Company law elective module notes - CL299 PDF

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Company law elective module notes - CL299...

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Business Structures Sole Trader The sole trader and the business are one, there is no legal distinction between the business and the sole trader The sole trader: -

Signs the business contracts in their own name Owns the assets of the business Can take any profits made by the business Is legally responsible/liable for any actions taken by the business

Start-up of a sole trader: -

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Sole trader can begin business at any time, no need for registration/incorporation provided tax and planning requirements are met They must inform HMRC that they are self-employed and keep records of all transactions If their turnover is above the VAT taxable turnover they must register for VAT They can start the business with their own money and seek to obtain a bank loan

The risk of a sole trader: -

As the sole trader and the business are one, the sole trader is responsible for everything the business does They are liable for all debts and other business obligations, their personal possessions are at risk if the business cannot afford it’s debts

Partnerships A partnership is two or more people who join forces to create a business, usually sharing management, profit and losses Three types of partnership: 1. Unlimited Partnership – Partnership Act 1890 2. Limited Partnership – Limited Partnerships Act 1907 3. Limited Liability Partnership (LLP) – Limited Liability Partnerships Act 2000

For unlimited and limited partnerships there are no legal distinction between the business and the partners LLPs are a hybrid between a partnership and a company, therefore the LLP is legally distinct from its members Unlimited Partnerships: -

There are no registration requirements, they can commence business at any time Partners are liable for debts and other obligations of the partnership without limit Partners are jointly liable for contractual obligations and joint and several liable for tortious obligations Joint and several liability means a claimant may sue the partners together or one of them individually for the whole amount

Limited Partnerships: -

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Limited partnership must be registered to come into existence under the Limited Partnerships Act 1907 To register, they must deliver an application for register to be signed by all partners to the registrar, once accepted the limited partnership will come into existence Any business activities occurring before registration will be dealt with under the rules for unlimited partnerships Limited partnerships are popular for short term projects, like film making One or more of the partners has only limited liability for the debts The general partner must have full liability for the partnership’s debts and obligations General partners have joint liability for contract and joint and several liability for tort Partners with limited liability cannot take part in the management, if they do they become personally liable

Limited Liability Partnerships: -

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Prospective members send an incorporation document to the registrar of companies, a certificate is produced if the LLP is incorporated From this date, the members can trade via a LLP allowing all partners to achieve limited liability up to a certain point Any trading prior to incorporation is dealt with under an unlimited partnership The LLP is a separate legal entity to the partners, the LLP owns the business assets and is fully liable for its debts

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In the event of insolvency, members may lose capital which they contributed and will be liable for any sum they agreed to pay on winding up But they are not personally liable for the LLP’s debts They can be personally liable if they committed negligent acts

The Company A company is a legal entity which acts as a legal framework for the operation of the business The shareholders/members own the company, the directors manage the day-

A company which is limited by shares, the liability of the company’s members is limited to the amount unpaid on their shares – S3(2) CA 2006 Anyone can contribute to the capital of a company by taking shares -

Additional capital can be raised by issuing/allotting further shares This must be done in accordance with the articles of association Private company cannot advertise its shares for sales, must negotiate personally with prospective shareholders A public company can offer their shares to the public

Private company -

Majority of UK companies are private They cannot offer their shares to the general public, S755 CA 2006 There are no minimum capital requirements LTD must appear at the end of the name

Public company -

Raise finance by offering their shares to the public Minimum capital requirement of £50,000, S763 CA 2006 Plc must appear at the end of their name

Private limited company structure -

Once incorporated, a company is independent from its shareholders

Company start-up, S7 CA 2006 -

To incorporate a company you need: application to register, memorandum of association and articles of association Fee between £12-£100 depending on method of delivery

Formation and Constitution

Pre-Incorporation This is the stage before a company comes into legal existence – before it is formally registered Promoters are relevant at this stage Promoters are the individuals who wish to form a company -

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Twycross v Grant: defines a promoter as ‘one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose’ - the person who wants to get the company up and running Whaley Bridge Co: whether or not a person is a promoter is a question of fact, determined by their involvement in the creation of the company

At common law, the promoter owes fiduciary duties to the company as an entity that is yet to exist -

These fiduciary duties cannot be enforced until the company is incorporated

During pre-incorporation promotors can enter into a contract on the company’s behalf, the company cannot sue or be sued on this contract Even once incorporated, due to the doctrine of privity the company cannot enjoy the benefit or sustain the burden of the contract as it is not party to this contract -

Kelner v Baxter: the promoter who signed a contract will be personally liable – also S51 CA 2006

There are options for promoters to avoid personal liability -

Prepare a draft contract to be signed on incorporation Expressly state that promoter are not liable Novation of any existing contract once incorporated Stating that once incorporated, the company will agree a new contract on similar terms Transferring benefit of the pre-existing contract to the company in exchange for its agreement to indemnify

Promoter suing under pre-incorporation contracts: Braymist Co v Wise Finance – a group of solicitors who acted as promoters were able to enforce a contract that had been entered into on behalf of a yet-to-exist company, in their personal capacity

Requirements of Incorporating a Company S7 CA 2006: A company is formed under this Act by one or more persons: (a) subscribing their names to a memorandum of association and (b) complying with the requirements of this Act as to registration

S9 CA 2006 lays out the majority of requirements, to incorporate a company the following documents and information must be filed with the Registrar of Companies -

The name of the company (S9) Location of the company’s office (S9) Whether the liability of the members is to be limited, if so by shares or guarantee (S9) Whether the company is to be private or public (S9) Statement of the intended address to the company’s registered office (S9) A statement of capital and initial shareholdings (S10/11) A statement of the company’s proposed officers (S12) A statement of compliance with the act (S13)

The Memorandum of Association Individuals must subscribe their name to the MOA – agreeing that they wish to form the company and will act as its initial members Historically companies were created by concessions from the Crown, these gave individuals the right to exploit a certain product or pursue a certain aim – therefore under the CA 1985 and its predecessors all companies were required to have an objects clause -

An objects clause is a statement of the purpose or business goal of the company S31(1) CA 2006 = objects clauses are no longer required, but companies can still choose to have one

Motivations behind the change to the memorandum: -

To have a single constitutional document, the articles of association If a company wanted to diversify in the future it would be very difficult and require the formation of a new company

The present law on objects clause: -

S31(1) CA 2006 = unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted

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S39(1) CA 2006 = the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution Companies which still do have an objects clause: the effect of ultra vires actions are now less severe as any breach of the objects clause does not affect the validity of transactions with outsiders

The Articles of Association The articles are the company’s constitution, they set out the internal structure and governance of the company -

Companies are free to draft their own There are also model articles which can be adopted

Once incorporated, S21 CA 2006 allows for the possibility of the articles to be amended by special resolution – 75% vote in favour Division of power in the company The Articles divide power between the board of directors and the general meeting (shareholders/members) -

The directors and shareholders are the constitutional organs of the company, they have the power to act as the company

The directors have the power to run the company as they see fit, until the shareholders put a stop to a specific action S168 CA 2006: members can by simple majority (50%) remove a director for any reason In theory, S168 means that shareholders are at the centre of the corporate power structure, but unless and until they want to exercise control over the board of directors, the directors de facto yield the power regarding day-to-day management -

Demonstrated by Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd, the directors can make a decision that the majority of shareholders disagreed with

What is the power of the shareholders? (i.e the general meeting) -

S21 CA: The shareholders may amend the articles by special resolution S168(1): A company may be ordinary resolution at a meeting remove a director before the expiration of his period in office, not withstanding anything in agreement between it and him

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S336(1): Every public company must hold a general meeting as its annual general meeting in each period of 6 months beginning with the day following its accounting refence date S336(1A): Every private company that is a traded company must hold a general meeting as its annual general meeting in each period of 9 months … S420: the director’s pay package must be put to a vote

In smaller companies general meetings are often not held or are merely a tick box exercise In larger companies, the shareholders fail to attend or vote Power is pushed back to directors with the shareholders often rubbing stamping what directors decided

Arguments for the directors having the power: o Directors are the experts o They are subject to statutory duties o Long term effects of company actions better taken into account by directors, shareholders may only consider short term profitability o It is more efficient, allowing a smaller number of directors to manage the company is more efficient than giving control to vast and dispersed shareholders o Rigid adherence to shareholder consent is timely and expensive Arguments for shareholders having the power: o It is the shareholders money at risk and directors may take risks they wouldn’t with their own money o Possible risks in leaving power in the hands of the directors, may agree a contract which benefits themselves but not the company The impact of the company’s constitution -

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A statutory contract: statute has deemed the articles should be viewed as a set of contractual promises on behalf of the company and each of its members S33, CA 2006: The provisions of a company’s constitution bind the company and its members

The articles of association are an unusual contract: -

The terms of the contract are changeable by agreement of the majority of members The articles are changeable even if some shareholders don’t agree The articles are changeable even if this results in a breach of contract with an outsider

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The articles bind future members at the point of joining

This statutory contract enables shares to be more readily transferred because new members can join and be bound without the need to renegotiate the articles A contract between the company and its members – also inter se? -

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According to S33, the company and each of its members are party to the statutory contract, but a shareholder can enforce this contract only against the company and the company against the shareholder This may be an issue for minority shareholders Unclear whether the shareholders can enforce the contract inter se (against eachother)  Wood v Odessa Waterworks Co: ‘The articles of association constitute a contract not merely between shareholders and the company but between each individual shareholder and every other’ – Stirling J  Welton v Saffrey: ‘I think that no member has, as between himself and another members, any rights beyond which the contract with the company gives’ – Lord Herschell  Salmon v Quin & Axtens Ltd: ‘It may well be that the court would not enforce this covenant as between the individual shareholders in most cases’ – Farwell LJ  Rayfield v Hands: ‘There is a contract inter se enforceable by one member against another but only in circumstances involving a quasi-partnership’ – Vaisey J Guidance notes attached to CA 2006 state that it should be viewed as a contract binding inter se

Who can sue to enforce S33? -

Foss v Harbottle: the proper plaintiff rule, only the company can sue to enforce the S33 contract

When a wrong has been done to the company, the company itself as a D separate legal entity is the proper plaintiff, not the members If the breach is a wrong to the company, then only the company can sue If the beach relates to a members personal rights, the member can sue -

Pender v Lushington: shareholder’s votes refused at general meeting, member sought an injunction. Voting right’s = member’s personal rights

Can members sue only in their capacity as members?

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Difficulty when one persons serves the company in multiple capacities If the articles gives the member (insider) rights in connection with their non-member (outsider) capacity, can they as a member sue to enforce such non-member rights?  Eley v Positive Government Assurance: action failed as capacity as a solicitor was an outsider so could not enforce articles eventhough he was also a member  Hickman v Kent or Romney Marsh Sheep Breeder’s Association: no article can constitute a contract between company and a third person  Salmon v Quin & Axtens Ltd: under the articles, consent of both managing directors was required for certain decisions, Salmon as MS refused consent to a decision for the purchase of property but was overridden. He sued to enforce the articles as a member, action upheld and injunction granted as this was viewed as a member enforcing membership right

Alteration of the articles The articles can be altered by special resolution under S21 CA Case-law suggests the power to alter the articles must be exercised in good faith for the benefit of the company as a whole – Allen v Gold Reefs of West Africa Ltd -

But it is unlikely that the courts would interfere with a 75% majority S22 allows for the entrenchment of certain articles, making it very difficult for amendment (important to secure financing)

Contracting out of S33 Possibility for members to alter the terms of the constitution via shareholder agreements, company may also be a party to these agreements -

The agreements are private and deal with issues such as how shareholders will vote The agreement cannot conflict with a statutory right or power given under S33 and the articles: Punt v Symons & Co Ltd Contrast with Bushell v Faith: articles contained provision which required a director’s shareholder to be multiplied by three in event of their removal, entrenching the director on the board, eliminating a statutory power of removal. But the HL held this did not contradict the statutory power

Generally, private agreements cannot override the statutory right to alter the articles

Separate Corporate Personality

Separate corporate personality Separate corporate personality: the legal personality of the company exists distinct from that of its members

Once registered with the Companies House, the company is a legal or juristic person acting via the company directors (agents) The company has rights and responsibilities in its own capacity, separate from the shareholders Separate corporate personality provides the members and officers protected by the corporate veil -

This protects members personal liability, limiting it to their investment

The benefits of separate corporate personality: -

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Perpetual succession for the company: members can change but the company retains its identity Contractual capacity: company can make contracts in its own rights, can sue and be sued under them Assets are owned by the company: shareholders have no proprietary interest in the company’s assets: Macaura v Northern Assurance Co Finance: companies can access a floating charge (specific form of security), enabling the company to grant security over assets which are constantly changing offering flexibility allowing continuing dealing with the assets as normal until the charge crystallises It enables members to take lucrative risks without being afraid of personal liability, encouraging innovation and enterprise

Disadvantages of separate corporate personality: -

Criminal liability: Tesco Supermarkets v Nattrass – HL found the manager was not a part of the directing mind of the corporation The company acts through natural human persons: what responsibilities do these people have? Can they do as they wish as the company will be liable anyway?

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How can creditors protect themselves from potential losses? If the company is unable to pay its debts are there other avenues of redress Can the corporate veil be used for fraud/to hide behind?

Justification of the corporate veil by the courts Salomon v A Salomon & Co Ltd : are the Salomon and the company one and the same? With the effect that Salomon’s personal assets be used to pay the money owed to the creditors? First Instance: Vaughan-Williams LJ held that Salomon was the real owner and operator of the company, the company was a mere fraud/sham so the corporate veil could not be used Court of Appeal: CA agreed with first instance outcome but on a different basis -

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Employed a purposive approach reading the relevant sections of the 1862 Act and asked why the act ...