Company Law cheat sheet PDF

Preview

Summary

Company Law Cheat Sheet: 2018 Corporate Entity Company Formation is created through registration Registrar of Companies of incorporation issued sections 10 to 14 CA for legal requirements of registration and incorporation Contracts Are contracts entered into a promoter on behalf of a company binding...

Description

Company Law Cheat Sheet: 2018 Corporate Entity Company Formation -Company is created through registration by Registrar of Companies -Certificate of incorporation issued -See sections 10 to 14 CA for legal requirements of registration and incorporation Pre-Incorporation Contracts Are pre-incorporation contracts entered into by a promoter on behalf of a company binding?In circumstances where the pre-incorporation contract is not ratified ( the company is not registered), the promoter can be made personally liable to pay damages to each other party to the pre-incorporation contract, under s 183 or 185. Section 183 means that there is an implied warranty on behalf of the promoter that the company will ratify the contract within a specified period in the contract or within a reasonable time after incorporation. Section 185 provides that in proceedings against a company for the breach of a ratified pre-incorporation contract, the Court in its discretion may order relief against the promoter who made the contract. Section 184 allows a party to a pre-incorporation contract that has not been ratified by the company power to apply to the Court for an order validating the contract, an order directing the return of property or any other relief that the court considers just and equitable. NZ Maintenance Team Ltd v Taigel (1991)Facts: A person owned a pie shop and wanted to set up a similar shop Wellington with another company yet to be incorporated. He contacted Maintenance Team to undertake maintenance ork. Maintenance Team were not getting paid for the work and sued Taigel personally for breach of contract. Taigel argued the newly formed Pieland Ltd wasliable as Pieland Ltd was liable for the rental of the property wherethe work was being conducted. Held: There had been no formal act of ratification by Pieland Ltd of the contract by Taigel. As there had been no effective act of ratification, Taigel was made personally liable. Development Finance v McSherry Export Kilns Ltd Facts: A new company was to be formed to expand an existing company and a loan was made over the newly formed company to be secured by a first debenture. The company was registered one day after the debenture had been signed and so the debenture was made with a company that did not exist at the time the contract was made. Held: The act of registration was insufficient to amount to an act of ratification. There had to be some clear adoptive acts which amounted to ratification. This act of ratification of a pre-incorporation contract needed to be clearly identified as amounting to an act of ratification so that there is full knowledge of all the essential facts that relate to the particular transaction. Elders Pastoral v Gibbs Facts: The question for the court was whether a debt was owed by a company or the promoter was personally liable for the debt that had been created in a pre-incorporation contract. Held: A possible argument could be made that the implied warranty for Personal liability had been excluded. Evidence was led that a phone conversation meant that the company name had been used rather than a personal name which could have negated personal liability. Definition of a pre-incorporation contract: s 182(1) CA-Promoter is personally liable if company does not ratify contract or company is not formed: Taigel What constitutes Ratification?Act of registration is not ratification: Taigel -Validation by court: s 184(1)(c) CA -Implied warranties: s 183 CA Characteristics of a Company -A company is a legal person created by incorporation -It is a separate legal entity from its shareholders and directors. See section 15 CA 1|P a g e

Salomon v Salomon (1897) “The company is at law a different person altogether from the subscribers … although it may be that after incorporation the business is precisely the same as it was before … the company is not in law the agent of the subscribers or trustee for them.” Lord Macnaghten SEPARATE LEGAL ENTITY Under the Companies Act 1993, a company must have: A name which has been reserved by the Registrar of Companies (s 10 and 20); At least one share, shareholder and director (s 10); and A registered office and address for service (s 186 and 192) Once a person who properly completes the application for the registration of a company, a Registrar must register the application and issue a certificate of incorporation (s 13). Classifying Companies: A privately owned company has a great deal of flexibility in the way that it operates. A publicly owned company, however, that wishes to be publicly listed needs to comply with the NZX (New Zealand Exchange) Listing Rules. The Listing Rules dictate how a company is to conduct the financial and disclosure aspects of its business. The key difference is that publicly owned companies have more onerous obligations of disclosure to prospective and current shareholders. Separate Legal Entity and Legal Capacity: Section 15 of the Companies Act 1993 provides that a company is a legal entity in its own right, separate from its shareholders and continues in existence until it is removed from the New Zealand register. Section 16 states that a company has full legal capacity to carry on or undertake any business or activity, do any act, or enter into any transaction. Section 30 of the Interpretation Act 1999 provides that person includes a corporation sole, a body corporate, and an unincorporated body. In practice, this means that a company as a legal person may bring actions in the courts and have actions brought against it. This basic doctrine provides that because a company is a separate legal entity, its members are not liable for any debts incurred by the company (in excess of the amounts paid up on the shares held by the member in the company s capital). This essentially means that a company’s creditor cannot recover the company’s liabilities from the shareholders. The doctrine is codified in s 97(1) of the Companies Act 1993 which provides that Excem pt where the constitution of a company provides that the liability of the shareholders of the company is unlimited, a shareholder is not liable for an obligation of the company by reason only of being a shareholder Common Law: Salomon v Salomon & Co Ltd (1897) AC 22. S sold his own successful business to a limited liability company which he incorporated and appointed himself managing director. The sale price which was rather optimistic was paid with the issue of shares, cash and a debenture. Salomon owned almost all of the shares but his wife and five children each had a share. When the company was liquidated after the business failed, the liquidator claimed that the company was a sham because the company was an agent of Salomon and that Salomon should be fully liable for the company s debts. This was because as a debenture holder, Salomon was entitled to preference above other unsecured creditors. This case establishes the fact that legal personality is recognized even where one shareholder effectively controls the company. Limited liability Is the number one reason for the incorporation of a company. A policy justification of limited liability of companies is that it decreases the need for shareholders to monitor actions of management or other

shareholders, encourages investment diversification and promotes economic efficiency. Another justification for the incorporation of companies generally is for taxation purposes to share income amongst members of a family because a company can easily transfer its shares unlike other business structures where the process of transfer is more complex. The nature of shares, in addition, means that there are different classes of shares. Other business structures may need to be better organized and limited liability creates credibility in the market. Lastly, a company unlike a trust continues in existence until the company is removed from the Companies Register Application of Salomon’s principle Lee v Lee’s Air Farming Could Mr Lee be both the controller of a company and its employee? Facts: Mr Lee incorporated a company which had two shareholders, Mr Lee and his solicitor. Mr Lee was the sole director. Mr Lee entered into a contract of service with Lees Air Farming Ltd. While out flying for Lees Air Farming Ltd, the plane crashes and Mr Lee is killed. The question for the court was whether Mr Lee was a worker under the Workers Compensation Act 1922 and whether Mrs Lee could thereby recover compensation for the death of Mr Lee. Held: Mr Lee could act in different capacities as employee and director independent from the company itself. Lord Morris found that one person may function in dual capacities so that the company and Mr Lee as an employee were separate legal entities so as to permit contractual relations between them. This meant that Mrs Lee was entitled to the workers compensation. Lifting the corporate veil Section 15 of the Companies Act 1993 (“Act”) states that a company has a legal personality in its own right and is separate from its shareholders. This is a principle known as the Salomon principle, originating from the case of Salomon v A Salomon & Co Ltd. The corporate veil is drawn from the Salomon principle which separates the rights and duties of the company from the rights and duties of the shareholders and directors. Essentially, the corporate veil is a metaphoric veil with the company on one side of it and its directors and shareholders on the other and liability does not pass through. The corporate veil does not provide protection to its shareholders and directors for their personal conduct or allow companies to be used for sham transactions. Accordingly, the courts may lift or pierce the corporate veil: The corporate veil/Salomon principle were applied in Lee v Lee’s Air Farming Ltd. The Court ruled that although Lee was the controlling shareholder, sole director and chief pilot of Lee’s Air Farming Ltd, he was also considered an employee of the company and thus the company was a separate legal entity, even though Lee’s Air Farming Ltd was essentially a ‘one-man entity’. This ruling created the opportunity for the corporate veil to be misused and has since been regulated against by imposing reckless trading provisions. However, there are common law exceptions to the general rule that companies have a separate legal identity independent of individual owners and managers. This is known as lifting or piercing the corporate veil At common law: Agency, Fraud, Group enterprise, Tort Trevor Ivory v Anderson Facts: Mr Ivory trading through a limited liability company (Trevor Ivory Ltd) advised a client to spray a crop of berries with a certain chemical to get rid of weeds. The chemical killed the crop of berries as well. The question for the court was whether Mr Ivory could be personally liable in the tort of negligence because Trevor Ivory Ltd was insolvent. Held: A limited liability company and its shareholders are separate. As Mr Ivory had identified himself as trading through the limited liability company only that company could be liable. Body Corporate 202254 v Taylor 2009

Company Law Cheat Sheet: 2018 Facts: Company owned land and built residential buildings on it. Taylor was the sole director and controller. Within 2 years the buildings began to exhibit leaky syndrome and houses suffering water damage. All companies and contractors had gone out of existence. No corporate entity left. The building were leaky and the owners wanted to sue. All the companies involved had gone insolvent, so they brought the action against Mr Taylor personally. Evidence showed that brochure contained statements about professionalism and expertise. The owners claimed under negligence and FTA for damage to the houses. Negligence case not negligent misstatement. T did not make these statements, the Fair-Trading Act for the brochure of the company: said that T had experience and professionalism in the field. Law: Rules of attribution do not act as shield to personal liability. Principle of limited liability is not a shield to liability. Existence of a contract is not a shield to liability. Necessary to establish all elements of tort. Here the claim was in negligence, so necessary to establish the existence of duty of care. Assumption of responsibility was important to establish a duty of care (majority). Also important for whether limited liability was overriding principle. Minority put less importance on assumption of responsibility (Chambers J). No reason why director should not be liable in negligence. Outcome: This was a strike out application - court said no strike out and there might be a duty of care. It was FTA which got liability. Taylor's role was actually fairly minimal and suggested not enough to establish a duty. Minority gave interesting opinion - said that at the heart of the claim a claim in negligence against Taylor who was involved a number of ways in the development. Employee - liable and company vicariously liable. What difference does it make that he is a director. Distinguished from Ivory case, ivory was acting as the company. Not the case here because Taylor acting as a builder and an employee doing a job. Negligent misstatement law would be different. Claim in negligence - analogous to crashing car. Statutory exceptions: sections 135, 136, 25(2) CA Company Constitutions & Shareholder Agreements Company Constitutions – content, function and legal effect Company Constitutions Pre-1994 companies: memorandum and articles of association A company may, but need not, adopt a constitution: s 26 CA If no constitution, the company is governed by the CA including default rules (s 28 CA) If company has a constitution, it is governed by the CA subject to any changes to the default rules (s 27 CA) Legal effect of the Constitution: Section 31(1) provides that constitution has no effect where it is inconsistent with CA Section 31(2) provides that, subject to CA, constitution is binding as between – the company and each shareholder; and each shareholder. See Hickman v Kent; Eley; Foss v Harbottle Hickman v Kent [1915] H applied for membership of company (sheep breeders association) and was duly elected Article 49: any disputes between the company and its members shall be referred to arbitration (mediation). H sued company for refusing to register his sheep HELD: Articles of association constitute a contract between company and its members in respect of their ordinary rights as members Eley v Positive Government Security Life Assurance (1876) Eley agreed with promoter that he would meet the expenses of setting up a company on the basis that he would be appointed as its permanent solicitor Eley inserted a clause in the articles of association to that effect He sued the company for breach of contract when it ceased his employment 2|P a g e

HELD: Articles did not confer any rights on outsiders – it only has legal effect as between company and members in that capacity meaning that here the Articles provided that Eley should be solicitor to the company, it was held that this was not a right given to him as a member and he could not rely on the Articles as a contract for professional services Foss v Harbottle (1843) Two shareholders sued directors for breaching articles of association as well as their duties to company Directors controlled company HELD: Courts dismissed the claim. Proper Plaintiff Rule – a wrong done to the company maybe vindicated by the company alone: Company is a separate legal entity. Majority rule principle – Cadit quaestio – if alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting – court will not interfere. Problem Down Under Ltd owns a chain of book stores. Its directors and shareholders are Spike, Buffy, Angel and Cordelia. The company has a constitution that contains the following clauses: The directors of the company shall be Spike, Buffy, Angel and Cordelia for a period of 15 years from 1 January 2014. Xander shall be employed as the company’s accountant until 31 December 2020. Spike, Buffy, Angel and Cordelia have been unhappy with Xander’s work for some time. At a meeting of the board of directors, they decide toterminate Xander’s employment. Spike, Buffy and Angel have a disagreement with Cordelia about the future direction of the company. They decide to call a members’ meeting at which they pass a resolution removing Cordelia from her position as a director of the company. Assume that all procedural requirements under CA and constitution have been followed. Questions Xander seeks your advice regarding the termination of his employment. Advise him. Under the rule held in Eley v Positive Government Security Life Assurance the contract provided that Xander should be solicitor to the company, it is not a right given to him as a member and he cannot rely on the Articles as a contract for professional services Cordelia is upset about her removal as a director of the company. Advise her. (hint: see section 156 CA) S156 subject to the constitution of a company, a director of the company may be removed from office by ordinary resolution passed at a meeting called for the purpose or for purposes that include the removal of the director. Under Foss v Harbottle: Proper Plaintiff Rule – a wrong done to the company may be vindicated by the company alone: Company is a separate legal entity. Majority rule principle – Cadit quaestio – if alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting – court will not interfere. Shareholder Agreements Although shareholders are not responsible for, and don’t participate in, the day-to-day management of the company, the Act holds that there are certain powers that only shareholders of a company can exercise. These include:

Adopting, altering or revoking a constitution (section 32); Altering shareholder rights (section 119); Approving a major financial transaction (section 129); Appointing and removing directors (sections 153 and 156); Approving an amalgamation (section 221); and Putting the company into liquidation (section 241). While the appointing and removing of directors is usually done by an ordinary shareholders’ resolution (simple majority vote), the other powers require a shareholders’ resolution to be passed by a majority of 75% (or higher if required by the company’s constitution) of those shareholders entitled to vote and voting on the decision. Under section 109 of the Act, resolution is not binding on the board. Why have a shareholder agreement? private contractual document avoids “capacity as shareholder” limitation rule Legal effect of shareholder agreements - see Russell v Northern Banking Russell v Northern Banking [1992] Company had authorised share capital of £1,000 divided into 1,000 shares of £1 each Shareholder agreement between 4 members and company stated that no further share capital shall be created or issued without written consent of parties to agreement Board of directors wanted to raise more capital by issuing new shares HELD: Company cannot fetter (restrict) its statutory power to increase its share capital members may lawfully agree to exercise voting rights in accordance with shareholders agreement meaning, a private shareholders' agreement cannot restrict a company's statutory powers but could bind the voting rights of those parties to the agreement. The number of authorized shares per company is assessed at the company's creation and can only be increased or decreased through shareholders' vote Questions Refer to the facts in Problem: Would it make any difference to your answer if Xander was a shareholder in Down Under Ltd? Under the rule held in Eley v Positive Government Security Life Assurance the article provides that Xander should be solicitor to the company, it is not a right given to him as a member and he cannot rely on the Articles as a contract for professional services. No. Same as above. The corporate veil would mean that he has 2 roles – share holder and solicitor for the coy. Since Xander would only be 20% of the vote, majority principle rule in Foss v Harbottle would mean that 80% S/H would vote that he be removed as solicitor. ???? Xander was now a member and contract would be. How could the company have lawfully removed Cordelia as a director? ordinary shareholders’ resolution (simple majority vote), the other powers require a sha...