Company Cheatsheet - Lecture notes 1-12 PDF

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FUNDAMENTAL PRINCIPLES & CONCEPTS Co. law: is concerned with the creation & operating of registered Co’s. Capitalism: economic activity controlled by private owners who may profit. ‘Free market’ economy Communism: economic activity controlled by a totalitarian...

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FUNDAMENTAL PRINCIPLES & CONCEPTS Co. law: is concerned with the creation & operating of registered Co’s. Capitalism: economic activity controlled by private owners who may profit. ‘Free market’ economy Communism: economic activity controlled by a totalitarian state dominated by a single political party Organisation: Sole trader: owner operator – contract personally = liability. Personally liable for the debt that occurs – in NZ use trusts which may protect it. Partnership two or more who undertake business to make a business – partnership deed – jointly liable for debt – no liability for pure partnership – personal assets at risk. Limited partnership facilitates startups. Mechanism to help start-ups. Trust method of holding property – a relationship. Protecting assets for the beneficiaries. Limited liability Co. most commonly used Co’s in NZ.

Registering a Co. is creating a new legal personality – distinct entity that is recognised by the NZ legal system as a legal person that can do things on its own account: own assets & money, can sue & be sued. Formation of limited liability Co.: s10 – 14 of the Act Characteristics of a Co.: Co. is a legal person, separate from SHers & Ds, terms of trade are that liability is limited, Co. had perpetual succession s15. Separate Personality: s15 = a Co. is a legal person/ entity recognised by the law. Humans have natural legal personality & Co’s have corporate legal personality. S16 = Co. has full capacity to carry on or undertake business or activity: can sue & be sued, can contract with 3 rd parties & own controllers, has perpetual succession until deregistered, is a separate taxpayer & SHers usually have LL. Salomon v Salomon [1879] HL as the Co. was duly incorporated, it is an independent person with its rights & liabilities appropriate to itself, & that "the motives of those who took part in the promotion of the Co. are absolutely irrelevant in discussing what those rights & liabilities are". Thus, the legal fiction of "corporate veil" between the Co. & its owners/controllers was firmly created by the Salomon case. This case decided that an agency relationship between the Co. & SHers cannot simply be inferred. Lee v Lee’s Air Farming Ltd [1961] confirmed Salomon in NZ. On a strict application of the Salomon principle, the Co. & the deceased were separate legal entities & a contractual relationship existed between them. Corporate personality is abstract or artificial because a Co. cannot act on its own accord like a human legal person. For a Co. to acquire rights or obligations, we use the rules of attribution Meridian Global Finds Management Asia Ltd v Securities Commission [1995]: primary, general, & special rules. Effect of incorporation on assets: distinct pool of assets owned by Co. created / Pool of assets separate from personal assets of SHers / Co.’s assets available to Co.’s creditors – secured & unsecured / Creating a pool of assets for creditors is called ‘affirmative asset partitioning’. Limited Liability (LL): SHers enjoy protection of LL Co. obligations. LL essentially means that if Co. fails, SHers cannot be called upon to pay Co. debts from own assets. A Co. can be

a separate legal person but may chose that its SHers still have unlimited liability for its debts. LL is made up of two rules: 1. SHer has no liability to Co.’s creditors for Co. obligations: SHers do not own Co. assets but hold shares that carry certain rights eg right to vote & to receive dividends / It is the Co. carrying on business, not the SHer, even if the Co. only has one SHer / So SHer no liability to the third parties with whom Co. contracts or to whom Co. owes debts. s97(1). But can have unlimited Co. & SHer can accept liability for Co. debts eg by guaranteeing them. 2. SHer has limited liability to the Co.: If Co. cannot pay its debts, it can turn to the SHer for a contribution from SHer’s assets to a LIMITED extent. s97(2). If SHer pays full amount at the start = no liability under s97(2)(a),(b),(e). If SHer leaves any amount unpaid, SHer has ongoing liability to the Co. for unpaid amount under those section – very rare. Justification for limited liability: LL means that SHers can invest without risking everything they own. Encourages investment, aggregation of wealth, taking business risks. Helps development of the economy. LL arguably reduces the costs involved in the separation of ownership and control: LL reduces the need to monitor management and other SHers / LL and free transfer of shares, with which it is arguably linked, facilitate the market for control this acts as an incentive to management to perform efficiently / LL, in adding to the marketability of shares, improves info fed to the market place by the increased volume of transactions / LL allows SHers to diversify their holdings / It facilitates optimal investment decisions since a positive attitude to risk taking will ensue Affirmative asset partitioning: separate personality doctrine protects the assets of the Co. from debts & obligations of the SHer. SHers have no legal or equitable interests in the property or rights of the Co. SHers hold shares & enjoy rights attached to those shares – s36. Macaura v Northern Assurance Co Ltd [1925] no SHer has any right to any item of property owned by the Co.. Transferability of shares: SHers have invested in Co. & cannot just withdraw investment / SHer can change nature of investment by selling the shares / Shares may be easy to sell or not / More liquid asset if listed on a stock exchange like NZX / Common for Co’s to modify their constitutions so that the general rule of free transferability does not apply / Can result in difficulties for minority SHers in selling shares at a fair price or at all / Such SHers may have to resort of issuing court proceedings for unfair prejudice under s174 of the Act. Formation: easy process by registration – s 11-14. Need to reserve a Co. name – s20-22. Must use Co. name to warn those dealing with Co. that LL – s25. Promoters: a promoter is a person who decides to form a Co. – often forms a Co. to sell Gs & Ss to it. Equitable protection as promoter owes fiduciary duties to Co. – Gluckstein v Barnes [1900] Promoter often enters into contracts on behalf of Co. prior to incorporation – ‘preincorporation contracts’. May incur costs of setting up the Co. & can incur liability – this is covered by the Co. once established. Constitution & governance documents: the CA 1993 provides rules that govern relationships between Co., SHers & Ds. – includes default rules which parties can modify, negate or supplement by agreement, optional rules that apply if Co.’s constitution permits & mandatory rules that can be modified only if consistent with Act & do not contravene it. Constitution: s2, s26, effect s31. SHers have some powers in relation to constitution. Can alter or revoke by special resolution ( s 32 ), but some limitations & protective provisions – special resolution s2(1). SHer agreements have certain advantages, eg: Private, Can be between only some SHers. Limit to extent SHer can contract out of Act. Often make Co. a party to the SHer agreement so bound by it & can enforce it. Differences between SHer agreement & constitution: Agreement contractual & only change by unanimous agreement of parties / Constitution can be changed by special resolution (75% of SHers) / Agreement personal to parties & if SHer sells, purchaser not bound by agreement,

but can have limitations on transfer to cover this / Agreement is private; constitution is publicly registered / If agreement with Ds, called a management agreement. Shares: Share – mechanism for describing SHer’s interest in Co. / Payment for shares when issued forms part of Co.’s capital (share capital) / Share is a chose in action – bundle of rights & liabilities SHer bears in relation to Co. / Usually carries no right to withdraw investment (unless redeemable share – s68) & gives no legal or equitable interest in Co.’s assets / Unless redeemable shares, only way for SHer to withdraw interest is through liquidation process. Being a SHer usually carries the right to vote, value of voting rights are changed for control purposes usually. Rights can be altered under s36(2). Limitation on ordinary rights must be expressly set out in constitution or terms of issue. S37(1) – can have different classes of shares, Class – group of shares that have same rights, privileges & liabilities Preference share – shares with preferential rights for distributions of capital & income Redeemable shares – get money back from Co.. S68 – must be in constitution. Shares can have different voting rights – special, limited or none. Shares transferable subject to limitation in constitution – s39. Can also agree limitations on transferability in SHer agreement. Common to have limitation in closely held Co’s, but listed Co’s usually prohibited from limiting transfer by listing rules. Share register maintained by Co. showing SHers. Legal title to shares passes only when new SHer name entered on register – s84(1) & s39(1). Distributions: distribution – method to distribute wealth to SHers. CA 1993 strictly regulates distributions in order to: protect creditors, ensure SHers are treated equally & control Ds to prevent abuse of power. Distributions include: dividends, debts acknowledged to be owed to SHer in current account, acquisition by Co. of own shares, redemption by Co. of own shares. Distributions exclude: salary & price paid for goods or services. Protection of creditors (distribution): Creditors can only look to Co. assets for payment / If Co. near insolvency, incentive on SHers to try & get wealth out through distributions. Main protection in s52 where Board authorises distribution – Co’s generally prohibited from making distributions except where statutory solvency test satisfied. Flitcroft’s Case (1882) The creditor, therefore, I may say, gives credit to that capital, gives credit to the Co. on the faith of the representation that the capital shall be applied only for the purposes of the business, & he has therefore a right to say that the corporation shall keep its capital & not return it to the SHers …’ Solvency test: Solvency test only applied to a handful of specified activities: Distributions (s52) / SHer discount schemes ( s55) / Repurchase of the Co’s shares( s67(1)) / Share redemptions (s70 ) / Financial assistance for purchase of Co shares (s77) / Unanimous assent powers under s107 / Buy out exemptions ( s115). The basic definition has two limbs, both of which must be satisfied: 1. The Co. must be able to pay its debts as they fall due in the normal course of business - trading solvency 2. The Co. must have assets of greater value than its liabilities - balance sheet solvency Treat SHers equally (distributions): Power of Board to authorise distributions regulated so that cannot be used unfairly to benefit one group of SHers at expense of others. Power subject to general duties of Ds – fiduciary duty to act in good faith. Other regulation in Act - eg s53 Board cannot authorise a dividend in respect of some but not all shares in a class. Control Ds (distributions): General duties on Ds (as above) overarching all exercises of power by Ds. Also some specific controls in Act eg provisions on financial assistance Distributions: SHers (‘entitled persons’) can also authorise distributions - s107 & 108. Board must be satisfied on reasonable grounds that solvency test is satisfied immediately after exercise of power. LIFTING THE CORPORATE VEIL:

General principle: separate personality = s15 CA. Co. is a separate person from its SHers. MacLaine Watson & Co Ltd v Department of Trade & Industry [1988] rejecting the Salomon doctrine of agency to impugn the non-liability of the members for the acts of the corporation is the foundation of modern Co. law. Lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its SHers. Refers to situation in which separate personality of a Co. can be ignored or disregarded. Is where a person who owns & controls Co. is said, in certain circumstances, to be identified in law with that ownership or control (Prest v Petrodel [2013]). AG v Equiticorp Industries Group Ltd [1996] The phrase ‘to lift the corporate veil’ is a description of the process by which in certain situations the Courts can look behind the corporate façade & identify the real nature of a transaction & the reality of the relationship created. It is not a principle. It describes a process, but provides no guidance as to when it can be used. When is the corporate veil lifted? In private agreements, via statute or by the Court’s jurisdiction. Private agreement: Parties to agreement can agree to ignore legal personality of Co. & court will give effect to agreement. Co. constitutions are capable of lifting the corporate veil Statute: s25(2). Co’s in groups usually possess their own legal rights & liabilities. The Albazero [1977] each Co. in a group of Co’s (a relatively modern concept) is a separate legal entity possessed of separate legal rights & liabilities so that the rights of one Co. in a group cannot be exercised by another Co. in that group even though the ultimate benefit of the exercise of those rights would ensure beneficially to the same person or corporate body irrespective of the person or body in whom those rights were vested in law. S2(3). Courts jurisdiction: Courts have separate jurisdiction to lift the corporate veil when it is appropriate. Settled jurisdiction: Court can lift corporate veil where Co. is being used as part of a sham transaction. Gilford Motor Co Ltd v Horne [1933] is often cited as an example of the court lifting the corporate veil - but in no sense did the court ignore the different legal personalities of Mr Horne and the Co. - to the contrary the court granted injunctions against both defendants recognising that each was a separate person. Jones v Lipman [1962] the court held that despite its separate legal personality, the Co. should, in the circumstances, be ordered to convey the land to the plaintiffs. General CL jurisdiction exists to look behind sham transactions – applies to trusts too Snook v London & West Riding Investments Ltd [1967] ‘[I]t means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to 3rd parties or to the court the appearance of creating between the parties legal rights & obligations different from the actual legal rights & obligations (if any) which the parties intend to create.’ Sham is the transaction not the Co., so the things the Co. purports to do can be shams. DHN Food Distributors Ltd v Tower Hamlets London Borough council [1976] This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of compensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, & the parent Co. DHN should be treated as that one. So DHN is entitled to claim compensation accordingly.’ Woolfson v Strathclyde Regional Council (1978) it is appropriate to pierce the corporate veil only where special circumstances exist indicating that [it] is a mere façade concealing the true facts. Re Securitibank Ltd (No 2) [1978] we should lift the corporate veil in order to prevent something being done which is contrary to the Moneylenders Act. Such a suggestion runs counter to the established rule that people are entitled to organise their affairs in a way which keeps them outside the scope of that Act. In doing so they are entitled to rely on ordinary accepted legal principles including the principle of the separate legal entity of an incorporated Co. Problem with broad jurisdiction. Participants rely on ordinary Co. law to structure business using corporate vehicle & rely on separate personality & LL. If those benefits can be set aside easily, participants cannot plan as structure unreliable. Chen v

Butterfield (1996) In essence the corporate veil should be lifted only if in the particular context & circumstances its presence would create a substantial injustice which the Court simply cannot countenance. In any event something really compelling must be shown to go behind them. The statement problematic – what is ‘a substantial injustice’, ‘something really compelling’ & what is ‘so unsatisfactory as to warrant some departure from the normal rule’? Prest v Petrodel Resources Ltd [2013] ‘Piercing the corporate veil is an expression rather indiscriminately used to describe a number of different things’. Properly speaking it is disregarding the separate personality of the Co. There is a range of situations in which the law attributes the acts or property of a Co. to those who control it, without disregarding its separate legal personality. True piercing the corporate veil – is where a person who owns & controls a Co. is said in certain circumstances to be identified with it in law by virtue of that ownership & control. Well- established that court can pierce the corporate veil if a Co.’s separate legal personality is being abused for wrongdoing. Concealment principle: does not involve piercing the corporate veil. It is the imposition of a Co. or a few companies so as to conceal the identity of the real actors. Here the structure will not stop the courts from identifying them. Here court not disregarding a façade but only looking behind it to discover facts that the corporate structure is concealing. Evasion principle: Court might disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the Co.’s involvement & a Co. is interposed so that the separate legal personality of the Co. will defeat the right or frustrate its enforcement. Prest – apply concealment principle. Husband concealing that he is true owner of assets. Not a situation where the court should pierce the corporate veil. Held – Co’s held the assets beneficially (on trust) for Husband & under Matrimonial Causes Act, court could order transfer. OPERATING THE CO.’S BUSINESS: Corporate Governance: the system of management & control. Alignment of the interests of the managers & the SHers to ensure that managers do no pursue their own interests. Internal mechanism: extent to which law puts into SHers’ hands the ability to control & influence the BOD – voting a meetings, enforcement of Ds duties. external mechanism: includes regulatory environment - powers to remove Ds. Ds = manage the assets of the Co. SHers = provide the capital. Stock market too provides mechanism for corporate governance for listed Co’s: Through share price falling – impact on Ds’ personal wealth & Through hostile takeover bids – if successful D usually dismissed. Many investors require companies to adopt corporate governance practices that promote accountability on the part of Ds & executives = mechanisms for controlling conduct. Co. management: power to make decisions divided between: the SHers in general meeting & the BOD. Precise division depends on constitution & general principles of Co. law. Compare widely-held Co’s & closely-held Co’s. Basic premise of Co. law derived from England is that power ultimately rests with the SHers as a whole, not individually. Known as ‘SHer primacy’ & largely true under CA1993. Powers of Ds: s128 confers power of management of Co.’s business & affairs on to Ds. Ds are ordinarily required to act collectively through the board. Board can delegate some powers under s130 to a committee of Ds or a D or employee of the Co. However some powers cannot be delegated = s52 distributions, s60 offers to acquire shares & s76 provision of financial assistance. S128(3) provides that ss(1) is subject to the Act & to constitution so open to SHers to withdraw management powers from Ds & give them to themselves. Generally, any decision not expressly reserved for SHers by Act or constitution probably within jurisdiction of BODs. SHer approval is required for s106(1)(a), s106(1)(c)&(d), s129, s117.(all require special resolution). Usually had to have a special resolution changing the constitution in relation to

management decision. Burnes v Pennell (1849) All who have dealings with a ...