Company Law (LAW559) Lecture 2 Slides PDF

Company Law (LAW559) Lecture 2: Company Formation and the Constitution of a Company (1) 1  Learning Outcomes By the end of Lecture 2 you should be able to: 1. Understand the process of registration and the relevant issues when forming a...

Company Law (LAW559) Lecture 2: Company Formation and the Constitution of a Company (1) 1  Learning Outcomes By the end of Lecture 2 you should be able to: 1. Understand the process of registration and the relevant issues when forming a company 2. Identify the key documents making up the constitution of pre-2006 Act and post-2006 Act registered companies 3. Explain the key differences between the constitutions of companies registered pre-2006 Act and post-2006 Act 4. Understand the historical importance of the ultra vires doctrine 2 Types of Companies: Public v Private 1. Public companies may offer and sell shares to the public private may not – see S.755 CA 2006. 2. Limited company can have only one director a plc will require a minimum of two 3. Plc requires a certificate to trade or borrow 4. Minimum allotted share capital for a plc is £50,000 – see S.761 & S.763 5. Plc must have a company secretary whereas a Ltd does not – S.270 6. Model articles are different 7. AGM’s must be held by plc 8. Ltds can reduce share capital without recourse to the courts 9. Ltds can be exempt from audit a plc can not – see S.381 & S.477 Company formation Formation Formation Promoters Constitution The role of the promoter A promoter is a term used to describe a person involved in the setting up of a company: (a) The promoter’s position creates the opportunity for abuse. Therefore, the courts have held there is a fiduciary relationship between promoter and company. (b) There are also various statutory rules regulating this practice, e.g. refer to Companies Act 2006, ss.598-604. (c) One of the key functions of a promoter is the creation of pre-incorporation contract(s), i.e. a contract to which a company appears to be a party that has been entered into before the company has been incorporated. Cont. (d) Pre-incorporation contracts were traditionally regulated by the law of agency. In an agency agreement, the agent acts on behalf of a principal. The traditional view was that an agent (e.g. a promoter) cannot legally bind a non-existent principal; therefore, a pre- incorporation contract was not binding on the company once it was incorporated. (e) Art. 7 First Company Law Directive 68/151/EEC now found in Companies Act 2006 s.51 clarifies the position: ‘A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.’ 5  Company Formation: The Current Practice  Over half of all UK company registrations now involve company formation agents.  On registering a company, Company House will issue the company with a certificate of incorporation which is one of the company’s constitutional documents  ‘A company may not be so formed for an unlawful purpose.’ s.7(2) Companies Act 2006. In the past, Companies House could use a company’s objects clause to discern its purpose; however, under the 2006 Act, the objects clause is optional for most companies and therefore is rarely used.  The certificate of incorporation is ‘conclusive evidence that the requirements of this Act as to registration have been complied with and that the company is duly registered under this Act.’ Companies Act 2006, s.15(4). However, it is clear from R v Registrar of Companies ex parte Attorney General Ltd (1991) that the certificate is NOT conclusive evidence that the company has been formed for a lawful purpose. 6 Registration Documents – ss7-13 Companies Act 2006  S 8 (1) - from October 2009 – one or more persons subscribes to memorandum and complies with CA 2006.  Subscribers wish to form a company under the CA 2006 and agree to become members taking at least 1 share each 7 New-style registration documents – CA 2006 s 9  Company’s name  If public company - state this  Situate of registered office  Limitation of liability  Statement of share capital  Company’s proposed officers  Address of registered office  Proposed articles of association 8 Old-style Registration  Many companies will have completed old-style registration  Required documents: ◦ Memorandum of association ◦ Articles of association ◦ Statement of first directors and co secretary (Form 10/21) ◦ Statement of compliance (Form 12/23)  Compulsory clauses – name, registered office, objects, limited liability, authorised share capital 9 Company Name  Limited/Ltd/PLC (now ss.58-59 CA 2006)  Must not be offensive or constitute a crime (s.53 CA 2006)  Must not be the same as one on register (s.66 CA 2006)  Permission of Secretary of State required for certain names (ss.54-56 CA 2006)  Tort of passing off  Change of name 10 Registered Office  Country not actual address  Fixes company’s nationality  Residence - important for tax purposes  Purpose - legal documents, notices etc can be served on the company  Change of address 11 Old style memorandum: Objects Clause  Company’s capacity - what it can do  Ultra Vires - to what extent a contract beyond the capacity of the company is enforceable, either against the company or by the company  Substratum destroyed - company can be wound up  Drafting the objects clause Ultra Vires Doctrine (see handout)  Ratification of ultra vires acts by co's - Ashbury Railway Carriage Co v Riche (1875)  Constructive notice  External aspect - Re Jon Beauforte (1953)  Internal aspect - Rolled Steel (1986) Reform of the Law  Article 9 of first EC Directive/S.9(1) of European Communities Act 1972  The Prentice Report: ‘Reform of the ultra vires Rule: A Consultative Document’ (1986)  CA 1989 S 3A – general commercial company  CA 1989 S 35 amended Companies Act 1989 S.35  'The validity of an act done by a company shall not be called into question on the grounds of lack of capacity by reason of anything in the company's memorandum'.  CA 2006 s 39(1) – memorandum changed to ‘constitution’  Cannot now use ultra vires rule to question corporate capacity but what about limitations on directors’ powers? 15 Effect of S.35  (i) doctrine of constructive notice abolished i.e. a person dealing with a co is not deemed to have taken notice of any matter merely because it is disclosed in a document which can be inspected (s.35(B))  (ii) Co can now ratify action taken by directors in excess of their powers by means of a special resolution (s.35(3))  (iii) Member can prevent co from pursuing transaction outside objects (s.35(2)) 16 Section 35(A) replaced  See now CA 2006 s 40(1) - ‘In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution’.  S 35A identical but referred to ‘the power of board of directors’. Effect of CA 2006 s 40  Will new section widen circumstances in which it will apply?  Directors can still be liable to co for exceeding their powers  S 40(2)(b) – persons dealing with a company ◦ no constructive notice ◦ presumption of good faith ◦ not in bad faith by reason only of his knowing act is beyond powers of directors under the company’s constitution Overview  Objects clause no longer required  Objects clause now treated as provision of the articles – CA 2006 s 28(1)  Still relevant though as: ◦ A limitation on authority of board of directors to bind the co ◦ A provision of the company’s constitution (directors’ duties e.g. s.171 duty to act in accordance with co constitution and internal control) ◦ If object no longer pursuable then ‘subtratum’ is gone and company may be wound up CA 2006 - summary  1980’s case law already limiting the doctrine/significance of reforms prior to CA 2006  By retaining the concept of an objects clause the 1989 Act maintained one of the initial justifications of the ultra vires rule - shareholder protection  External relations - relegated ultra vires rule to the history books? - CA 2006 s 40 – protects unconnected third party dealing with company in good faith  Internal relations - CA 2006 s 41 – ultra vires contract between company and director or connected persons is voidable