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Chartered Governance Institution - Foundation Programme > Module 3, Chapter 8 - How Companies are Structured > Flashcards

Module 3, Chapter 8 - How Companies are Structured Flashcards

1
Q

Prior to 1844, who established companies?

A

Companies were established by Royal Charter or Act of Parliament.

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2
Q

Prior to 1844, neither companies nor unincorporated associations benefited from limited liability for their members. Explain the negative consequence of this.

A

For unincorporated associations, this meant all contracts and property assets had to be held in the name of the members. This made it very costly and complex to sue businesses due to the need to join in all the members.

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3
Q

What was established under the Joint Stock Companies Act 1844?

A

The concept of incorporating a separate legal entity to set out the rights and duties of investors and managers was established. Incorporation gave the company legal personality and perpetual succession of ownership of assets separate from its investors via a simple registration process.

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4
Q

What was established under The Limited Liability Act 1855?

A

This made it possible for investors to limit their liability for the debts of the companies they invested in. If the shares are fully paid on issue there is no further liability to pay any additional funds. If the shares are issued as either nil or partly paid then the liability is limited to the amount agreed to be paid for those shares when they were originally issued and cannot be subsequently increased.

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5
Q

Which act established separate legal identity?

A

Joint Stock Companies Act 1844

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6
Q

Which act established separate limited liability?

A

The Limited Liability Act 1855

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7
Q

Which act combined the features of separate legal identity and separate limited liability?

A

Joint Stock Companies Act 1856

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8
Q

Complete the sentence. A company is an artificial construct having its own …….

A

A company is an artificial construct having its own legal identity separate from its owners and managers.

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9
Q

What two key aspects were introduced by the Joint Stock Companies Act 1844?

A
  1. Legal personality of a company; and
  2. Perpetual succession of ownership of assets separate from its investors via a simple registration process.
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10
Q

What are the four types of company that can be incorporated under the Companies Act 2006?

A
  1. Private company limited by shares
  2. Public company limited by shares
  3. Private company limited by guarantee
  4. Private unlimited company, with or without shares
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11
Q

What is the most popular type of company used by a majority of trading businesses?

A

Private companies limited by shares

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12
Q

What are Private companies limited by guarantee primarily used for?

A

Non-profit organisations that require legal personality, such as charities.

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13
Q

Private unlimited companies have a formal structure. Provide two features of this structure type.

A
  1. They manage the relationship between managers and investors together with perpetual succession of title.
  2. Disclosure of financial information is not required but needs to be balanced against the potential requirement to fund any deficiency of funds in the event of an insolvent liquidation.
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14
Q

True or false? A public company is mandatory if shares are to be offered for sale to the public.

A

True!

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15
Q

What are PLCs subject to?

A
  1. Greater financial disclosure
  2. Mandatory audit of their financial statements
  3. PLCs with shares admitted to a trading market (such as the London Stock Exchange) are subject to the more onerous disclosure requirements contained in the UK Corporate Governance Code.
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16
Q

In 2020, how many UK companies were PLCs?

A

6198

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17
Q

What is a registered office address?

A

The registered office is the legal address of the company and the address where all official letters and other documents
required to be served on the company must be delivered. All companies must have a registered office in the country of their registration.

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18
Q

Where should copies of the company’s statutory registers and other documents such as directors’ service contracts, contracts to repurchase shares and minutes of meetings of the members be kept at?

A

The registered office or at a Single Alternative Inspection Location (SAIL address).

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19
Q

Who are companies owned by?

A

Companies are owned by their members.

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20
Q

What do shares represent?

A

Each share represents a proportion of the ownership of the company.

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21
Q

What is the minimum and maximum amount of members a company limited by shares should have?

A

All companies limited by shares must have at least one member and there is no maximum.

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22
Q

What is the minimum amount of members companies limited by guarantee should have?

A

These companies must have at least two members.

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23
Q

What is the minimum amount of members unlimited companies should have?

A

These companies must have at least two members.

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24
Q

What are the two elements to becoming a member of a company?

A
  1. The person must consent to becoming a member, which usually also includes specific agreement to being bound by the memorandum and the Articles.
  2. By having their details entered in the company’s register of members.
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25
Q

The process by which a company sells its own shares is referred to as….?

A

A share allotment or share issue.

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26
Q

Prior to 2006, where was the authorised share capital set out in?

A

The Memorandum of Association and this would be ‘topped up’ as required by resolution of the shareholders.

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27
Q

In terms of share capital, what did the Companies Act 2006 abolish?

A

The 2006 Act abolished the concept of authorised share capital and there is now no maximum number of shares that can be issued, subject to any restrictions in the Articles.

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28
Q

In order to allot new shares, Directors must obtain authority from where?

A
  1. The Articles of Association
  2. Member’s Resolution
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29
Q

What are pre-emption rights?

A

Pre-emption rights on the allotment of new shares gives protection to existing members by giving them the right to acquire new shares being offered by the company, in proportion to the number of shares already held, before those shares may be issued to any non-members Directors of Companies.

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30
Q

Where are pre-emption rights found?

A

In the Articles of Association.

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31
Q

True or false? It is a legal requirement to have pre-emption rights in place?

A

False! Pre-exemption rights can vary or be removed entirely from the Articles either by them never being adopted on
incorporation or by resolution of the shareholders at any time.

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32
Q

Public companies with shares traded on a stock exchange will usually seek a partial waiver of the pre-emption rights. What does this allow for?

A

This allows for modest share issues without the need for a lengthy and expensive formal share offer process.

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33
Q

What is a share transfer?

A

A share transfer is the process by which a shareholder can transfer ownership of shares they hold to another person.

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34
Q

Who authorises a share transfer?

A

The directors authorise the transfer of shares.

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35
Q

What must the directors ensure when transferring shares within a company?

A

They must ensure:
1. That any rights of pre-emption contained in the Articles are observed or waived.
2. The transfer form itself is properly executed.
3. The transfer form is ‘stamped’ if required.
4. A share certificate is issued.

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36
Q

What is meant by the stamping?

A

Stamping is the process under which share transfers are taxed (at a stamp duty rate of 0.5% of the consideration) on the
transfer of UK shares, where the consideration exceeds £1,000.

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37
Q

What is a transmission of shares?

A

A transmission of shares is a share transfer by operation of law, typically when a member dies or the shares form part of a
divorce settlement.

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38
Q

How are transmission of shares documented?

A

The transfer of ownership is documented using a letter of request rather than a stock transfer form.

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39
Q

What is the role of a director - why are they appointed?

A

Directors are appointed to exercise the powers and authority of the company subject to any restrictions set out in the
company’s Articles.

40
Q

How many directors are required for a private company?

A

Private companies must have at least one natural person as a director, who must be at least 16 years old.

41
Q

How many directors are required for a public company?

A

A public company must have at least two directors.

42
Q

The first appointed directors are set out in which form?

A

IN01 - Incorporation Form.

43
Q

Which form is used to appoint a director?

A

AP01 for all companies and LL AP01 for LLPs.

44
Q

How might a director be removed?

A

Directors of all companies may be removed by a simple majority of shareholders.

A director can also formally resign themselves.

A form TM01 will then be used to document the resignation.

45
Q

How are directors appointed in public companies?

A

Directors of public companies will typically be required to stand down and offer themselves for re-election on a rotating
three-year basis.

46
Q

How might the director’s authorities and powers be limited?

A

Through a special resolution of the shareholders requiring a 75% majority in favour.

47
Q

What are the duties and responsibilities of directors? List the 7 duties recorded in the Companies Act 2006.

A
  1. To act within their powers (s. 171)
  2. To promote the success of the company (s. 172)
  3. To exercise independent judgement (s. 173)
  4. To exercise reasonable care, skill and diligence(s. 174)
  5. To avoid conflicts of interest (s. 175)
  6. Not to accept benefits from third parties (s. 176)
  7. To declare interests in any proposed transaction or arrangement (s. 177).
48
Q

True or false? Directors carry personal liability for their action or inaction in managing the affairs of the company.

A

True!

Where a company fails and a liquidator or administrator is appointed to protect the interests of creditors, one of their tasks is to review the behaviour of the directors to consider whether action against them is appropriate and to consider if disqualification from their being involved in the management of companies in the future should be sought.

49
Q

True or false? All public companies are required to appoint a company secretary.

A

True!

50
Q

True or false? All private companies are required to appoint a company secretary.

A

False!

51
Q

Which groups/individuals does the Company Secretary support?

A

The company secretary’s main duties are concerned with supporting the board, the company and the members.

52
Q

What is the Persons of Significant Control?

A

A person with significant control ( PSC ) is someone who owns or controls a company. They’re sometimes called ‘beneficial owners’.

53
Q

What are the conditions required to be met to be a PSC?

A

A PSC is a person who either:
1. Holds, directly or indirectly, more than 25% of the shares;
2. Holds, directly or indirectly, more than 25% of the voting rights;
3. Holds the right, directly or indirectly, to appoint or remove a majority of directors;
4. Otherwise has the right to exercise or actually exercises, significant influence or control over the company;
5. Has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm
which is not a legal person, the trustees or members of which would satisfy any of the four conditions above.

54
Q

List some ‘sensitive words’ that require approval for use in a company name.

A

‘Royal’, ‘government’ or ‘chartered’

55
Q

What documents are required to be submitted to Companies House to incorporate a company?

A

Form IN01 and the memorandum and articles should be submitted to Companies House together with the registration
fee payable.

56
Q

What information is included on a Certificate of Incorporation?

A
  1. Registered name
  2. Registered number
  3. Date of incorporation
  4. Type of company
57
Q

Once incorporated a private company can commence trading activities immediately, whereas a public company must
demonstrate that it meets the authorised minimum share capital requirement and apply for a certificate to commence
business and borrow. What is this certificate known as?

A

A trading certificate.

58
Q

PLCs must apply for a trading certificate to commence trading activities. How do they apply for this certificate? List the name of the form.

A

Application is made using form SH50.

59
Q

All public and most private companies are limited by shares. Where are the rights of these shares set out in?

A

The Articles of Association.

60
Q

What is the name for shares with preferential rights to dividends or capital?

A

Preference shares

61
Q

What is the name for shares which are redeemable or convertible?

A

Redeemable shares or convertible shares

62
Q

In theory any right attaching to shares can be enhanced or restricted but, in practice, the variable rights fall into the what following categories?

A
  1. Rights to vote
  2. Rights to profit
  3. Rights to capital
  4. Rights to manage
63
Q

What is the name of the share class most typically used and has full rights to vote, participate in
profit distribution or return of capital, make changes to the constitution, composition of the board of directors and
generally to exercise all the powers and authority vested in the members by the company’s articles?

A

Ordinary Shares

64
Q

What rights do preference shares carry?

A

These shares carry a preferential right to one or more of the variable rights of voting, profit, capital or management.

65
Q

Why might a company issue preference shares?

A

Most often, preference shares are issued by companies seeking to raise additional working capital, either generally or for a specific purpose, without diluting control.

66
Q

What rights do redeemable shares carry?

A

Such shares carry the right to be purchased by the company subject to the availability of distributable reserves. Shares
may be redeemed at fixed dates or at any time at the option of the shareholder, the company or both.

67
Q

Where is protection for pre-existing shareholders found?

A

The Articles of Association via the pre-emption provisions.

68
Q

When must the Register of Members be updated?

A

Companies must update their register of members with details of any new share allotments or transfers of shares and
issue any new shares certificates resulting from the changes within two months of the date of registration.

69
Q

What information should be contained within the Register of Members?

A

The register of members must contain the full name and address of each member, the date their membership
commenced, date and number of shares acquired or disposed of, whether the shares are fully or partly paid (if partly
paid, the amounts still due) and, where relevant, the date of cessation of membership.

70
Q

When does the beneficial ownership of shares pass to the transferee?

A

Beneficial ownership passes once a stock transfer form is signed and the consideration for the shares is paid.

71
Q

When does the legal title of shares pass to the transferee?

A

Legal title only passes once the detail of the new shareholder(s) is entered in the register of members which can be a few days or weeks after beneficial ownership changes. In this interim period the seller of the shares holds the registered title on trust for the purchaser(s).

72
Q

Share certificates are prima facie evidence of title. What does this mean?

A

This means that the share certificate is sufficient evidence of title unless evidence is produced to show that not to be correct.

73
Q

The process to register a death of a member is divided into three parts. List the parts.

A
  1. First, the death of the member should be notified to the company. The date of death should be noted in the register of members, any dividend mandates cancelled and the death certificate returned.
  2. When a person dies, only their executor or personal representative has the authority to deal with their estate, including
    disposing or transferring shares. This authority exists only when the Grant of Probate or Personal Representative is given. The Grant of Probate may take some time, especially if the will is disputed or if there is no will. Where shares are held in joint names, the registration automatically passes to the remaining joint holders.
  3. Once probate has been issued, the original or a copy should be forwarded to the company for registration. The executor can elect for the shares to be registered in their own name pending distribution to the beneficiaries or they can be transferred to the beneficiaries immediately.
74
Q

How might companies communicate with their members?

A
  1. Letter sent via post
  2. Electronic means - consent is deemed. Members can opt out of electronic communications, but consent is deemed if members do not provide confirmation otherwise.
75
Q

List two constitutional documents required to be registered on incorporation.

A
  1. The Memorandum of Association
  2. The Articles of Association
76
Q

The Memorandum of Association includes a subscriber clause. What is the purpose of this clause?

A

It is through this clause that the subscribers make a statement that they wish to form a company under the Companies Act, agree to become the first members and, if the company is to be limited by shares, agree to take at least one share.

77
Q

True or false? Once the company has been incorporated it is not possible to alter the memorandum of association.

A

True!

78
Q

What is the purpose of the Articles of Association?

A

The articles contain the regulations governing the relationship primarily between the company and its members, between
members and members’ rights to appoint and remove directors.

The articles also form a contract between each member and the company which is why new members acquiring shares must
also agree to become members and to agree to be bound by them.

79
Q

Which topics are covered in the Articles of Association?

A
  1. Share capital
  2. Directors
  3. Meetings
  4. Communication
80
Q

What content might be covered in a shareholder’s agreement? Provide a few examples.

A
  1. Right to approve any changes in company name, banking arrangements, the articles and senior employees
  2. Right to appoint or change a director
  3. Provisions relating to the convening, quorum and voting at directors meetings
  4. Pre-emption rights on transfers and permitted transfers
  5. Pre-emption rights on allotment and ‘drag and tag along’ rights
  6. Rights to dividends or return of capital
81
Q

Who can convene a company meeting?

A

Any director or the company secretary under the direction of a director may convene a directors’ meeting.

82
Q

Who is responsible for day-to-day management decisions?

A

Day-to-day management decisions are often delegated to an executive committee of executive directors and senior
managers.

83
Q

Who is responsible for strategic decisions?

A

Strategic decisions and certain approvals are reserved to the board and constitutional changes reserved to the members.

84
Q

List two annual filings required to be made to Companies House.

A
  1. Annual report and accounts
  2. Confirmation statement
85
Q

List examples of Companies House ad hoc filings.

A
  1. Appointment and termination of appointment of officers
  2. Changes to the articles
  3. Changes of name or re-registration of type of company
  4. Allotment, cancellation, redemption, conversion etc. of shares
  5. Changes to PSC register
  6. Commencement of liquidation, administration and winding up
  7. Registration of charges
86
Q

Name the annual filing required to be submitted to HMRC.

A

Corporation tax

87
Q

List 3 examples of HMRC ad hoc filings.

A
  1. VAT
  2. PAYE
  3. Stamp duty
88
Q

Provide examples of filings required to be submitted by listed and traded companies.

A
  1. DTR notifications of trades
  2. PDMR and PCA notifications of trades
  3. Announcement of results and interim financial statements
  4. Trading updates
89
Q

Provide two examples of general disclosures required to be filed.

A
  1. Payment practices disclosure
  2. Gender pay gap disclosure
90
Q

What type of members’ resolutions must be filed at Companies House?

A

Many resolutions of the members must be notified to Companies House. In general, these are any ordinary resolutions that change the constitution or share capital of the company and all special resolutions. Types of ordinary resolution include resolutions authorising the directors to issue additional shares.

91
Q

What is the minimum notice period for an annual general meeting of a public company?

A

21 days

92
Q

What is the minimum notice period for a general meeting of a public company?

A

14 days

93
Q

What is the minimum notice period for a general meeting of a private company?

A

14 days

94
Q

What is the minimum notice period for a notice to company of intention to put resolution?

A

28 days

95
Q

What is the minimum notice period for a general meeting of a traded company that is not an AGM?

A

14 days

Chartered Governance Institution - Foundation Programme (22 decks)

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