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Business Orgs Exam:

Sources of company law: – – – – –

Companies Act 2006 Insolvency Act 1986 Company Directors Disqualifications Act 1986 Financial Services and Markets Act 2000 Subordinate Legislation

Purposes of company law: – Company law is concerned with the regulation of the powers, rights, duties and liabilities of companies and constituencies closely linked with the company – Once a company is properly incorporated and registered in terms of the Act, it possesses a separate legal personality which is distinct from its owners, managers and other third parties – Much of company law concerns regulating the relationship between: – The company and its managers, namely the board of directors: – The company is an artificial person and as such cannot act on its own accord and acts through certain designated persons; commonly provided for by the Board of Directors, who are agents of the company and act on behalf of the shareholders – The company and its owners, namely the shareholders: – Company law seeks to ensure that members are protected from the activities of majority shareholders and conversely, are not held to ransom by minority shareholders – The owners and the managers, shareholders – board of directors: – The majority of decisions made by a company will be made by the Board, however the principles of company law provide that there are certain decisions which cannot be made without the approval of the shareholders – Protection of the company creditors: – Creditors are affected by the actions and omissions of the company and its directors and members; presence of corporate insolvency laws to regulate the fair treatment of a company's creditors, but company law also acts as a protection for creditors by preinsolvency actions, preventative regulations etc Limited liability, separate legal personality and the Saloman principle: – Saloman v A. Salamon & Co: deals with :Limited liability, Separate legal personality and the Saloman principle – Case concerned the liability of the members of a limited liability company for the debts of the company – Mr Saloman ran a wholesale leather boot manufacturing business as a sole trader and decided to convert the business into a limited liability company. The company had seven shareholders, of which Saloman was the majority. Due to hard financial times, the company underwent liquidation proceedings, to which after all of the assets were sold off and various creditors paid, it was discovered that a debenture holder named Mr Broderip who was an unsecured creditor of the company was not paid, and he raised an action against Mr Saloman for repayment. Trial judge held that Mr Broderip had the right to recover from Saloman because it was argued that Saloman's company was not properly set up in conjunction with the Companies Act 1862, but on appeal to the HoL, the Lords dissented with the trial judge and held that Saloman had set the company up

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correctly in compliance with legislation and ruled that: the company is a separate legal personality from its members and the members of a firm enjoy limited liability and as such, ruled that Mr Broderip could not recover from Saloman The house of Lords ruled in the case that: 1. The shareholders of a limited liability company enjoy limited liability for the debts 2. A company is a body corporate having a separate legal personality from its constituent members, see also s16(2) CA 2006 The effect of the rule that a company is a separate legal personality is that it can be sued, sue third parties in its own name, enter into contracts, own property in its own name etc Limited liability in this context means that the shareholders of a company are only liable to the value of their investment as regards a company's debts, their personal assets cannot be touched as they are not personally liable

Corporate Veil: Not Lifting/Lifting – The separate legal personality, seen as erecting a natural barrier between the members and managers of a company and the company itself is given a legal term known as the 'Corporate Veil' whereby creditors of a company will be unable to secure redress from the company's members, managers, employees or other third parties for the debts, obligations and/or liabilities of the company. – It is rare for the corporate veil to be lifted, an example of this being the case of Macaura v Northern Assurance LTD in which M was the owner of a timber estate of which he sold to a company which he was the sole shareholder and substantial creditor of. He insured his timber against fire damage in his own name with various insurance companies, and when the timber was destroyed by fire, he sued the insurance companies when they refused to payout asserting that the timber belonged to the company so he had no right to recover in his own name for something he did not own; the HoL held that Macaura had 'no legal or equitable' relation to the timber because it was property of the company and not him personally and as such the insurance company were entitled not to indemnify him for the loss. This shows the HoL not being prepared to pierce the corporate veil. – Since it is evident that the courts will pierce the corporate veil very sparingly it is important to understand the common law tests which apply. What emerges is that the courts only lift the corporate veil where: – The law concerning trading with the enemy in times of war applies – Special circumstances exist which demonstrate that the company is a 'mere facade or sham concealing the true facts' (Jones v Lipman), ie. Where a company or several companies are incorporated to conceal the real actors lying behind the company or those companies; this is known as the 'Concealment Principle' as per the case of Prest v Petrodel Resources Ltd where the wife in a divorcing couple during the divorce proceedings claimed that her husband had set up various companies which he 'wholly controlled and owned', these companies owned the family home, as well as various other family properties but in reality, all of the property was owned by her husband. After the initial hearing in family court, the case went on appeal to the supreme court, who had to delve into the issues of divorcing spouses and single-man companies whilst maintaining the Saloman principle. Lord Sumption ruled that the therms 'sham' or 'facade' should be replaced with 'evasion' or 'concealment' and heralded the 'concealment principle' denoting that company law could not be used as a means for avoiding liability. – However, where a corporate group structure has been used or exploited whereby a new company within the group has been specifically incorporated as a means of ensuring that the legal liability, if any, in respect of particular future activities of the group will fall on the specific company rather than the other companies within the

group; this is perfectly legitimate and will not see the courts pierce the corporate veil as per Adams v Cape Industries Plc – The company has been incorporated with the specific objective of facilitating fraud or evading its existing legal obligations and liabilities; this is known as the 'Evasion Principle' and is exemplified in the case of Gilford Motor Co v Horne where the court was concerned with whether it could lift the corporate veil where and individual incorporated a company for the sole purpose of defeating the terms of a legally binding restrictive covenant. – Mr Horne entered into the covenant which restricted him from soliciting or dealing with customers of his former employer for a period of five years subsequent to the termination of a contract appointing him as the managing director. He solicited and entered into contracts with customers of his former employer using a third party company of which his wife and one employee were the only shareholders and directors; the company was incorporated 6 months after his termination from his previous employer, as he knew that he would be in breach of the restrictive covenant if he were to solicit and contract on a personal basis – The Court ruled that the company was formed as a device in order to mask the effective carrying on of a business by Horne and to circumvent the valid legally binding restrictive covenant upon him, as such the court pierced the corporate veil – So it is clear that the courts are very apprehensive about piercing the corporate veil. – There are provisions in the Companies Act 2006 that impose liability on the directors and members of a company in certain circumstances for the debts, obligations and liabilities of the company. – Ss767(3)-767(4) stipulates that every director or officer of a public company that does business or exercises borrowing powers without having been issued a trading-certificate from the Registrar of companies is jointly and severally liable to indemnify the third party who has suffered loss as a result of such a failure – S563(2) stipulates that any officer of a company who knowingly authorises or permits a contravention to the rules of ss561 and 562 of the act which concern the pre-emption rights of existing shareholders on an allotment of shares is jointly and severally liable to indemnify any third party who ought to have been offered shares and suffered a loss – Ss76 and 213 of the Insolvency Act 1986 imposes personal liability on members of a company, with s213(2) affording that the court can declare any person to be liable to make contributions to the assets of a company, including the members or directors if the company is found guilty of fraudulent trading, furthermore s 76(3) of the act provides for circumstances in which past members of a company may be liable to make personal contribution to the assets of the company.

Types of companies:

– Companies can be classified according to three classifications: – Limited liability companies V unlimited companies – Companies limited by shares V companies limited by guarantee – Private companies V public companies Purposes and uses of a company: Groups of companies: – Most corporate trading companies, as well as regulatory avoidance companies, are organised in groups: that is the shares in a company are owned by another company called the 'holding company' – In a group of companies there will be a holding company that owns all of the shares in the subsidiary companies that comprise the rest of the group – Each subsidiary company will carry out a particular business activity or hold identified assets, whereas the holding company is the central part of the structure through which senior management will ordinarily be carried on and which commonly only owns share in the subsidiary companies and no property – Advantages: – Possible to sell off either business simply by selling the shares in the appropriate company if management wanted to concentrate on one specific aspect of the business – Structure of the organisation can be kept simple by separating off the ownership of different premises, the tax affairs of the organisation can be controlled efficiently etc. example being ABC Ltd v M Asset management: – Most companies in existence are there to hold assets and not to trade – Nonetheless, the same general company law governs these companies – Example; Barack Obama in 2012 spoke of an office block in the Cayman Islands from which 12,000 companies were registered, referring to the creation of front companies – These companies are known as 'shelf companies' and do not actually carry out a business, they are incorporated solely to manage assets and organise the ownership of property – Companies exist purely in electronic register and not in physical form Limited liability companies: – The shareholders of a limited liability company are safe in the knowledge that they are not personally liable for the company's debts, and are only liable to the extent of their investment – Limited liability companies only have limited liability if their constitution provides as such as per s3(1) CA 2006 – The financial affairs of public limited liability companies must be published for public consumption – LLC limited by shares dictate that a shareholder's liability for the company's debts is limited to any value which remains unpaid on their shares – LLC limited by guarantee dictate that the shareholders are limited to the value of the contribution they have made to the company as these companies are not likely to have shares – Rationales for limited liability companies:

– Risk bearing and entrepreneurship: all risk is transferred to external parties, with members only being liable to the extent of their investments, with the ratio being that external parties will have more money and can accept the risk – Lower monitoring costs: concentrating investment in one place, encourages passive investing – Diversification: Investing in various areas, making investments more efficient – Control by market share and market trading: Purchase of shares at a lower price due to poorly run company, investors are more likely to invest in a company which is being efficiently run Unlimited liability companies: – The members of an unlimited liability company are personally liable for the company's debts s3(4) CA 2006 – Don't have to publish internal affairs Community interest companies – Form of social enterprise as per s6 CA 2006 The nature of the company: Perspectives on nature: – Most companies are portrayed as being organisations providing jobs and economic prosperity – In fact, most companies in the world conduct no trade at all, nor do they employ people, nor do they directly contribute to the economy – Rather they are vehicles to hold assets Shareholder v Stakeholder theories: – Shareholder primacy: – The approach which considers what is best for the shareholder only – Enlightened shareholder value: – The approach which is adopted, s172 concerning directors duties denotes consideration of the needs of stakeholders of the company, but ultimate consideration is still given to the needs of the shareholder – Change in the common law, what was originally for the best interest of both shareholder and stakeholder, is now for the ultimate benefit of the shareholder – The company as an investment: – From a shareholders perspective, a company is a means of making an investment (Ireland, 1999) – As an investment, a share provides the shareholder with an asset that can be sold for a profit if the company is seen as becoming more valuable – A public company's shares are quoted on the London stock exchange, which provides an accessible market for anyone to purchase them – Private company's cannot sell on the stock exchange, which results in them having a more intimate group of shareholders, holding shares because they are a manager of the company or because they have a view to making a small profit selling them privately; or the shareholder may be hoping that the company is sufficiently profitable in a year of trading to pay a fair dividend (a

proportion of the company's profits that year which the directors consider are capable of being distributed to the shareholders) CA 2006 s755 – 2 reasons for making an investment: – Intention of making a regular income through a dividend – The view to making a quick profit in the expectation the shares will go up in value – The nexus of contracts: – Associated with economist Ronald Coarse, who explained that the attraction with a firm is that it reduces transaction costs by concentrating the various costs by concentrating all the various contracts which otherwise would need to be made between human beings involved into one single transaction with a company – A benefit of the company model is that an agent of the company can create contracts and bind the company without needing to obtain the consent of all shareholders – The advent of companies with separate legal personalities has made transactions much cheaper Company as legal fiction: – The law treats a company as though it were a physical person, when in fact this is a facade; it is merely a mask behind which people act anonymously – Company law is based on legal fiction because it is commercially useful – Companies are deemed as having a separate legal personality as per Saloman v A saloman & Co – Companies are juristic persons Creation of companies: People – A company may be formed by one person as per s7(1) CA 2006 – Major development since Saloman as per the 1862 companies act which required seven people – A company may not be formed for an unlawful purpose as per s7(2) Mechanics: – The people creating the company must subscribe their names to a memorandum of association and then comply with registration requirements in s9-13 (s7(1) CA 2006) – The initial subscribers are the founding members – In a company limited by shares, the subscribers acquire their shares in consideration for paying the amount specified in the company's constitution – Articles of association set out the company's internal rules but little more – After the 2006 Act, the articles of association became the constitution; the memorandum is still required under s8 as a statement that the subscribers wish to form a company and become members of that company – Under s9, the memorandum of association, along with the application form and statement of compliance must be delivered to the registrar of companies as per s9 – The statement of compliance is a statement that the documentation provided is in compliance with the companies act, s13 – s9 also requires further documentation to be delivered to the registrar of companies; including: a statement of the companies capital and initial shareholdings; which sets out the number of shares and their nominal value, s10 – A statement of the company's proposed officers is also required, including a statement on the identity of the company's director and secretary, s12

– If the registrar is satisfied that the documentation complies with the act, they will register the undertaking a a company as per s14 – the effect of registration is that the subscribers become a body corporate, that is to say that their individual personalities merge into a single person to form the company s16 – The registrar issues a certificate of registration under s15 Constitution: – s17 allows for resolutions of the articles of association – s33(1) the constitution binds the company and its members to the same extent as if there were covenants on the part of the company and of each member – Any amount owed by a shareholder to the company under the articles is treated as an ordinary debt owed by that shareholder to the company s 33(2) Memorandum & Articles: – Articles now stand for the whole companies constitution – memorandum was previously to set out objectives etc but is now just part of the formal registration process – All companies are required to have articles of association as per s18(1) – If no articles drafted, model articles from s19 – If any gaps, s20(1) – s28, old companies pre-2006 Amending articles: – special resolution under s21 – only changed if a shareholder holding 75% of the voting rights in the company approves the amendment Corporate responsibility: Capacity: – s31, powers of a company are unrestricted so long as the acts carried out are lawful and not excluded in the articles – s39, protection for third parties, company cannot rely on its own restrictions Delict: – Leading case is Lennard's Carrying Co v Asiatic Petroleum – If the directing mind of the company performs an act, then it should be deemed that the company performed the act itself – Vicarious liability, suing a company for the actions of an agent – One executive in Assiatic, registration of an unseaworthy ship Criminal – Corporate manslaughter and corporate homicide act 2007 – s1(1) causes a person's death through breach of doc owed to the decease – s1(3) an organisation is guilty if the way in which activities are managed or organised by its senior management is a substantial element in the breach – s2 relevant duty of care – Company, not directors are liable

The office of director: – Directors are agents of the company (Meridian Global Funds Management Asia v Sec Comm)

– They are not agents of the members of a company, only of the company itself – s250 of the CA defines a director as a “person occupying the position of...