Chapter 3: Formation of a company

Question 1

The company’s constitution

Constitutional documents

Answer 1

CA 2006 came into force on 1 October 2009. Prior to this, companies were governed by the principles of the Companies Act 1985 (CA 1985). In practice you will deal with many companies incorporated prior to CA 2006 therefore it is important to understand some of the provisions of CA 1985 which still affect those companies. CA 1985 required companies to have two constitutional documents: the Articles of Association and the Memorandum

Question 2

Constitutional documents

Answer 2

Under s 17 CA 2006 the memorandum no longer forms part of the company’s constitution - it is only required as part of the procedure to register a company at Companies House. The memorandum of a company incorporated under CA 2006 simply amounts to a declaration on the part of the company’s subscribers ie that the first members of the company wish to form a company and agree to become members of that company (s 8 CA 2006).

Question 3

Memorandum

Answer 3

Under the Companies Act 1985 (CA 1985) the memorandum was a more complex document and formed part of the company’s constitution. Companies could set out constitutional restrictions in their memorandum and were required to include an objects clause setting out the purposes for which the company has been formed. Acting outside of this purpose was described as acting ultra vires or outside the company’s capacity.

Question 4

Memorandum

Answer 4

Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company’s Articles. So the ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles. You will learn more about this in the next Topic.

Question 5

Memorandum

Answer 5

For older companies that were incorporated under the CA 1985, s 28 CA 2006 provides that any provisions in a memorandum must be treated as provisions of the company’s Articles. This includes the objects clauses included in the memoranda of all CA 1985-incorporated companies. Under CA 2006, therefore, the objects clause of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause.

Question 6

Example memorandum under CA 2006 in prescribed form

Answer 6

COMPANY HAVING A SHARE CAPITAL Memorandum of association of Bradford Enterprises Limited

Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.

Name of each subscriber - Authentication by each subscriber

Martin Bradford - M Bradford

Dated [date]

Question 7

Articles of association

Answer 7

All companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company.

Examples of the types of provisions which are included in the Articles of a company are:

• the number of directors required to transact business (both to form a quorum at board meetings and to take decisions at board meetings);
• the method of appointment of directors;
• the powers of directors;
• how board meetings are to be conducted;
• any special rights attaching to shares;
• how shareholder meetings are to be conducted; and
• how and to whom shareholders may transfer their shares.

Question 8

Relationship between CA 2006 and the Articles

Answer 8

A company’s Articles must be interpreted in the light of relevant legislation. There is considerable scope for overlap between the procedures set out in CA 2006 and those that may also be contained in the company’s Articles. The Articles must comply with the minimum provisions of CA 2006 (this is known as the Legality Test).

A company may in certain circumstances provide a procedure in its Articles which ismore onerous than that contained in CA 2006.

Question 9

Relationship between CA 2006 and the Articles

Answer 9

For example, s 154(1) CA 2006 provides that a private company must have a minimum of one director. Company X Ltd could provide in its Articles that it requires three directors. Company X Ltd would need to comply with the three-director requirement in its Articles, rather than the requirement set out in CA 2006.

There are some CA 2006 provisions which override anything in a company’s Articles.

An example of this would be s 321 CA 2006 (the right to demand a poll vote at a general meeting). This cannot be removed in the Articles.

Question 10

Relationship between CA 2006 and the Articles

Answer 10

There are also powers available to companies by default under the provisions of CA 2006 unless the Articles provide otherwise, for instance, the power of a private company to issue redeemable shares. It is important to always check the procedures set out both in the relevant legislation and in your client’s Articles.

Question 11

1. Model Articles (MA) / Table A

Answer 11

The Secretary of State has prescribed MA for different types of company (under s 19 CA 2006). If a new company does not register Articles at Companies House, s 20(1) CA 2006 provides that the relevant MA will constitute the company’s Articles in default.

There was a similar provision under the CA 1985. For companies incorporated under the CA 1985 the default Articles were known as Table A. In practice, you may encounter older companies with Table A Articles.

Question 12

2. Amended MA

Answer 12

Not all of the provisions contained in the MA are suitable for all companies. Many companies therefore choose to adopt the MA as their Articles, but elect to exclude, or modify the effect of, some of its provisions.

Question 13

3. Tailor made Articles

Answer 13

The third option available to a client is to instruct a solicitor to draft Articles which are tailor-made for the particular company concerned. Law firms often have a precedent form of Articles that can be adapted for this purpose. However, generally this is a very time-consuming process and therefore costly for the client, although the end product can often be more useful to them in the long run. Most small companies will prefer to adopt MA, subject to certain amendments.

Question 14

Amending the Articles

Answer 14

Once a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006). A special resolution is a decision of the shareholders. You will consider the different types of shareholder resolutions later in this module.

Section 22 CA 2006 permits the entrenchment of specific provisions within a company’s Articles, though this occurs relatively rarely in practice. An entrenched provision of a company’s Articles is one which can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with. Entrenched Articles can nevertheless always be amended by the agreement of all of the members, or by a court order (s 22(3) CA 2006).

Question 15

Amending the Articles

Answer 15

There is a great deal of case law relating to the alteration of a company’s Articles. The basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656.

In Shuttleworth v Cox [1927] 2 KB 9 the court held that an amendment to the Articles is not valid if no reasonable man could consider it to be for the benefit of the company.

Question 16

Amending the Articles – case law examples

**Sidebottom v Kershaw, Leese & Co Ltd **[1920] 1 Ch 154 (Court of Appeal)

Answer 16

The defendant company had altered its articles by introducing a provision which gave the directors power to buy out, at a fair price, the shareholding of any member who competed with the company’s business. The plaintiffs, who were minority shareholders and who carried on a competing business, unsuccessfully challenged the validity of the alteration. The Court of Appeal found that the alteration was initiated in good faith and bona fide in the interests of the company and therefore allowed this to stand to protect the company.

Question 17

**Re Charterhouse Capital Ltd **[2015] EWCA Civ 536 (Court of Appeal)

Answer 17

The amendment of a company’s articles to permit the shares of a minority shareholder to be compulsorily acquired under a takeover offer was held to be valid as it was consistent with the terms of a shareholders’ agreement. It was not open to challenge on other grounds such as unfair prejudice. The Court of Appeal held that the amendment was no more than a ‘tidying up exercise’ which had been consistent with the initial bargain of the founding members, which included the appellant himself. In the absence of any finding of bad faith, improper motive or irrationality, there was no basis for the challenge to the validity of the amendment.

Question 18

Legal effect of the Articles

Answer 18

The nature of the contract established by the Articles of a company is set out in s 33(1) CA 2006, which provides that the provisions in the company’s Articles bind 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.

Whatever form the company’s Articles take, therefore, they will be binding on both the company and its members and enforceable.

Question 19

Legal effect of the Articles

Answer 19

The predecessor to s 33(1) CA 2006 (namely s 14 CA 1985) has been the subject of a large amount of case law. The generally established rule is that the Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members (Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881 (Ch)).

Question 20

Articles as a contract between the company and its members

Answer 20

Courts have been willing to prevent a company from infringing its members’ rights in breach of the Articles by granting an injunction. Each member, acting in his capacity as a member, is similarly obliged to the company to comply with the Articles. However, a member may not enforce any rights contained in the Articles against the company that are not relevant to his capacity as a member.

Rights contained in the Articles that would probably be enforceable by members under s 33 CA 2006 would be the right to vote or the right to receive a final dividend once it has been declared (ie approved by a resolution of the shareholders).

Question 21

Example

Answer 21

In Eley v Positive Government Security Life Assurance Company (1876) 1 Ex D 88 (CA), a member of the company who had inserted a right into the company’s Articles for him to be employed as the company’s solicitor for life could not enforce this provision (under a forerunner of s 33 CA 2006) as this was not a right which he held in his capacity as a member, but rather in his capacity as the company’s solicitor_._

Question 22

Articles as a contract between the members themselves

Answer 22

Although the courts have acknowledged that the forerunners to s 33 CA 2006 provide that the Articles constitute a contract between the members themselves, as well as between the company and its members, there is conflicting authority as to whether one member may enforce the Articles against another member directly (Rayfield v Hands [1960]Ch 1 (Ch)) or only through the company itself, ie by requiring the company to enforce the provisions against the member (Welton v Saffery [1897] AC 299).

Question 23

Articles as a contract between the members themselves

Answer 23

The particular facts of Rayfield v Hands would suggest that, if a member accepts a personal obligation to another member through the Articles (eg to transfer shares), that member can enforce the right against the other member directly. Otherwise the courts appear to be of the opinion that members will only be able to enforce provisions contained in Articles through the company itself.

Question 24

Articles as a contract between the members themselves

Answer 24

If a member is likely to wish to enforce rights against other members, he/she should be advised to enter into a shareholders’ agreement. A shareholders’ agreement is a private agreement between the shareholders which is enforceable as a contract between the members. You will consider shareholders’ agreements later on this module.

Question 25

Summary

Answer 25

• Although previously of constitutional significance, in companies incorporated since CA 2006 came into force the company’s memorandum is now merely a formality.
• The main constitutional document for a company is its Articles.
• The provisions in the company’s Articles bind 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.
• Companies may have the standard Model Articles under CA 2006 or these may be amended. The Articles must always be interpreted alongside CA 2006.

Question 26

Formation of a company

Answer 26

This element covers:

• How companies are incorporated – either from scratch or using the shelf company conversion method, and
• Liability for pre-incorporation contracts.

Question 27

Introduction: Formation of a company

Answer 27

A client wishing to start a business through the medium of a company can either incorporate a new company from scratch or purchase and then convert an existing shelf company to conduct its business.

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

Question 28

Incorporation from scratch

Answer 28

In order to incorporate a new company from scratch, the following must be delivered to Companies House (s9):

• a copy of the company’s memorandum;
• Articles (if the company does not intend to use the Model Articles (MA));
• the fee (the applicant may pay a higher fee for a same-day incorporation); and
• an application for registration (Form IN01) containing:
• The company’s proposed name and registered office which is an “appropriate address”;
• Whether the company is to be private or public;

Question 29

Incorporation from scratch

Answer 29

• The company’s registered appropriate email address for Companies House use (s 9(5)(aa)) - added by ECCTA in March 2024;
• Whether the company is to be limited by shares (or guarantee);
• A statement of capital and initial shareholdings (s 10) (or if it is to be limited by guarantee, details must be given of the guarantee (s 11));
• A statement of the company’s proposed officers (s 12) and persons with significant control (s 790);
• A statement of compliance (s 13); and
• A statement of lawful purpose, ie a statement that the subscribers are forming the company for lawful purposes (s 9(e)). This was added by ECCTA in March 2024.

Question 30

Appropriate Address

Answer 30

The “appropriate address” requirement was added by ECCTA and is an address where a document addressed to the company and delivered by either hand or post would be expected to come to the attention of a person acting on behalf of the company and where the delivery of documents is capable of being recorded by obtaining acknowledgment of delivery. It is therefore not possible to use a PO Box as a registered office now.

Question 31

Appropriate Address

Answer 31

Note there will be other additional formalities after other sections of the ECCTA come into force, such as verifying the identity of the directors, company secretary and persons with significant control.

Once the Registrar of Companies has approved the application for incorporation of the company, the company is sent a certificate of incorporation authenticated by the Registrar’s official seal.

Question 32

The certificate of incorporation sets out:

Answer 32

• the name of the company. This may be changed at a later date;
• the company’s registered number. The company’s registered number will never change and must therefore be used when drafting any legal agreements to which the company is a party to ensure that the company can be correctly identified following future changes to its name; and
• the date of incorporation.

Question 33

Company becomes a legal entity

Answer 33

The company becomes a legal entity (s 16(3)) from the date on which the certificate of incorporation is issued by Companies House. The date of incorporation is set out in the certificate of incorporation (s 15 CA 2006).

Question 34

Incorporation by converting a shelf company

Answer 34

It has been more common traditionally for a solicitor to purchase a shelf company on behalf of the client and then make the necessary changes rather than to incorporate a new company from scratch. This position however is changing as a result of online incorporation services.

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:

Question 35

Name

Answer 35

*Name – most shelf companies will have a name that has no connection with the client or its business (eg ABC 123 Ltd). It will therefore need to be changed to a name selected by the client. Under s 77(1) CA 2006 a company’s name can be changed by a special resolution of the shareholders or by any other means provided by the company’s Articles (eg a decision of the directors by way of board resolution). Form NM01 is required to be filed at Companies House with the special resolution passed to change the name and the fee;

Question 36

Registered Office

Answer 36

*Registered office - the client’s chosen address will need to be substituted for the first registered office in accordance with s 87(1) CA 2006. The new address will need to satisfy the requirements of an “appropriate address” (see above). Form AD01 is required to be filed at Companies House.

Question 37

Articles

Answer 37

*Articles – 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). You will need to consider whether the company’s existing Articles need to be amended, in accordance with s 21(1) CA 2006, to meet the specific requirements of your client. A company may alter its Articles by special resolution (SR). The amended Articles and SR need to be filed at Companies House.

Question 38

Members, Directors and Company Secretary

Answer 38

*Members, directors and the company secretary – representatives of the company registration agent or law firm will have become the first member(s) (subscriber(s)), director(s) and company secretary (if the company has one) of the company. It is therefore essential that:

Question 39

The Share

Answer 39

*the share(s) held by the subscriber(s) (the first members) is/are transferred using a stock transfer form. The client becomes the shareholder once it is entered on the register of members;

Question 40

Client’s Representative

Answer 40

*the client’s representatives are appointed as director(s) and the company secretary (if there is to be one). Forms AP01 (directors) and AP03 (secretary) are required to be filed at Companies House, and

Question 41

First Director

Answer 41

*the first director(s) and company secretary (if there was one) resign. Forms TM01 (directors) and TM02 (secretary) are required to be filed at Companies House. The order that appointments and resignations are made is very important; the company will always need at least one director to be CA 2006 compliant.

Question 42

Company Name: Considerations

Answer 42

A preliminary consideration for a business, whether incorporated from scratch or via a shelf company conversion, will be choosing a company name. There are various commercial and legal considerations regarding a company name. The name:

• Must not be offensive (s 53(b) CA 2006);
• Must end in limited/ltd (for a private limited company - s 59 CA 2006);
• Must not be the ‘same as’ another on the index of company names (s 66 CA 2006);
• Must obtain approval if it suggests a ‘connection with government or public authority’ (s 54 CA 2006) or contains other ‘sensitive words’ (s 55 CA 2006). Companies House publishes guidance on these names from time to time, so it is advisable to refer to these each time you advise a client

Question 43

ECCTA

Answer 43

ECCTA amended CA 2006 and added additional restrictions on the choice of company name. A name may also be prohibited if it:

• In the opinion of the secretary of state, is intended to facilitate what would, in the UK (or potentially outside the UK), constitute an offence of honesty or deception (s 53A CA 2006);
• Suggests a connection with a foreign government or its off-shoots (eg NATO) (s 56A CA 2006);
• Consists of or includes what, in the opinion of the secretary of state, is a computer code (s 57A CA 2006);
• Is one that has already been subject to a direction by the Registrar to change and the company is seeking to re-register using that name (ss 57B and C CA 2006);

Question 44

ECCTA

Answer 44

• Gives a misleading indication of its activities (s 76 CA 2006); or
• In the opinion of the secretary of state, has been used or is intended to be used for criminal activities (s 76A 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).

A new company name becomes effective from the date on which the new certificate of incorporation on change of name is issued by the Registrar of Companies (s 81(1) CA 2006).

Question 45

Post-incorporation steps

Answer 45

Once the new company has been formed, there are a number of practical issues that the directors will need to attend to as follows:

*Chairperson – The Board needs to decide whether to elect a chair and whether the Chairperson should have a casting vote in the event of a tied board resolution. MA 13 provides for this, but they may wish to amend the MA by special resolution (s21). The SR and amended Articles need to be filed at Companies House.

Question 46

Post-incorporation steps

Answer 46

*Accounting reference date – s 391(4) provides that the default accounting reference date will be the last day of the month in which the company was incorporated. Often companies will change this to align with their financial year. Form AA01 is required to be filed at Companies House.

*Auditor – all companies must prepare annual accounts (s 394) and will usually therefore need to appoint an auditor usually by Board resolution if company has MA.

*Tax registrations – the company will need to register for corporation tax, VAT and PAYE and National Insurance (if it has employees).

Question 47

Post-incorporation steps

Answer 47

*Shareholder agreement – this is a private contract between the shareholders. It is not required and not all companies have a shareholder agreement, but it may be useful. We will consider shareholder agreements in more detail later in this module.

Question 48

Pre incorporation contracts

Pre-incorporation contracts: Section 51 CA 2006

Answer 48

Section 51 CA 2006 seeks to protect third parties who believe they are entering into a contract with a company which is incorporated and registered by making pre-incorporation contracts enforceable as personal contracts against the persons purporting to act on the company’s behalf (known as ‘promoters’).

Question 49

Section 51 Pre-incorporation contracts, deeds and obligations

Answer 49

(1) A contract that purports to be made by or on behalf of a company at a time when the company has not been incorporated has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.’

Question 50

Section 51 Pre-incorporation contracts, deeds and obligations

Answer 50

Example: If one of the directors of a company purports to enter into a contract on behalf of the company before the company has been properly incorporated, it is the director themselves who will be personally liable under the contract. The company, once incorporated, will have no rights or obligations under the contract (unless the parties take steps to novate the contract). Note that it is also not possible for a company to ratify a contract made before it came into existence.

Question 51

Summary

Answer 51

*A company may be formed either directly at Companies House, or by converting a shelf company.

*When incorporating from scratch, the following must be sent to Companies House:

• the company’s memorandum;
• Articles (if the company does not intend to use the Model Articles (MA));
• the fee, and
• an application for registration (Form IN01).

Question 52

Summary

Answer 52

*If a shelf company is converted, it will be necessary for meetings of the shelf company’s directors and shareholders to be held in order to make the necessary changes to the company name, registered office, Articles, directors, company secretary and shareholders. The first shares will be transferred from the subscribers (initial shelf company shareholders) to the company’s new shareholders.

*Liability for pre-incorporation contracts rests with the promoter under s 51 CA 2006, subject to any agreement to the contrary.

Question 53

Company decision making

Answer 53

This element covers company decision making – how directors and shareholders may vote and the different types of shareholder resolutions.

Question 54

Introduction: Company Decision Making

Answer 54

*As the company is inanimate, much of the standard day-to-day business of a company is carried out by the directors. Unless the power to take a particular decision has been delegated by the board of directors (the board) to a particular director or committee of directors, a decision of the board of directors of a company must be taken in accordance with the procedure set out in the company’s Articles.

*From time to time however, it will be necessary for specific authority to be given to a director (perhaps in connection with the execution of documentation on behalf of the company in respect of an especially important transaction).

Question 55

Introduction: Company Decision Making

Answer 55

• Alternatively, a matter may need to be referred to the company’s shareholders. For example, where:
• a matter is outside the powers of the directors and must be effected by a resolution of the shareholders (eg amending the company’s Articles); or
• a matter is within the powers of the directors but requires the prior approval of the shareholders before the directors can be authorised to act (eg making a loan to a director of the company).

Question 56

Board resolutions

Answer 56

Decisions of the directors are taken by passing Board Resolutions at Board Meetings (BMs).

Question 57

Board Resolutions

Answer 57

Board Resolutions – each director has one vote.

Board resolutions are passed by simple majority (MA 7) unless the directors have agreed that a particular decision requires unanimity (MA 8).

Note if all of the directors are in agreement with a decision, they can also pass a written Board Resolution which means the directors don’t have to waste time attending Board Meetings.

Question 58

Shareholder resolutions

Answer 58

Decisions of the shareholders are taken by passing Shareholder Resolutions.

Shareholder resolutions may be passed either:

• At a meeting of the shareholders (referred to as a General Meeting (GM)), or
• In writing (for private companies only under s 288 CA 2006).

There are two different types of shareholder resolution:

• Ordinary Resolutions which are passed by a simple majority – so over 50% of the votes, and
• Special Resolutions which are passed by a majority of 75% or more of the votes.

Either CA 2006 or the Articles will stipulate what type of resolution is required.

Note that a written resolution is a method of voting, not a different type of vote.

Question 59

Shareholder voting – show of hands and poll votes at General Meetings

Answer 59

Ata GM it is possible for shareholders to vote on a show of hands or on a poll. The votes are counted out of all the eligible shareholders who are present and voting at the meeting. Note that shareholders are entitled to appoint another person as their proxy to exercise all or any of their rights to attend and to speak and vote at any GM (s 324).

When the shareholders vote on a show of hands, each shareholder who is present at the meeting will be entitled to one vote, regardless of the number of shares held by that shareholder (provided the share has voting rights under the Articles) (s 284(2)).

Question 60

Shareholder voting – show of hands and poll votes at General Meetings

Answer 60

When the shareholders vote on a poll, every shareholder has one vote in respect of each share held by them (s 284(3)).

The right to demand a poll vote is very important and will make a significant difference when the shareholders are not in agreement over a resolution. Section 321CA 2006 sets out the conditions that must be met in order for a shareholder to be entitled to demand a poll although these conditions may be relaxed by a provision in the Articles and in fact they are relaxed in the MA (see Art 44 MA).

Question 61

MA44 Poll voting

Answer 61

MA 44(1) sets out that a poll on a resolution can be demanded either in advance of the GM where the vote will take place or at a GM either before a show of hands on that resolution or immediately after the result of that vote.

MA 44(2) sets out who can demand a poll as follows:

*The chairperson of the meeting;

*The directors;

*Two or more persons having the right to vote on the resolution; or

*A person or persons representing at least 10% of the total voting rights of all the shareholders entitled to vote on the resolution

Question 62

The importance of poll voting Example 1

Answer 62

The shareholders of a company are:

A – 45%

B – 20%

C – 20%

D – 15%

A and B are in favour of passing an ordinary resolution but C and D are not in favour. Could A and B pass the ordinary resolution without the support of C and D?

Assume the OR will be voted on at a GM and all the SH will attend and vote.

Question 63

The importance of poll voting Example 1

Answer 63

An ordinary resolution requires a simple majority, ie more than half of the shareholders voting and present at the meeting.

Show of Hands: A simple majority will be 3 of the 4 shareholders;

A and B will require one of C or D to support the OR.

However, if either A or B is unhappy with the result, they could demand a poll (both have sufficient voting rights to do so).

Poll: A simple majority will be more than 50% of the shares;

A and B together have 65% so could pass the OR together without C or D.

You can see how shareholders with a larger percentage of the votes can hold more power in a company by forcing through resolutions.

Question 64

The importance of poll voting Example 1

Answer 64

The shareholders of a company are:

A – 45%

B – 20%

C – 20%

D – 15%

B, C and D are in favour of passing a special resolution but A is against. Could B, C and D pass the special resolution without the support of A?

Assume the SR will be voted on at a GM and all the SH will attend and vote.

A special resolution requires a majority of at least 75% of the shareholders voting and present at the meeting.

Question 65

Show of Hands

Answer 65

Show of Hands: a special resolution requires 3 of the 4 shareholders (ie at least 75% of them):

B, C and D could pass the SR without A.

However, if A is unhappy with the result, they could demand a poll (and have sufficient voting rights to do so).

Poll: at least 75% of the total number of shares is required;

B, C and D together have 55% so could not pass the SR without A on a poll, ie A could BLOCK this SR alone.

You can see how shareholders with a larger percentage of the votes can hold more power in a company by blocking resolutions.

Question 66

Voting on a Written Resolution

Answer 66

Under s 281 CA 2006 only private companies may pass a shareholders’ resolution by way of a written resolution.

Section 284(1) CA 2006 states that, 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.

There are two types of written resolution:

• written ordinary resolution - passed by a simple majority of the total voting rights of eligible members (s 282(2) CA 2006).
• written special resolution:

Question 67

Voting on a Written Resolution

Answer 67

• must state it is a special resolution, and
• passed by a majority of members representing not less than 75% of the total voting rights of eligible members (ss 283(2) and (3) CA 2006).

Note that there are two decisions that may not be passed as written resolutions (s 288(2), which are removal of a director under s 168, and removal of an auditor under s 510.

Question 68

Voting on a Written Resolution – Example 3

Answer 68

The shareholders of a company are:

A – 45%

B – 30%

C – 20%

D – 5%

A and D are in favour of passing an ordinary resolution, but B is not in favour. C is planning to abstain.

Could A and D pass the ordinary resolution if the vote took place as a written resolution?

Question 69

Voting on a Written Resolution – Example 3

Answer 69

An ordinary resolution requires a simple majority but as it is being proposed as a written resolution, the simple majority will be taken of the total voting rights of eligible members.

A and D together hold 50% of the voting rights. This is not sufficient.

B is voting against and holds 30%. This is not enough to block the resolution alone.

C is abstaining. On a written resolution vote, abstaining counts as voting against. So C’s 20% will count as a vote against meaning that B and C together hold 50% which is sufficient to block the resolution.

Question 70

Summary

Board Resolutions

Answer 70

Passed by? Directors

Where? Board Meeting (or in writing)

What for? Day to day decisions

Voting threshold? Simple majority MA7(1) (or unanimity for written)

How counted? 1 vote/director

Question 71

Ordinary Resolutions

Answer 71

Passed by? Shareholders

Where? General Meeting (or in writing)

What for? Decisions that CA06 or Co Articles say require OR

Voting threshold? Simple majority (s 282 CA 2006)

How counted? Show of hands: 1 vote/SH (GM only)

Poll: 1 vote/share

Question 72

Special Resolutions

Answer 72

Passed by? Shareholders

Where? General Meeting (or in writing)

What for? Decisions that CA06 or Co Articles say require SR

Voting threshold? At least 75% (s 283 CA 2006)

How counted? Show of hands: 1 vote/SH (GM only)

Poll: 1 vote/share

Question 73

Company meetings

Answer 73

This element covers company meetings, including procedural requirements, statutory filings and disclosure requirements.

Question 74

Board Meetings

Answer 74

Board resolutions can be passed, without great formality, at a BM.

Question 75

Who calls a BM?

Answer 75

MA 9 provides that any director may call a BM or require the company secretary (if the company has one) to do so at any time. Therefore, the process is fairly informal and, when acting for a company, it is important to consider what the usual practice is for its directors.

Question 76

Notice

Answer 76

In Browne v La Trinidad, the court held that reasonable notice of the BM was necessary, and that this would be whatever notice is usual for the directors to give. For example, if all the directors are in the same building, the meeting could be called almost immediately, if such notice is customary for the directors.

Question 77

Quorum

Answer 77

Directors may not validly consider business unless a minimum number of directors entitled to vote are present at the time the meeting takes place. MA 11(2)requires a minimum of two directors to be present for the meeting to be quorate (unless the articles provide otherwise).

Question 78

Voting

Answer 78

Board resolutions are passed by majority vote on a show of hands (MA 7(1)). Each director has one vote. The chair may have a casting vote to prevent deadlock (MA13 provides for this but it is possible for the company to amend this).

Question 79

General Meetings

Who calls a GM?:

Answer 79

The Board will usually convene (ie call) a GM.

Question 80

Notice

Answer 80

For private companies, 14 clear days’ notice is required (s307(1) CA 2006)(subject to a shorter notice period – see later). In this context, the word ‘notice’ refers to a period of time (between the board’s act of convening a GM and its actually taking place).

Question 81

Section 360(1) CA 2006

Answer 81

States that the clear-day rule applies to s 307(1) CA 2006, and in counting the days of the notice period, the day of the meeting and the day the notice is given are both excluded. Note: s 1147 CA 2006 provides that if the notice is posted or e-mailed, it is deemed to be served 48 hours after sending.

Question 82

General Meeting

Answer 82

• In order to convene the GM, the board must inform the shareholders of when (and where) it is taking place, by giving notice to the shareholders. In this context, the word ‘notice’ refers to a document inviting shareholders to attend the GM.
• The directors must approve the form of the notice of the GM and then they must authorise its circulation to the shareholders.

Question 83

Quorum

Answer 83

The quorum for a GM is generally two shareholders (s 318(2) CA 2006), although it is one shareholder for single member companies (s 318(1) CA 2006).

Question 84

Company meetings – the ‘GM sandwich’

Answer 84

You saw above that it is generally the Board who will call a GM (note that it is possible in limited circumstances for shareholders to do this and we will explore this later in this module). Where a shareholder vote is required for a certain transaction, it is therefore necessary for the company to hold a series of meetings (depicted below):

Question 85

Company meetings – the ‘GM sandwich’

Answer 85

• A BM is first required in order to call the GM;
• A GM is then required for the shareholders to vote on the proposed resolution;
• A further BM is then required to put into effect the outcome of the shareholder vote, and
• There may be post meeting matters (PMM) to attend to such as filings at Companies House.

We will now look at this process in more detail, starting by looking at the procedure where the GM is held on full notice. The GM is ‘sandwiched’ between the two BMs.

BM – GM – BM – PMMs

Question 86

Sequence of Meetings – full notice GM

Board Meeting 1

Answer 86

A BM is held to decide on the issues to be considered at the GM, to resolve to convene the GM, to approve the form of notice for the GM and to authorise its circulation. The notice of the GM will set out the wording of the resolutions to be put before the shareholders. The notice of the GM is then circulated to the shareholders by the company secretary (if the company has one) or by the directors.

Question 87

General Meeting

Answer 87

The GM will take place and the shareholders will vote on the resolutions set out in the notice.

Question 88

Board Meeting 2

Answer 88

A further BM will be held and the directors will be informed as to how the shareholders voted at the GM and whether the resolutions were passed. The directors will then authorise the company secretary, or a director, to deal with the post-meeting matters.

Question 89

Post-Meeting Matters (PMMs)

Answer 89

The PMMs will then be carried out by the company secretary (if the company has one) or a director (if not). This means that copies of the relevant documents will be filed at Companies House, and the company’s internal records (minute books and registers) will be brought up-to-date. We will consider the PMMs further below.

Question 90

Full notice - summary

Answer 90

BM1 To be held on “reasonable” notice

GM to be held at least 14 clear days from BM1

GM

BM2 To be held on “reasonable” notice

PMMs

Question 91

Shortening the notice for a GM

Answer 91

You have seen previously in this element that the Board is required to give the shareholders at least 14 clear days’ notice of the GM. However, you can appreciate that for some companies (eg those where the same persons are the directors and shareholders) this notice period might hold up the decision-making process of a company unnecessarily.

The CA 2006 allows for GMs to be called on less than the usual amount of short notice if sufficient members agree. Section 307(5) CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by:

Question 92

Shortening the notice for a GM

Answer 92

• 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.

Therefore, where companies have few shareholders, it is often possible for meetings to be held at short notice.

Question 93

Short notice Example

Answer 93

Question: A company (with Model Articles) has 5 shareholders and each of them has 20% of the ordinary shares of the company.

How many shareholders will be required to approve short notice?

Answer: The company requires a majority in number of the shareholders (ie 3 out of 5) PLUS that majority must hold 90% of the total nominal value of the shares (the threshold is 90% as the company has MA). Three of the shareholders will not satisfy the second limb of the test (because any three would only hold 60% of the ordinary shares). The only way the company can obtain approval for short notice would be if ALL FIVE of the shareholders approve it.

Note: a company with MA only has ordinary shares in issue and these ordinary shares carry voting rights.

Question 94

Sequence of meetings – short notice GM

Answer 94

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 this can be dealt with in under an hour.

• A BM is held to resolve to convene the GM, to approve the form of notice for the GM and the form of consent to short notice, and to authorise their circulation to the shareholders. The notice of the GM and the form of consent to short notice are then given to the shareholders who indicate their agreement for the GM to be held on short notice by signing the form of consent to short notice. The BM is then adjourned to enable the GM to take place.

Question 95

Sequence of meetings – short notice GM

Answer 95

• The GM takes place immediately following the adjournment of the BM and the shareholders vote on the resolutions set out in the notice.
• The BM is then reconvened. The directors are informed as to how the shareholders voted and they authorise one of their number to take the relevant action and deal with the post-meeting matters.
• The PMMs will then be carried out.

Question 96

Short notice - summary

Answer 96

BM (adjourned)

GM – If consent to use SN obtained, GM can take place immediately following adjournment of BM

BM1 (reconvened)

PMMs

Question 97

Written Resolutions – Procedure

Answer 97

Sections 288 - 300 CA 2006 contain the general provisions applying to written resolutions. Points to note are:

*A written shareholder resolution (WR) can be proposed by the directors or the members of a private company and is passed when the required majority of the eligible members signify their agreement to it.

• The required majority will depend upon whether it is an ordinary or a special resolution that needs to be passed.
• An eligible member is a member (shareholder) who would have been entitled to vote on the resolution on the circulation date of the WR.

Question 98

Written Resolutions – Procedure

Answer 98

• If the company does not receive a sufficient number of responses to pass the WR, it will lapse. For a company with MA, the lapse date is 28 days beginning with the circulation date. A company can choose another period of time in its Articles if it so wishes.

*Section 288(2) CA 2006 provides that resolutions to remove a director or auditor from office may not be passed by way of WRs (essentially to allow the director or auditor the time and the opportunity to mount a defence).

*WRs must be recorded in the minute books of the company in the same way as the minutes of a GM.

Question 99

Sequence of meetings – Written Resolution

Answer 99

• A BM is held to resolve to propose the use of the WR procedure and to approve the form of wording of the WR and to circulate the WR. The WR is then circulated to the shareholders (eligible members) with details of how to signify their agreement and when to respond by ie the lapse date.

Question 100

• There are two options to proceed:

Answer 100

*If the shareholders are present (available immediately), the BM is adjourned. The approval of the WR takes place immediately following the adjournment of the BM and the shareholders vote on the resolutions set out in the WR by signing to signify their agreement, or not signing or abstaining (both of which constitute votes against the resolution); or

Question 101

• There are two options to proceed:

Answer 101

• If the shareholders are not present and available (eg they are in different parts of the country/world), the BM is closed. The WR is circulated to the shareholders. The WR is passed once it receives the requisite level of shareholder support or it will deem to lapse after 28 days (for a MA company).

Question 102

• There are two options to proceed:

Answer 102

*The BM is then reconvened if the first option was used or a second BM is called if the second option was used. The board is informed as to how the shareholders voted and it authorises one of their number or the company secretary to take the relevant action and deal with the post-meeting matters. The PMMs will then be carried out.

Question 103

Written Resolution – Summary – option 1

Answer 103

Possible to achieve in under 1 hour

BM (adjourned)

WR - If shareholders are present, approval of WR can take place immediately following adjournment of BM

BM1 (reconvened)

PMMs

Question 104

Written Resolution – Summary – option 2

Answer 104

BM1

WR - If shareholders are not present, WR is circulated to shareholders. Company awaits approval from the required % of shareholders.

WR lapses after 28 days (MA Co)

BM2

PMMs

Question 105

Post-Meeting Matters

Answer 105

Essentially the PMMs break down into three categories:

• Internal
• Minutes of all meetings need to be kept for 10 years
• Updating of statutory books eg register of members, directors, PSC register
• Filing at Companies House
• All special resolutions must be filed. Generally ordinary resolutions do not need to be filed (but you will encounter some exceptions such as the authority to allot shares under s551).
• Amended Articles must be filed, along with any forms that the Companies House requires eg Change of Name form.
• Record Keeping
• You will come across various documents that need to be kept at the registered office, eg directors service contracts.

Question 106

Summary of main points in relation to meetings

Answer 106

Who transacts the business – the board or shareholders?

Call - how, and by whom, must the meeting be called?

Notice - how much notice is required to be given and to whom?

Quorum - what quorum is required for business to be validly transactead?

Agenda - what is on the agenda for the meeting and is it set out in the correct order? The notice of a GM which is given or sent to members must describe in sufficient detail the business to be transacted in order for members to decide whether they wish to attend or not (s 311(2) CA 2006). Further, if a special resolution is proposed, the notice must specify that the resolution is to be passed as a special resolution and must set out the text of the resolution (s.283(6)(a) CA 2006).

Voting - who is entitled to vote and how?

Post-meeting - what documentation must be dealt with for the decision(s) taken?

Question 107

Summary

Answer 107

• Decisions are made on behalf of the company by directors and shareholders.
• Directors make decisions by passing Board Resolutions in Board Meetings.
• Shareholders make decisions by passing Shareholder Resolutions (Ordinary and Special Resolutions) in General Meetings or by Written Resolution.
• It is important to appreciate the power held by shareholders with a larger share of the voting rights: they can block or pass resolutions, sometimes without other shareholders.