Incorporation and Company Constitution

Question 1

Name the three methods of incorporation.

Answer 1

1. By Royal Charter
2. By Act of Parliament
3. By registration

Question 2

How are companies incorporated by royal charter?

Answer 2

Royal Charters are granted by the monarch on the advice of the Privy Council (uncommon)
- Each Charter is unique and sets the objective, constitution, and powers of the company it incorporated.
- A company incorporated by Royal Charter is unregistered , so CA 2006 does not apply,

Question 3

How are companies incorporated by Act of Parliament?

Answer 3

Parliament can create a company by passing an Act (uncommon).
- Each Act is unique and sets the objective, constitution, and powers of the company it incorporated. (e.g. Olympic Delivery Authority being created by the London Olympic Games and Paralympic Games Act 2006)
- A company incorporated by an Act is unregistered, so CA 2006 does not apply.

Question 4

How are companies incorporated by registration?

Answer 4

These companies are created by being registered at Companies House, and they are governed by CA 2006. For registration, specific documents are needed:
1. Application form IN01 (only if doing paper registration and not online)
2. Memorandum of Association
3. Articles of Association
4. Fee: £50

Question 5

What exactly is the Memorandum of Association?

Answer 5

A legal statement stating:
- that the shareholders with to form a company
- that they agree to take at least 1 share
- names of shareholders, signatures and date signed

Question 6

What happens if a company does not attach any special Articles when registering the company?

Answer 6

Model Articles will apply by default

Question 7

What should a company do if it wishes to entrench any of its Articles i.e. make them harder to amend?

Answer 7

They must notify the registrar and submit a statement of compliance.

Question 8

What must the paper IN01 form contain?

Answer 8

1. Company name and registered office address
2. List of officers: Director, secretary + their addresses.
3. Company public or priv?
4. Memorandum of Association
5. Statement of Capital
6. Liability limited or unlimited? (if limited, limited by what?)
7. Statement of Compliance stating all statutory requirements have been met.

Question 9

What is the Statement of Capital?

Answer 9

A statement of capital is a statement that a company needs to have if it is to have a share capital. It sets out:

a) Total number of shares taken out by shareholders

b) Aggregate nominal value of shares

c) Total number of shares in each class and rights attaching to shares (e.g. voting rights?)

d) Amount to be paid up on each share

e) Details of all of above (a-d) for each shareholder

Question 10

What is a new EECTA requirement, with regards to a company’s registered address?

Answer 10

It must be possible for a person to take delivery of documents at that office

Question 11

Does a company have to keep a PSC Register?

Answer 11

Yes, for now.

NOTE: When the EECTA takes effect, this will no longer be required as well as the need to keep local registers of directors

Question 12

Outline 8 new changes brought about under the EECTA

Answer 12

1. Statement of lawfulness: Shareholders must give statement confirming incorporation is for lawful purpose and activities will be lawful.
2. ID: Anyone interacting with CH (i.e. new directors, PDC anyone delivering docs) will need to provide ID verification (either through authorised provider or ID docs)
3. Annual confirmation statement confirming all info on register correct.
4. Registrar can query, decline, or request info filed if deemed confusing/inconsistent. Registrar can request info in specific form/manner. Registrar can also state how inconsistency is to be dealt with.
5. Offence of failing to provide info created/.
6. New members: 2 months to inform Registrar
   Old members: 2 months to inform of any further updates.
7. Registrar can share info with other bodies.
8. New enforcement practises: penalties, annotation of company record, criminal prosecutions or striking company of record.

Question 13

What are the new objectives for the Registrar, as set out in the ECCTA?

Answer 13

• Ensure that person responsible for filing docs complies
• Ensure info on register is accurate, complete, and not misleading
• Prevent companies from unlawful activity or from facilitating unlawful activity of others.

Question 14

What happens if the Registrar is satisfied that the docs/info provided are complete and accurate?

Answer 14

They will issue a certificate of incorporation, which is proof of valid registration.
- Then, all of the info/docs about the company are made available on CH.

Question 15

What do you call shareholders before the company comes into force/is registered?

Answer 15

subscribers

Question 16

What is the effect of registration?

Answer 16

The company comes into existence and has separate legal personality
- the subscribers to the memorandum of Association become shareholder’s and the company’s officers are officially appointed.

Question 17

MCQ POINT If a company enters into a contract prior to incorporation, is it bound by this contract?

Answer 17

No, the company itself is not bound. The person contracting will be personally liable on that contract.

Question 18

What is the ‘constitution of a company’?

Answer 18

It is a set of rules that governs the company itself e.g. how shares are issues, voting etc).
- The two types of constitutional documents are the AA’s and resolutions passed by the company.

Question 19

Is a handbook on company policies (e.g. sexual harassment policy/IT usage etc), part of the constitution of a company?

Answer 19

No, this just relates to how a company runs its business.

Question 20

Prior to CA 2006, what was the 3rd form of constitutional document?

Answer 20

Memorandum of Association

Question 21

According to CA 2006, How are the provisions of the memorandum of Association to be treated now?

Answer 21

Under CA 2006, provisions contained in Memorandum are now to be treated as provisions of the company’s Articles (even though the memorandum still needs to be shown separately on incorporation).

Question 22

In the event of a dispute over the meaning of an Article, how should the Article be interpreted?

Answer 22

It should be interpreted “so as to give them reasonable business efficacy”. It should not be given their plain and ordinary meaning if this would produce commercial absurdity.

Question 23

Can a company amend its Articles?

Answer 23

Yes

Question 24

Through what ways can a company amend its Articles?

Answer 24

1. Through Special Resolutions
2. By the Court (rare).
3. If all members agree, even if no formal resolution passed or meeting held.

Question 25

Can the Company be prohibited from making changes to the Articles?

Answer 25

Yes. It can be prohibited by CA 2006 and Court but this is rare, especially if most members agree and it is for the benefit of company

Question 26

What does it mean for an Article to be entrenched?

Answer 26

When an Article is entrenched, it is made harder to alter

Question 27

Give an example of how a company may entrench an AA

Answer 27

By including specific requirements e.g. a requirement that only certain shareholders can agree to a change in the AA

Question 28

How can entrenchment be overriden?

Answer 28

If all the members agree to the change, or if a court orders the change

Question 29

Whose agreement do you need to entrench any Articles?

Answer 29

All of the shareholders

Question 30

How do you test if AA amendments are workable?

Answer 30

By applying the legality and commerciality test?

Question 31

What is the legality test? (give an example where the Articles conflict with legislation)

Answer 31

To test if the AA amendments are legal, you ask yourself: - do the AA' conflict with CA? If yes, not workable. - if the CA is silent on issue, AAs take precedence e.g. the Articles cannot exclude the written resolution procedure.

Question 32

What is the commerciality test?

Answer 32

To test if the AAs are commercially workable, ask yourself: - Does the amendment suit the company? Will it be effective? What will the effect be in the long or short term? e.g. if amendment is that directors can vote through casting vote due to even number of directors, this is commercially sensible as it prevents deadlock.

Question 33

Which document would include all the company relevant persons rights and obligations?

Answer 33

The Articles of Association

Question 34

Will further rights or obligations be implied into the AAs?

Answer 34

No

Question 35

What are some common alterations made to the Model Articles?

Answer 35

1. Limits on objects - a company's objects will be unrestricted unless limits are specified in the Articles. 2. Removing casting vote 3. Increasing quorum for board meetings above 2. 4. Removing prohibition on directors voting on matters in which they have interest. 6. Making director's duties more or less onerous. 7. Reviewing directors authority to allot shares. 8. Reviewing shareholders' statutory pre-emption rights **MCQ will tell you if you are considering MAs or AAs

Question 36

What restrictions are there on the company name?

Answer 36

The name cannot be: - misleading, cause harm/risk, or be offensive - suggest association with government - use certain restricted professional names without permission from relevant professional body - more than 160 characters - be in computer code - be same/similar to another company name . if pre-existing company can argue there is value attributable to its name, then it can object. . If name is too similar, may be required to change. - used to facilitate crime - suggest non-existent connection with overseas gov

Question 37

What can happen if a company fails to change its name within 28 days of a direction to change?

Answer 37

The company may be fined up to £1000 - EECTA

Question 38

Can a company change its registration status?

Answer 38

Yes

Question 39

What is the most common change that companies want to make to their registration status?

Answer 39

To change from private to public or vice versa

Question 40

Why might a private company wish to become public?

Answer 40

A private company may wish to become public to raise finance by offering shares more widely, e.g. through stock marker.

Question 41

Why might a public company wish to become private?

Answer 41

It may wish to switch to a less-regulated and less-public structure

Question 42

What formalities are requires to change registration status from private to public?

Answer 42

Members of company must approve through SR (75% approval required) - CH must then by notified and shown proof that company has min. £50,000 in share capital

Question 43

What formalities are requires to change registration status from public to private?

Answer 43

SR of members is needed but no minimum share capital amount required.

Question 44

What formalities are requires to change registration status from public to listed?

Answer 44

Must comply with several strict and complex regulation, e.g. - Part VI of the Financial Services and Markets Act 2000 and 2023 - FCA's Listing, Prospectus, Disclosure and Transparency Rules.

Question 45

What formalities are requires to change registration status from listed to public?

Answer 45

A company can delist shares in accordance with the regulation (either voluntarily or as a result of being required to delist by the Stock Exchange).

Question 46

What is an alternative to changing registration status if someone wants a new type of business quickly?

Answer 46

By using a shelf company

Question 47

What is a shelf company?

Answer 47

A shelf company is a company that is already incorporated but will never have traded - it is usually purchased from an agent specialising in company formations.

Question 48

What are the advantages of acquiring a shelf company?

Answer 48

1. It will be available immediately and incorporation/changing registration status delays are therefore avoided. 2. Where particular incorporation date or accounting reference date is required, this can be accommodated (i.e. if a company needs to have existed for 'x' years, in order to receive 'x' status) 3. It can enter into contracts before being 'customised' as it is its own legal entity.

Question 49

What should the owner of a shelf-company receive after purchasing it?

Answer 49

1. Certificate of incorporation 2. Statutory Books and Registers 3. Memorandum and AAs 4. Stock Transfer form (STF) to transfer subscriber shares to purchaser 5. Resignation letters of nominee directors and company secretary. 6. Certificate that company has not traded.

Question 50

Before the vendor releases the shelf company to the purchaser, what does the purchaser need to provide?

Answer 50

The necessary signed forms to appoint replacement directors (and a secretary if required) and to change the registered office (if required)

Question 51

Can a purchaser customise the shelf-company after receiving it, or does it have to be before?

Answer 51

The purchaser can customise after receiving it

Question 52

What are the steps for customising a shelf company? **MCQ QUESTION**

Answer 52

1. Execute STF, issue a new share certificate and register the transfer at CH. 2. Update PSC register 3. Appoint directors (and comp sec if required). Within 14 days of appointment, send forms AP03 and AP04 respectively noting changes to CH. 4. If required, change registered office by board resolution and lodge form AD01 at CH. 5. Change name of company by SR of shareholders. and lodge form NM01, the SR and requisite fee of £50 at CH 6. Amend AAs if required 7. Allot shares as required. Advise CH of allotment within 1 month on form SH01. 8. Hold first board meeting

Question 53

Do directors have to appoint auditors after registration?

Answer 53

Yes, unless they reasonably resolve that audited accounts are unlikely to be required

Question 54

What is a company's 'accounting reference date'?

Answer 54

This the last day of a company's financial year and the date on which annual financial accounts must be filed with Companies House

Question 55

What is the *central* advantage of incorporation?

Answer 55

Having separate legal personality

Question 56

What are the other advantages that flow from a company being incorporated and having SLP?

Answer 56

1. Limited liability (for most companies): members not liable for debts of company 2. Continuity: Unlike sole traders + partnerships, companies can continue indefinitely through changing members/ directors. - Shares easy to sell so ownership can easily be transferred. Unlike with partnerships, where continuing partnership or apportioning shares is difficult when a partner leaves. 3. Contracts: can execute contracts in own name 4. Ownership: Can own assets , e.g. shares ,in own name. Allows for formation of complex group structures + joint ventures with other entities. 5. Legal action: Can take legal action in own name. 6. Financing: Can raise equity finance through issuing shares. Easier to secure loans than sole traders and partnerships but security still needed. - Floating charges offer creditors greater security, making it easier for companies to receive more.

Question 57

What are some disadvantages of incorporation?

Answer 57

1. Limited liability: If small company wants to raise finance, lender will likely require member to personally guarantee loan by securing own assets. Here, liability arises personally and courts often look past limited liability & 'pierce the veil'. 2. Regulation and formalities: More regulation and formalities than sole traders/partnerships. 3. Publicity: lack of privacy as everything available on CH. 4. Legal Action: Action can be taken against company and companies can be held liable/vicariously liable for actions of employees (civil + criminal) - In certain serious cases , e.g. fraud, a director can be held personally liable for a crime.

Question 58

A sole trader's business has started growing and he wants to incorporate. What kind of business structure is he likely to choose?

Answer 58

Private Limited Company

Question 59

What structure should you use when answering a scenario MCQ on incorporation?

Answer 59

1. Consider each type of business model that client could set up - Which is most relevant to scenario? 2. Consider pros and cons of incorporation that are relevant to client's needs. 3. Are there any concerns? 4. Pick most appropriate answer for specific details given in MCQ?