3. Company Law 4. AML and CTF Flashcards
3.1 What is a scheme of arrangement?
A statutory procedure allowed for under Part 26 of the Companies Act 2006, whereby a company makes a compromise arrangement with its shareholders and/or creditors, allowing it to restructure itself
3.1. What is the key difference between a part 26 and a part 26A plan?
A part 26A plan can be sanctioned even when there is a dissenting class of creditors or members
Part 26A focuses more closely on companies in significant financial difficulty
3.1 What purposes can a scheme of arrangement be used for? (8)
- Acquiring a company or business
- Merging two or more companies or businesses
- Acquiring shares owned by minority investors
- Restructuring a business (such as creating a new holding company)
- A management buy-out/in of a company
- Demerging/splitting a company into separate entities
- Reconstructing a group into two or more separate companies
- Effecting a moratorium among a company’s creditors (eg, an agreement to postpone payments to them)
3.1.1 What are the 3 main stages for a scheme of arrangement?
- Explanatory Statement - dispatched to shareholders and creditors
- Members’ and creditors’ meetings - the proposal must be approved by a majority in number, and 75% in value, of those present/proxies
- Court Approval
3.1.1 How soon after a scheme is sanctioned by court must a copy of the court order be filed with the Registrar of Companies?
7 days
3.2.1 What are the squeeze-out rights?
Provided in Section 979 of the Act
Where a bidder has offered to acquire all of the shares in a company not currently held by them, and has acquired or agreed to acquire both 90% of the shares to which the offer is related and 90% of the voting rights attached to the shares, the bidder may oblige the shareholders to sell any remaining shares to them, and at the price in the original takeover
3.2.1 How far in advance must a bidder give shareholders notice that they wish to exercise squeeze-out rights?
Within 3 months of the last date on which the offer can be accepted, or within 6 months of the date of the offer if earlier
3.2.1 What are the sell-out rights?
Provided in Section 983 of the Act
Allow that where the bidder has acquired or contracted to acquire at least 90% in value of all of the shares in the target company, those shareholders who did not accept the offer have the right to oblige the bidder to acquire their shares
3.2.1 Within what time-frame must sell-out rights be exercised?
Within three months from either:
a) the end of the period within which the offer can be accepted
b) the date of the notice to shareholders informing them of their right to exercise their sell-out rights;
whichever is the later
3.2.2 What are pre-emption rights?
Section 561 of the Act
Whenever a company issues new equity shares wholly in exchange for cash, it must offer the shares in the first instance to their existing shareholders, pro rata to their existing shareholdings.
essentially allows shareholders to protect their proportion of total equity in a company when new shares are issued
only applies for issue of new shares in exchange for cash, not in share-for-share acquisition
Private companies may exclude pre-emption rights from their Articles of Association, but public companies may not
3.2.2 How long must shareholders be allowed at minimum to accept the offer of new shares?
Under Section 562
No less than 14 days
3.4.1 Under which circumstances can the Department of Business & Trade (DBT) investigate a company’s affairs? (4)
- The company may have been conducting its affairs with intent to defraud creditors, or in a manner prejudicial to members, or for unlawful or fraudulent purposes
- Promoters or managers may be guilty of fraud or any other act of misconduct
- The company has failed to provide proper information to the members
- The company was formed for any fraudulent or unlawful purpose or engaged in prejudicial acts
3.4.3 What powers does the secretary of state for DBT have? (3)
- Give directions to an inspector as to the subject matter to be investigated (e.g. the area of operation, specific transactions, or a period of time)
- Terminate an investigation when criminal offence matters have been passed to a prosecuting authority
- Set requirements for the contents and time limit of the inspector’s report
3.5 What is classified as Financial Assistance? (3)
Sections 678-680 of the Companies Act prohibit a public company, or its subsidiary, from directly or indirectly giving financial assistance to a third party for the purchase of its own shares, or to reduce or discharge a liability incurred by a purchaser or a third party for the purpose of acquisition
- A gift
- Provision of a guarantee, security, indemnity, release or waiver
- Any other form of assistance whereby the company’s net assets are reduced to a material extent
3.5 What is the possible penalty for the use of Financial Assistance?
- Any financial assistance is void and therefore any contracts have no legal effect
- The company and its officers may be liable to a fine and/or two years’ imprisonment on conviction in the Crown Court
- Directors initiating are in breach of their duties and therefore liable to the company for any losses
3.5.1 What are the exceptions for the use of financial assistance? (4)
- The principal purpose of the transaction is not the provision of financial assistance
- The financial assistance is an incidental part of a larger purpose
- The assistance is lending in the ordinary course of the company’s business
- A loan is made to employees as part of an employee share scheme
3.5.1 What are the possible punishments for a person found guilty of providing unauthorised Financial Assistance?
- On conviction or indictment, to imprisonment for a period not exceeding two years and/or to a fine
- On conviction, to imprisonment for a period not exceeding 12 months or to a fine not exceeding the statutory amount (£5000)
3.6.1 What time frame must public companies hold an AGM?
Private companies do not have to hold an AGM unless provided for in their articles
Within 6 months of the financial year’s end
3.6.1 What is the notice period required for an AGM of a public and a private company?
Public Company - 21 calendar days
Private Company - 14 days
3.6.1 What is the minimum notice period for GMs for listed companies?
Companies Act Section 307, listed on UK-regulated markets such as the LSE Main Market, but excluding AIM and Aquis Exchange Growth
21 calendar days, but this may be reduced to 14 days if shareholders pass a resolution at their AGM each year, and the company allows shareholders to vote via electronic means
3.6.1 What is the minimum notice period for GMs for non-listed companies?
14 calendar days
GMs of public companies may be held at shorter notice providing shareholder representing 95% of voting rights agree to the notice period, 90% for private companies
3.6.2 How long do directors have to convene a GM if they receive a S.303 request?
They must call the meeting within 21 days from the date of receipt of the notice, and it must be held no more than 28 days from the notice convening the meeting
If this is not fulfilled, S.305 states that the shareholders who requested the meeting (or any of them representing more than 50% of the total rights of those shareholders) may call the meeting, and are entitled to be reimbursed their reasonable expenses in relation to this
3.6.3 What is an ordinary resolution?
- Require only a simple majority (>50%) of votes cast
may be required in the approval of annual financial statements, appointment and removal of auditors, appointment and removal of directors and approval of a dividend
3.6.3 What is a special resolution?
- Requires a 75% majority of votes cast
examples include resolutions for changing a company’s name, waiving pre-emption rights, de-listing a public company, share buy-backs, changes to the Articles of Association and voluntary winding-up (liquidation) of a company
3.6.3 What non-director shareholders can propose resolutions? (2)
- shareholders representing at least 5% of voting rights
- at least 100 shareholders holding at least £100 paid-up shares each
The costs of circulating the notice of this resolution must be paid by the requesting members unless notice is given before the end of the previous financial year
The shareholders above may require the company to circulate to all shareholders a statement, of not more than 1000 words, regarding a matter to be dealt with at a meeting, or a matter referred to in a proposed resolution to be dealt with at that meeting
3.6.4 What is a quorum?
Two members unless otherwise stated in the company’s Articles
3.6.5 What are Sections 994-8 of the Act?
A shareholder may petition the court if they consider that the company’s affairs are being conducted in a way that is unfairly prejudicial to the interest of some or all of the shareholders, or that it is proposing some prejudicial act or omission
If the court is satisfied that the petition is well founded, it may take steps to regulate the company’s affairs in the future, or require the company to take steps to remedy the matter or matters complained of
3.7 What is S.793 of the Act?
Provides a public company (listed or unlisted) with the power to issue a notice to a person who it knows, or has reasonable cause to believe, has an interest in its shares or has had an interest in the previous three years directly or through concert parties
The notice requires shareholders to disclose if they have an interest and to provide information about their interest if they do
If a shareholder has sold their shares within the last 3 years, they must disclose who they were sold to, the date of the txn, and the broker used (if applicable)
3.7 What are the penalties of failing to respond to a S.793 in time?
This enables companies to disenfranchise (i.e. remove the voting/dividend rights of) defaulting shareholders
3.7 What are the penalties of a shareholder providing false info to a S.793?
They are liable to:
- Maximum of two years in jail on conviction
- and/or an unlimited fine
- company may seek court orders imposing restrictions on transfer, voting, and the payment of dividends
Only the company secretary may send out the enquiry notices (rather than shareholders or third parties)
- on conviction, to imprisonment for a period not exceeding 12 months or to a fine not exceeding the statutory amount (£5000)
3.8 What are the requirements to be a public limited company (plc)? (4)
- a minimum of two shareholders
- a minimum issued share capital of £50,000 on which all the share premium, and at least 25% of the nominal value, have been paid up
- have a memorandum of association which states that it is a public company
- be correctly registered as a public limited company
Such companies must have ‘plc’ or ‘public limited company’ at the end of their names
3.8 What are public companies allowed to do? (2)
- Sell shares to the public
- Apply to the FCA for listing or for admission to another market, such as AIM
A public company does not have to be listed
3.8 What are private companies allowed to do? (1)
- They may place restrictions on who may be a shareholder
they must have either ‘ltd’ or ‘limited’ at the end of their names
they require a min of one member/shareholder
3.8.1 What is the memorandum of association?
- external rulebook of the company, governing its relationship with the outside world
Must state:
- the name of the company
- whether the company has a share capital or not
- that each of the subscribers listed wish to form a company and has agreed to become a member
3.8.1 What are the articles of association?
- internal rulebook of the company governing the relationship between the company and its members (shareholders)
There are standard terms for articles contained in the Companies (Model Articles) Regulations 2008, but each company can create its own rules.
The model articles can be found on the Companies House website
Once established, the provisions are binding on the shareholders in their relationship with the company and with each other. They may only be altered on the passing of a special resolution in a GM
The articles typically include:
- the company’s name and form
- details of each class of shares, including voting, redemption, and distribution rights
- provisions for GMs, including resolutions, notice, short notice, quorum, and chair
- directors’ reqs, including meetings and maintenance of registers
- actions that are permitted or prohibited for the company and its directors, such as pre-emption rights, transfer restrictions, borrowings and trading activities
3.8.2 What are the penalties for a private company selling securities to the public?
The company and its officers are liable to fines for a breach of S.755
The allotment will still be valid
Pvt companies can only issue shares to people known to them, such as employees, pvt investors, or family members
An exception to this rule is if a pvt company commits to re-register as a public company within six months of the date the shares are issues
3.8.2 What are the conditions for a pvt company to be re-registered as a public company, under S.90?
- A special resolution to re-register is passed
- It meets the reqs to be a public company set out previously
- it has not previously been re-registered as unlimited
- it makes the necessary changes to its name and articles to comply with the provisions for public companies
- it obtains a balance sheet, dated no earlier than 7 months before the application to re-register as a public company, including both an unqualified audit report and a written statement from the company’s auditor that the amount of the company’s net assets at the balance sheet date was not less than the aggregate of its called-up share capital and undistributable reserves
- there was no change in the financial position of the company between the balance sheet date and the date of application for re-reg, which changes this position
3.8.2 Who must the application for re-reg be made to?
Applications for re-reg must be made to the Registrar of Companies, accompanied by copies of the special resolution, amended articles, balance sheet, and statements referred to above, together with a statement that the reqs for re-reg as a public company have been complied with
3.9 What are the main duties of directors (and shadow directors) according to S.170-175?
- A director of a company must act in accordance with the company’s constitution and only exercise powers for the purpose for which they are conferred
- Directors must act in the way they consider, in good faith, is most likely to promote the success of the company for the benefit of its shareholders as a whole, having regard for:
- the long-term consequences
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers, and others
- the impact of the company’s operations on the community and environment
- the company’s reputation for high standards of business conduct
- the need to act fairly
- Directors should exercise independent judgement
- Directors should exercise such care, skill and diligence as might reasonably be expected from a person with the general knowledge, skill and experience that might reasonably be expected from a person carrying out those functions, and the general knowledge, skill and experience that the director actually has
- Directors have a duty to avoid conflicts of interest
- A director must not accept benefits from a third party
- The director has a duty to declare interest in any proposed transaction or arrangement with the company. This includes a duty not to profit personally and depriving the company of a business opportunity
- What is ‘criminal property’?
Property which an alleged offender knows or suspects constitutes or represents benefit from any criminal product
- What is ‘criminal conduct’?
The conduct undertaken by an individual that has resulted in an offence.
With regards to money laundering, it would be accepting money that the individual knew was derived from criminal activity and the attempt to launder it to make it appear ‘clean’ or legitimate money
- What are the 3 stages to a successful ML operation?
- Placement
- Layering
- Integration
- What is Placement?
Introduction of the money into the financial system; typically, this involves placing the criminally derived cash into a bank or building society account, a bureau de change, or any other type of enterprise which can accept cash, such as a casino
- What is Layering?
Involves moving the money around in order to make it difficult for the authorities to link the placed funds with the ultimate bene of the money. This may involve buying and selling international currencies, shares, or bonds in rapid succession, investing in CISs, or insurance-based investment products, as well as high-value physical items such as cars or jewellery, or moving the money from one country to another
- What is Integration?
At this final stage, the layering has been successful, and the ultimate bene appears to be holding legitimate funds and/or assets (clean money rather than dirty money). The money is regarded as integrated into the legitimate financial system
4.1.1 Which acts provide the primary legislation for AML? (4)
And the secondary legislation?
- Proceeds of Crime Act 2002 (POCA)
- Serious Organised Crime and Police Act 2005 (SOCPA)
- Counter-terrorism Act 2008 (CTA)(Schedule 7)
- Terrorism Act 2000 (TA)
Secondary is provided in:
the Money Laundering Regulations 2017
- this gave effect to the Fourth Money Laundering Directive (4MLD)
The Money Laundering and Terrorist Financing (amendment) Regulations 2019
- this gave effect to the Fifth Money Laundering Directive (5MLD)
The Joint Money Laundering Steering Group (JMLSG) guidance provides guidance on how to implement the reqs of the ML regulations
4.1.1 What is the Proceeds of Crime Act (POCA)?
Specifies that money laundering relates to criminal property - that is, any benefit (monetary or otherwise) that has arisen from criminal activity
The broad req is for firms to report suspicions of money laundering to the authorities
4.1.1 What is The Serious Organised Crime and Police Act 2005 (SOCPA)?
Act amended certain section of POCA
POCA created the ‘Spanish Bullfighter’ problem, i.e. Bullfighting is illegal in the UK but not in Spain, meaning an FI should arguably regard deposits made by a Spanish Bullfighter as proceeds of crime, even though it is legit business in Spain
SOCPA allows alleged offenders to defend themselves if they believe their activity was not illegal in the country it was performed.
The Secretary of State has reserved the right to still deem certain offences as ‘relevant criminal conduct’ which may be legal where they occurred i.e. the Govt may specify serious tax evasion or drug cultivation as types of criminal conduct as activities which need to be reported despite occurring overseas
