Chapter 18 Company law: the basics Flashcards
18.2 The creation of a company
Companies incorporated in the UK is UK resident for tax purposes. To incorporate a company, you must carry out the formalities and deliver documents to the registrar of companies as required by law and also paying the companies house requisite fee. A memorandum of association must also be submitted, this is a document signed by the company’s initial shareholders stating they wish to form a company and become members. The application for registration must contain details of:
• The name of the company. Special permission has to be granted for a company likely to suggest a connection with the government and contain other words listed in statute. An existing company can challenge the use of a name by legal action
• The address of the company’s registered office.
• Whether the company is an unlimited or limited company and if limited whether it is limited by shares or guarantee
• That the company is a public or private company
• Whether the company wishes to maintain its statutory registers only at company’s house (only for private companies)
• At least one standard industrial classification describing the nature of the main business
A statement of capital or a statement of guarantee also need to be submitted, this must detail:
• the total number and nominal value of shares issued by the company
• the name of each share class
• the rights attached to each and the currency in which the shares are denominated
• the total amount unpaid on the company’s issued shares
other documents to be submitted on incorporation of a private company are:
• a statement of proposed offers, the first directors and the company secretary
• a statement of initial significant control providing details of all persons with more than 25% of shares or voting rights
• a statement of compliance to indicate the incorporation requirements of the 2006 Companies Act have been met
• the company articles of association
an application to form a public company must have a statement relating to the trading certificate, which must state:
• the nominal number of shares issued, must be at least £50,000
• that at least 25% of the nominal value and share premium have been paid
• the amount of any preliminary expenses and who has paid them or will pay them
• any benefits provided to the promotors of the company
persons wishing to run a business through a company can acquire one already created by company formation agents. This is known an off the shelf company.
18.3 The Consequences of the incorporation of a company
Once incorporated the company has a corporate personality and is separate from its members. This has the following consequences on the company:
• the company makes its own contracts, but its affairs are conducted by the directors, who act as agents to the company.
• A company may engage individuals to work for it
• The company owns its own property. A shareholder or director cannot take an asset from the company and sell it as their own
• The company can sue and be sued. As an artificial person a company cannot commit a tort buts it officers and employees can commit them, which the company will be liable for
• The company may be able to commit criminal offences. Persons exercising the directing mind and will of the company are able to commit the actus reus and to have the requisite mens rea
• The company continues in existence despite changes in its shareholders
• The company is liable for its own tax compliance and tax liabilities
Companies incorporated abroad as resident in the UK for tax purposes only if they are centrally managed and controlled in the UK.
18.4 Types of company
The main types of company that can be formed under the 2006 Companies Act are unlimited companies, companies limited by shares and companies limited by guarantee.
Companies limited by guarantee – tends to be used to create charitable objects, sporting associations and non-governmental organisations (ECB and Network rail are examples). This is not incorporated in the same way as other companies; it does not have share capital or shareholders. Its members act as guarantors of the company, they contribute an amount if the company becomes insolvent.
The company still has juristic personality and members still own the company, they do not own shares, they own a non-descript chose in action. Reliefs available to group companies such as group relief and the transfer of assets are only available to companies with shares.
Companies limited by shares – the members own shares and their liability for the company’s debts are limited to the amount of share capital they subscribe for. As a result, major creditors may insist on taking personal guarantees from the directors or shareholders of a company.
A company limited by shares can be a private or public company. The main differences are:
• A public company only is free to offer its shares to the public
• A public company can become listed on a stock exchange
• A public company must have a minimum allotted share capital of £50,000 before it can trade
• A public company must have a minimum of two directors, a private company only needs one. However, both only need one shareholder
• A public company must have a company secretary, they are the chief administrative officer and assumes responsibility for ensuring the company complies with legal obligations
• If a shareholder pays for shares in a public company by transferring a non-cash asset, the asset must be independently valued to ensure the shares are not at a discount
• A public company must have an annual general meeting within 6 months of its accounting date and cannot use written resolutions. A private company may dispense with an AGM if all of its shareholders agree to this in writing
• Private companies generally are subject to less regulation
18.4 Types of company (2)
Limited liability and the veil of description – the law recognises that assets of a company and its members are separate through limited liability. However, the veil of incorporation may be ignored in certain circumstances so the members of a limited company are liable for the debts. This occurs to prevent the protected of limited liability being exploited to perpetrate wrongdoing, but only applies to members of a company who have sough to abuse the veil of incorporation. This is known as lifting of the corporate veil.
Changing the status of a company – an incorporated company can change its status. A private company may re-register as a public company, the members must approve the change by means of a special resolution, the copy must be sent to the registrar of companies and prove they have the minimum allocated share capital.
A public company may re-register as a private company, the process is the same. Some members of the public company may object to a change as it will be more difficult to sell their shares, they, may apply to the courts to cancel the change.
A public company may apply to have its shared listed so they can trade on the stock exchange. If approved the company is said to be floated on the stock exchange. The company subjects itself to increased regulation as it must observe the listing rules.
A private company limited by shares may become an unlimited company and vice versa. There is no process for a company limited by shares to become a company limited by guarantee.
18.5 The constitution of a company
Consists of the articles of association plus certain resolutions its shareholders make. The constitution of companies formed earlier than the 2006 Companies Act comprise a more detailed memorandum of association setting out the companies’ purpose. The articles of association compromise detailed written rules governing the running of the company including:
• The issue of shares
• The right of shareholders
• The declaration and payment of dividends
• The conduct of meetings
• The role and powers of directors
When registering a company, the articles only need to be included if they are bespoke. If no articles are submitted, the company will be incorporated with the relevant model articles. The articles are regarded under Company law as forming a contract between the members and the company. However, members cannot use the articles to enforce rights under any other contract that they may be party to with the company. A company can alter the articles where 75% of the voters are in favour of the change
18.6 Members (shareholders)
Ultimate control of the company lies with its members, the following rules apply to general meetings of members:
• For companies limited by shares, each shareholder usually has one vote for each share they hold in the company
• Most shareholders’ decisions are passed by an ordinary resolution which means that a simple majority
• Some shareholder’s decisions are more fundamental to the operation of the company and require a special resolution where 75% of the votes are needed to pass
• Company meetings require at least 14 days’ notice to the shareholders
• A public company’s AGM requires at least 21 days’ notice
• Some types of ordinary resolution require a special notice of at least 28 days to be given to members
• A member may appoint a proxy to attend and vote on their behalf at meetings
• Where members have concerns over the action of directors, they can remove them or withdraw their powers but altering the articles
• Private companies can use written resolutions to avoid the need for meeting for most decisions, but not for the removal of a director or auditor
18.7 Directors
The role of a director – the management of the company on day-to-day decisions are usually done by directors. The company’s articles treat the directors as the company’s agents and the principles of agency law govern the dealings of directors with third parties. Directors take their decisions at board meetings; the following rules generally apply at board meetings:
• Reasonable notice must be given to all directors in the UK
• There must be a quorum present, which is the minimum number needed for a valid meeting, this is in the articles
• Decisions are taken on a majority basis
• Conduct is presided over by a chairman who is appointed by the board of directors
Status and capacity – the directors are the officers of a company; they may also be employees in addition to being office-holders. They must be at least 16 and not be an undischarged bankrupt or otherwise disqualified from being a director. A company cannot appoint a corporate director (directors who are corporate bodies not natural persons). Details of directors are filed at company’s house and the company must maintain a register of directors.
Directors can be removed by shareholders passing an ordinary resolution of which 28 days’ notice is given. They can be disqualified from acting as a director by the court. They can be terminated, but the director will often have a contract of service and any breach of it by the company might result in compensation being payable to the director.
Company law states someone who acts as a director regardless of their formal appointment is deemed to be a director.
18.7 Directors (2)
Duties of directors – if directors do not perform their duties correctly, they can be liable to contribute to the debts of the company, as directors own fiduciary duty to the company. Under the Companies Act 2006 the key duties imposed by directors are:
• To act within their powers
• To promote, in good faith, the success of the company
• To exercise independent judgement
• To exercise reasonable care, skill and diligence
• To avoid conflicts of interest
• Not to accept benefits from third parties
• To declare an interest in a proposed transaction or arrangement with the company
Breaching duties can result in:
• Damages payable by the director to the company where it has suffered loss
• Restoration of company property
• Repayment of any profits made by the director
• Rescission of contract where the director did not disclose interest
• Criminal offences being committed
Loans to directors – a company is not allowed to make a loan to a director unless the transaction has been approved by an ordinary resolution of the members. The rules also apply to the company providing security for a loan or entering into a guarantee in connection with such a loan. There are various exceptions including expenditure on company business that does not exceed £50,000, minor and business transactions not exceeding £10,000 and intra-group transfers. All transactions must be disclosed in the annual accounts and the transaction is voidable if the law has been breached.
18.8 Administration
The company secretary is the chief administrative officer of a company. A company is required to maintain certain information by law including a register of members, charges, directors and people of significant control.
A confirmation statement must be submitted annually confirming information held at company’s house and if any updates are necessary. Special resolutions must be filed with company’s house within 15 days of being passed. Companies must keep sufficient accounting records. A private company must keep them for at least 3 years and a public company for 6 years from the date they were made. Accounts must be filed with company’s house within 9 months of a private companies accounting date and six months for a public company.
18.9 Company structures
Singleton company – company that does not form a group with another company. They may carry on one or more businesses. When it carries more than one business the company may be divided into divisions. Despite divisions there is one single legal entity. Typically, each division is carried on separately drawing its own accounts.
Groups of companies – company members do not have to be individuals. A company (holding company) can be a member of another company (subsidiary). This forms a group. A holding company might hold shares in more than one subsidiary company. Under the Companies Act 2006 a company is a subsidiary of a holding company (parent) if:
• The holding company holds a majority of the voting rights
• The holding company is a member of the subsidiary and has the right to appoint or remove a majority of its board of directors
• The holding company is a member of the subsidiary and controls a majority of the voting rights
• The subsidiary is a subsidiary of a company which itself is a subsidiary of the holding company. This deals with tiers of ownership
Permanent establishment – sometimes an overseas company might operate in the UK through a branch. A branch is a section of the company organised separately from its head office but does not form a separate legal entity. The overseas company must register with company’s house and provide certain returns. They are subject to the same rules on accounts, reports and audit as a UK company.
