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Business Law and Practice (V) > Formation of a company > Flashcards

Formation of a company Flashcards

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1
Q

What are the two constitutional documents that a company is required to have and which one remains relevant?

A
  1. Articles of Association
  2. Memorandum (as of CA 2006 it is no longer a part of constitution and now is required only for CH registration to declare that first members wish to form a company)
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2
Q

What did a memorandum contain and what was their effect for companies incorporated under CA 1985? Will it still apply today?

A
  • Objects clause setting out purpose of company’s formation - acting outside of this would be ultra vires
  • Will continue to apply as a limitation on company unless Articles of company are amended to remove it
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3
Q

How are objects restricted for companies incorporated under CA 2006?

A

Companies have unrestricted objects unless specifically restricted in Articles

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4
Q

What is the purpose of Articles of association?

A

Regulate relationship between shareholders, directors and company

Contract between company and members + between members themselves

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5
Q

What provisions would be included in Articles?

A
  • 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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6
Q

How much must the Articles comply with CA 2006?

A

Must comply with the minimum provisions, but Articles can make procedures more onerous than CA (or remove those provided by default e.g. power to issue redeemable shares)

E.g. CA provides a Ltd must have at least one director - but company could provide in its Articles that it requires 3 directors (so company must comply with this!)

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7
Q

If there is a conflict between the articles of association and the Companies Act 2006 - which provisions will prevail?

A

Companies Act 2006 overrides everything!

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8
Q

Will CA provisions override a company’s Articles?

A

Some can override anything in Articles e.g. right to demand a poll vote at GM cannot be removed from Articles

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9
Q

What choices does a company have regarding its Articles?

A
  1. Model Articles (MA) - default if no Articles registered
  2. Amended MA - MA with modifications
  3. Tailor made - solicitor drafts tailor-made Articles for company concerned
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10
Q

How does a company amend its Articles at a later date?

A

By special resolution of shareholders

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11
Q

When will more than a SR be required to amend Articles?

A

Where specific provisions have been entrenched i.e. can only be amended/repealed if specific conditions met or restrictive procedures complied with

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12
Q

What is the basic rule for an alteration to the Articles to be valid?

Aside from procedurally

A

Alteration must be made bona fide in the interests of the company as a whole

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13
Q

What is the test for whether an alteration would be for the benefit of the company?

I.e. when would an alteration be deemed unreasonable?

A

Where no reasonable man could consider it to be for the benefit of the company, e.g. …

  • Provision giving directors power to buy out (at fair price) shareholding of member competing w company = good faith and in company’s interests
  • Provision allowing shares of minority shareholder to be compulsorily acquired under takeover offer valid if consistent with terms of shareholder agreement = absence of bad faith/improper motive
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14
Q

To what extent do the Articles bind the company and its members?

A

To the same extent as if there were covenants on part of the company and each member to observe those provisions - i.e. binding on both company and its members and enforceable

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

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15
Q

When is a member unable to enforce rights contained in the Articles against the company?

A

If the rights are not relevant to his capacity as member

Eley v Positive Government Security Life Assurance Company (1876): member inserted right into Articles for him to be employed as company’s solicitor for life. Could not enforce provision as this was in capacity as company’s solicitor and not member

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16
Q

Can the courts prevent a company from infringing its members’ rights in breach of Articles?

A

Yes - as the Articles form a contract between the company and its members

E.g. grant an injunction where member does not receive financial dividend if declared

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17
Q

What is the only situation in which a member can enforce Articles against another member directly (rather than only through company itself)?

Through company itself = requiring company to enforce provisions against member

A

A member can only enforce Articles against another member directly if one member accepted a personal obligation to another member through the Articles e.g. to transfer shares

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18
Q

How should a member enforce rights against other members?

A

Using a shareholders’ agreement; a private agreement between shareholders that is enforceable as a contract between members

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19
Q

What are the 2 ways a client can start a business through medium of a company?

A
  1. Incorporate company from scratch
  2. Purchase a shelf company and convert to conduct business
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20
Q

To incorporate a company from scratch, what 4 things must be delivered to CH?

A
  1. Company’s memorandum
  2. Articles (if not using MA)
  3. Fee (premium for same-day)
  4. Application for registration (Form IN01) stating name, whether reg office in E+W, S or NI, whether liability limited and whether public or private
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21
Q

What must the application contain statements of?

3

A
  1. Capital and initial shareholdings (where company is to have a share capital)
  2. Proposed officers (directors, secretary)
  3. Compliance w/ CA 2006
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22
Q

When will a certificate of incorporation be sent and what 3 things will it set out?

A

Sent out once Registrar has approved application for incorporation - certificate sets out:

  • Name of company (can be changed)
  • Company’s registered number (never changes)
  • Date of incorporation
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23
Q

On what date does the company become a legal entity?

I.e. come into existence

A

From the date of incorporation set out in certificate

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24
Q

What is a shelf company and why use one?

A
  • Company set up in adavance by company station registration agent or law stationer
  • Can be done all the time on every day of year (unlike online incorporation limited to CH opening hours)

Speed might be an advantage but advent of online incorporation services means the difference in speed converting shelf company and incorporation from scratch is negligible

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25
Q

What changes must be made to shelf company and how are they made?

A
  • Name by SR or provision in Articles e.g. BR
  • Articles (if amending) by SR!
  • Registered office
  • Members, directors and company secretary by BR

Shares held by subscribers transferred to client; client’s reps are appointed as director(s); first directors resign from positions

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26
Q

If changing the name of a shelf company, must a SR always be used?

A

Yes, unless otherwise provided for in articles

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27
Q

What are the rules for a company’s name?

A
  • Cannot be offensive
  • Must not be ‘same as’ another on index of company names
  • Must obtain approval if it suggests a ‘connection with GOV/public authority’ or contains other sensitive words
  • Once chosen - must be displayed in certain prescribed locations
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28
Q

From what date is a new name effective?

A

From date on which new certificate of incorporation on change of name is issued by Registrar of Companies

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29
Q
A
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30
Q

What 4 practical issues must be attended to post-incorporation and how is each done?

A
  • Deciding whether to elect a chairperson and if they should have casting vote in event of tie (MA 13)
  • Adjusting accounting reference date to align with their financial year (Form AA01)
  • Appoint auditor to prepare annual account (BR)
  • Register for corp tax, VAT and PAYE and NI (if it has employees)
  • Decide whether to make shareholders’ agreement
31
Q

What is the default accounting reference date if unchanged?

A

Last day of the month in which company was incorporated

32
Q

Can a company enter into a contract before it is incorporated?

A

No - it is not a legal person and so not possible for company to have legal rights/duties under contract

Contracts (Rights of Third Parties) Act 1999 (which allows for TPs to enforce contract where it confers benefit on TP) does not apply as pre-incorporations will impose obligations as well as benefits on TP

33
Q

What is the outcome where a TP believes they are entering into a contract with a company which is incorporated and registered?

Is the third party protected?

A

The directors themselves will be personally liable under the contract; pre-incorporation contracts are enforceable as personal contracts against person purporting to act on company’s behalf (the promoter)

34
Q

Can a company ratify a contract that was made before its existence?

A

No - but parties can take steps to novate the contract

35
Q

Must a decision only be referred to shareholders where it is a matter outside the powers of directors?

A

No, both situations…

  1. Matter is outside powers of directors and must be effected by resolution of shareholders (e.g. amending Articles)
  2. Matter is inside powers of directors but requires prior approval before director is authorised (e.g. making loan to director of company)
36
Q

If members of a company want to do something informally - i.e. without using GM procedure - what is required?

A

Unanimous assent - all must agree

The duomatic (ratification) principle

i.e. anything the members of the company can do by formal resolution in a general meeting, they can also do informally if all of them assent to it

37
Q

How are Board Resolutions passed at Board Meetings?

A

By a single majority (unless they have agreed in Articles it requires unanimity)

Each director has one vote

38
Q

Do directors have to attend BMs to pass BRs?

A

No - are able to pass a written BR

39
Q

How can shareholder resolutions be passed?

A
  • At a meeting of shareholders (GM); or
  • In writing (private companies only)
40
Q

Can all types of companies pass written shareholder resolutions?

A

No - only private companies

41
Q

How is an ordinary resolution and special resolution passed?

A
  • OR = over 50% (simple majority)
  • SR = 75% or more
42
Q

What are votes counted out of at a GM?

A

All eligible shareholders present and voting at meeting

43
Q

What is meant by a shareholding appointing another person as their proxy?

A

A proxy can attend meeting and exercise their rights e.g. attend, speak, vote

44
Q

What are the two different methods of voting and what do they mean?

A
  1. Voting on a show of hands - one vote regardless of number of shares
  2. Voting on a poll - one vote per share

Right to demand poll makes significant difference

45
Q

When can a poll vote on a resolution be demanded?

3 times

A

Either
1. In advance of the GM where vote takes place; or
2. At a GM before a show of hands on resolution or
3. At a GM immediately after result of vote

46
Q

Who can demand a poll vote?

4 different types of person

A
  • Chairperson of meeting
  • The directors
  • Two or more persons having the right to vote on the resolution; or
  • Person(s) representing at least 10% of total voting rights of all shareholders entitled to vote on resolution
47
Q

Shareholders are A (45%) B (20%) C (20%) and D (15%). Can A and B pass an OR without support of C and D?

Importance of poll voting

A
  • On a show of hands = no (will require one of C or D to support OR)

But because of their voting rights, either A or B alone can demand a poll

  • On a poll vote = yes (together have 65% shares i.e. a simple majority)

So shareholders with larger % of votes hold more power in company

On other hand - A alone could block a SR on a poll vote if B, C and D voted in favour

48
Q

Can both public and private companies pass a resoution by written resolution?

A

No - only private

49
Q

When voting on a written resolution, how many votes does a shareholder have?

NB PRIVATE COMPANIES ONLY

A

A shareholder has one vote for each share they hold

50
Q

What are the 2 types of written resolution?

A
  • Written OR - passed by a simple majority of total voting rights of eligible members
  • Written SR - passed by majority of members not less then 75% of total voting rights of eligible members

Written SR must state that it is a written SR

51
Q

What is the consequence of votes being counted out of all eligible members in a written resolution and a member abstains?

A

If a member abstains, it means they are effectively voting against (as their vote will still contribute to the votes of all eligible members)

E.g. A (45) B (30) C (20) D (5) - A and D in favour of passing **written **OR, but B not and C planning to abstain. A and D hold 50% of voting rights, whereas D and C (who still counts even though is abstaining) count for 50% too - A and D do not have simple majority and cannot pass written OR

52
Q

What decisions cannot be passed as written resolutions?

A

Removal of a director or removal of auditor

53
Q

Can any director call a BM? How much notice must be given?

A
  • Any director can call a BM (or can require secretary to)
  • Reasonable notice is necessary (would be whatever is usual for directors to give)

E.g. if all the directors are in the same building, the meeting could be called almost immediately, if such notice is customary for the directors.

54
Q

What is the required number of directors (by the MA) to be present for the BM to be ‘quorate’? Will this always be the case?

May be modified in Articles

Quorate = for business to be validly considered (cannot consider business unless minimum number of directors entitled to vore are present)

A

2 directors must be present

Again - articles might provide otherwise

55
Q

How are BRs passed? What if there is a deadlock?

A
  • Passed by majority vote on a show of hands - each director has one vote
  • Chair may have casting vote to prevent deadlock (provided for by MA)
56
Q

Who calls a GM?

A

Board

57
Q

What notice is required for a private company GM and a public company’s AGM and what information must be given in the ‘notice’ (document) inviting shareholders?

Notice = period of time between act of convening and actually happening

A
  • 14 days’ clear notice for private GM and 21 days’ clear notice for a public AGM
  • ‘Notice’ must inform shareholders of when and where GM happening

Clear day rules applies

Directors must approve form of notice of GM and authorise circulation to shareholders

58
Q

What notice is required for a public company GM that is not an AGM?

A

14 days

59
Q

If the notice is posted or emailed, when is it deemed served?

A

48 hours after sending

60
Q

What is the quorum for a GM? What if it’s a single member company?

A

Two shareholders (but one shareholder for single member companies)

61
Q

After the GM, why will there be another BM and what will the secretary do?

A
  1. Further BM to put into effect outcome of shareholder vote (directors informed about vote and will authorise secretary to deal with post meeting matters)
  2. Secretary carries out PMM e.g. filings at CH
62
Q

What is the ‘GM sandwich’? What is the notice for each stage?

I.e. order of meetings for a GM

A
  1. BM (reasonable notice) - to decide on issues, convene GM, approve and authorise circulation of notice
  2. GM (14 days’ notice) - shareholders vote on resolutions in notice
  3. BM (reasonable notice) - effect outcome of shareholder vote
  4. PMM
63
Q

What are the 2 conditions for a GM to be called on short notice for a private company?

I.e. short-notice procedure

14 clear days’ notice of GM can hold up decision-making (esp where shareholders and directors are the same person)

A

If…

  1. Agreed to by a majority in number of members; who…
  2. Together hold shares with a nominal value of not less than 90% of the total nominal value of shares which give right to attend and vote at GM

NB % may be increased by Articles

64
Q

If a company with MA has 5 shareholders and each has 20% of ords, how many shareholders are required to approve short notice?

A

Only if all 5 shareholders approve it; majority in number would be 3 out of 5 (first limb) but together they would only hold 60% (second limb)

Even 4 would only hold 80!

65
Q

What is the sequence of meetings for a short notice GM and how long will it take?

A

Can all be dealt with in under an hour…
1. BM - convene GM; approve form of notice for GM; approve form of consent to short notice and to authorise circulation to shareholders; shareholders indicate agreement by signing form. BM adjourned and immediately following this…
2. GM - shareholders vote on resolutions set out in notice
3. BM…reconvened, directors informed on how shareholders voted and authorises one of their number to take relevant action and deal with PMMs

66
Q

Who can propose a written shareholder resolution and when will it be passed?

A
  • Can be proposed by directors or members of a private company
  • Passes when the required majority (OR or SR) of the eligible members signify agreement to it
67
Q

What is an ‘eligible member’ in context of written resolution?

Recall - point about abstaining

A

A member who would have been entitled to vote on the resolution on the circulation date of the written resolution

68
Q

Will the WR exist until it receives the sufficient amount of responses?

A

No - if it does not receive sufficient number of responses to pass WR after 28 days (beginning with circulation date) it will lapse

28 days can be adjusted in Articles

69
Q

What cannot be passed by WR?

Repeat

A

Resolutions to remove director or auditor from office

Allows time to mount a defence

70
Q

What is the sequence of meetings for a written resolution?

A
  1. BM - resolve to use WR procedure; approve wording and circulate
  2. Then either…

2a. Shareholders are present = BM adjourned and approval/abstaining takes place immediately
2b. Shareholders are not present = BM closed and WR passes or lapses after 28 days

  1. BM - reconvened; authorise relevant action
71
Q

What are the 3 different categories of post-meeting matters (PMMs)?

A
  1. Internal
  2. Filing at CH
  3. Record keeping
72
Q

Re internal PMMs, how long must minutes be kept and what must be updated?

A

Minutes of all meetings kept for 10 years and updating of statutory books (reg of members, directors, PSC register)

73
Q

Do all resoutions and amended Articles need to be filed at CH?

A
  • All SRs filed - but ORs generally do not need to be filed
  • Amended Articles must be filed along with forms that CH requires (e.g. change of name)

Business Law and Practice (V) (13 decks)

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