'called'
  73. 73Share capitalCompany’s issued share capital is made up of:
    a) Shares purchased by the first members of the company - ‘subscriber shares’; and
    b) Further shares are issued after the company has been incorporated, to new or existing shareholders. New shares can be issued at any time provided that the correct procedures are followed
  74. 74Allotment‘Allotment’ is defined in s 558 CA 2006
    Shares are said to be allotted when a person acquires the unconditional right to be included in the company's register of members in respect of those shares.
    The term 'allotment' is often used interchangeably with 'issue' of shares but the two have different meanings.
    There is no statutory definition of issue but it has been held that shares are only issued, and only form part of a company's issued share capital, once the shareholder has actually been registered as such in the company's register of members, and his or her title has become complete
  75. 75Different classes of shareA company may create different classes of share.
    For example, there may be two classes of ordinary share, each carrying different voting rights, or perhaps one carrying no voting rights at all.
    There may also be preference shares, which entitle the holder to a preferential right, such as the first claim to a dividend or the return of capital (i.e. the return of money the shareholders had invested in their shares) on a winding up
    The rights will depend on the terms of the issue and are usually (and in some cases, must be) set out in the company's Articles.
    Class rights may be relevant when determining which shareholders can vote at general meetings and whether some shareholders have enhanced voting rights.
    It is also important to examine class rights where it is proposed to vary the terms of the rights attaching to a particular class of share.
    When looking at the rights of shareholders it is important to check the company's Articles and also to ascertain whether there is a Shareholders' Agreement in place
  76. 76Limited LiabilityThe total nominal value of the shares held by a shareholder is equal to the total amount of that shareholder's liability to contribute to the assets of the company if it becomes insolvent.
    This means that, if all the shareholder's shares are fully paid, he will not have to contribute any further amount to the company on insolvency.
    This is the way in which a shareholder's liability is said to be limited
    Therefore the shareholder's total liability is limited to the amount, if any, unpaid on his/her shares.
  77. 77Persons with significant control (PSC)- Every UK company is required to identify its 'people with significant control' (PSC).
    - Broadly, this term refers to any individual (ie human being) who:
    a) owns more than 25% of the shares or voting rights in the company;
    b) has the power to appoint or remove a majority of its board of directors; or
    c) otherwise exercises 'significant influence or control' over the company.
    - Every company must maintain a register of its PSCs, and this register must be open to public inspection (see ss 790A - 790ZG CA 2006).
    - The intended purpose of the SC register is to increase transparency so as to help combat tax evasion, money laundering and terrorist financing.
    - The PSC register must be filed at Companies House along with a company's confirmation statement (annual statement confirming the company's constitution and details).
  78. 78Directors- A company is an artificial person and therefore needs human agents to take decisions and act on its behalf to run the company.
    - All companies will therefore have one or more directors who will be officers of the company.
    - The directors are responsible for the day-to-day management of the company.
    - Directors are agents of the company and their conduct is governed by statute and the common law principles of agency.
    - They also owe fiduciary duties to the company. These duties have been codified by the CA 2006.
    - Together the directors of a company constitute the 'board of directors', often simply referred to as 'the board'. - References in CA 2006 to 'the directors of a company' (plural) are references to that company's board
    - Some fundamental decisions cannot be taken by the directors but are reserved for the shareholders, for instance the making of changes to the company's Articles under s 21 CA 2006.
  79. 79Number and nature of directorsUnder s 154 CA 2006:
    a) A private company must have at least one director; and
    b) A public company must have at least two directors
    At least one director must be a natural person (s 155 CA 2006).
    This is intended to ensure that for all companies, there will always be one individual in place to aid accountability.
    However the implementation date to incorporate these restrictions into CA 2006 has not yet been confirmed. There is a minimum age limit of 16 for directors (s 157 CA 2006).
    The role of a director is always separate from that of a shareholder though in small private companies they are often the same people.
  80. 80Types of directorThere are various different types of director: executive directors, non-executive directors, shadow directors, de facto directors and alternate directors. A brief overview is set out below. A key point to understand is that all of these directors owe the same duties to the company and are subject to the same responsibilities under CA 2006 and also under the insolvency legislation (Insolvency Act 1986).
  81. 81Types of director1. Executive directors
    2. Non-executive directors
    3. Shadow directors
    4. Alternate directors
    5. De facto directors
  82. 82Types of director Executive directorsAn executive director is a director who has been appointed to executive office eg Finance Director, Managing Director.
    Such a director will generally spend the majority, if not all, of their working time on the business of the company and will be both an officer and an employee of their company (pursuant to a service contract)
  83. 83Types of director Non-executive directorsA non-executive director is also an officer of the company, but will not be an employee of the company.
    Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders
  84. 84Types of director Shadow directorsUnder s 251 CA 2006 a 'shadow director' is defined as a person "in accordance with whose directions or instructions the directors of the companv are accustomed to act".
    However, a person is not deemed to be a shadow director by reason only that the directors act on advice given by them in a professional capacity (s251(2) CA 2006).
    This legislation is designed to prevent for example a disqualified director from getting around the prohibitions placed on them and still being involved in the running of a company, by running it and acting behind the scenes.
  85. 85Types of director Alternate directorsCompanies may provide in their Articles for the appointment of alternate directors.
    An alternate director attends board meetings and acts in the director's place, if the actual director is incapacitated, otherwise engaged or out of the country.
    An alternate director is usually either a fellow director of the company or someone who has been approved by a resolution of the board of directors
  86. 86Types of director De facto directorsA de facto director is someone who assumes to act as a director but has in fact not been validly appointed and therefore is not a de jure (legal) director.
  87. 87Appointment of directors under CA 2006 and MA- The CA 2006 does not stipulate a procedure for the appointment of directors, so this is something that will be governed by the Articles of the company.
    - The MA deal with the matter simply, as follows
    a) 'Art 17(1): 'Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director
    b) by ordinary resolution [of the shareholders], or
    c) by a decision of the directors.
    - The second of these two procedures is easier to put into effect than the first and therefore, unless there is a particular reason for using the ordinary resolution procedure, it is usual for the board of directors to appoint new directors.
    - Of course, companies may not have followed the approach set out in the MA. They may instead have customised articles
  88. 88Directors’ service contractAn executive director will be an employee of the company and should be given a written contract of employment ('service contract), setting out the terms and conditions of employment including duties, remuneration package, notice provisions etc.
    The effect of Art 19 MA is that the terms of an individual director's service contract, including remuneration, are for the board to determine.
    As a general rule, a director's service agreement will only require the approval of a resolution of the board of directors.
    However, shareholder approval may be required to enter into long-term service contracts.
  89. 89Long term service contracts- Section 188 CA 2006 applies where a service contract provides for a director's employment to have a guaranteed term' which is, or may be, longer than two years.
    - Wheres 188 CA 2006 applies, the relevant provision of the service contract requires shareholder approval. This would apply, for instance, if a director had a service contract for one year and had an option to renew the contract for a further two-year term at their sole discretion.
    - If shareholder approval is not given, then the term incorporated into the service contract in contravention of s 188 CA 2006 is void under s 189(a) CA 2006.
    - In addition. under s 189(b) CA 2006. the service contract will be deemed to contain a term entitling the company to terminate the contract at any time, by the giving of reasonable notice

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Different business models and intro to companies
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