Formation of a company Flashcards
Constitutional documents of a company
Under Companies Act 2006: articles of association only
Under CA 1985: articles of association and the memorandum
Under 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.
It simply amounts to a declaration on the part of the subscribers that they wish to form a company and agree to become members of that company.
Memorandum: 1985 and 2006
1985:
- includes an objects clause setting out the purpose for which the company was formed
- acting outside the purpose was acting ‘ultra vires’
2006:
- do not have an objects clause unless specifically restricted in the companies articles
Note: the objects clause of an older company continues in force unless and until the articles are amended to remove its objects clause
Articles of Association
This is the main constitutional document of a company.
Regulates the relationship between the shareholders, the directors and the company.
Example provisions:
- number of directors required to transact business
- method of appointment of directors
- powers of directors
- how board meetings are to be conducted
- any special rights attaching to shares
- how shareholder meetings are to be conducted
- how and to whom shareholders may transfer their shares
CA 2006 and the articles
- Articles must comply with minimum provisions of CA 2006 (legality test)
- In certain circumstances provide a procedure which is more onerous than contained in CA 2006.
- Some CA 2006 provisions override anything in a company’s articles (e.g. right to demand a poll vote cannot be removed or varied)
- Come powers are available by default unless the Articles provide otherwise (e.g. power of a private ltd to issue redeemable shares)
Choices of articles
- Model articles
Model articles are used in default if no other articles are registered (1985 act called Table A articles) - Amended MA
May elect to use MA but exclude or modify some of the provisions in so far as they are allowed - Tailor made articles
Client may wish solicitors to draft articles which are tailor-made for particular company concerned. Time-consuming and costly - most companies will prefer to adopt MA.
Amending articles
Once a company has adopted articles it is able to alter them at any future fate by special resolution.
Basic rule: to be valid must be made bona fide in the interests of the company as a whole
Entrenched articles: can only be amended or repealed if specific conditions are met or by specific procedures.
Can also be amended by ALL members or court order.
- Very rare!!
Effect of the articles
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.
Provisions bind company and members to same extent as if there were covenants on the part of the company and each member to observe those provisions.
Articles as a contract between the members themselves
- members are only able to enforce provisions contained in articles through the company itself
- if a member wishes to enforce against another shareholder, should advise to enter into a shareholder’s agreement
Articles as contract between the company and its members
- 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 against the company that are not relevant to his capacity as a member e.g. right to vote
Two ways to incorporate a company
- incorporation from scratch: submitting relevant information to companies house/online
- shelf company conversion: purchase of shelf company followed by formalities to enable necessary changes
Companies House requirements to incorporate a new company from scratch
- copy of memorandum
- articles (if not using model articles)
- the fee
- an application for registration (Form IN01)
What is in form IN01?
- Company’s proposed name and registered office (appropriate address)
- Whether company is to be private or public
- Registered email address
- limited by shares or guarantee
- Statement of capital and initial shareholdings
- Statement of proposed officers and persons with significant control
- statement of compliance
- statement of lawful purpose (statement the company is being formed for a lawful purpose)
Appropriate address: cannot use PO box, can be delivered by hand or post and expected to come to the attention of a person acting on behalf of the company
Certificate of Incorporation
Once application is approved, certificate is sent with Register’s official seal.
Sets out:
- name of company
- registered number
- date of incorporation
Company becomes a legal entity from the date on which the certificate of incorporation is issued by Companies House.
What is a shelf company?
Not as useful now that there are online incorporation services.
A shelf company is one that has been set up in advance - many law firms offer service that sets up shelf companies for sale to clients
Will likely have to make changes to:
- name (special resolution and form NM01)
- registered office (form AD01)
- articles (special resolution and new articles)
- members, directors and company secretary
+ shares are transferred using stock transfer form, client becomes shareholder once entered on register of members
+ client’s representatives are appointed as director(s) and company secretary if there is one (AP01 - directors and AP03 - secretary)
+ first directors and company secretary resign (TM01 - directors, TM02 - secretary)
Post incorporation steps
- Chairperson: board needs to decide whether to elect a chairperson and whether they should have a casting vote in the event of a tied board resolution. MA13 provides for this but they can amend it by SR. (SR and articles would also need to be filed)
- Accounting reference date: default is the last date of the month in which the company was incorporated. Often companies will change this to align with their financial year (form AA01)
- Auditor: all companies must prepare annual accounts and therefore may need to appoint an auditor usually by board resolution
- Tax registrations - will need to register for corporation tax, VAT and PAYE and National Insurance (if it has employees)
- Shareholder agreement - private contract between the shareholders. Not required and not all companies have one.
Pre-incorporation contracts
Until the issue of the certificate of incorporation by the Registrar the company is not a legal person and has no capacity to enter into contracts.
If one is entered into - the person purporting to act for the company is personally liable on the contract.
Where a company changes its name, from when will the new name be effective?
The new name will be effective once the Registrar of Companies issues a new certificate of incorporation.
How are company decisions made?
Day to day: by the board of directors
Otherwise: may need to refer the decision to the shareholders who will pass a resolution
Board Resolutions
Decisions of the directors are taken by passing Board resolutions at Board meetings.
Each director has one vote.
Passed by simple majority unless the directors have agreed a particular decision require unanimity.
If all are in agreement, can also pass a written Board Resolution which means the directors don’t have to waste time attending board meetings.
How are shareholder resolutions passed?
- At a meeting of the shareholders (general meeting)
- In writing (for private companies only)
Types of shareholder resolutions
- Ordinary resolutions - passed by simple majority (over 50% of the votes)
- Special resolutions - passed by majority of 75% or more
Voting at a GM
Can decide whether to vote by a show of hands or a poll. Counted out of all of the eligible shareholders who are present and voting at the meeting (can appoint a proxy).
Show of hands: each shareholder present is entitled to one vote regardless of their shareholding
Poll: shareholders have one vote in respect of each share held by them
Poll voting
Poll cote can be demanded in advance of GM, before a show of hands or immediately after a show of hands vote.
Who can demand a poll?
- chairperson
- directors
- two or more persons having the right to vote on the resolution
- a person or persons representing at least 10% of the total voting rights of all the shareholders entitled to vote
Voting on a written resolution
Only private companies may pass a shareholders’ resolution by way of written resolution.
Every member has one vote in respect of each share held by them when voting on a written resolution.
Note: abstaining from a WR counts as voting against
Two types:
Written ordinary resolution: passed by a simple majority of the total voting rights of eligible members
Written special:
- must state it is a special resolution
- passed by a majority of members representing not less than 75% of the total voting rights of eligible members
Note: cannot use WR for removal of a director or removal of an auditor
Who calls a board meeting?
Any director may call a board meeting or require the company secretary to do so at any time. Therefore the process is fairly informal.
Board meeting notice
Must provide reasonable notice of a board meeting.
Reasonable depends on whatever notice is usually given.
Board meeting: quorum and voting
- Minimum two directors to be present (unless articles provide otherwise)
- Passed by simple majority. Each director has one vote (show of hands), chair may have a casting vote to prevent a deadlock.
Who calls a general meeting?
Usually the board calls a general meeting
Notice for a general meeting
14 clear days notice is required.
- day of meeting and day notice is given are excluded
- is notice is posted or emailed, it is deemed served 48 hours after sending
Notice must inform shareholders of where and when the GM is taking place
Directors must approve the form of the notice of the notice of the GM and must authorise its circulation to shareholders
Quorum for a GM
Two shareholders although one shareholder for a single member company
GM sandwich
Procedure for calling a GM:
- BM required to call the GM (held on reasonable notice)
- decide on issues to be considered at GM
- resolve to convene GM
- approve form of notice of GM
- authorise circulation of the notice - GM required for shareholders to vote on resolution (at least 14 clear days after first BM)
- Further BM to put into effect the outcome of the GM (on reasonable notice)
- Then post meeting matters (PMMs) to attend to such as filings a companies house
Shortening notice for a GM
A GM may be called on short notice if this is agreed to by:
- 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
This means the whole sequence could be dealt with in under an hour.
Procedure for written resolutions
- Written shareholder resolution can be proposed by the directors or the members of a private company and is passed when the required majority of eligible members signify their agreement to it
- required majority will depend on OR or SR
- eligible member = entitled to vote on the circulation date
- if not enough responses within 28 days beginning with circulation date, WR will lapse
- WRs are recorded in minute books the same way as minutes of a GM
Sequence of meetings for a WR
- BM is held to propose use of WR and approve the form of wording of WR and to circulate the WR
- a) If shareholders are present - BM is adjourned and approval of WR takes place immediately
b) not present and available - BM is closed, WR is circulated to shareholders, once it receives level of support it is passed.
- BM is then reconvened or called to implement resolution.
- PMMs
Post meeting matters
- Internal
- minutes of all meetings need to be kept for 10 years
- updating of statutory books: register of members, directors, PSC register - Filing at Companies House
- All special resolutions must be filed. Generally ordinary ones do not
- Amended articles must be filed along with any form that Companies House requires - Record keeping
- e.g. directors’ service contracts
