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Company Law > Different business models and introduction to companies > Flashcards

Different business models and introduction to companies Flashcards

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1
Q

Why do businesses need to raise finance? (4)

A
  • Purchase premises/stock/software etc.
  • Employ staff
  • Obtain professional advice
  • Expand and grow - acquiring other businesses for example
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2
Q

How do businesses raise finance? (4)

A
  1. owners may invest - contribute to capital
  2. outside investors may make capital contribution in order to share future profits
  3. businesses may borrow money i.e. from a bank
  4. proportion of money will be retained to help it grow
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3
Q

4 business models?

A
  1. sole trader
  2. partnership
  3. limited partnership
  4. limited liability partnership (LLP)
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4
Q

Key considerations when forming a business? (6)

A
  1. costs
  2. risk
  3. structure
  4. formalities
  5. privacy
  6. finance
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5
Q

Key characteristics of a sole trader?

A
  • no set up costs or formalities
  • not separate legal entities
  • unlimited personal liability
  • no formal structure
  • no companies house filing
  • complete privacy
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6
Q

Key characteristics of a sole trader?-

A
  • no set up costs or formalities
  • not separate legal entities
  • unlimited personal liability - joint (contract) and several (tort) liability
  • no companies house filing
  • complete privacy
  • Governed by the provisions of the Partnership Act 1890 (PA 1890).
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7
Q

Does there need to be intention to form a partnership?

A

No - ‘…the relation which subsists between persons carrying on a business in common with a view to profit’. s1(1) PA 1890

s2 PA - list of rules for determining existence of partnership. Factors include: shared profits/losses, loans, property etc. No one factor - all will be considered - ‘held out’ as a partner.

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8
Q

What are the terms of a partnership? (4)

A
  • Section 24(1) Profits and losses (share both)
  • Section 24(6) Remuneration (not entitled to salary)
  • Section 24(8) Decision Making (majority decided - but NATURE of partnership requires unanimity)
  • Section 25 Expulsion
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9
Q

Key principles that partnership agreements deal with? (5)

A
  • Profit sharing ratio
  • Salaries
  • Decision making – eg are certain partners able to make decisions on particular issues alone or in small committees?
  • What happens when a partner leaves the partnership
  • How new partners may be appointed and how partners may be removed.
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10
Q

Key characteristics of Limited Partnerships (LP)?

A

Two types of partners:

  • Limited partners (limited liability) not involved in management of business
  • General partners (unlimited liability)
  • –> must be one of each.
  • Governed by Limited Partnership Act 1907 - must be registered at CH but don’t have to file
  • Not common - investment vehicle
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11
Q

Limited Liability Partnership (LLP) - Key Characteristics?

A
  • Limited Liability Partnership Act 2000 (LLPA 2000).
  • Separate legal personality - however for tax, treated as partnership
  • All partners have limited liability
  • Registered at CH and have to file accounts

Organisational structre is flexible. Members’ Agreement - without this, Limited Liability Partnerships Regulations 2001 applies; provisions are:

  • Share equally profits and capital
  • Every member take part in management - not entitled for remuneration
  • Consent of all existing members for new members
  • Majority decision making
  • No implied power of expulsion
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12
Q

Companies – Key characteristics? (3)

A
  1. Separate legal entity
  2. Limited liability
  3. Governed by CA 2006 - CH filing - procedural requirements can be onerous
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13
Q

What’s a persons with significant control?

A

Shareholder with over 25% of shares

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14
Q

Key changes that CA 2006 made to CA 1985?

A
  • removal of AGM requirement
  • codification of directors’ duties
  • private companies can pass shareholder res in writing
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15
Q

3 types of private companies?

A 
Private companies limited by shares (Ltd)
- most common 
- no shares to public 
- can be one person
Private companies limited by guarantee
- no share capital 
- liability limited to amount agreed to contribute in event of winding up
- rare
Unlimited companies
- rare
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16
Q

2 types of public companies?

A 
Public companies limited by shares (Plc)
- shares to public 
- min 2 directors 
- min share capital requirement £50,000
- need trading certificate 
Listed companies
- London Stock Exchange 
- Not all public companies listed
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17
Q

Principal differences between private and public company? (6)

A 
Name
- ltd or plc
Share capital
- private company can be 1p, or £1. public must have nominal £50,000 share capital.
Number of directors
- 1 ltd 2 public. 
Company secretary
- private company no secretary requirement, but can, public MUST and must be qualified 
Annual general meetings
- Public must 1 a year, private no. 
Regulation
- higher level of regulation for public company
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18
Q

Advantages (5) and disadvantages (3) of incorporation?

A

Advantages
1 Allows investment with limited liability
2 Minimises risk
3 Gives a formal structure for the business to run
4 Easier to raise finance through issue of shares / bank loans
5 Potential for return on investment through dividends

Disadvantages
1 For small private companies where the directors and shareholders are the same individuals, the effective separation of ownership from control is not achieved
2 High levels of formality may not be appropriate or desirable
3 Public disclosures necessary eg annual accounts, personal details

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19
Q

Difference of constitutional documents needed under CA 1985 and CA 2006?

A

CA 1985:
2 - Articles of Association and Memorandum.
CA 2006:
- Memorandum no longer constitutional - just part of procedure

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20
Q

What did the Memorandum do under CA 1985?

A

Set out an objects clause

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21
Q

Do companies under CA 2006 have objects clauses?

A

No - unrestricted objects (s 31 CA 2006) - unless specifically restricted in companies Articles

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22
Q

What’s the situation with older companies incorporated under CA 1985 that have an objects clause?

A

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.

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23
Q

What is s18 CA 2006?

A

All companies must have articles of association (Articles).

Examples of provisions in Articles;
• 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.

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24
Q

What is the legality test?

A

The Articles must comply with the minimum provisions of CA 2006:

Note - company may in certain circumstances provide a procedure in its Articles which is more onerous than that contained in CA 2006 - i.e. requiring 3 directors instead of 1. There are also some CA 2006 provisions which can override anything in a company’s Articles.

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25
Q

3 choices of Artciles?

A

Model Articles (MA)
Amended MA
Tailor Made Articles

26
Q

What provision of CA 2006 to be able to alter Articles?

A

s21(1) - special resolution

- General rule - to be valid, any alteration must be made bona fide in the interests of the company as a whole

27
Q

Are the Articles a contract between the company and members?

A

Essentially yes - s33(1) CA 2006 - 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

28
Q

Do the Articles constitute a contract between the members themselves?

A

Conflicting case law - Rayfields v Hands.
- courts appear to be of the opinion that members will only be able to enforce provisions contained in Articles through the company itself.

29
Q

2 ways re. formation of a company?

A
  1. Incorporation from scratch (by submitting relevant information to Companies House)
  2. Shelf company conversion (purchase of shelf company followed by formalities to enable changes)
30
Q

Under s9 CA 2006 what must be delivered to CH for incorporation from scratch? (4)

A
  1. memorandum
  2. Articles (if not using MAs)
  3. Fee
    – up to 5 days to process
  4. Form IN01; companies name, location, ltd/plc etc.
    — Must contain:
    - statement of capital and initial shareholdings
    - statement of the company’s proposed officers
    - if the company is to be limited by guarantee, details must be given of the guarantee
    - statement of compliance
    Once done; certificate of incorporation!
31
Q

Changes made when purchasing shelf company? (4)

A
  1. Name
  2. Articles
  3. Registered office
  4. Members, directors and the company secretary

Traditionally cheaper and quicker, but this is changing.

32
Q

Key stakeholders in a company?

A
  1. Shareholders (members)
  2. Directors (the board)
  3. Persons with Significant Control (PSC - over 25% of shares)
33
Q

Can a company own shares in another company?

A

Yes - shareholder need not be a human being - subsidiary company (s1159 CA 2006)

34
Q

What is a share? Most common type of share?

A

‘Bundle of rights’

Ordinary shares.

35
Q

What is the ‘nominal’ value of a share?

A

Minimum subscription price for that share. It represents a unit of ownership rather than the actual value of the share.

36
Q

Can a share be allotted/issued at a discount?

A

No - but it can in excess; the excess is then known as the PREMIUM amount.

37
Q

What’s the ‘issued share capital’?

A

Total amount in value (nominal and premium) of all shares in issue at any time - amount of share capital that will be shown in the company’s accounts.

38
Q

What’s a company’s issued share capital made up of?

A
  1. shares purchased by first members of the company

2. further shares issued after company has been incorporated

39
Q

What is a shareholders’ liability limited to?

A

The amount, if any, unpaid on his/her shares.

40
Q

What is a PSC?

A
  • owns more than 25% of the shares or voting rights in the company;
  • has the power to appoint or remove a majority of its board of directors; or
  • otherwise exercises ‘significant influence or control’ over the company.
41
Q

Minimum age for shareholder?

A

16 - s157 CA 2006

42
Q

Types of directors? (5)

A

Executive directors - finance/managing director
Non-executive directors - officer but not employee
Shadow directors
De facto directors - assumes to act as director but is not legally appointed director
Alternate directors

43
Q

Does the CA 2006 stipulate procedure for appointment of director?

A 
No - Articles: 
Art 17(1): 
a) ordinary resolution
b) decision of directors 
Companies may have customised articles on this point.
44
Q

Which director should get a written contract of employment?

A

Executive director - written contract of employment setting out T&Cs
Art 18: terms of contract are for board to decide.

45
Q

When does s188 CA 2006 apply?

A

Service contract provides for a director’s employment to have a ‘guaranteed term’ which is, or may be, longer than two years.

46
Q

How are decisions of directors taken?

A

Board Resolutions in Board Meetings (BM).

47
Q

How are decisions of shareholders taken?

A

Passing Shareholder Resolutions, either in a meeting of the shareholders (referred to as a General Meeting (GM)) or in writing:

  1. ordinary resolutions
  2. special resolutions
48
Q

Board resolutions procedures?

A 
Art 7(1) MA: majority decision at a meeting of the directors.
Art 13 MA: in event of deadlock, chairman has casting vote (if appointed under Art 12 MA - chosen by directors from amongst themselves). 
-- Art 8 MA says directors can make decisions without having to hold a BM: i.e. by any means.
49
Q

Examples of decisions that cannot be taken by directors without authorisation from shareholders?

A
  • the making of changes to the company’s constitution;
  • the approval of certain transactions between the directors and the company; and
  • the formal declaration of dividends.
50
Q

Ordinary resolutions?

A

s 282(1) CA 2006: simple majority (more than 50% of votes are cast in favour

51
Q

Special resolutions?

A

s 283(1) CA 2006: majority of not less than 75%.

52
Q

Different methods of voting?

A
  • show of hands: one hand one vote (present at meeting)
  • poll vote: one vote per share (s284 CA 2006)

There is a right to demand a poll vote - s321 CA 2006 (conditions that must be met).

Right to appoint a proxy: exercise all or any of his rights to attend and to speak and vote at any GM, in his place s 324

53
Q

What are the two resolutions that may not be passed as written resolutions (s288(2))?

A
  • Removal of a director under s 168

* Removal of an auditor under s 510

54
Q

Board meetings: key factors?

A
  1. reasonable notice
  2. quorum - minimum of two directors
  3. passed by majority vote (chairman may have casting vote, depends on Articles)
55
Q

What two situations will need referral to the shareholders?

A
  1. matter is outside the powers of the directors and must be approved by a resolution of the shareholders (i.e. amendments to company articles - s 21 CA 2006)
  2. matter is within the powers of the directors but requires the prior approval of the shareholders before the directors can be authorised to act (loan to a director of the company)
56
Q

General meetings: factors?

A
  • s 307 CA 2006: LTD companies must give 14 clear days notice for shareholder GMs.
  • Quorum - generally 2 shareholders (s318(2) CA 2006)
57
Q

What’s the sequence of meetings when a matter is outside the powers of the directors?

A

BM -> GM -> BM -> (PMM post meeting matters - secretary - copies of documents filed at CH).

58
Q

Can GMs be called on less than usual amount of notice?

A

Yes - if sufficient members agree.

- s 307 (5) CA 2006: if majority agree who together hold shares with nominal value of not less than 90%

59
Q

Written resolution procedure for private companies?

A

s 281 CA 2006 only private companies.
s 282 CA 2006 simple majority of the total voting rights of eligible members.
s 283 CA 2006 special resolution can be passed by a majority of members representing not less than 75% of the total voting rights of eligible members.
s 284 CA 2006 every member has one vote in respect of each share held by him when voting on a written resolution.
s 288 CA 2006 resolutions to remove a director or auditor from office may not be passed by way of written resolutions.

60
Q

Process post meeting?

A

Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days.
All special resolutions must be filed.

61
Q

Why is it important to follow the correct procedures? (2)

A
  1. If the correct procedures are not followed, then resolutions purportedly passed at meetings may be invalid.
  2. There may also be criminal sanctions. For example, ss 248(3) and (4) CA 2006 state that if a company fails to record minutes of meetings in the relevant statutory books, every officer in default is liable to a fine.

Company Law (10 decks)

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