3 - Formation of a Company

Question 1

What key constitutional documents must a company have?

Answer 1

Under the reformed CA 2006, only the Articles of Association are required (s 18 CA 2006).

The Memorandum is now just a declaration that subscribers wish to form a company and agree to become members. It no longer forms part of the company’s constitution - it is only required as part of the procedure to register at Companies House.

Question 2

What is a memorandum?

Answer 2

Under CA 1985:
Part of the company’s constitution and included an objects clause, which limited the company’s purpose.
Ultra vires rule: Acting outside the objects clause was considered acting “ultra vires,” meaning beyond the company’s capacity.
For CA 1985 companies, s 28 CA 2006 treats the memorandum provisions as part of the Articles.

Under CA 2006:
Purpose: A statement by the first subscribers (members) declaring their wish to form a company and become its members (s 8 CA 2006).
Objects clause: Companies formed under CA 2006 have unrestricted objects unless specifically restricted in their Articles (s 31 CA 2006).

Question 3

What are Articles of Association?

Answer 3

The primary constitutional document under CA 2006. They govern the relationship between shareholders, directors, and the company.

Key provisions often include:
- Quorum and decision-making for board meetings.
- Appointment and powers of directors.
- Procedures for shareholder meetings.
- Share transfer rules and any rights attaching to shares.
- How board meetings are to be conducted.
- How and to whom shareholders may transfer their shares.

Question 4

How does CA 2006 interact with a company’s Articles?

Answer 4

Legality Test: Articles must comply with CA 2006, meaning that the minimum standards of CA 2006 must be followed.

Overrides: Some provisions of CA 2006 override Articles (e.g., the right to demand a poll vote at a general meeting, s 321 CA 2006).

Onerous provisions: Companies may have more onerous requirements in their Articles than CA 2006 (e.g., requiring more than one director pursuant to, s 154(1) CA 2006).

Default powers: If Articles are silent, CA 2006 provides default rules (e.g., issuing redeemable shares).

Question 5

What forms can a company’s Articles take under CA 2006?

Answer 5

1. Model Articles (MA): The default Articles if none are registered (s 20(1) CA 2006). Different versions exist for private and public companies.
2. Amended MA: Companies can adopt the MA but modify or exclude certain provisions.
3. Tailor-made Articles: Custom-drafted Articles for specific needs, though costly and time-consuming.

Question 6

How can a company amend its Articles?

Answer 6

Special resolution is required to amend Articles (s 21(1) CA 2006).
The alteration must be bona fide in the company’s interest as a whole.

Entrenched provisions (s 22 CA 2006): These can only be amended or repealed if specific conditions are met but can always be changed with unanimous member consent or a court order.

Question 7

What is the legal effect of the Articles?

Answer 7

• The Articles form a contract between the company and its members, as well as between the members themselves (s 33(1) CA 2006). Members will only be able to enforce provisions contained in the Articles against other members through the company itself.
• The Articles bind members in their capacity as members, not in any other capacity (e.g., as employees or creditors).

Question 8

How can Articles be enforced between the company and its members?

Answer 8

• Members can enforce rights (e.g., voting rights, dividends) outlined in the Articles under s 33(1) CA 2006.
• The courts may grant an injunction if the company breaches member rights under the Articles.
• Members must comply with the Articles when acting in their capacity as members.

Question 9

Can members enforce rights against each other under the Articles?

Answer 9

• Generally, members cannot enforce provisions against each other directly through the Articles.
• To enforce rights between members, a shareholders’ agreement is recommended, which acts as a private contract between members.

Question 10

What are the two main ways that a company can be incorporated?

Answer 10

Incorporation from scratch: Submitting relevant information to Companies House or online.

Shelf company conversion: Purchasing a shelf company and making necessary changes to conduct business.

Question 11

How is a company incorporated from scratch?

Answer 11

The following must be delivered to Companies House (s9 CA 2006):
- Company’s memorandum.
- Articles (if not using Model Articles).
- Fee (higher for same-day incorporation).

Form IN01 containing:
- Proposed name, registered office (appropriate address, i.e., delivering post here would mean it is likely to come to the attention of the person acting on behalf of the company, so a PO Box cannot be used), email (added by ECCTA in 2024).
- Private or public status.
- Limited by shares or guarantee.
- Statement of capital and initial shareholdings, or if it is to be limited by guarantee, details must be given of the guarantee (s10-11).
- Proposed officers and persons with significant control (s12, s790).
- Statement of compliance (s13).
- Statement of lawful purpose (added by ECCTA in 2024), i.e., a statement that the subscribers are forming the company for lawful purposes.

Question 12

What happens once the Registrar of Companies has approved the application for incorporation of a company?

Answer 12

A certificate of incorporation is issued, stating:

• The name of the company (which may be changed later).
• The company’s registered number (which does not change).
• The date of incorporation.

The company becomes a legal entity (s16(3)) from the date on the certificate (s15 CA 2006). The date of incorporation is set out in the certificate of incorporation (s 15 CA 2006).

Question 13

How is a company incorporated by converting a shelf company?

Answer 13

A shelf company is one that has been set up in advance by a company registration agent or law stationer. Many firms of solicitors also operate an in-house service that sets up shelf companies for sale to clients.

It is likely that the client will have to make some, or all, of the following changes (amongst others) to the shelf company to meet their requirements:
- Name change (s77(1) CA 2006) via special resolution or directors’ decision. File Form NM01 at Companies House with the special resolution passed to change the name and the fee. The new name will be effective once the Registrar of Companies issues a new certificate of incorporation is issued.
- Registered office change to an “appropriate address” (s87(1) CA 2006). File Form AD01 at Companies House. Approved by Board resolution in a Board Meeting.
- It is common for a shelf company to have been incorporated with MA (though some firms and registration agents incorporate their shelf companies with a different form of Articles drafted in-house). Articles may need amending by special resolution (s21(1) CA 2006). The amended Articles and SR need to be filed at Companies House.

Members, directors, and secretary changes:
- Transfer shares using a stock transfer form. The client becomes the shareholder once it is entered on the register of members. Approved by Board Resolution in a BM.
- Appoint new directors (Form AP01) and secretary (Form AP03), and file these changes at Companies House. Approved by Board Resolution in a BM.
- Resign old directors (Form TM01) and secretary (Form TM02). Can do this by BR. Ensure at least one director at all times to be compliant with CA 2006. Letter accepted by BR in a BM.

Question 14

What legal considerations apply to a company name?

Answer 14

• Must not be offensive (s53(b) CA 2006).
• Must end in Limited/Ltd (for private limited companies, s59 CA 2006).
• Must not be the same as another company (s66 CA 2006).
• Requires approval if it suggests a connection with government or contains sensitive words (s54-55 CA 2006).

ECCTA adds restrictions, amending CA 2006, prohibiting names that:
- In the opinion of the secretary of state, is intended to facilitate offences of honesty or deception (s53A CA 2006).
- Suggest connection with foreign government (s56A).
- Contain computer code (s57A).
- Have previously been directed to change (ss57B, 57C).
- Mislead about activities (s76).
- Are used for criminal activities (s76A). - New names are effective from the date of the certificate of incorporation on name change (s81(1) CA 2006).
- Once a company has chosen its name and had it registered, it has an obligation to display it in certain prescribed locations (s 82 CA 2006).

Question 15

What are the key post-incorporation steps?

Answer 15

• Chairperson: Decide on a chairperson and whether they have a casting vote (MA 13) in the event of a tied board resolution. Amend Articles if needed (s21).
• Accounting reference date: Default is the last day of the incorporation month (s391(4)). File Form AA01 to change at CH. Often companies will change this to align with their financial year.
• Auditor: Appoint to prepare annual accounts (s394). Will usually need to appoint an auditor by Board resolution if company has MA.
• Tax registrations: Register for corporation tax, VAT, PAYE, and National Insurance.
• Shareholder agreement: This is a private contract between the shareholders. Optional but may be useful.

Question 16

What is the legal effect of pre-incorporation contracts under s51 CA 2006?

Answer 16

• Pre-incorporation contracts are personal contracts of the person acting for the company (the promoter), who is personally liable.
• The company, once incorporated, has no rights or obligations under the contract unless it is novated.
• The company cannot ratify a contract made before its existence.

Question 17

Who is responsible for company decision-making, and how is authority typically delegated?

Answer 17

The directors are responsible for day-to-day company decisions, acting in accordance with the company’s Articles.

Specific authority may be delegated to individual directors or committees for certain transactions. Some matters, like amending the Articles or making a loan to a director, require shareholder approval through resolutions.

Question 18

How are decisions made by the board of directors?

Answer 18

• Board decisions are made through Board Resolutions passed at Board Meetings (BMs).
• Each director has one vote, and resolutions are generally passed by a simple majority (MA 7).
• Unanimous decisions can be required if directors agree (MA 8).
• Directors may also pass written resolutions without meeting in person if all agree, saving time.

Question 19

How do shareholders make decisions, and how are shareholder resolutions passed?

Answer 19

Shareholders make decisions by passing resolutions either at a General Meeting (GM) or, in private companies, by a written resolution under s 288 CA 2006.

Resolutions require either:

• An Ordinary Resolution, passed by a simple majority (more than 50% of votes)
• A Special Resolution, passed by a 75% or greater majority of votes

The type of resolution required depends on the Companies Act 2006 or the company’s Articles.

Question 20

How do shareholders vote at General Meetings, and what is the difference between a show of hands and a poll vote?

Answer 20

Shareholders may vote on a resolution via:

• Show of hands: Each shareholder present gets one vote, regardless of how many shares they hold (s 284(2)).
• Poll vote: Shareholders get one vote for each share they own (s 284(3)). A poll can be demanded in certain circumstances (e.g., where shareholders’ holdings differ significantly), affecting the outcome.

Shareholders may also appoint proxies to vote on their behalf (s 324 CA 2006).

A corporate representative is someone who is representing a legal entity, for example if the parent company is the sole shareholder of the subsidiary, it can elect a corporate representative.

Question 21

Who can demand a poll vote under the Model Articles, and when can a poll vote be requested?

Answer 21

Under MA 44, a poll on a resolution can be demanded before a vote or after a show of hands. Those entitled to demand a poll include:

• The chairperson of the meeting
• The directors
• Two or more shareholders with voting rights
• Any shareholder(s) holding at least 10% of the total voting rights

A poll is significant when shareholders hold different percentages of shares, as it ensures that voting power corresponds to share ownership.

Question 22

What are the rules for written resolutions in private companies under the Companies Act 2006?

Answer 22

Only private companies can pass shareholder resolutions in writing (s 281 CA 2006). Voting in a written resolution is based on shareholding (s 284(1) CA 2006).

Written resolutions can be:

• Ordinary Resolution: Passed by a simple majority, more than 50% (s 282(2)).
• Special Resolution: Must state it is special and passed by at least 75% of eligible members (s 283(2)-(3)).

Certain decisions (e.g., removal of a director or auditor) cannot be passed by written resolution (s 288(2) CA 2006).

Question 23

What are the key requirements for a valid board meeting (BM)?

Answer 23

Who calls the meeting? Any director may call a BM or require the company secretary to do so (MA 9).

Notice: Reasonable notice must be given (Browne v La Trinidad).
Customary notice for the directors may vary depending on their usual practice.

Quorum: At least two directors must be present unless Articles state otherwise (MA 11(2)).

Voting: Decisions are made by a majority on a show of hands, with each director having one vote. The chair may have a casting vote to prevent deadlock (MA 7(1) & MA 13).

Question 24

What are the essential requirements for a general meeting (GM)?

Answer 24

Who calls the meeting? The board typically convenes a GM.

Notice: 14 clear days’ notice is required for a private company (s307(1) CA 2006). Clear days exclude the day notice is given and the meeting day (s360(1) CA 2006).

Quorum: Two shareholders are required, or one in a single-member company (s318 CA 2006).

Voting: Shareholders vote by show of hands or by poll (s284 CA 2006).

Question 25

What is the GM sandwich, and when is it used?

Answer 25

Where a shareholder vote is required for a certain transaction, it is therefore necessary for the company to hold a series of meetings.

The GM sandwich refers to the process where:

1. BM1: The board meets to call the GM and approve the form of notice.
2. GM: The shareholders meet to vote on the resolutions.
3. BM2: The board reconvenes to implement the outcome of the GM.
4. Post-Meeting Matters (PMMs): Filings and internal record updates are handled.

This sequence ensures proper decision-making where shareholder approval is needed.

Question 26

What is the sequence for a GM held with full notice?

Answer 26

1. BM1: Held with reasonable notice to call the GM, approve the notice, and authorise its circulation.
2. GM: Held at least 14 clear days after BM1. Does not include the day that the notice is sent out and the day of the meeting itself.
3. BM2: Held with reasonable notice to decide on actions post-GM.
4. PMMs: Filings at Companies House, update of records.

Question 27

How can the notice period for a GM be shortened?

Answer 27

A GM may be called on short notice if agreed to by a majority of members (in number), also holding at least 90% of the nominal share value (s307(5) CA 2006). The articles may increase this to up to 95%, but not in Model Articles.

Question 28

What is the sequence for a GM held on short notice?

Answer 28

1. BM: Held to call the GM and approve the notice and consent form for short notice. Meeting adjourned.
2. GM: Held immediately after adjournment if consent for short notice is obtained.
3. BM (reconvened): Directors are informed of the voting outcome, and actions are authorised.
4. PMMs: Filing and records updates.

Question 29

What is the procedure for passing a written resolution?

Answer 29

A written resolution (WR) can be proposed by directors or members of a private company.

It requires a majority of eligible members to signify agreement. For a company with Model Articles, a WR lapses after 28 days (s 288-300 CA 2006).

Question 30

What are the two options for passing a written resolution?

Answer 30

Option 1:
1. BM1 (adjourned): Held to approve and circulate the WR.
2. WR approval: If shareholders are present, they vote immediately after adjournment.
3. BM1 (reconvened): Directors are informed of the voting outcome.
4. PMMs.

Option 2:
1. BM1: WR is circulated if shareholders are not present.
2. BM2: Held after the WR passes or lapses.
3. PMMs.

Question 31

What are the key post-meeting matters after a GM or WR?

Answer 31

Internal: Minutes of all meetings must be kept for 10 years. Statutory books must be updated.

Filing at Companies House: All special resolutions and certain ordinary resolutions (e.g., authority to allot shares) must be filed.

Record keeping: Documents like directors’ service contracts must be kept at the registered office.

Question 32

What should be considered in company meeting procedures?

Answer 32

1. Who transacts the business? Board or shareholders?
2. Call: Who calls the meeting and how?
3. Notice: How much notice is required, and to whom?
4. Quorum: What is the quorum for valid business?
5. Agenda: Is the agenda correct and clear?
6. Voting: Who votes, and how?
7. Post-Meeting: What documentation needs to be processed after the meeting?