Key Terminology & Principles

Limited Companies

• Limited by shares

• Limited by guarantee

• Private limited company

• Public limited company

Limited by shares

Shareholders have their liability for any losses of the company limited to the amount specified in the company's constitution - typically related to amount per share.

Limited by guarantee

Each member of the company agrees to contribute by way of a guarantee an amount of money identified in the company's constitution to meet the company's obligations.

Private limited company

• Investment is provided by founding member - saving or bank loan

• Closer relationship between members

• No minimum capital requirements

• Cannot invite public companies to buy shares

• Members are liable for the amount unpaid on their shares

  • Members are not liable for debts of the company

• Less regulated and less prestigious

Public limited company

• Investment secured from the general public

• Minimum capital requirement of £50,000 - (CA 2006, s761)

• PLC at the end of the company name

• The liability of members is limited

• Heavily regulated

Separate legal personality

A company has its own legal personality when it is treated as being a 'legal person' separate from the owners or managers.

• Company can own property and enter contracts

Advantages of incorporation

• Corporate personality

• Limited liability

• Perpetual succession (death of shareholders does not end the company)

• Contractual capacity (greater certainty in commercial transactions)

• Ownership of assets

• Ability to commence legal proceedings

• Transferable shares (easier for investors to enter or exit)

• Floating charges (easier to finance)

• Human rights

Disadvantages of incorporation

• Increased formality and regulation

• Publicity

• Civil liability

• Criminal liability

• 
  

The Corporate Veil

To ignore the fact an act has been performed by a company, which is a distinct legal person, and instead holding that any human beings involved should be personally liable as though the company had not been there.

Concealment principle

The company hides the true facts or actors, but the court can uncover them without piercing the veil.

Evasion principle

The company is used to avoid an existing legal obligation, allowing the veil to be pierced.

Vires (powers)

Objects set out the purposes for which the company was created.

• Ultra vires: activities that fall outside of these objects

Memorandum of Association

A legal statement signed by all initial shareholders or guarantors agreeing to form the company.

• Includes statement of intent

Certificate of incorporation

1. The incorporation of the company on the given date

2. The company’s unique registered number

3. States that the company is limited (if appropriate)

4. Signed by the Register of Companies

5. From this date the company becomes a legal entity

6. Official Notification of the Fact of Issue is given by notice in the Government’s official newspaper

Agency

Refers to a specific type of relationship between two persons whereby one person appoints another to act on their behalf.

• Without agency, those who run and manage business would be required to personally negotiate each of the contracts of business.

Agent

A person with the authority to carry out business on behalf of another person.

Principal

Person for whom an agent acts - may be disclosed or undisclosed.

Third party

Person(s) who contracts with the agent.

Agency by Agreement Between the Parties

An agency relationship is typically created by an agreement between the parties under which the agent is given actual authority by principle.

Agency agreement: formally by deed (express)

Gives power of attorney to the agent.

• Essential where an agent is appointed to act on behalf of a person who has become incapable of managing their own affairs

Power of attorney

Authority created by deed enabling an agent to manage affairs for a principal who is currently incapable of doing so.

Agency agreement: informally by speech or writing (express)

It is possible to appoint an agent by word of mouth or in writing.

• Does not necessarily include all the terms binding the parties

Agency agreement: implicit

The relationship of the parties may give rise to an implied agency agreement.

• Common in employer/employee relationships

Agency by estoppel

When a third party assumes that a person has the authority of an agent even if this is not so.

• Provided there was nothing to alert the third party to the true facts, the principal is estopped from denying that the relationship exists

Estopped

Prevented in law from denying the existence of a right of another person.

Apparent/ostensible authority

The agent has no real authority but it appears that they do because the principal has given the impression that authority exists or has failed to give notice that the authority no longer exists.

Actual authority

Comes from an express or implicit agreement between the principal and agent.

Agency arising from necessity

When an emergency occurs and one party spontaneously takes steps to preserve somebody else’s property interests.N

Agency arising from necessity: conditions

1. A genuine emergency.

2. Action taken to protect the principal's property/interests.

3. It is impossible or impracticable to communicate with the principal.

4. The agent acts reasonably and in good faith.

Agency by ratification

Even if a party has no authority or exceeds the given authority to act for another when making the contract, authority can be given subsequently if the other party wants to adopt the transaction.A

Agency by ratification: conditions

1. The agent must expressly/impliedly indicate that it is acting as someone's agent - so the principal must be disclosed;

2. the principal must both exist and have the capacity to make the contract when it was made;

3. ratification must be within reasonable time;

4. ratification must be complete: principal must agree to all of the contract with full knowledge;

5. notice of ratification must be communicated: via conduct

Agency by ratification: consequences

• The agent is freed from any liability for acting without authority

• The agent is entitled to remuneration from the principal where appropriate

• A third party obtains title to any property which has been transferred under the contract

• A contract made by the agent on the principal's behalf is retrospectively binding on the principal

Agent’s duties: competence

1. Obey instructions (Turpin v Bilton, 1843)

2. Care and skill (Chaudhry v Prabakhar, 1989)

3. Personal importance (Bertram, Armstrong & Co, 1830)

Agents duties: fiduciary

The agent must act loyally and in the best interest of the principal.

1. Avoid conflicts of interest

2. No secret profits

3. No bribes or undisclosed commissions

4. Duty to account - proper record keeping

5. Disclosure to the principal and confidentiality towards outsides

Rights of agent: indemnity

An agent can recover expenses and losses incurred while properly carrying out the principal's instructions.

Rights of agent: payment

An agent is entitled to remuneration only if the agency agreement provides for payment.R

Rights of agent: lien

A lien allows an agent to keep possession of the principal's property until the money owed has been paid to the agent.

Liability of agent: principal

• Exceed authority

• Disobey instructions

• Act negligently

• Breach fiduciary duties

• Make a secret profit

Liabilities of agents: third parties

Usually an agent acting for a disclosed principal is not personally liable.

Termination of agency: operation of law

• Death

• Mental incapacity

• Bankruptcy

• Frustration of agency agreement

Termination of agency: acts of the parties

• Performance

• Agreement / revocation

Termination of agency: irrevocable agency

• The agent's authority is linked to the agent's own interests

• The agent has been granted an irrevocable power of attorney

• The agent has been granted a lasting power of attorney

Company officers

The individual(s) responsible for managing the company.

Company officer duties

Duties and powers are governed by a combination of statute, common law, and regulations under a company's articles of association.

• Companies Act 2006

• Common Law

• The company's Articles of Association

Directors

Individuals responsible for the management and strategic direction of a company.

• Together they act as a board of directors, making decisions on behalf of the company

Requirements of directors: minimum number of directors

• Every company must have at least one director

• PLCs must have at least two directors

• Model Articles generally assume  a minimum of two directors for board decision-making

Requirements of directors: natural person requirement

At least one director must be a natural person - a real human being rather than a corporate entity

• Ensures that there is always an identifiable individual accountable for company management

Requirements of directors: shareholdings

A director does not need to be a shareholder

• The Article of Association may specifically require directors to hold shares

Requirements of directors: registration & transparency

• The names of the first directors must be provided when a company is incorporated

• Companies must maintain a register of directors

Functions of directors

• Setting company strategies and objectives

• Managing company resources

• Monitoring performance

• Ensuring compliance with legal and regulatory requirements

• Acting in the best interest of the company

• Representing the company in dealings with stakeholders

Importance of directors

Directors are central to corporate governance because they:

• Exercise management powers on behalf of the company

• Balance interests of shareholders and other stakeholders

• Ensure accountability and lawful operation of the business

• Can be held liable for breaches of certain legal duties

Executive director

A director who is involved in the day to day management for the company.

• Full-time employee

• Managerial and directorial responsibilities

• Strategic decision-making and daily operations

Non-executive director

A board member who is not involved in the company's day to day management.

• Provides independent oversight

• Challenges and monitors executive directors

• External experience and expertise

• Improve corporate governance

De facto director

Someone who acts as a director and performs the functions of a director without being formally appointed.

• Makes management decisions

• Appears as part of the board

• Exercises influence over company affairs

Shadow director

"any person in accordance with whose directions or instructions the directors of a company are accustomed to act" - s251(1) CA 2006

• Not formally appointed as a director

• Usually operates behind the scenes

• Influences or controls board decisions

Appointment of directors

Methods:

• First directors are appointed during company incorporation

• Shareholder may appoint directors by ordinary resolution

Ordinary resolution

A decision made by a company's shareholders that is passed by a simple majority vote.

Retirement of directors

Retirement occurs when a director leaves office at the end of their term or voluntarily steps down.

• Reaching a retirement age (if specified in the Articles)

• Expiration of a fixed term of office

• Voluntary resignation

• Corporate governance practices encouraging board renewal

Removal of directors

Removal occurs when a director is forced out of office before the end of their term.

• Provides accountability by allowing shareholders to remove directors who are underperforming or acting against the company's interests.

Vacation of office

Refers to circumstances in which a director automatically ceases to hold office.

Common grounds:

• Become bankrupt

• Become disqualified from acting as a director

• Suffer prolonged incapacity

• Fail to meet requirements set out in Articles

• Death

• Resignation

Removal vs vacation of office

Removal: shareholders actively vote a director out.

Vacation of office: office ends automatically because certain events occur.

Directors’ powers

• Directors manage the company

• Directors must act collectively

• Directors are agents of the company

Quorum

The minimum number of directors required for a valid board meeting.

• Default is 2 directors  (Article 11 of Model Articles)

Directors' duties owed to the company

• Statutory duties (s171-177 CA 2006)

• Fiduciary duties

• Duty to make returns to the Registrar of Companies

• Duty to keep minutes of meetings

• Duty to deliver accounts

*Duties to third parties are limited

Company secretary

An officer responsible for administrative, compliance and governance functions.

• A company secretary may also serve as a director

• Must be "suitably qualified" for the role

  • Relevant legal or accounting qualifications

  • Previous experience as a company secretary

Company secretary funtions

• GUIDING the chairman and board of their responsibilities

• SUPPORTING the chairman in ensuring the board functions efficiently and effectively

• ENSURING good information flows

• MAINTAINING good shareholder relations

• DEVELOPING & OVERSEEING the systems that ensure that the company's legal and statutory compliance

• MONITORING changes in relevant legislation and regulatory environment

• OVERSEEING the day to day administration of the company

Director vs company secretary

Director	Company Secretary
Manages and controls the company	Handles administration and compliance
Makes business decisions	Advises on legal procedures and governance
Member of the board	Officer of the company

Register of Directors and Secretaries

The company secretary's details must be recorded in the company's statutory records and notified to Companies House where applicable.

Auditors

An independent professional (usually a qualified accountant) who examines a company's financial statements and reports on whether they give a true and fair view of the company's financial position.Au

Auditor appointment

Appointed by shareholders at the AGM

• Sometimes appointed by the board of directors

Auditor duties

Their primary responsibility is to report to shareholders and the company - not directors.

• The accounts comply with the Companies Act.

• The accounts have been properly prepared.

• The accounts give a true and fair view of the company's financial affairs.

Promoters

A person who undertakes the formation of a company and takes the necessary steps to bring it into existence and enable it to commence business.

Promoter duties

• Conceiving the business idea

• Arranging capital and investors

• Selecting directors and key personnel

• Preparing incorporation documents

• Negotiating preliminary contracts on behalf of the company

• Completing the registration process