Company Law Flashcards
Features of a Company (10/1,3,2,3,3,1,3,2,2,5)
Limited Liability
- Limited to the unpaid amount on shares or the guaranteed amount as stated by the member
Tax Treatment
- Corporation tax by the Company on the profits
- Tax on dividend by the shareholders (depends on the threshold limit)
- Directors receive salary
Perpetual Succession’
- Members and directors can come and go, but the company remains
- Remains unaffected by the changes in directors and shareholders
Common Seal
- An official seal used by a corporate body for the purposes of authenticating and executing legal documents (such as a contract or deed).
- The formalities for affixing a corporation’s seal will usually be prescribed by its AOA
- s.45 (1) - A company may have a common seal, but need not have one.
Contractual Capacity
- As the company is a person, it can enter into contracts with persons inside and outside the company.
Lee v Lee’s Air Farming Ltd[1961] (the workmen’s compensation case)
When he died in a crash, the question arose whether he was a ‘worker’ for the company. The Privy Council ruled that he was, establishing the principle of legal personality, where a company and its owner are separate entities. This allowed Mrs. Lee to claim compensation for her husband’s death.
Principle
- As the company is a legal person, it can enter into binding contracts, with persons inside the company, as well as those outside the company.
Ownership of assets
- Assets belong to the company
- Separation between the property of the company and the property of the members
- Macaura v Northern Assurance Co Ltd (the timber yard case)
Macaura, the sole owner of a timber company, insured the company’s timber in his name. After a fire, the insurance company refused to pay, arguing the timber belonged to the company, not Macaura. The House of Lords agreed, reinforcing the principle of separate legal personality, where a company and its owner are distinct entities
Suing and Being Sued
- As a legal person, a company can take action to enforce its legal rights and can be sued for breach of its legal duties
- Unlike unincorporated structures where ‘representative action’ is the only recourse.
Transferable Shares
- Freely transferable by the shareholder
- Subject to any constitutional restrictions
Borrowing
- Creating a ‘floating charge’: This is like creating a safety net. It’s a type of security that a company gives for a loan.
- The charge ‘floats’: Imagine a cloud floating over everything the company owns. This cloud is the ‘charge’, and it can turn into a storm if the company doesn’t pay back the loan.
- Crystallised as fixed: The floating charge can become a ‘fixed charge’ at certain times, like when the company fails to repay the loan. This is like the floating cloud turning into a storm and raining down on specific assets.
- Chargor not restricted: The company can still sell its assets in the normal course of business, just like you can still live your life even though there’s a cloud in the sky.
- Security to lenders: This gives comfort to the people who lend money to the company. It’s like having an umbrella ready for when the storm comes.
- When the Fixed charge is impracticable: Sometimes, it’s not practical to have a fixed charge on specific assets (like if the assets keep changing). In such cases, a floating charge is like having a cloud that can rain down anywhere, instead of a storm that only hits one place.
Public company limited by shares
Definition?
What is it limited to?
Share capital requirements (2)
Other requirements (2)
All…?
What is it offered to?
- a company limited by shares, or limited by guarantee and having a share capital, whose certificate of incorporation states that it is a public company – s. 4(2)
- Limited to the amount unpaid on the shares of the shareholders
- share capital of £50,000or more, of which at least 25% must have been paid up before the company can begin trading.
- At least 2 directors and a company secretary
- All listed companies – PLCs
- offered to the public via Initial public offer (IPO) or Private placement
Private Company Limited by Shares
Definition?
What is it limited?
What cannot it not do?
How do they raise money? (4)
- Any company that is not a public company
- share capital and the liability of each member is limited to the amount, if any, unpaid on their shares.
- cannot offer its shares for sale to the general public or be listed or traded
- Raising capital – family, bank loans, venture capitalists, angel investors, etc.
Private and Public Company Limited by Guarantee
Definition?
When can liability be recovered?
No…?
Similar regulations to what?
Widely used by who (6)
- Members ‘guarantee’ a certain amount
- To be recovered at the time of liquidation
- No investment at the time of incorporation
- Similar regulations like the company limited by shares
- Widely used by charitable and analogous organisations (e.g. schools, colleges, etc.)
- membership-based organisations and clubs like sports associations, workers’ cooperative
Difference between Public & Private Company
What suffix is required?
Which needs a qualified company secretary?
Directors?
Shares? (2)
Regulation?
Limited?
Minimum capital requirement?
Public Company
- Suffix required- PLC
- A qualified Company Secretary
- At least have 2 directors (at least one director must be an individual)
- Shares can be listed on stock exchange
- Can offer to sell its shares to the public at large
- Heavily regulated
- Must be limited. It is impossible to create an unlimited public company
- Minimum allotted share capital requirement - £50,000
Private Company
- Suffix required - Ltd
- No such requirement, if there is one, does not need to be qualified
- At least 1 director (must be an individual)
- Shares cannot be listed on stock exchange, or advertised for sale
- Cannot offer to sell its shares to the public at large
- Less stringent than public company
- Can be limited or unlimited, although the vast majority are limited
- No minimum capital requirement
Private unlimited company
How many is there?
Liability?
What happens in a formal liquidation?
Management?
Companies House?
- Not many
- Unlimited liability
- Formal liquidation - shareholders responsible for all outstanding liabs irrespective of their initial investment
- Low-risk approach to management
- Not required by law to submit annual accounts to Companies House
Community Interest Company
What is the purpose?
Distribution?
What can it be limited by?
Company’s assets are…?
Therefore?
Examples of these?
- Purpose - benefit of the community
- Distribution to the company’s members and payment of debenture interest is subject to a cap
- Can be limited by shares or guarantee
- Company’s assets are ‘locked in’
- Therefore, investors in CIC have less incentive to exercise control because the potential rewards are more limited than an ordinary co.
- housing associations, community development trusts, leisure centres
Duties of Directors - An Overview
Duties (7)
If a director breaches any of those duties he will be required: (7)
Directors’ duties are now codified in the Companies Act 2006
- A duty to act within powers:
- If they act beyond powers, company will still be bound by the transaction if third party has acted in good faith - When they act outside their powers, shareholders can retrospectively ratify the transaction
- A duty to promote the success of the company:
- But in some circumstances the law requires the directors to primarily consider the interest of creditors - E.g. Where a company is insolvent, the directors may be liable for wrongful trading!
- A duty to exercise independent judgement
- A duty to exercise reasonable skill, care, and diligence
- A duty to avoid conflict of interest
- A duty not to accept benefits from third parties
- A duty to declare an interest in any proposed transaction or arrangement with the company
If a director breaches any of those duties he will be required:
- to make up any losses suffered by the company
- Any secret profit gained can be claimed by the company
- Any contract entered by the director where he failed to disclose interest will be voidable (i.e. company can rescind it).
- If property has been taken by the director and has not passed to an innocent third party, this should be returned.
- Where breach is continuing or breach has not yet occurred (but it has been made clear that the director intends to commit) the company can seek an injunction
- If more than one of the directors is in breach of their duties, liability is joint and several
- The articles of a company can impose more onerous duties
Duties of Directors - An Overview - A duty to act within powers
An amalgam of two prior common law duties namely
Case Law?
An amalgam of two prior common law duties namely –
- the duty to act in accordance with the company’s constitution, and
- the duty to exercise powers only for the purposes for which they are conferred.
Eclairs Group Ltd v JKX Oil & Gas plc - The directors used power in the company’s articles to disenfranchise a group of shareholders, who were due to vote against the company at the upcoming AGM. The proper purpose rule would apply to provisions in the articles. Exercising the power to disenfranchise members is not a proper purpose.
Duties of Directors - A duty to promote the success of the company
What should they do?
2 components?
Case Law?
- Enlightened shareholder value’ – prioritize members but take into account wider factors and other stakeholders
Two components –
- The Director must act in good faith to promote the success of the company for the benefit of the members as a whole.
- Director must consider the non-exhaustive factors to which Director must “have regard to” in s172(1) CA 2006:
Long Term Consequences; Interests of Employees; Fostering Business Relationships; Impact on Community & Environment; Reputation; Act fairly between Member
Mutual Life Insurance Co of New York v Rank Organisation Ltd
shareholders claimed discrimination when Rank Organisation Ltd excluded them from a share offer. However, the court dismissed the complaint, ruling that the directors had acted in good faith and in the company’s interest, and that the shareholders’ rights had not been affected.
Duties of Directors - Duty to exercise independent judgment
Meaning?
The duty is not breached if? (4)
Akin to the common law duty placed upon directors not to fetter their discretion when exercising their powers
The duty is not breached if:
- the directors act ‘in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors’
- director acts in a way that is authorized by the company’s constitution
- Any agreement in contravention will be voidable at the co.’s instance
- Directors obligated to indemnify
Duties of Directors - Duty to exercise reasonable care, skill, and diligence
What did inexperienced directors do?
What objective element is there?
Case Law
- Similar common law duty was subjective, hence, incompetent, unskilled, and inexperienced directors used their deficiencies as a shield against liability
The level of care, skill, and hard work expected from a director is based on what a reasonably diligent person would have. This includes:
- The basic knowledge, skill, and experience that anyone in the director’s position is expected to have. This sets a minimum standard of care. - The specific knowledge, skill, and experience that the director personally has. This can raise the standard of care, especially for directors with professional backgrounds like accountants or lawyers. Re Barings plc (No 5) [2000]
Barings Bank collapsed due to the activities of a rogue trader. Disqualification proceedings were brought against three former directors based in London for serious management failures
Duties of Directors – Duty to avoid conflicts of interest
Examples of this (3)
What is irrelevant (2)
No breach if..?
Public v private?
Applicable to?
Does not apply to?
Case Law
- Avoid a situation that directly or indirectly causes or may possibly cause conflicts of interest
- E.g. Helping a competing company, corporate opportunity doctrine, using the company’s property to benefit financially, a director is also a major customer, supplier, or creditor of that company.
- duty arises in particular to ‘the exploitation of any property, information or opportunity’ and it is irrelevant whether or not the company wishes or is able to take advantage of the property, information, or opportunity.
- Irrelevant if the profit is negligible or substantial
- No breach if the interest is declared and authorized by the BOD
- For public companies, authorization is only valid if the constitution so provides - For private companies, authorization from BOD is sufficient - unless the constitution provides otherwise
- Applicable even to former directors
- does not apply to transactions between a director and the company
Bhullar v Bhullar
established that directors must avoid conflicts of interest, particularly regarding corporate opportunities. A director bought an adjacent property without informing the company, breaching his duty to communicate opportunities
Duties of Directors - Duty not to accept benefits from a third party
Meaning?
Example?
Motive is..?
Not breached when?
- a director must not accept from a third party a benefit conferred by reason of his being a director, or by doing (or not doing) anything as a director.
- Maybe monetary or non-monetary benefit
- E.g. to influence his decision by offering a bribe
- Motive is irrelevant and will not be a defence for the director to argue that he acted in good faith
- NOT BREACHED - where ‘the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest’
- the duty only arises in relation to benefits that are likely to give rise to a conflict of interest.
Duties of Directors - Duty to declare interest in transactions or arrangements
What must the director do to avoid this?
Only applies to?
as the duty covers indirect transactions/arrangements…?
the director who made the declaration cannot…?
- If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.
- only applies to transactions/arrangements that are likely to give rise to a conflict of interest, and
- as the duty covers indirect transactions/arrangements, the director does not actually need to be a party to the transaction/arrangement in order for the duty to be breached.
- the director who made the declaration cannot generally participate in the board resolution, nor will he generally count towards the quorum during that resolution.
- Only covers ‘proposed’ transactions, for ‘existing’ transactions
