Module 2, Chapter 6 - Company Law and Governance Framework

Question 1

List the six sources of company law.

Answer 1

1. Legislation
2. Case law
3. The constitution of the company
4. Contract law
5. EU law
6. Human rights law

Question 2

What is the primary source of company law?

Answer 2

Legislation is the principal source of company law, with the Companies Act 2006 being the dominant piece of
company law legislation.

Question 3

Who created the Companies Act 2006?

Answer 3

Parliament - Acts of Parliament makes up the dominant form of company law legislation.

Question 4

True or false? The Companies Act 2006 is the lengthiest piece of legislation ever passed by Parliament.

Answer 4

True!

Question 5

How many Acts is the Companies Act 2006 divided up into?

Answer 5

The Act is divided into 49 Parts.

Question 6

Certain company law topics that were once covered under a Companies Act are now covered by their own Act of
Parliament. List a few examples.

Answer 6

1. Stock Transfer Act 1963
2. Insolvency Act 1986
3. Companies Act 1985
4. Company Directors’ Disqualification Act 1986
5. Criminal Justice Act 1993
6. Financial Services and Markets Act 2000
7. Corporate Manslaughter and Corporate Homicide Act 2007

Question 7

Subordinate legislation (usually in the form of statutory instruments) has five principal functions. List the functions.

Answer 7

1. It expands upon the basic rules found within an Act of Parliament.
2. It is used to bring parts of Acts of Parliament into force in the form of Commencement Orders.
3. It can be used to amend existing legislation including (controversially) amending Acts of Parliament.
4. It is often used to implement EU law.
5. It can empower certain persons or bodies to create law.

Question 8

What does BEIS stand for?

Answer 8

Department for Business, Energy and Industrial Strategy.

Question 9

What is the role of BEIS?

Answer 9

BEIS is the governmental department that, according to its website, is responsible for (amongst other things) ‘leading the
government’s relationship with business’. To that end, it is the government department that is most closely involved in
company law and corporate governance reform.

Question 10

Certain rules are not found in legislation, but have legislative backing or are recognised by legislation. Provide examples of non-legislative rules that are recognised by legislation.

Answer 10

1. The FSMA 2000 empowers the Financial Conduct Authority to impose rules on listed companies.
2. The CA2006 empowers the Takeover Panel to make rules.
3. The Financial Reporting Council is empowered to determine technical standards and other standards on
   professional ethics and internal quality control of statutory auditors and statutory audit work.

Question 11

Case law still constitutes an extremely important source of company law for four reasons. List the reasons.

Answer 11

1. Certain company law topics are largely creations of case law and have little or no legislative involvement. For
   example, the rules relating to attribution (i.e. whose actions can be attributed to the company) are entirely judge
   made.
2. Case-law principles that are well established often become enshrined in legislation. For example, the duties placed
   upon directors were, historically, case-law-based, but can now be found in ss. 171–77 of the CA2006.
3. Legislation will often empower the courts to grant remedies and, in the case of criminal offences, impose
   punishments. The scope and application of these remedies and punishments is often determined via case law.
4. Legislative rules need to be interpreted and applied. In some cases, in order to afford the courts sufficient flexibility,
   statutory rules will be made purposely broad and vague and the role of applying those rules in specific instances will
   be left to the courts.

Question 12

The constitution of the company refers to?

Answer 12

The company’s Articles of Association. These are rules created by the company on how it should be run.

Question 13

What powers do the Articles of Association hold?

Answer 13

The Articles can empower the company and its directors but also limit powers. For example, the articles can limit the types of activities that the company, directors or members can engage in

Question 14

What can breaching the limitations in the Articles amount to?

Answer 14

Breach of limitations can amount to a breach of the ultra vires rule, breach of contract, or breach of the directors’ duties.

Question 15

Every day, companies enter into contracts with suppliers, directors, shareholders, consumers, clients and many other types of
person. These relationships will largely be governed by…?

Answer 15

Contracts, which allows companies to effectively make their own law. These contracts are governed by general contract law principles, but company law does establish some specific contractual rules.

Question 16

(EU Law) - What is Freedom of establishment?

Answer 16

One of the key rights contained in the Treaty on the Functioning of the European Union (TFEU) is the right of EU
nationals to establish a business anywhere in the EU. Effectively, this allowed UK companies to easily set up a subsidiary or branch in, or relocate to, an EU Member State. Following the UK’s withdrawal from the EU, UK companies no longer enjoy freedom of establishment. So, whilst UK companies can still establish themselves in the EU, they will face additional conditions that will need to be complied with.

Question 17

(EU Law) - What is The harmonisation programme?

Answer 17

In order for freedom of establishment to be of benefit and to facilitate cross-border company activity, it is also necessary
for there to be a degree of harmonisation across the company laws of EU Member States. Article 50(1) of the TFEU states that freedom of establishment shall be attained ‘by means of directives’ so EU company law harmonisation has been attained by the passing of directives. To date, eleven harmonisation directives have been passed. The UK has left the EU and so will no longer be obliged to harmonise its laws. However, as the EU is still the UK’s largest trading partner, it is likely that Parliament may choose to
harmonise its laws in some cases in order to facilitate cross-border trade and regulation.

Question 18

List company laws that are derived from the EU.

Answer 18

1. Cross-border mergers and insolvencies
2. The Listing Regime
3. The regulation and independence of auditors
4. The market abuse regime
5. The capital maintenance regime
6. Takeovers
7. Shareholders’ rights
8. Corporate transparency

Question 19

What is one concern of Brexit?

Answer 19

One concern relating to Brexit is the fact that UK firms have lost their ‘passporting’ rights. Passporting essentially means
that businesses engaged in certain areas (notably financial services) that are registered in an EEA state are free to do
business in any other EEA state without obtaining further authorisation. As the UK has left the EU (and the EEA), affected UK companies will need to obtain authorisation in the EEA country before they can conduct business.

Question 20

How do human right laws apply to companies?

Answer 20

Not all human rights are applicable to companies (e.g. the prohibition of torture) but the ECHR does often specify that
certain rights can apply to companies. For example, Art. 1 of the First Protocol of the ECHR states that ‘every natural or
legal person is entitled to peaceful enjoyment of his possessions’.

Question 21

What is the UK’s corporate governance system dominated by?

Answer 21

The UK’s corporate governance system is not dominated by sources of law, but instead by a series of reports and codes.

Question 22

According to the Cadbury Report 1992, what is Corporate Governance?

Answer 22

Corporate Governance is ‘the system by which companies are directed and controlled’.

Question 23

The three key corporate governance codes are…?

Answer 23

1. The UK Corporate Governance Code
2. The Wates Corporate Governance Principles for Large Private Companies
3. The UK Stewardship Code.

Question 24

Companies with a premium listing must do what?

Answer 24

Companies with a premium listing must explain how they have applied the UK Corporate Governance Code’s
Principles and must comply or explain against the Code’s Provisions.

Question 25

What approach is used by The Wates Principles and the UK Stewardship Code?

Answer 25

The ‘apply and explain’ approach - the signatories must apply the Principles and explain how they have applied the Principles.