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Company 1 – Different Business Models and an Introduction to CompanyBusinesses need to raise finance for premises, advice, employees and expansion:  Capital contributions  Borrow money  Outside investors  Proportion of profitBusiness model key considerations:  Costs  Risk  Structure  Formali...

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Company 1 – Different Business Models and an Introduction to Company Businesses need to raise finance for premises, advice, employees and expansion:  Capital contributions  Borrow money  Outside investors  Proportion of profit Business model key considerations:  Costs  Risk  Structure  Formalities  Privacy  Finance Sole Traders  No set up costs, no formalities  Unlimited personal liability  No formal structure  No Companies House filing or procedural requirements  Complete privacy Partnerships  No set up costs  Partnerships can be formed without any formal agreement or intention  Partnership is not a separate legal entity  Unlimited personal liability (in contract and tort)  No Companies House filing  Complete privacy  Governed by provisions of Partnership Act 1980 o S1(1) PA 1980: relation which subsists between persons carrying on a business in common with a view to profit o S 2 considers whether profits/losses are shared, loans, property held jointly o Evidence of profit sharing is prima facie evidence of a partnership but not necessarily conclusive evidence (Northern Sales Limited v Ministry of National Revenue) o If a person is not being ‘held out’ as a partner > existence less likely (Walker v Hirsh) 

Terms of partnership: PA 1980 o Partnership governed by default provisions of PA 1980  S24(1) partners are entitled to share equally the profits and losses in a business, even where parties have contributed to capital unequally  S24(6) partners are not entitled to salary  S24(8) 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  S25 a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this  S26: partner leaving results in dissolution

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Partnership Agreements o Mutual rights and obligations can be varied at any time by unanimous consent (s19 PA 1890) o Partners can vary the default provisions of PA 1980 as they are not suitable for modern business

Limited Partnerships  Limited partners = limited liability > not involved in management of business  Management of business = unlimited personal liability  1 limited partner and 1 general partner  Governed by Limited Partnership Act 1907  Registered at Companies House but no requirement to file accounts  Often used as investment vehicles

Limited Liability Partnership  Organisation structure = flexible and decided between partners in formal Members’ Agreement  Regulations 7 and 8 of LLPR 2001 contain default provisions o R7: members share equally in capital and profits o LLP must indemnify its members for repayments and personal liabilities occurred in LLP business o R7: every member may take part in management, but no member is entitled to remuneration for managing LLP o No person can become a member/assign membership without full consent of existing members o R7: ordinary decision making by majority of members  Any proposed change to the nature of the business requires full consent o R8: no implied power of expulsion by majority unless provided in Members’ Agreement  Allows tax transparency and procedural flexibility without personal liability  Prescribe own management structure  Annual accounts and other prescribed information filed at CH in accordance with LLPA 2000

Introduction to Companies  Separate legal entity > company is liable for debts not shareholders; profits belong to company  Liability of shareholders is limited to the amount unpaid on their shares  Formal procedural requirements of CA 2006 can be onerous; small private companies > shareholders and directors are often the same individuals Shareholders:  Owners of the company; not involved in day to day management; usually voting rights on key decisions  Subscribers = first shareholders in company Directors:  Officers/managers; day to day; the board PSC: 

Must be provided by CH; generally, shareholders with over 25% shares

Companies Act 2006  Removed requirement for private companies to hold AGMs or submit Annual Returns  Codification of director’s duties  Allow private companies to pass shareholders resolutions in writing, dispensing the requirement for GMs Private companies limited by shares (Ltd):  Most common type of company  SLE; limited liability; minimum of 1 person for incorporation; easy to raise finance  Set-up costs, register at CH, extensive disclosure, CA 2006 requirements  S4(1) CA private = not public; ends in limited (s59(1)) Public companies limited by shares (plc):  Offer shares to public; minimum 2 directors  Minimum share capital requirement £50,000 (s763 CA 2006)  Requires a trading certificate before it can trade (s761 CA 2006)  S4(2) CA = public; ends in plc (s58(1))  Subject to more onerous regulations Principal difference between private and public:  Share capital – there is no requirement for a private company to have any specified amount of share capital  Public company must have a share capital with a nominal value of at least £50k, 25% paid up (s586 and s763 CA 2006)  Private = 1 director; public = 2 (s154 CA 2006)  Private company does not have to have company secretary (s270(1) CA 2006)  Public must have a company secretary (s271) o Person appointed must have requisite knowledge and experience (s273(2))

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Public company is required to have 1 AGM each year (s336); private companies don’t need to Public companies are able to offer shares to the public > subject to higher regulation

Incorporation:  Investment; limited liability; minimises risk; formalised structure; easier to raise finance; dividends  Effective separation of ownership from control not always achieved; formality; public disclosures

The Company’s Constitution and Incorporation  Prior to CA, governed by CA 1985  CA 1985 required 2 constitutional documents: Articles of Association and Memorandum  S17 CA 2006: memorandum no longer forms part of the company’s constitution > procedure for CH o Declaration of company’s subscribers (s8) Memorandum  1985: companies could set out constitutional restrictions and required to include an objects clause (acting outside = ultra vires)  CA 2006 = unrestricted objects (s31) unless restricted in company’s Articles  Companies incorporated by CA 1985, s28 CA 2006 provides that any provisions in the memorandum must be treated as provisions of the Articles o Includes objects clauses o CA 2006: object clauses of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause Articles of Association  All companies must have articles (s18); they are the main constitutional document of the company  Regulates the relationship between shareholders, directors and the company Relationship between CA 2006 and Articles  Articles must comply with the minimum provisions of CA 2006 (legality test)  Company may provide a procedure in its Articles which is more onerous than CA 2006  Some CA provisions that override anything in Articles o S321 right to demand a poll vote  Powers available to companies by default unless Articles provide otherwise o Power of a private company to issue redeemable shares Form of articles  Model: different MA for different companies (s19) o New company doesn’t register Articles > 20(1) relevant MA will constitute  Amended MA: exclude/modify some provisions  Tailor-made: time-consuming/costly but get what you want Amending the Articles  Alter by special resolution (s21(1)) > decision of shareholders  S22 permits the entrenchment of specific provisions in the Articles o Entrenched = only amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied  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)  Shuttleworth v Cox: the court held that an amendment to Articles is not valid if no reasonable man could consider it to be for the benefit of the company  Sidebottom v Kershaw; Leese and Co Ltd: D company altered articles to introduce a provision to buy out shareholding who competed with the company’s business; plaintiffs = minority > unsuccessfully challenged validity; alteration initiated in good faith/bona fide in the interests of the company  Re Charterhouse Capital Ltd: amendment of articles to permit minority to be compulsorily under a takeover offer; valid as consistent with terms of SHA Legal effect of Articles

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Nature of contract established by Articles (s33(1)) o Provides that provisions in 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 General rule: 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 SheepBreeders’ Association)

Articles as contract between the company and its members  Courts have been willing to prevent a company from infringements its members’ rights in breach of Articles by granting an injunction  Each member = obliged to the company to comply with Articles  Member cannot enforce rights contained in Articles against the company that are not relevant to his capacity as a member  Rights contained in Articles that would probably be enforceable by members under s 33 CA 2006 would be right to vote and right to receive dividend once declared  Eley v Positive Government Security Life Assurance Company: member of company inserted a right into Articles that he would be employed as a solicitor for life (under s 33); HELD: not a right which he held in capacity as a member, but capacity as a solicitor Articles as a contract between members themselves:  Conflicting authority as to whether one member may enforce the Articles against another member directly  Rayfield v Hands: member accepts personal obligation to another member through Articles, then that member can enforce the right against the other member directly o Or through the company itself i.e. by requiring the company to enforce the provisions against the member (Welton v Saffery)  Advised to enter into SHA o Private agreement between shareholders, which is enforceable as a contract between members Incorporation of a new company from scratch:  Application to Registrar of Companies; register at CH  Traditionally slower than purchasing shelf company  Now possible to incorporate online  Scratch = tailor-made S9 CA 2006, following must be delivered to CH:  Copy of company’s memorandum  Articles prescribing regulations for the company  Fee – required fee for incorporation Register at CH: (can pay a fee for premium, same-day incorporation)  Application for registration (Form 1N01) stating the company’s proposed name; registered office; limited liability; public/private; office address  The application must contain: o A statement of capital and initial shareholdings (s 10 CA 2006) o A statement of the company’s proposed officers (directors, company secretary) (s 12 CA 2006). o If the company is to be limited by guarantee, details must be given of the guarantee (s 11 CA 2006). o Statement of compliance stating that the requirements of CA 2006 have been complied with (s 13 CA 2006)  CH approval > sent certificate of incorporation authenticated by Registrar’s official seal o Name of the company o Registered number o Date of incorporation The company becomes a legal entity (s16)3)) from the date of incorporation set out in the certificate of incorporation (s15 CA 2006) Purchase of a shelf company:  Shelf company set up in advance  Quick; avoids the need to draft and submit an incorporation document  Available option all the time, 365; online = only during CH hours

Company is likely to make changes to a shelf company:  Name (s77(1)) CA 2006 – name change by special resolution of shareholders/Articles  Articles (s21(1)) CA 2006 – meet specific requirements of client  Registered office (s87(1)) CA 2006  Shares held by subscribers need to be transferred to client  Client’s representatives are appointed directors/company secretary  First directors and company secretary resign from their positions o Traditionally been regarded as cheaper option

Stakeholders in a Company Shareholders:  Invest; evidenced by share certificate  Rights set out in Articles  Membership begins when member’s name is entered in the company’s register of members (s112(2)) CA 2006 Shares:  Bundle of rights; part owner; often have voting rights  Different classes of share carry different entitlements (set out in Articles)  Common = ordinary share > vote; share of profits; surplus of assets after wound up Nominal or par value:  Fixed nominal value (common = 1p, 5p, £1)  Nominal = minimum subscription price for that share o Represents unit of ownership, rather than actual value o Cannot be issued at discount, but can be issued at premium  Market value will often be much higher than the value of the share Issued, paid-up and called-up shares:  Total amount in value (nominal and premium) of all shares in issue = issued share capital Share capital:  New shares can be issued at any time provided correct procedures are followed Allotment:  Allotment defined in s558 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 o Different to issue > shares are only issued once the shareholder has actually been registered as such in register of members Different classes of share:  Different voting rights  Preference shares: preferential right e.g. first claim to dividend or return of capital  Look to see if there’s a SHA Limited liability:  Total nominal value of shares = liability to contribute to the assets if the company becomes insolvent  Fully paid = no more contribution Persons with significant control:  Owns more than 25% shares/voting rights  Power to appoint/remove directors  Significant influence/control  Register (can be inspected ss 790A-790ZG CA 2006) o Increases transparency to combat tax evasion, money laundering and terrorist financing Directors:  Directors = agents, conduct governed by statute/common law principles

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Some fundamental decisions cannot be taken by the directors; reserved for shareholders o E.g. changes to Articles (s21 CA 2006)

Types of director:  Directors owe same duties to company and subject to same responsibilities (CA 2006) and insolvency legislation Executive director:  Appointed to executive office e.g. FD, MD  Business of the company; officer and employee Non-executive directors:  Officer but not employee  Do not take part in day-to-day running  Provide independent guidance and advice to board to protect the interests of shareholders Shadow directors:  S251 CA 2006 – in accordance with whose directions or instructions, the directors of the company are accustomed to act  Directors act on advice given in a professional capacity (s251(2) CA 2006) Alternative directors:  Attends board meetings and acts in the director’s place if the actual director is incapacitated/otherwise engaged  Usually fellow director/approved by a resolution of board directors De facto directors:  Assumes to act as a director but has in fact not been validly appoint o Not de jure (legal) director Appointment of directors under CA 2006 and MA:  Governed by the Articles  '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: o (a) by ordinary resolution [of the shareholders], or o (b) by a decision of the directors.’  Unless there is a particular reason for using ordinary resolution, usual for the board to appoint Directors’ service contracts:  Employee > should be given written contract of employment  Art 19 MA: terms of individual director’s service contract, including remuneration, are for the board to decided  Shareholder approval may be required before entering into long-term service contracts Long-term service contracts:  S 188 CA 2006 – service contract provides for a director’s employment to have a ‘guaranteed term’ which is, or may be, longer than 2 years o Where this applies, the relevant position of the service contract requires shareholder approval o E.g. director with the opportunity to renew 1-year contract for further 2-year term  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 o S 189 (b), 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

Resolutions  Decisions of directors = Board Resolution in BM  Decisions of shareholders = Shareholder Resolution in GM or writing (ordinary/special) Directors – board resolutions:

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Decision of the board of directors of a company must be taken in accordance with the procedure set out in the company’s Articles

Procedure for passing BR at BM:  Art 7(1) MA – decision of directors can be made by a majority decision at a meeting of directors  Usual procedure for directors’ decision making  Decisions = majority on show of hands  Art 13 MA: deadlock > chairman (if appointed under Art 12 MA) will have a casting vote Chairman of the Board:  Chosen by the directors from among themselves (Art 12 MA)  Company members may decide to amend Articles by removing chairman’s right Quorum for a valid BM:  Number of people required to attend for a meeting to be valid  Art 11 MA: no proposal may be voted on unless there is a quorum  Art 11(2): may be fixed, but must be never less than 2 Alternative procedure: unanimous decision of directors  Art 8 MA: directors make decisions with unanimous agreement, without needing BM o Must be written, but can be telephone/email (Art 15) Companies with 1 director:  Sole director can make decisions on his own (Art 7(2) MA) Shareholder Resolutions:  Changes to company’s constitution; approval of certain transactions; formal declaration of dividends Ordinary resolutions:  Where CA 2006 does not specify, then OR will be sufficient unless Articles require a higher majority (s281(3)  50%+ Special resolutions:  S283(1) requires not less than 75% Show of hands:  Each shareholder who is present at the meeting will be entitled to 1 vote o Regardless of the number of shares held Poll: 

Every shareholder has 1 vote in respect to the number of shares held (s 284)

The right to demand a poll vote:  S 231 sets out the conditions that must be met to demand a poll vote  These conditions may be relaxed by provisions in Articles (Art 44 MA) o Articles of a company may not include provisions more onerous than CA Right to appoint a proxy:  Member of a company is entitled to appoint a proxy at GM (s324) Quorum for a GM:  S318(2) 2 qualifying persons (includes proxies and representatives of corporate shareholders)  S323 if a corporation is a member of a company, it may be by resolution of its directors to authorise a person to act as a representative  S318(1) where a company only has 1 member, 1 qualifying person present is sufficient to constitute a quorum Written resolutions:  S281 private companies may also pass shareholder’s resolutions without holding GM o Written resolution (subject to s288)

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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) Method of voting, not a type of vote 2 resolutions that may not be passed as written resolution: o Removal of director under s 168 o Removal of auditor under s 510

Introduction to Company Procedure BM:  

Board resolutions can be passed by directors without great formality Noti...