BLP (+ Tax) Flashcards
Different legal forms of business
sole trader
partnership
llp
private and unlisted public companies
key considerations when forming a business
x7
costs
risk
structure
formalities
privacy
finance
tax
principal differences between a private and public company
x9: name; min x3; secretary; AGM; trading; written; offer
name must end with
- private: limited/ltd
- public: public limited company/plc
min shareholders
- private: 1
- public: 1
min directors:
- private: 1
- public: 2
company secretary required?
- private: no
- public: yes
AGM required?
- private: no but able to
- public: yes
min share capital to be issued
- private: must have at lease one share (could be incorporate with one share of 1p)
- public: min of 50k (or prescribed euro amount)
certificates required before commencement of trading
- private: certificate of incorporation (can commence business as soon as is incorporated)
- public: certificate of incorporation AND cannot commence business until a trading certificate is issued by Registrar showing that the company’s allotted share capital is not less than the minimum
CA 2006 allows offer of shares to the public?
- private: prohibited
- public: permitted
use of written resolutions?
- private: permitted
- public: not permitted
two key principles of company law which make a company such an attractive business medium for many investors
separate legal personality + limited liability
separate legal personality: a company has a separate from that of its owner(s)
- a company becomes a legal person from the date of incorporation (date of issue of certificate of incorporation)
- from this date, the company has its own existence and personality
limited liability: shareholders’ liability for the company’s debts is limited
- compare with unincorporated models: a sole trader or partners in a partnership
partnerships – formation
traditional partnership is very easy to establish
no formality is required
“relationship between persons carrying on a business in common with a view to making a profit”
NOT a legal entity separate from the partners themselves
“firm”/”partnership” are nouns used to refer to the partners collectively
partnerships – liability of partners
contractual liability + tortious liability
contractual liability
- every partner in the firm is liable JOINTLY with the other partners for all the debts and obligations of the firm incurred while they ar a partner
tortious liability
- in tort, the partners’ liability is JOINT AND SEVERAL
partnerships – tax
the partners each individually pay income tax on their share of profits to HMRC
the partnership agreement
most partnerships will have some form of express written partnership agreement governing
usual min provision x13
- commencement and duration
- partnership name and place of business
- partnership property
- capital, profits and losses
- drawings, salary
- accounts
- dissolution of partnership
- duties, powers and restrictions on partners
– work input and roles; any limits on the authority of the partners
– partnership decision making
– incoming partners
– retirement/expulsions of existing partners
– non compete / other restrictions
limited liability partnerships (LLP)
corporate x6: personality + liability + CH + incorp/reg reqs + floating charge + insolvency law
partnership x4: no share/capital maintenance; no distinction members/partners; members agree x5 (profit, manage, decide, retire, ‘agreement’), tax transparent
corporate characteristics + partnerships characteristics
corporate characteristics x6
- separate legal personality
- limited liability for members
- incorporation and registration requirements
- requirement to file account at companies house
- can create a floating charge over the assets of LLP
- certain provisions of company law and corporate insolvency law apply to LLPs in modified form
partnerships characteristics x5
- no share capital or capital maintenance requirements
- no real distinction between members and management
- members can agree amongst themselves x5
– how to share profits
– management duties
– how decisions are to be made
– how new members are to be appointed
– what retirement provisions shall apply
- member’s agreement (if there is one) is private
- tax transparent
the company’s constitution
constitutional documents under
CA 1985: articles of association + memorandum
CA 2006: article of association
- memorandum only required as part of procedure to register company at Companies House
the company’s constitution – articles of association
x3
– all companies must have them
– they are the main constitutional documents
– purpose is to regulate the relationship between the shareholders, the directors and the company
nature of the contract binds the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions
company <–> articles (contract between the company and the members <–> members
formation of a company
incorporation from scratch + shelf company conversion
incorporation from scratch: by submitting relevant information to Companies House/online
shelf company conversion: purchase of shelf company followed by formalities to enable necessary changes
company decision making
directors + shareholders
directors
- decisions taken by board resolutions at board meetings (BMs)
- board resolution: each director has one vote
- board resolution are passed by simple majority unless the directors have agreed that a particular decision requires unanimity
shareholders
- two different types of shareholder resolution
1 - OR: passed by simple majority OVER 50% of the votes
2 - Special R: 75% OR MORE of the votes
- shareholder resolutions may be passed either at General meeting or in written resolutions – latter for private companies only
shareholder voting – show of hands and poll votes at GM
when shareholders vote on show of hands
- provided the share has voting rights under the Articles
- each shareholder who is present at the meeting will be entitled to one vote
- regardless of the number of shares held by that shareholder
when the shareholders vote on poll
- every shareholder has one vote in respect of each share hef by them
company meetings
BM + GM
BM
- who calls? any director
- notice? reasonable (= whatever notice is usual for the directors to give)
- quorum? 2 directors
- voting? board resolutions pass by majority vote
GM
- who calls? the board (at a BM)
- notice? 14 clear days or short notice
- quorum? 2 shareholders (or 1 for single member company)
- voting?
– OR: >50%
– SR: =/> 75%
company meetings – the GM sandwich
BM –> GM –> BM –> PMMs
where a shareholder vote is required for a certain transaction, is is necessary for the company to hold a series of meetings
a BM is first required to call the GM
a GM is then required for the shareholders to vote on the resolution
a further BM is then required to put into effect the outcome of the shareholder vote and
there may be post meeting matters to attend to such as filings at Companies House
the role of directors vs shareholders
directors
- manage the company on a day to day basis: on an agency basis
- powers derive from MA3 and MA5
- certain actions can only be taken by directors if the shareholders have given authority
- owe duties to the company
shareholders
- own the company
- are able to control key decisions through shareholder resolutions eg to give directors authority to change the articles, or name of the company
what is a director?
3 categories (can overlap)
1 – at law
- de jure
- de facto
- shadow
2 – in practice
- executive
- non executive
3 – the company’s articles may also provide for alternative directors
appointment of directors
governed by the Articles of the company
CA 2006 does not stipulate a procedure for the appointment of directors
companies with MA may appoint director
- by an OR of the shareholders
- by a decision of the directors
usually latter since easier
always check articles as these can set out an alternative procedure
the rights and remedies of shareholders – removal of a director by the shareholder
ultimate sanction by shareholders against a director
under CA 2006, a company (ie the shareholders) may by OR remove a director
NEVER written resolution so GM
special notice (28 days) required of resolution for board
board is not obliged to put resolution on agenda of a GM
if board fails to call a GM within 21 days, shareholders may call it themselves on normal notice
not possible for board to remove a director (unless articles provide for it)
directors who are also shareholders can vote in capacity as shareholder on OR to remove them AND may protect by Bushell v Faith clause into articles or entering into a shareholder’s agreement
a company may pay compensation to a director who leaves office – shareholder approval unless an exceptions apply
the general duties of director CA 2006
x7 duty to: within; success; independent; care; avoid; no benefit, declare interest
1 – act within powers
2 – promote success of the company for the benefit of the members as a whole
3 – exercise independent judgment
4 – exercise reasonable care, skill and diligence
5 – avoid conflict of interests
6 – not accept benefits from third parties
7 – declare any interest in a proposed transaction
transaction with directors
x3: long term; substantial; (quasi) loans/credit
3 types of transactions between the company and its directors (or people connected to them) which are regulated by CA 2006 and which require the approval of the company’s shareholders by OR, in order for the transaction to be valid
1 – director’s long-term service contracts
2 – substantial property transactions
3 – loans, quasi-loans and credit transactions
in these, there is a risk of conflict of interests so potential breach of duties
Director’s long-term service contracts
OR if <2 yrs (guarantee or terminate only specific)
no OR = void + reasonable notice
Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (s 188(2)(a) CA 2006).
The guaranteed term is the period during which the contract is to continue other than at the instance of the company where the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)).
In the absence of approval the term will be void and the contract deemed to terminate on reasonable notice (s 189).
Under s 188(6)(b) approval is not required by the members of any company which is a wholly owned subsidiary of another company.
If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval (s 188(2)(b)).
Where an ordinary resolution is required, a memorandum setting out the terms of the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the day of the meting and at the meeting itself (s188(5)(b))
Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.
Substantial property transactions
non-cash
before or conditional
sub: 5k + 10% or 100k
no OR approval of wholly owned but yes holding
Shareholder approval by ordinary resolution is required where there is an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
‘Substantial non-cash asset’ means an asset other than cash where the value is either: over £5,000 and 10% of the company’s net asset value; or over £100,000.
If the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR (s 190(2)).
Approval is not required by the members of any company which is a wholly-owned subsidiary of another company (s 190(4)(b)).
Loans, quasi-loans and credit transactions
private no w/ plc: OR
plc or private w/ plcs: not wholly but holding OR
For private limited companies which are not associated with a Plc, the only relevant provision is s 197 which provides that an ordinary resolution is required to approve loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors.
Plcs and private limited companies which are associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company / holding company; quasi-loans to, or credit transactions with, their directors / directors of a holding company / connected persons and guarantees or security in respect of any of these transactions (s 198 – 202).
Where the transaction is with a director of the holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
Approval is not required by the members of any company which is a wholly-owned subsidiary of another company.
Where an ordinary resolution is required to approve a loan / quasi-loan / credit transaction / guarantee or security, a memorandum setting out the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the date of the meeting and at the meeting itself.
Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.
Short notice GMs
90% + (or 95% articles not MA)
GMs may be called on less than the usual amount of short notice if sufficient members agree.
CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by a majority in number of the members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM.
This percentage may be increased to up to 95% by a provision in the company’s articles of association but there is no such provision in the MA.
Where companies have few shareholders, it is often possible for meetings to be held at short notice.
If all the shareholders are available at the time the directors decide to convene a GM, the following sequence of events may be possible. All of this can be done in well under an hour.
BM - Approve notice of GM and consent to short notice.
GM - Vote on resolutions set out in notice.
Reconvene BM - Directors authorise relevant action and PMM.
PMM - carried out.
Post-meeting — dealing with documentation
resolutions (copy) to Registrar of C: 15 days
amended articles + SR filed (+ OR re constitution)
update statutory books (secretary): eg register of members
Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days of their being passed.
All special resolutions must be filed as they form part of a company’s constitution (ss 17(b) and 29(1)(a) CA 2006), as do a few particular ordinary resolutions specified by the relevant provisions of the CA 2006.
Copies of any amended articles must also be filed (s 26(1) CA 2006), together with various company forms. The CA 2006 refers in numerous places (e.g. s 87(1) CA 2006) to requirements for notice of certain events and/or decisions to be given to the Registrar of Companies.
The directors will also be responsible for updating the statutory books, e.g. the registers of members and directors, and the BM and GM minute books. If the company has a company secretary he/she will update the statutory books.
the rights and remedies of shareholders
x6
membership rights – CA 2006
shareholder agreements
shareholder rights under CA 2006
the removal of directors CA 2006
unfair prejudice actions CA 2006
just and equitable winding up Insolvency Act 1986
the rights and remedies of shareholders – derivative claims
by member in/for company re proposal/actual/omit due to director
2 stages: prima facie + consider
claim initiated by a MEMBER of a company rather than by the company itself
a) in respect of a CAUSE OF ACTION VESTED IN THE COMPANY and
b) seeking relief ON BEHALF OF COMPANY
a claim may be brought in respect of a cause of action from an ACTUAL or PROPOSED act or OMISSION involving negligence, default, breach of duty or breach of trust by DIRECTOR of the company
2 stage approval for derivate claim
1 – court decides if there exists a prima facie case
2 – detailed consideration of criteria, including evidence from other members; case the proceeds to trial
any remedy is granted on behalf of the company and not the shareholder who brought the claim
the rights and remedies of shareholders – unfair prejudice
personal action by shareholder against company
remedy: buy shares back
CA 2006 allows a member to bring an action on the grounds that the company is being run in such a way that they have suffered unfair prejudice
Any shareholder can bring an unfair prejudice claim under s 994 CA 2006 on the grounds that the running of the company has unfairly prejudiced them.
A claim under s 994 CA 2006 is a personal action brought by the shareholder against the company.
The various orders for relief are set out in s 996 CA 2006 and the most common order would be that the other shareholders or the company buy the claimant shareholders’ shares from them.
the rights and remedies of shareholders – just/equitable winding up
IA 1986: the right for a disgruntled shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so
equity finance
the rights attached to a class of shares are determined in the company’s articles
ordinary shares
redeemable shares
preference shares
non-voting shares
employees’ shares
cumulative shares
convertible shares
deferred shares
allotment, transfer and transmission of shares
allot: company to (new) shareholder
transfer: between shareholders (x4)
- sale or gift
- transferor gives signed stock transfer form + share certificate
- check articles for restrictions eg pre-emption rights
- stamp duty: 0.5% tax when >1000
an ALLOTMENT of shares is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price
allotment: company –> shareholder A
a TRANSFER is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is NOT a party to the contract on a transfer of shares (with the exception of a sale out of treasury shares)
transfer: shareholder A <–> shareholder B
A company can allot new shares or existing shares can transfer between shareholders by sale or gift.
Private limited companies are prohibited from offering shares to the public.
When a shareholder is seeking to transfer shares, the Articles must always be checked to ensure there are no restrictions on transfer or pre-emption rights.
Transfer of shares is effected by the transferor signing a stock transfer form and giving this to the transferee together with the share certificate.
Stamp duty is payable on transfer of shares at 0.5% (min payment £5) where sale price > £1,000.
Transmission of shares is an automatic process in the event of death or bankruptcy of a shareholder.
the procedure for allotment of shares
x6: CAP; authority; ES?; new; BR; admin
1 – check if there is a CAP on the amount of shares that can be issued by the company
2 – check if company directors needs AUTHORITY to allot shares
3 – EQUITY SECURITIES? look at capital and dividend payout on the shares
– if BOTH are capped, the share is NOT an equity security so no pre-emption rights
– if equity securities: disapply pre-emption rights?
4 – is company creating a new class of share? if so, the articles will need be amended (SR) to incorporate new class of shares
5 – BR to allot shares (always required regardless of other steps)
6 – administrative matters (fillings at companies house and updating company registers)
STEP 1: Any cap on the number of shares that may be issued?
How can the cap be removed?
CA 1985: OR
CA 2006: MA = N/A but if Articles = SR
The requirement for a company to have an ASC no longer exists under CA 2006.
Companies incorporated under CA 2006 will not have an authorised share capital and shareholders wishing to impose a cap to restrict the number of shares which such a company can issue will need to amend the Articles (by special resolution) to include suitable provisions.
For companies incorporated under CA 1985, shareholders wishing to remove or amend the deemed restriction in a company’s Articles may do so byordinary resolution. This is despite the fact that removing such a deemed restriction involves changing the Articles, which would normally require a special resolution under s 21(1) CA 2006.
Any such deemed restriction will also fall away due to the company adopting, wholesale, new Articles (eg MA) which do not include provision for any cap (applying s 21(1) CA 2006).
Companies incorporated under CA 2006will not have an authorised share capital. For such companies, therefore, there will be no bar to issuing shares under step 1.
The only exception would be if the company has placed a provision in its Articles limiting the number of shares that may be issued. If such a restriction exists, it can be removed, or the limit increased, byspecial resolutionunder s 21(1) CA 2006.
Per s617(2)(a) CA 2006, each time a company issues shares, its share capital increases automatically.
STEP 2: Do the company’s directors need authority to allot?
private + one class of share = automatic unless CA 1985 = OR
other companies: OR + restrictions + valid?
CA 2006 provides that the directors of a company must not exercise any power of the company to allot shares in the company except:
for private companies with only one class of shares in existence, directors have automatic authority to allot new shares of the same class (unless prohibited by Articles) but CA 1985 = OR.
or
for all other companies, the directors will need to be granted authority to allot the new shares by the shareholders by way of ordinary resolution.
– Authority to allot under s 551(1) CA 2006 can only be given subject to limits in terms of both time and number of shares (s 551(3) CA 2006).
–This means that if the company has already granted its directors a s 551(1) CA 2006 authority, it must be checked to ensure it is still valid.
STEP 3: Must pre-emption rights be disapplied on allotment?
offer to shareholders proportionally or disapply by SR
Any new ‘equity securities’ (defined ins 560 CA 2006) must be offered to the existing shareholders of a company (holding ordinary shares), in proportion to their existing shareholdings, before they can be offered to anyone outside the company.
Where pre-emption rights apply, the most usual approach is for the company to request the existing shareholders to disapply these pre-emption rights byspecial resolution.
STEP 4: Must new class rights be created for the shares?
if yes then SR to amend articles
In order to create a new class of shares, it is necessary for the company, in addition to taking some or all of the steps set out previously, to insert new provisions in its Articles dealing with the rights attached to those new shares.
An alteration to the Articles, you will recall, requires aspecial resolutionof the shareholders under s 21 CA 2006 (except if removing a cap transferred from a company’s authorised share capital in its memorandum).
