1) Different Business Models Flashcards
Different legal forms of business
- Sole trader
- Partnership
- Limited partners
- Limited liability partnership
Why businesses raise finance
- Purchase premises
- Employ staff
- Obtain advice (oft accountants)
- Expand and grow (by acquiring other businesses, marketing)
How businesses raise finance
- Owners may invest in it by making contributions of capital
- Outside investors may make capital contribution to the business to share in its profits.
- Business may borrow money
- Retention of profit.
Sole traders
- No set up costs or formalities
- Not a separate legal entity
- Unlimited personal liability
- No formal structure
- No Companies House filing or procedural element
- Complete privacy - no publicly filed accounts
Partnership - Overview
- No set up costs
- Not a separate legal entity
- Unlimited personal liability
- No CH filing
- Privacy
Governed by the provisions of the Partnership Act 1890
Partnerships - Formation
- No formalities
- There does not need to be intention - two or more people working together with the intention of creating profit = a partnership
s1(1) PA 1890
“…the relation which subsists between persons carrying on a business in a common view to profit”
No need for intention
Section 2 PA 1890
- Rules for determining the existence of a partnership
- Profits/losses shared = conclusive
- Loan between partners
- Property jointly held
Does a partnership exist
- No one factor suffices - consider all the facts
Northern Sales (1963) Limited v Ministry of National Revenue (1973)
Agreement to share losses as well as profits = partnership more likely
Walker v Hirsch 1884
Clerk lent money to the partnership, was paid a fixed salary and took 1/8th of the profits/losses but **was never held out **as a partner.
No partnership found to exist.
Terms of Partnership
Nothing required in terms of formalities - advisable to have an agreement drawn up by a solicitor.
Otherwise partnership governed by the default provisions of the PA
Standard Clauses of the PA 1890
Section 24(1) Profits and Losses
Section 24(6) Renumeration
Section 24(8) Decision making
Section 25 Expulsion
PA 1890 Section 24(1)
- Section 24(1) Profits and Losses
Partners entitled to share equally in the profits of the business, share equally in the losses - Even if capital has been contributed unequally.
Recommend express provision of profit sharing ration
PA 1890 Section 24(6)
Renumeration
Partners are not entitled to a salary
PA 1890 Section 24(8)
Decision making
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.
PA 1890 Section 25
Expulsion
A partner cannot be expelled by majority vote unless all partners have previously expressly agreed a majority can do this.
Partnership Agreements
Can be varied by unanimous consent (s19 PA)
Legal advice recommended.
Sleeping Partners
Not involved in the management of the business.
Limited liability unless become involved in business
General Partners
Run the business and have unlimited liability
Limited Partnerships - Overview
- At least one limited and one general partner
- Governed by the Limited Partnership Act 1907
- Must be registered at Companies House,
- but have no requirement to file accounts.
- Not commonly used for general business - usually used for investment vehicles.
What structure is usually used for investment vehicles?
Popular** joint venture business structures** where an investor (limited partner) puts money into a business run by the general partner.
Subcategory of private fund limited partnership also created.
Limited Liability Partnership - Key Characterstics
- LLPs were introduced by the LLP Act 2000
**Separate legal personality. **
Treated as a partnership for tax purposes.
All partners has limited liability - limited to the amount that they have agreed to pay under the terms of their Partnership Agreement
Registered at CH in the same way as companies
Required to file annual accounts
LLPs are in effect a hybrid
Between a traditional partnership (procedural flexibility) and a company (with limited liability).
Companies Key Characteristics
- Separate legal entity
- Limited liability - the liability of shareholders is limited to the amount unpaid on their shares
Key considerations in choosing a business model
Costs
Risk
Structure
Formalities
Privacy
Finance
Companies - key charateristics
- Separate legal entity
- Limited liability - limited to the amount unpaid on their shares
- Governed by Companies Act 2006
Shareholders /Members
- Owners of the company
- Invest money
- Receive dividends
- Have voting rights
Subscribers
Name given to the first shareholders in a company who invest.
Directors
Officers/managers of the company
Day-to-day running
= The Board
Often shareholders
Persons with Significant Control
Must be provided to Companies House
Shareholders with over 25% of shares
Other stakeholders
Anyone interested in the company such as employees or creditors.
Companies Act 2006
Replaced Companies Act 1985.
* Removal of the requirement of private companies to hold AGM or submit Annual Returns.
* Codification of directors’ duties
* Allowing private companies to pass shareholders resolutions in writing
Private Limited Company
Section 4(1) CA 2006
“a private company is any company that is not public”
Name ends with Ltd (s59(1)
Types of Private Companies
- Limited by shares
- Limited by guarantee
- Unlimited companies
Limited by shares
- Most common type of company
- No minimum share capital
- Prohibited from offering shares to public
- Can be formed by one person
Limited by guarantee
- No share capital
- Liability limited to the amount that they agreed to contribute in the event of winding up.
- Membership non-transferable
- Rare companies
Unlimited companies
- The liability of members is unlimited
- Rare type of company
Public Limited Company
- section 4(2) CA 2006
- “company whose certificate of incorporation states that it is a public company”
- Ends plc
- Can offer shares to public eg LSE
- More onerous requirements
Public Companies limited by shares
plc
* Minimum of 2 directors
* Minimum share capital requirement of £50k (s763 CA 2006)
* Requires a trading certificate before it can trade (s761)
Listed companies
- Only public companies can be listed.
- Not all companies are
- Listed means admitted on a regulated investment exchange
Reasons to list a company
- Raise greater funds
- Stock exchange listing allows investors to deal freely.
Should not assume that a company whose name ends in “plc” is….
Should not assume that a company whose name ends in “plc” is a listed company.
Differences between private and public - NAME
Plc v Ltd
Differences between private and public - SHARE CAPITAL
- Private: No specific minimum share capital (eg £1)
- Public: Nominal value of at least £50k, at least 1/4 must be paid. (s586 & s763 CA 2006)
Differences between private and public - DIRECTORS
Private: Need only have one director
Public: Need to have two directors (s154 CA 2006)
Differences between private and public - COMPANY SEC
Private: May choose to have a CoSec S270(1)
Public: Must have a CoSec s271. Must hold one of the qualifications specified s273(2)
Differences between private and public - AGM
Public: Required to have one AGM per year s336
= Opportunity to question directors and finances.
Private: Not required to hold an AGM, may do if wish.
Company’s Constitution
Made up from the following docs:
- Memorandum
- Articles of Association
Constitutional Docs following CA 2006
- Memorandum no longer forms part of the company’s constitution
- Only required as part of the procedure for Companies House
- = declaration that subscribers want to form a company
- s17 CA
Memorandum Under Companies Act 1985
- Constitutional restrictions
- Object clause = the purpose of a company
- Acting outside the company’s purpose = ultra vires
Companies formed under CA 2006 - objects
Have unrestricted objects (s31 CA), unless specifically restricted in the company’s
For companies incorporated under the CA 1985
s28 CA 2006
Any provisions m in the memorandum to be treated as Company’s Articles
For companies incorporated under the CA 1985
- OBJECTS
The Objects Clause continues in force as an Article, until Articles amended to remove clause
s28 CA 2006
Articles of Association
s18
= main constitutional document.
Legality Test
Articles must comply with the minimum provisions of CA 2006
Check whether procedures set out in the relevant legislation and in Articles
Certain provisions cannot be overidden. Eg Right to demand a poll s321 CA
Three choices as to form of Articles
- Model Articles / Table A
- Amended MA
- Tailor made Articles
Model Articles /
Table A
- SoS prescribed MA for different companies s19
- MA will be default if no Articles registered s20(1)
- 1985 = Table A
Amended MA
- Adopt the MA and elect/exclude/modify certain ones
Tailor Made Articles
- Eg law firms
- But time consuming and costly to do.
- Most small companies adopt MA
Amending the Articles
- Alter them by special resolution (s21(1))
- Entrenchment possible by rare (s22) - can only be repealed if conditions met, all members agree, or court order.
Entrenched Articles
Amended only by
* Conditions being met
* Agreement of all members
* Court order (s22(3))
Basic case law rule for amending articles
To be valid any alteration must be made bona fide in the interests of the company as a whole.
Allen v Gold Reefs (1900)
Allen v Gold Reefs (1900)
To be valid any alteration must be made bona fide in the interests of the company as a whole.
Shuttleworth v Cox (1927)
An amendment to the Articles is not valid if no reasonable man could consider it to be for the benefit of the company.
Sidebottom v Kershaw 1920
- Fair price buy out provision for competitors
- CoA initiated in good faith and bona fide interests of the company
- Allowed to stand to protect the company.
Re Charterhouse Capital Ltd 2015
- Amendment of articles to permit the shares of minority shareholder to be compulsorily acquired
- Held to be valid as consistent with shareholders agreement = “tidying up exercise”
- Not in bad faith, no improper motive = no basis for challenge
Legal effect of Articles
s33(1)
* Articles bind as a covenant.
Predecessor to s33(1) CA 2006
s14 CA 1985
Much case law
Est rule = Articles evidence a contract between company and members
Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915
Est rule = Articles evidence a contract between company and members in their capacity as members and with respect to their rights and obligations as members.
Articles as contract
- Between company and members
- Courts have been willing to intercede with an injunction
- Member may not enforce rights contained in the Articles against the company that are not relevant to their capacity
- Members would be able to enforce right to vote, and dividend after declaration (s33)
Member may not enforce any rights….
Member may not enforce any rights contained in the Articles against the company that are not relevant to their capacity as a member
Members’ rights enforceable under s33 CA
- Right to vote
- Right to receive a final dividend.
Eley v Positive Government Security Life Assurance Company
1876
- A member who inserted the right for him to be employed for life as company’s solicitor
- could not enforce the provision
- not a right held in capacity as a member , rather as the solicitor
Articles as a contract between members
- Articles = contract between members and between company and members
- Conflicting authority as to whether one member may enforce Articles against another member directly
- or through the company itself
Members enforcing against members - CASES
Rayfield v Hands 1960
vs
Welton v Saffery 1897
Rayfield v Hands 1960
- If members accept personal obligations to another member through the Articles (eg transfer shares)
- Then can directly enforce
If members accept personal obligations to another member through the Articles
- If members accept personal obligations to another member through the Articles (eg transfer shares)
- Then can directly enforce
- Otherwise through the company.
Rayfield v Hands 1960
Welton v Saffery 1897
If a member is likely to wish to enforce rights against other members……
They should be advised to enter a shareholders agreement
A Shareholder’s Agreement
A private agreement between the shareholders which is enforceable as a contract between the members.
Memorandum since 2006
- Was of constitutional significance
- But in companies incorporated since CA 2006 = a formality
Main constitutional document
Articles
Articles bind
The Articles bind the company and its members
As if covenants on the part of the company and each member
Articles must always be interpreted …
Articles must always be interpreted alongside CA 2006
Formation of a company
- Incorporation from scratch
- Shelf company conversion
Incorporation from scratch - HOW
Submitting relevant info to CH / online
Shelf Company Conversion - HOW
Purchase of shelf company followed by any formalities to enable necessary changes
Incorporation from scratch
- Made to the Registrar of CH
- Ensures tailor made to needs.
- section 9 CA 2006
section 9 CA 2006
To be delivered to the Registrar of Companies at CH
* Copy of Memorandum
* Articles
* Fee
* Application for registration (Form IN01)
Application for registration
Form IN01
- Company’s name; Registered office; Appropriate address; Liability / limited or not; private or public
- Statement of capital and initial share holding
- Proposed officers
- limitation
- Statement of compliance
- lawful purpose
- registered emails
Form IN01 covers
s10 - s13 CA 2006
What to include un the application
s10 CA 2006
Statement of capital and intiial share holdings
s12 CA 2006
Statement of proposed officers.
Enauk
s11 CA 2006
Statement of whether company is to be limited by guarantee, and what of the guarantee
s13 CA 2006
Statement of compliance with the CA 2006
Company becomes a legal entity from
Company becomes legal entity (s16(3)) from the date of incorporation set out in the certificate of incorporation (s15)
Summary of submission to CH
Memorandum
Articles
Form IN01
Fee
Purchase a shelf company
Traditionally more common as was quick.
Changing since online incorporation
Shelf company
Set up in advance
Many firms operate in-house service
Shelf company advantage
Available all the time on every day of the year, online CH only during opening hours
Likely a client would make changes to the Shelf Company
- Name
- Articles
- Reg Office
- Confirmation statement
- Members, directors and Co-Dec
ECCTA 2023
- Economic Crime and Corporate Transparency Act 2023
- Introduced the need for a company to have a lawful purpose recorded at CH
- Increased fees payable on certain filings.
- further changes will be introduced.
Changes that will take effect through ECTA 2023
- Verification of identity of directors or persons filing
- Limitations on who can make CH filings
- Reg of Authorised Corporate Service Providers
Stakeholders in a company
- Shareholders
- Directors
- Persons of significant control (over 25% usually)
Shareholders
- Owners of a company
- Shareholders = members
- Shareholders invest money (share capital) in return for ownership
- Rights are in the Articles
Shareholder Certificate
Evidences ownership of a company.
Shareholders rights
- Voting
- Dividend
etc
Set out in the Articles
Sometimes in a Shareholder Agreement
Membership begins
Membership begins when member’s name is entered into company’s register of members
(s112(2) CA 2006)
Subscribers
First shareholders of the company are shareholders
section 8
Subsidiary of company
When a company owns all the shares in another company = a wholly owned subsidiary of company
A share is described
As a “bundle of rights”
Shares Overview
- Can issue different classes - see company’s Articles
eg ordinary, nominal par, issued, paid up etc….
Ordinary share
- Entitle holder to vote
- Receive a share of profits
- Receive share of surplus assets of a company if it is wound up.
Nominal Value
or par value
Minimum subscription price for that share.
Share may not be allotted/issued for less than nominal.
May be issued for a premium.
Premium
An excess over nominal value
Issued share capital
Total amount in value (nominal and premium) of all shares in issue at any time.
Will be shown in company’s account.
Paid-up share capital
Not always necessary to pay the full amount due on their shares.
The amount paid = paid-up share
Called-up shares
Not always necessary to pay the full amount due on their shares.
The amount to be paid once demanded = **called*
Share capital
- Shares purchased by the first members (subscriber shares)
- Further shares issued after incorporation to new or existing shareholders.
Allotment
Allotted when a person acquires unconditional right to be included in the company’s register of members in respect of those shares.
s558 CA 2006
Issued
Shares are only issued and form part of a company’s issued share capital, once the shareholder has been registered in the company’s register of members and her title as complete.
Different classes of share
There may be two classes of ordinary share - maybe carrying different voting rights.
May also be preference shares
Preference Shares
Entitles holder to a preferential right
* First claim to a dividend
* Return of capital on winding up
Limited Liability
Total nominal value of the shares held by a shareholder is equal to the total amount of that** shareholder’s liability** to contribute to the assets of the company if it becomes insolvent.
Shareholders Liability
Limited
If shareholder’s shares are fully paid, he will not have to contribute anything further in the amount of insolvency
Persons with Significant Control
- Owns more 25% of the shares of voting rights.
- Power to appoint or remove a majority of its board of directors; OR
- Otherwise exercises “signficant influence or control”
Registration of PSC
PSC register is required to be open to the public for inspection.
Intended to combat tax evasion etc.
s790A - 790ZG CA 2006
Directors
Day-to-day management of the company.
Agents of the company - governed by statute and common law principles of agency.
Owe fiduciary duties
Making changes to company’s Articles
Can only be done by shareholders, not directors.
s21 CA 2006
s154 CA 2006
- A private company > one director
- A public company > two directors.
- At least one director must be a natural person
Minimum age for directors
Minimum 16
s157 CA2006
Gov legislation re: company directors
Gov has enacted legislation that all corporate directors must be natural persons (subject to some exceptions)
Date of implementation not confirmed
Types of director
Executive; Non-executive; Shadow;
De facto; Alternate.
All these types of directors owe the same duties to the company, are under the same obligations (CA 2006, Insolvency Act 1986)
Executive Directors
- Appointed to Executive office
- Spend their working time on the business.
- Both officer and employee
Non-Executive Directors
- Also an officer of the company
- Not be an employee of the company
- Independent guidance
- Protect interest of shareholders
Shadow director
Person in accordance with directions/instructions the directors of the company are accustomed to act s251 CA 2006
Not consultant if in professional capaciy and scope s251(2) CA 2006
Alternate directors
Acts in the actual director’s place if incapacitated, or otherwise engaged.
May be provided for in the Articles
De facto directors
Not a legal director who has been validly appointed = assumes the role
Appointment of directors under CA 2006
- Governed by Articles
Appointment of directors under Model Articles
- By ordinary resolution of the shareholders, or;
- By decision of the directors.
Art 17(1)
Directors’ Service Contracts
Article 19
The terms of an individual director’s service contract are for the board to determine.
Long term service contracts may require shareholder approval.
Long term service contract
s188 CA 2006
Applies if longer than 2 years.
* Requires shareholder approval.
* If approval not given, then void under s189(a)
A term also included under s189(b) entitling the company to terminate the contract at any given time.
s189(b) CA 2006
A term also included in the service contract it is deemed to contain a term entitling the company to terminate the contract at any given time.
Shareholders are the …… of the company
Shareholders are the owners of the company.
A company can itself by a shareholder of another company.
A company may have different ….
A company may have different classes of shares
The rights attaching to each class of shares will be set out….
The rights attaching to each class of shares will be set out in the Company’s Articles
Directors are….
- agents of the company.
- responsible for day-to-dau management.
Decisions of directors
Decisions of directors are taken by passing board resolutions in board meetings.
Decisions of shareholders
Shareholder resolutions.
Either in a General Meeting or in Writing.
* Ordinary resolutions
* Special resolutions.
Procedure for passing a board resolution at a Board Meeting
Article 7(1) Model Articles
* Majority
* In the event of a deadlock Chairperson casts vote (Art 13 MA)
Chairperson of the Board
Article 12 Model Articles
* Chairperson is chosen by directors
* Has casting vote.
Amend Articles to remove chairperson if only two as otherwise they can make decisions alone
Quorum necessary for a valid BM
- Number of people required to attend a meeting for it to be valid
- Valid meeting = quorate
Quorum
Number of people required to attend a meeting for it to be valid
If a quorum is not participating
No proposal may be voted at a Board Meeting
Article 11 Model Articles
Art 11(2)
Quorum for a directors’ meeting may be fixed from time to time by a decision of the directors.
* Can never be less than two
* Unless otherwise fixed = two
Unanimous decision of the directors
Art 8 Model Articles
Provision for directors to make decisions unanimously without a BM.
* Decision requires all directors to indicate a common view “by any means”.
* Written record required Art 15
Preferred decision making method
Easy to hold a Board Meeting under the Model Articles.
Practice the preferred procedure for decision making.
Companies with one director
Sole director can take decisions on their own
Art 7(2)
Example of decisions that cannot be made by directors without authorisation from shareholders
- Changes to the company’s constitution
- Approval of certain transactions between company & directors
- Formal declaration of dividends.
Types of shareholder resolution under CA 2006
- Ordinary resolutions
- Special resolutions
Ordinary resolution sufficient unless Articles require a higher majority (s281(3))
Ordinary Resolution
A resolution passed by a simple majority **(more than 50% of votes in favour)
s282(1) CA 2006
Special Resolution
Majority not less than 75%
s 283(1) CA 2006
Hands or Poll
- Hands = 1 vote per shareholder
- Poll = 1 vote per share held
c 284 CA 2006
Right to demand a poll vote
s321 CA 2006 sets out the conditions.
May be relaxed by the Articles (eg Art 44 MA)
Right to appoint a proxy
Entitled to appoint a proxy s324 CA 2006
s318(2) CA 2006
Two qualifying persons required for a GM
s323 CA 2006
Provides that if a corporation is a member if a company, by resolution authorises a person to act as representative at any meeting.
Signle member companies GM
One qualifying member = a quorum for a GM
318(1), CA 2006
Written resolutions
- May pass a resolution without a GM through written procedure
s288 CA 2006
Two resolutions that may not be passed as written resolutions
s288(2)
- Removal of a director s168
- Removal of an auditor under s510
Majority in written resolutions
Counted out of all shareholders entititled to vote, rather than those present
Art 9 Model Articles
Gives directors flexibility in regulating their meetings, providing that any director may call a BM or require CoSec to do so.
Browne v La Trinidad 1887
Court held that reasonable notice for a Board Meeting was necessary.
Depends on context what is reasonable
Quorum
Directors may not validly make a decision on company business unless a minimum number of directors entitled to voteare present.
Art 11(2) Model Articles
Minimum of two directors to be present tfor the meeting to be quorate
(unless the articles provide otherwise
Matters to be referred to shareholders
- Matter outside the powers of the directors
- Matter within power of directors but requires the prior approval of the shareholders
Section 307 CA 2006
Prescribes minimum notice periods for General Meetings
Minimum 14 clear says’ notice
General Meetings of Shareholders
- Minimum of 14 days notice
- Must inform shareholders when and where it is taking place * written notice to the shareholders.
- Directors must approve the form of notice of the GM and authorise circulation.
Notice
- Mean a period of time, or;
- A document
After a GM has taken place
A second BM will be necessary, to enable the directorsto implement t
Sequence of meetings
BM - propose change/convene GMM
GM - Shareholder approval
BM - Implement decisions
PMM - Post Meeting Matters
Short Notice GMs
- Can be called on at shorter to usual amount of short notice if sufficient members agree.
- May be called on short notice if this is agreed by a majority - ie not less than 90% nominal value of shares.
Section 307 (5) CA 2006
Post Meeting Matters
The post-meeting matters will be carried out by the CoSec (or director).
This means that copies of the relevant documents will be filed at CH and internal records brought up to date.
Art 8(2) Model Articles
Allows directors to take decisions in the form of a directors’ written resolution provided the prescribed procedure is followed.
Uncomment in practice
s281 CA 2006
Only private companies may pass a shareholders’ resolution by way of a written resolution
s282 CA 2006
A written ordinary resolution can be passed by a simple majority of the total voting rights of eligible members
s283 CA 2006
state that a written special resolution can be passed by a majority of members representing not less than 75% of the total rights of eligible members
s284 CA 2006
Where a company has a share capital, every member has one vote in respect of each share held by them when voting on a written resolution
s288 CA 2006
Provides that resolutions to remove a director or auditor from office may not be passed by way of written resolutions
Post-Meeting
Dealing with documentation - RESOLUTIONS
- Copies of all resolutions must be sent to the Registrar Companies within 15 days
Post-Meeting
Dealing with documentation - SPECIAL RESOLUTIONS
- Must be filed as form part of the Constitution
ss17(B) and 29(1)(a)
AMENDED ARTICLES
Copies of amended articles must also be filed
s26(1) CA 2006
DIRECTORS
Will be responsible for updating the statutory books
Why is it important to follow the correct procedures?
Resolutions may be invalid.
Criminal Sanctions
248(3) and 4 CA 2006
If a company fails to record minutes of meetings in the relevant statutory books, every officer in default is liable to a fine,
Default rules governing LLP in absence of Membership Agreement
**s7 and 8 of LLP Act 2000*
* Share capital and profits equally
* LLP indemnify partners for payments and liabilities incurred in ordinary course of business
* Every member may take part in management
* No entitlement to renumeration
* Cannot assign membership without consent
* Majority rule in ordinary matters; change to nature of business requires unanimous consent.
* No power of expulsion unless separate Membership Agreement
