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Why do businesses raise finance?
• Purchases premises to operate, plant and machinery
• Employ staff
• Obtain advice of professional advisers I.e accountants
• Expand and grow business
Key facts about partnerships
• Created without any formalities
• Governed by PA 1890
• Does not need to be any intention to form a partnership - 2 or more people can do so.
• Section 2 of PA 1890 provides a set of rules for determining the existence of a partnership
Although it's not required, why is it preferable to have a partnership agreement drawn up by a solicitor?
To prevent the agreement being governed by the default provisions of PA 1890 eg...
• Partners share profits and losses equally in the business even where the parties have contributed to the capital unequally. Provision in an agreement can provide a sharing ratio
• Partners are not entitled to a salary
• A partner cannot be expelled by the majority vote unless all of the partners have previously expressed a majority to do this.
Who do the profits and losses belong to?
A company and not the shareholders, the company is therefore liable for its own debts.
What law governs companies? What does it do?
Companies are governed by the Companies Act 2006 which superseded Companies Act 1985. Companies act contains detailed requirements regulating how companies are run, filing and disclosures which must be made by companies at Companies House.
• Primary aim of CA 2006 was to simplify the law for private companies.
What key changes were made in CA 2006?
• Removal of requirement for private companies to hold Annual General meetings (AGM) or submit annual returns
• Codification of directors' duties
• Allowing private companies to pass shareholder resolutions in writing, dispensing with the requirement for meetings of shareholders
What key changes were made in CA 2006?
• Removal of requirement for private companies to hold Annual General meetings (AGM) or submit annual returns
• Codification of directors' duties
• Allowing private companies to pass shareholder resolutions in writing, dispensing with the requirement for meetings of shareholders
Key facts about subscribers
• Name given to first shareholders in a company who invest
Key facts about directors
• Officers/ managers of the company
• Day to day running of board
• Known as the board
• Directors are often shareholders in small companies
Key facts about persons with significant control
Key
• Generally shareholders with over 250 shares
What type of companies are there?
• Private companies limited by shares
• Private companies limited by guarantee
• Unlimited companies
Key facts about private companies limited by shares
• Most common company
• No minimum share capital requirements
• Prohibited from offering shares to the public
• Can be formed by one per⁸son
Key facts about private companies limited by guarantee
• No share capital
• Liability of members is limited
• Membership is not transferable
• Companies are relatively rare
What act were companies governed by prior to Companies Act 2006?
Companies Act 1985
What did CA 1985 require a company to have? And what are they?
Memorandum - declaration of the rules subscribers. Companies could set constitutional restrictions but were required to have an objects clause (sets out reasons for company formation, acting outside of the purpose is described as ultra vires).
Articles of Association - internal documents and rules to specify the regulations for a company’s operations
Wha do companies under CA 2006 have?
Unrestricted objects. CA 2006 provides object clauses of companies that acted under CA 1985 to continue in force
What must articles comply with?
Minimum provisions of CA 2006 (known as the legality test). Some may be more onerous than others. Important to check procedure in relevant legislation and client's articles.
Public company definition by s4(2) CA 2006
A public company is a company….whose certificate of incorporation states that it is a public company.
Name difference between a public and private company
Public ends in either public limited companynor plc whereas private company does not
Share capital difference between a public and private company
A public company must have a share capital with a nominal value of at least £50,000. Whereas for a private company, there is no requirement to have any specified amount of share capital.
Number of directors difference between a public and private company
Public company has a minimum of two directors and private companies has a minimum of one
Company secretary difference between a public and private company
Public company must have a company secretary who has requisite knowledge. A private company can choose to have a company secretary but not obliged to have one
AGM difference between a public and private company
Public companies are required to have one AGM (s336 CA 2006) whereas private companies are no longer required to
Regulation difference between a public and private company
Public company are able to offer shares to public thus require increased regulation. Whereas private companies do not offer shares to public
What happens if a new company doesn’t register articles at Companies house
S20 (1) CA 2006 provides that the relevant model article will constitute the companies article in default
A company's three choices of articles
Model Articles
Amended MA
Tailor made articles
What are tailor made articles?
Client instructs a solicitor to draft articles that are tailor made for the company
How can a company amend articles?
Company can alter articles through special resolution (s21 (1) CA 2006). Special resolution is a decision of the shareholders. The basic rule is that to be valid, any alterations must be made bona fide in the interest of the company as a whole (Allen v Gold Reefs (1900)).
Nature of contract established by articles of a company?
S33 (1) CA 2006 which provides that the provisions in the companies articles bind the company and its members to the same extent as if there were covenants on part of the company
Incorporating a company
Submitting relevant info to companies House- memorandum, articles, incorporation fee, application for registration (Form IN01), statement of capital and initial shareholdings, statement of company's proposed officers, company limited by guarantee, statement of compliance, name of company, company’s registered number and date of incorporation
Shelf company conversion
Purchase of shelf company followed by formalities to enable necessary changes.
What is a shelf company?
A company in existence but not yet trading. , directors and the company secretary will be required to become either first members, subscribers, directors and company secretary of the company. Essential for:
Shares held by subscribers and transferred to client
Clients representatives are appointed as directors
First director and company secretary resign from positions
What is a share capital?
Shares purchased by first members of the company known as ‘subscriber shares’
Further shares issues after the company has been incorporated
Shares are allotted when a person acquires the unconditional right to be included in the company's register
What are the types of director?
Executive director - director who has been appointed to an executive office. Spends majority of time working on a business
Non-executive director - officer but not employee of the company. Do not take part in day to day running
Shadow directors - directors act on advice given by him in professional capacity.
Alternative directors - attends board meetings and acts in the director’s place.
De facto directors - someone who assumes to act as a director but in fact has not been validly appointed.
De jure director - validly appointed by law
How are directors appointed?
The CA 2006 does not provide a procedure for the appointment of directors, instead MA states that “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:
By ordinary resolution for shareholders
Decision of the directors
What is an executive director?
Employee of the company who is given a written contract of employment.
What is a resolution?
A way in which shareholders and directors can vote to affect decisions on behalf of the company.
Decision of directors are taken by board resolutions in board meetings.
Decisions of shareholders are taken by passing shareholder resolutions, either by meeting of shareholders in a GM or in writing
What fundamental decisions cannot be taken by directors until they receive authorisation from the shareholders to do so?
Making of changes to the company’s constitution
Approval of certain transactions between directors and company
Formal declaration of dividends
What are ordinary resolutions?
Resolution passed by a simple majority (more than 50% of votes)
What is a special resolution?
Requires a majority not less than 75% (s283 (1) CA 2006)
How do shareholders vote?
Vote on a show of hands/poll
Vote at a GM
Member of the company is entitled to appoint a person as his proxy to exercise all or any of his rights
What is a quorum?
Where a company only has one member, one person is sufficient to constitute a quorum for a GM
Facts about general meetings
If there is a shareholder resolution required then there must be a shareholder meeting
Board’s responsibility to convene general meetings
Board must decide when a GM will take place
Process of holding a GM by the board?
BM - held to decide the issues to be considered at a GM. The notice of the GM will be sent out
GM - on the day appointed, the GM will take and shareholders will vote on resolutions set out in the notice.
BM - a further BM will be held and the directors will be informed as to how shareholders voted at the GM
Post meeting matters - carried out by a company secretary or a director
A private company, a GM may be called on short notice
What is a written resolution procedure for private companies?
Board resolution - MA allows directors to take decisions in the form of directors’ written resolution.
Ordinary and special resolution - private companies may pass a shareholder
Copied of all resolutions must be sent to the registrar of companies within 15 days of it being passed. If procedures not followed, the resolutions passed at meetings may be invalid
What is a sole trader? Advantage and disadvantages
Exclusive owner of the business, not a separate legal entity.
+can start trading immediately
+no setup costs/formalities
+can keep all profits
+ control over decision making
+complete privacy as no disclosure requirements
+sole trader is not a separate legal entity
-unlimited personal liability
-contracts are formed between the sole trader and third parties
What is a partnership? Advantages and disadvantages
2 or more people own the business and share the profits. Partnership is not an legal entity
+can start trading immediately
+not set up costs/formalities
+full control over decision making
-partners have unlimited personal liability
-contracts are formed between the partners
What is a limited liability partnership? Advantages and disadvantages
2 or more persons carrying on a business. Introduced by limited liability partnership act 2000
+all partners have limited liability
+partners can enter contracts with third parties
-setup costs and formalities as an LLP must be registered at Companies Hoise
-file annual accounts and has disclosure obligations
What is a private limited company? Advantages and disadvantages?
A private limited company is a separate legal entity, distinct from its owners.
+limited liability as shareholders are only liable to pay any amount unpaid on their shares
+require 1 person to incorporate a company
+easier to raise finance
-there are setup costs and formalities as a company
-CA 2006 is strict on how they run
Who do shareholders have rights to?
The company rather than directors and third parties whom the company does have a business contract with
Principle of seminal case of Saloman v A Saloman & Co Ltd (1987)
If company has insufficient funds to meet its liabilities, creditors cannot pursue their claims against shareholders
What does it mean for a company to be an independent legal person?
Company owns its own property
Company enters into its own contracts
Company sues and is sued on its own liabilities
Case of prest v petrodel
Family law case concerning distribution of assets on a divorce
Husband controlled a group of companies which owned a number of residential properties worth over £50 million
Wife sought an order to transfer the property to her on the basis that they were held by companies on trust.
Case went to supreme Court in which the judge decided that piercing the veil may exist as a matter of law but is rare.
In summary, where other routes to infer liability on shareholders are available eg tortious liability, law of trust or agency which do not ignore the company's separate legal person, the courts will infer liability on these principles
What does company's liability is limited mean?
Liability of shareholders to pay debt is limited. Shareholders are not liable to pay debts which the company owes its creditors because it is the obligation of the company to do so.
What are the consequences of separate legal personality and what is legal personality?
Legal personality is to be capable of having certain rights and duties with a certain legal system. Consequences:
The company owns its own property - property belongs to company and not shareholders. Key case: Macaura v Northern Assurance Co (1925) - Macaura (M) sold whole of timber on the estate to the company which he set up, M and nominees owned shares in the company and M creditor of the company in the amount of £19k. M took out insurance policies in his own name with Northern Assurance Co, covering the timber against fire. Two weeks later, a fire destroyed the timber. M brought a claim on the insurance policy and HOL claimed that timber belonged to the company, not to M thus he was unable to claim on the insurance policy despite owning majority of shares in the company.
The company enters into its own contracts - a company enters into contracts on its own behalf and the benefits and liability under the contract belong to the company, not the shareholders or directors. Key case: Lee v Lee Air's farming Ltd (1961) - Mr Lee incorporated Lee's farming ltd in New Zealand in 1954. The nominal capital of the company was £3k divided into 3000 shares od £1 each. Lee held 2999 shares whereas a solicitor held one. Lee was the sol
Consequences of legal personality pt2
Lee was the sole director of the company and was appointed as an employee in the company's articles. In 1956, Lee was killed in a plane crash whilst working and left a widow and four infant children. Lee's widow brought a claim under the worker's compensation act 1922 where the privy Council found that the company and Lee were distinct legal entities and therefore L under his contract of employment was a worker. Widow was entitled to compensation
Company sues and is sued on its own liabilities. Key case: Adams v Cape industries pls (1990), Cape was a company of others, employees of the texas company became ill with asbestosis and sued Cape and NAAC. Judgment was entered for breach of duty of care. Issue before court of appeal was whether judgment could be enforced by the wealthier companies. Cape was present in the US texts and claimant argued that Cape and its subsidiaries should be treated as single economic unit, subsidiaries were used as a facade concealing the true facts and that Cape had an agency relationship with NAAC. court of Appeal rejected this and said judgment couldn't be enforced against Cape.
What is piercing the corporate veil
Piercing the corporate veil refers to a special instance where the court holds the shareholder or director of a corporation personally liable for the corporation's debts. Piercing the corporate veil is also known as veil-piercing, disregarding the corporate entity, or lifting the corporate veil.
Facts of saloman v saloman & Co (1897)
Saloman transferred his boot making business from sole proprietorship to company
Price for transfer was paid to saloman by way of shares and debentures having a floating charge.
When company’s business failed, it went into floating charge against the debentures who stood aprior to claims of unsecured creditors
Liquidator on behalf of the unsecured creditors alleged that the company was a sham and essentially an agent of Salomon who was personally liable for its debt.
Court of Appeal reasoned that saloman had incorporated the company contrary to the true intent of the Companies Act 1862
HOL upon appeal held that the company was duly incorporated
Saloman remains predominant and continues to underpin English law
Can a private limited company be formed with just one director and shareholder?
Yes, under CA 2006
Piercing the corporate veil and when?
When the courts go behind the corporate framework and company’s separate legal personality make shareholders of the company liable
Veil can be pierced where a person has an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up the company
When can a member of the company become liable?
Application of statutory
Employment
Taxation
corporate insolvency
Common law
Facade or sham
Single economic entity - established parent companies are not liable for subsidiaries.
Agency - liability based upon law of agency not lifting corporate veil
Tort - parent companies may be liable to those dealing with subsidiaries on the basis of tort
Elements of corporate contractual liability?
Capacity:
Does the company have actual or deemed capacity?
CA 2006 companies yes (s31)
For pre CA 2006 companies, check memorandum and articles for objects clause
If transaction outside of company's powers, consequence was for it to be void and unenforceable (ultra vires)
Authority
Does the agent have actual authority (express/implied)? - if yes, contract is binding. If no:
Does S40 CA 2006 remedy the defect and make the contract binding? If yes, contract is binding. If no:
Does the agent have ostensible authority? If yes, contract is binding but if not:
Does the rule in turquands case exist? Is reliance reasonable? If yes, contract is binding. If no:
Has the company ratified the act? If yes, contract is binding. If no, contract is not binding
What is general agency law?
An agent is appointed by a principal to act on their behalf. An agent contracts on the principals behalf and the contract will be entered into between principal and third party
When does a company come into existence?
Time of issue of the certification of incorporation by the Registrar of Companies (s16 CA 2006)
What is primary liability?
Where the company itself is said to have committed the tort through the acts of an individual which are attributed to the company
What is vicarious liability?
Employee of the company is individually liable for a tort but company is additionally vicariously liable for the person's act
What is the doctrine of ultra vires?
Refers to a situation where a body purports to act outside its power. The doctrine derives from public law as public bodies are granted certain powers that they are not permitted to go beyond eg company not permitted to act outside their objectives clause
What is doctrine of constructive notice?
A legal presumption that a party has notice when it can discover certain facts by due diligence or inquiry into the public records. A party found to have constructive notice cannot deny knowledge of a fact because that party did not have actual knowledge, since there is a duty to conduct due investigation.
What changes did CA 1985 introduce?
Memorandum could be altered by special resolution - companies
Authority in principals and agents
To bind a principle in the contract, the agent must be authorised either expressly or impliedly.
Eg implied actual authority from appointment to a specific role in the company or impliedly actual authority from a course of dealing
Deemed authority refers to the situation where an agent has no actual authority yet can still bind the principle.
Statute (s40)
Deemed authority at common law - ostensible authority (looks at relationship between principle and agent - freeman and lockyer v buckhurst park properties)
Deemed authority at common law under the “indoor management” rule in Turquands case
Case of Turquand (1856)
Bank brought a claim for return of money owed by the company
Company argued that the manager who neogitated the loan should have been authorised a resolution of shareholders and as he had not obtained authorisation, the loan was void and company was unable to pay back the money
Doctrine of constructive notice was that the bank deemed to know the process of authorisation
Court held that only public docs should reveal that a resolution was required
The principle is that outsiders should be able to assume that the outsiders about to assume internal procedures, had taken those steps(referred to as indoor management rule)
When does the rule in turquand apply?
When there are potential questions over the execution of docs. The passing of authorising resolutions and the regularity of appointments.
What is ratification?
A company is able to ratify acts beyond actual authority of its agents provided that the act is with the appropriate company department (new Falmouth resorts Ltd v International hotels Jamaica (2013) - the agent had no actual authority go enter into a transaction but the company ractified it and thus no longer able to rely on lack of authority of the agent
Can a company rectify a contract before n came into existence
No , only possible for acts which could have been authorised by a company at the time
What is attribution theory
Doctrines of attribution are legal doctrines by which liability is extended to a defendant who did not actually commit the criminal act. Key cases include Lennards carrying co Ltd v aviation petroleum co 1915 ( concluded that once individual had been identified, person who has the required fault, that fault can be attributed to the company) and tesco supermarkets Ltd v nattras 1972 (tesco was charger with the offence of advertising goods at a reduces price and then selling them for a higher one. Tesco argued that the company weren’t at fault and the manager of that company actually was. Court found the manager not the guiding mind and therefore tesco could not be liable for his actions.
Company law 4 notes
What is a key element of shareholders control of power?
Power to vote on resolution and remove directors from the board (s168 CA 2006) and/or appoint new directors whose approach to managing the company the shareholders prefer
Where do powers of shareholders derive from?
CA 2006 and company’s articles. For shareholders to pass a resolution, they need to vote at either a general election or use written resolution procedure
General meeting facts
Called by directors (s302) by passing a board resolution at a board meeting
Board resolution is passed by majority of directors
Board must give 4 clear days notice of a General Meeting (s 307 (1) & s360) unless short notice procedure is used.
Short notice procedure - 90 percent of shareholder with voting rights agree then General meeting can take place ln short notice immediately after board meeting
If directors don’t call a GM, shareholders have the right to do so.
Bundle of rights?
Another word for shares. Measure of the shareholder’s interest in a company as a member and their right to vote
Definition of share?
No formal definition of share in CA 2006 but s 541 confirms shares as a personal property. Rights attached to a class of shares are determined in a company's article
Legal effect of articles?
S33 CA 2006, company’s articles will constitute a contract which is binding on the company and the members themselves
Members may bring an action against the company under s33 in their capacity as a member
Members can bring actions against eachother for breach of articles without joining the company.
Key case for the shareholders to act where the board directors is unable to do so?
Barron v Potter 1914
Case established that the shareholders of the company in a general meeting may act in place of directors where there is no board of directors competent or able to do so.
Directors obligations on receipt of s303 request?
Under s304 (1) CA, directors must call a GM within 21 days from receipt of request to be hold not more than 28 days of the notice of GM
Summary of shareholders calling a GM
S303: shareholders request the board to call a GM
21 days
S304: directors must call the GM within 21 days of the request to be held not more than 28 days later
28 days
S305: if directors do not call meeting, shareholders can do so themselves within 3 months
Shareholder resolution and their voting threshold
Ordinary resolution - requires a simple majority (more than 50 percent of votes cast in favour of the solution (s282 (1) CA 2006)
Special resolution- requires majority of not less than 75% (s283 (1) CA 2006).
If CA 2006 doesn’t specify what resolution to use then use ordinary resolution unless company articles require a higher majority (s281(3) CA 2006)
Quorum for GM?
Two shareholders under s318(2)
Regulations regarding written resolutions
Written resolutions must be sent to all eligible members. Limit of 28 days applies for all eligible members to respond which must be passed by all
Principle established in key case of Re Duomatic Ltd 1969
Principal that informal regulations agreed by all shareholders outside of a formal meeting will be valid and binding. For this principle to apply, there must be an unqualified agreement of all shareholders.
Why might shareholders vote in their own interest?
They are not under any fiduciary duty to the company and can vote as they wish regardless of whether it is in the company’s interests but they must act in a way that is bona fides (person's honesty)
What is working capital?
Funds needed to keep the business going
Capital
Refers to funds available to run the business of company
Share capital
Money raised by issue of shares
Issued share capital
Amount of shares in issue at any time
Initial subscriber
Whether person subscribe to the first share issued when the company is corporated
Share issue
Where a person acquires further shares issued by the company after incorporation
Share transfer
Where a person acquires shares by way of a transfer from an existing shareholder
Transmission
When the title to shares is devolved other than by transfer, typically applying to devolution by death
How to become a member of a company
Section 112 c a 2006 states to become a member, a person must be entered into the company's register of members
Presumption of shares
All shares gave equal rights unless there is an express provision in the articles
Types of share
Ordinary shares
redeemable shares
preference shares
non-voting shares
employees shares
cumulative shares
convertible shares
deferred shares
Note 
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