Company Law

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1 Types of Corporation and Ways of Formation

• Corporation sole – a public office occupied by a natural person. Death of the person does not affect the continuing survival of the corporation. The Mayor of London is a corporation sole.

• Corporation aggregate – a collection of like-minded people who combine to form an artificial person – the corporation aggregate. Death of individual members has no effect on the existence of the corporation.

• Formation may be by any of 3 ways

• Royal Charter — for example, the BBC and many UK universities

  • Very rare in modern times

• Statute – equally (if not more) rare

  • For example, certain public corporations created directly by Act

• Registration – by far the most common method

  • Eg Tesco plc, Small & Co Ltd.

• Since 2004 a new form of company, the Community Interest Company (CIC) is available for organisations created for the benefit of the community/society rather than for the pursuit of profit

2 Types of Company

• Public quoted

  • Share price quoted on a recognised stock exchange

  • Must be limited by shares

• Public unquoted

  • Again limited by shares, but not quoted

• Private – unlimited

• Private – limited by shares

• Private — limited by guarantee (normally without share capital)

• Companies limited by guarantee with share capital are legacy forms and cannot now be newly incorporated

• Community interest companies

3 Public Companies

• A company is a public company if it satisfies the definition

• It is a company which is limited by shares

• The constitution states that it is public

• The name ends with the words “public limited company“ or “plc”

• It has an allotted share capital not less than £50,000…

• …of which not less than 25% is credited as paid up…..

• ….together with the whole of the share premium

• Any company which does not satisfy the definition is a private company

• Although a public company exists from the date on its certificate of incorporation, it cannot commence to trade until it acquires a trading certificate

4 Trading Certificates also known as “Certificates to Commence Trading”

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• Public companies cannot commence to trade until after they have received a trading certificate

• This is issued by the registrar following an application made by the company

• The application states

  • That the nominal value of allotted shares is not less than £50,000

  • The preliminary / formation expenses

  • And to whom these have been paid (or are still payable)

• The application must be accompanied by a statement of compliance

• If a public company does in fact commence trading before the receipt of the trading certificate, an innocent third party is protected

• But the company, and any officer in default, is liable to a fine

• If a public company fails to obtain a trading certificate within 12 months of incorporation, the court on application may grant a liquidation order against the company

5 Advantages of Being a Company as Distinct From a Partnership

• Separate legal personality (Salomon v Salomon)(Adams v Cape Industries)

• Limited liability

• Perpetual existence

• Raising finance

• Ownership of property

• Number of members

• Transfer of interest

• BUT there are disadvantages

• Legal implications

• Expense

• Publicity and disclosure

6 Disadvantages (Expanded)

• Legal implications

  • Formation

  • Audit

  • Share issues

  • Meetings and resolutions

  • Liquidation

  • “Proper accounting records“

• Expense

• Publicity

  • Details of directors and their remuneration

  • Business details

7 Lifting the Veil

• True veil piercing is confined to the narrow Prest v Petrodel evasion principle; agency, statutory liability, sham analysis and group accounts are separate doctrines

  • Gilford Motor Co v Horne

  • Daimler v Continental Tyre and Rubber

  • Ebrahimi v Westbourne Galleries

  • R v Oll

  • Re F G Films

  • DHN v Tower Hamlets

• The veil will also be lifted under the provisions of statute:-

  • Fraudulent trading

  • Wrongful trading

  • Commencing to trade without a trading certificate

  • Abuse of company name

• Other situations:-

  • Preparation of group accounts

  • Tax law

  • Personal guarantees

8 Formation

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• Formed by promoters (see next)

• Pre incorporation contracts (Kelner v Baxter)

• Documents to be filed :-

  • Application for registration

  • Memorandum

  • Articles

  • Statement of compliance

  • Statement of capital and initial shareholders

  • Registration fee

  • Certified translation

9 Formation - role and duties of promoters

• Roles

  • act, under instruction, to form a company

  • this involves:

    • finding people who will sign the memorandum and articles of association, and act as the company’s first directors

    • select a suitable name for the company

    • determine the form and amount of the company’s share capital

    • determine the rights to be attached to the different classes of share capital

    • prepare the constitution of the company

    • submit all the necessary forms to the registrar of companies

    • pay all the preliminary and formation expenses of the company

• Duties

  • act with reasonable skill and care

  • disclose any profit or potential conflict of interest

    • either to the first independent board of directors

    • or to the company’s existing or intended shareholders

  • breach of duty - ie non-disclosure - allows the company to rescind the contract and recover the purchase price (Erlanger v New Sombrero Phosphate Mining Co)

  • the company may require the promoter to pay over to the company any undisclosed profits (Gluckstein v Barnes) (Whaley Bridge v Green)

  • the company may sue the promoter and claim damages for breach of fiduciary duty (Leeds and Hanley)

10 Formation (continued)

• The application must cover the proposed name, registered office and email, company type, proposed officers, subscribers and share capital, and PSC information

  • Proposed name

  • Registered office (England and Wales)

  • Proposed postal address of registered office

  • Limitation of members liability (shares or guarantee)

  • Public or private

• Certificate of incorporation

  • If everything is in order, registrar will issue a certificate of incorporation

  • The date on the certificate is conclusive proof

  • Jubilee Cotton Mills v Lewes

• Streamlined company registration scheme

  • Companies House provides online incorporation

  • Online incorporation still requires all prescribed formation information and declarations

  • Tax registrations follow the applicable HMRC processes and should not be described as automatic in every case

11 Memorandum and the Constitution

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• Historically a major document

• Since 2006, now just a matter of record

• States that the subscribers

  • Wish to form a company

  • Agree to become members

  • Agree to take at least one share each

• Company’s constitution comprises

  • Articles

  • Resolutions (affecting the articles)

  • Agreements (affecting the articles)

12 Articles – Contractual Force

• When a person becomes a member of a company, it is as though they have separately entered a contract with the company and with all the other members individually

• The terms of that contract are contained within the articles

• The effect is to bind the members to the company

• Hickman v Kent or Romney Marsh Sheepbreeders Association

• …..and the company to the members

• Pender v Lushington

• ….and the members to the members

• Clarke v Dunraven

• But the articles do not create a contract between the company and third parties

• Eley v Positive Government Life Assurance Co.

13 Articles – Alterability

• Basic rule – can only alter if for the benefit of the company as a whole

• Individual hypothetical member of the future

• Greenhalgh v Arderne Cinemas

• No outside contract shall prevent a change, but company may become liable for breach of that contract (Southern Foundries v Shirlaw)

• Even if proposed alteration adversely affects only one member, it may still be valid (Allen v Gold Reefs of West Africa)

• Alterations allowing compulsory purchase of minority’s shares will be (normally) disallowed (Dafen Tinplate v Llanelli Steel)

• Allowing expulsion of defrauding director – OK (Shuttleworth v Cox Brothers)

• Allowing expulsion of competing members – OK (Sidebottom v Kershaw Leese)

• Possible to prevent alteration by weighted voting rights

• Bushell v Faith

14 Articles – Procedure for Alteration

• Special resolution

• 75% majority

• 14 days notice

• copy of resolution to registrar within 15 days

• copy of amended articles to registrar

• alteration is binding on all members

• articles may say that, for a meeting proposing an alteration, the affected member must be present

• so affected member can prevent alteration by not attending

• articles may require a greater majority than 75%

• …but can never be drafted to prevent amendment

15 Company Names

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• Basic rule – company can have any name selected by promoters

• But there are restrictions

• Registrar may refuse to register a company with a name which is misleading or offensive

• Connection with royalty, banks…..

• Name may be restricted by statute

• ANZAC

• Name will not be allowed if the same as an existing company

• Name may be disallowed as a tort (passing-off)

• Ewing v Buttercup Margarine

• The word ‘limited’ (or plc) shall not appear anywhere except at the end of the name

16 Name Change

• Compulsory or voluntary

• May be required to change by order from the registrar

• ….within 12 months if the company has been, by mistake, registered with a name too similar to an existing company

• ….within 5 years if misleading information was supplied

• At any time if the use of the name is likely to cause harm to the public

• Special resolution

• 75% majority

• 14 days notice

• Copy of resolution and amended constitution to registrar within 15 days

• Registrar issues new certificate of incorporation

17 Objects

• Company can do anything so long as it is legal

• Under Companies Act 2006 s31, objects are unrestricted unless the articles restrict them

• An internal objects restriction may affect directors and members but does not generally invalidate the transaction

• Member can object (Ashbury Railway v Riche)

• “The validity of a transaction shall not be called into question on the grounds of lack of capacity”

• “In favour of a third party acting in good faith, the power of the directors to bind the company shall be deemed to be free of any limitation under the company’s constitution”

• These apply only to third parties, not to members

• Good faith – but this is presumed unless shown otherwise

• No requirement for third party to make enquiries

• Under ss39–40, the company can generally enforce the transaction; directors may remain accountable internally for breaching an objects restriction