Company Law Lessons 1.2.3 PDF

COMPANY LAW I Dr. Kweku Ainuson School of Law University of Ghana January 2021  What is a Company?  Has no single agreed definition. To many, it is a special legal vehicle created to do business in the society. It can be constituted by an association, a group of associat...

COMPANY LAW I Dr. Kweku Ainuson School of Law University of Ghana January 2021  What is a Company?  Has no single agreed definition. To many, it is a special legal vehicle created to do business in the society. It can be constituted by an association, a group of associations, an individual or a group of individuals, or a combination of associations and/or individuals.  Although a company is primarily to engage in business with the aim of making profits, others exist for other reasons. Eg NGOs, Post Office, Data Protection Commission. Hwr Note: Government Policy on privatization of SOEs – see Statutory Corporations (Conversion to Companies) Act, 1993 (Act 461)  The company as a legal structure/vehicle for doing business is very flexible. It can accommodate the needs of one person or a group of persons or associations.  To many therefore, a company is the legal structure or kinds of structures that are covered in Statutes Regulating Companies.  For the History of corporations read pages 25 to 43 of Douglas Arner, Development of the American Law of Corporations to 1832, 55 SMU L. Rev. 23 (2002) https://scholar.smu.edu/smulr/vol55/iss1/6 , Williston, Samuel, History of the Law of Business Corporations before 1800. Harvard Law Review, Vol. 2 (1888) https://archive.org/details/jstor-1322201 In Ghana, a company can be said to be the legal structures that have been defined or described in the Companies Act, 2019 (Act 992)  Act 992 is a regulatory document that describes; 1. How the various types of companies are formed and dissolved. 2. The steps needed to operate legally. 3. The rights, duties, power and liability of members and officials of the company. 4. How the company is governed on a day to day basis. 5. How to achieve the long term goals of the company. 6. Regulatory oversight of the company by the institutions of state – Executive –thru Registrar General and Judiciary – through the courts  Sources of Company Law in Ghana The Constitution of Ghana Statutory Provisions Case Law Theoretical Framework/principles  Brief History of Company Law in Ghana  The modern company law in Ghana has its antecedents to the colonial days of Ghana.  Rapid development of Gold Coast cocoa, timber and mining and other merchants – attracted outside companies. The need for a legal vehicle to regulate their operations. Ghanaian businesses not surviving after the patriarch/owner.  The enactment of the Companies Ordinance of 1907 which was based on the English Companies Act of 1862.  The 1862 Act was said to be unsuited for the Gold Coast. The UK itself found it unsuited and enacted the English Companies Act of 1908.  The independence of Ghana in 1957 and the wave of civic nationalism.  According to Prof. Gower, the 1907 Act was fifty years behind time at the time it was enacted and by 1958, it was almost 100 years behind time.  In 1958 the Nkrumah government appointed a working party to revise the 1907 Ordinance, which it described as "completely obsolete and quite unfit to modern commercial needs."  Unfortunately, the draft prepared by this working party was a carbon copy of the 1948 Companies Act of the UK.  This was rejected as it was at variance with the mood of nationalism at the time.  The Gower Commission  The Government of Ghana through a Gazette with Notice No.1783 of 25th August 1958 indicated that they had taken a step towards the future of commercial law in Ghana by establishing a Commission of Enquiry with Professor LCB Gower of University of London as the sole Commissioner to enquire into the present company law of Ghana with a view to reform it. The Commission to Professor Gower read in part;  “Now therefore the commission of the Governor General is hereby issued appointing Laurence Cecil Bartlett Gower, Esquire, Sir Ernest Cassell Professor of Commercial Law in the University of London, to be a Commissioner under the [Commission of Enquiry Ordinance, s 2] to enquire into the working and administration of the present company law of Ghana and in the light of such enquiry to make recommendations for the amendment and alteration of the Companies Ordinance and of such other laws of Ghana as the commissioner may consider necessary in regard to his conclusions regarding the said Companies Ordinance. Vincent Cyril Richard Arthur Crabbe, Esquire shall be the Secretary and shall perform the duties specified under sec 6 of the Commission of Enquiry Ordinance. The Enquiry shall be opened in the Supreme Court in Accra on Tuesday 23rd fay of September 1958. … In making a report under this Commission, the Commissioner shall take into account and examine the laws of such other African states as he may consider appropriate and he shall be entitled to recommend that any existing or proposed law in relation to companies enacted by or proposed to be enacted by any African state may be adopted in whole or in part for use in Ghana. In framing his recommendations the Commissioner shall take into account the need for encouraging African enterprise in Ghana and the encouragement of foreign investment therein. …”  The Gower Report - Report led to the Companies Code 1963 (Act 179)  The Companies Code, 1963 (Act 179) was applicable to companies in Ghana until it was repealed in 2019.  Innovations introduced into Act 179  A code system as opposed to an Act – The Rule in Foss v Harbottle, Rule in Turquand’s Case, Issuing shares at a discount was in case law, mechanics of paying dividends were in case law.  The one man company.  The combination of the Memorandum and Articles of Association into one document called the Regulations.  The prescriptions of minimum capital for companies before they commence business.  The adoption of no-par value shares  The virtual abolition of the ultra vires rule as it affects third parties.  The ability of companies to ratify pre-incorporation contracts. Problems Associated with Act 179 and the Road to Act 992  Act 179 was in many respect modeled after the English Companies Act of 1948.  Many parts were not in line with the computer age.  Many parts of Act 179 had become anachronistic.  The Road to the Companies Act, 2019 (Act 992)  The Business Law Report Committee of Experts, 2008 to offer advice on the reform of business law of Ghana guided by the theme ‘Improving the Ease of Doing Business’ in Ghana.  The extensive stakeholder consultation approach of the Business Law Report Committee of Experts.  Consultations led to the National Stakeholders’ Consultative Conference first in 2008 and additional conferences/whorkshops in the Northern and Middle sectors of Ghana.  See Justice S K Date‐Bah on Revitalising Gower’s Legacy: Reforming Company Law in Ghana (Material available on Sakai)  Major Changes Introduced by the Companies Act, 2019 (Act 992)  Change from ‘Regulations’ to ‘Constitution’. The Abolition of the need to submit a constitution for registration as part of incorporation.  The full abolition of the Doctrine of Ultra Vires.  The introduction of suffixes to differentiate the different types of companies.  Increased shareholder rights by subjecting major transactions to special resolution.  Balancing majority and minority rights by the introduction of the right of the minority to be bought out as dissenting shareholder(s).  A dedicated office of the Registrar of Companies.  Registration and communication by electronic means.  Financial terminologies used in line with the terminologies for International Financial Reporting Standards (IFRS). Eg. Financial Statements for Accounts, Retained Earnings for Income Surplus and Income Statement for Profit and Loss Account. Legal Structures for Doing Business in Ghana 1. Sole Proprietorship 2. Partnerships 3. Companies  Sole Proprietorship (Mom and Pop Business)  It is the simplest form of organizing and doing business.  The business operation is by a single individual.  There are no requirements under the law to file any registration processes prior to commencing business.  However, where the business name does not consist of the person’s true first name and last name or the initials thereof, the person must register the business name under the Business Names Registration Act, 1962 (Act 151)  The business name may be reserved for exclusive use under the Business Names Registration Act 1962 (ACT 151) as amended.  The SP usually provides the funds for the business through his or her own means (personal savings, friends, family etc)  Any contract the SP enters, is in his own name. He enjoys the benefits alone and suffers personally for any liabilities thereof.  In law, there is no legal difference between the business assets and the personal assets of the proprietor. Thus, if there are any liabilities, creditors can go after the personal effect of the proprietor.  Because the business is owned by one person, there is little risk of disagreement and decision making is simpler. Thus, there is little need for an elaborate organizational structure.  This business model is ideal for an individual with his or her own capital who wants to enter into business.  It may be difficult to attract equity investment or debt support because of the unpredictable nature of structures of the business.  Partnerships  Partnerships are primarily governed by the Incorporated Private Partnership Act, 1962 (Act 152)  Partnership is defined by Section 3(1) of the Incorporated Private Partnership Act of 1962 (Act 152) as amended as the association of two or more individuals carrying on business jointly for the purpose of making profits.  Note: Family ownership or co-ownership of property shall not of itself create a partnership whether or not the family or co-owners share any profits made by the use of that property.  However, the sharing of the net profits of a business shall, prima facie, be evidence of a partnership, but,  But the remuneration of a worker or agent of a person engaged in business by paying them a share of profits of the business shall not of itself make the worker or agent a partner.  a person shall not be deemed to be a partner if it is shown that he did not participate in the carrying on of the business and was not authorised so to do. A partnership can be created by 1. oral agreement 2. Implication based on the conduct of the members of the business entity. 3. A formal written agreement, spelling out the conditions, terms and liabilities of the members of the Partnership.  Method of Registration of Partnerships (sec 5)  Deliver to the Registrar for registration a copy of the partnership agreement and a statement in the prescribed form signed by all the partners containing the following particulars, namely,  the name of the partnership;  the general nature of business;  the address and Post Office Box number of,  (i) the principal place of business of the partnership; and  (ii) all other places in Ghana at which the business is carried on;  the names and any former names, residential addresses and business occupations of the partners.  Incorporated Private Partnership Amendment Act, 2012 (Act 839) – Has incorporated parts of the Electronic Transactions Act 2008 (Act 772) –has made provision for electronic transactions with respect to documents to be filed with the Registrar or served between partners  Effect of Registration of Partnership The certificate, or a certified copy or the Gazette containing the notice of registration shall be conclusive evidence that the firm has been duly incorporated. The Partnership shall have distinct corporate personality from its members and shall have full powers like a human being capable of operating in its name. (sec 12) However the individual partners have joint and several liability (Sec 16) subject to the right to be indemnified by defaulting partners. (12)  Partners as Agent of the Firm (s 14)  Each partner is an agent of the firm and the actions of the partner as relates to the business of the firm binds the firm.  Here, the Firm is bound if actions are 1. Authorized expressly or impliedly or later ratified by other partners. 2. Done for carrying on the usual business of the firm -- unless the partner had no authority and the third party knew of the lack of authority.  Where the actions of the partner are not connected with the usual business of the firm, the firm shall not be bound unless he is in fact authorized or the firm made a representation to the third party.  Liability of incoming members and outgoing members (Sec 17) – new members are not liable for debts created before they become partners and retiring members shall not be liable for debts incurred after their exit.  No specific formal requirements for becoming a partner in a Partnership. A member can therefore be deemed by law to be a partner of the partnership even though that individual may not know what a partnership is and the existing partners had not specifically appointed him as such either orally or by a written document.  Hold out – A person who holds himself out or allows himself to be held out as a partner shall be liable as a Partner. (Sec 18)  However, if after the death of the named Partner, the Partnership continues with the name of the partner, the use of the name in itself shall not make the estate of the dead partner liable. (sec 18)  A body corporate cannot be a member of a Partnership. (sec 4(2))  Under Act 152, the minimum membership requirement of a Partnership is two members and the maximum is 20. See sec 4(2) of Act 152, section 5 of Act 179 and sec 3 of Act 992.  In a Partnership, all assets of the business are owned directly by the partners.  A Partnership which does not specifically exclude the Partnership Act will be governed by it.  In line with the Partnership Act, Each partner is entitled to participate in the management of the partnership, entitled to an equal share of profits, to be indemnified in respect of liabilities incurred by other partners, entitled not to be fired by the other partners.  How Partnerships Come to an End  By the agreement of the partners.  Through insolvency proceedings.  By the order of the court.  A Partnership ceases to exist on the death of one partner. Mensah & Ors vrs. Adu & Ors. GLR 198. However, the suvivors to the Partnership can by agreement constitute a partnership and call it by the same name it previously traded under.  However, the parties to a formal Partnership can modify the terms of the Partnership Act and incorporate their own terms.  One area that the Partners of a Partnership cannot contract from is the issue of limited liability. Under the Partnership Act, each partner is jointly and severally liable for the debts of the partnership incurred while an individual remains a partner.  What is a Company? A company is a succession or collection of persons having at law an existence, rights and duties which are separate and distinct from those of the persons who are from time to time its members. (Smith and Keenan)  Characteristics of a Company 1. A company is deemed a persona at law. The company is a separate legal entity from the members that form it. Members are not directly liable for the debts or liabilities of the company as it is assumed that the Company as a distinct legal entity owes those liabilities.  Salomon v Salomon & Co Ltd AC 22  Owusu v. RNT Thorne Ltd GLR 90-92  The plaintiff-applicant sued the first defendant, a limited liability company and the second defendant, its agent. By an ex parte application he obtained an absconding warrant against one R.N.T. who, together with his wife were the only directors of the first defendant company, on the grounds that they had closed the company offices and sold their property and that R.N.T. was going on leave and was not likely to return to Ghana. He therefore prayed for an order that R.N.T. be ordered to furnish personally bail for appearance under Order 35, r. 2.  Held: the company existed apart from the directors and members. R.N.T. was not sued personally and he was therefore not a defendant within the meaning of Order 35, r. 2 for the court to go into the question of security.  Macaura v. Northern Assurance Co Ltd (1925) AC 619  Macaura owned a timber estate in Ireland. He formed an estate company and sold the timber estate to the estate company for 42,000 pounds. The company paid for the timber estate by issuing to Mr. Macaura and his nominees 42,000 fully paid shares of 1 pound each. No additional shares were issued by the company. He also funded the company and held an unsecured debt of 19,000 pounds against the company. Macaura purchased an insurance policy for the timber estate under his personal name and not in his personal name as agent for the company. When fired destroyed the estate, Macaura claimed under the insurance company.  HELD: He has no insurable interest. By insuring in his name, he could have only be insuring as either a simple creditor or as a shareholder of the company and neither a shareholder or a simple creditor has an insurable interest in an asset which the company holds because the company is an independent entity. A separate person at law.  Lee (Catherine) v. Lee’s Air Farming Ltd (1960) 3 All ER 420  In 1954 the appellant’s husband formed the respondent company which carried on the business of crop spraying from the air. In March 1956, Mr Lee was killed while piloting an aircraft during the course of top-soil dressing, and Mrs Lee claimed compensation from the company, as the employer of her husband, under the New Zealand Workers’ Compensation Act 1922. Since Mr Lee owned 2,999 of the company’s 3,000 £1 shares and since he was its governing director, the question arose as to whether the relationship of employer and employee could exist between the company and him. One of his first acts as governing director had been to appoint himself the only pilot of the company at a salary arranged by himself.  Held – Mrs Lee was entitled to compensation because her husband was employed by the company in the sense required by the Act of 1922, and the decision in Salomon v Salomon & Co was applied.  A Company is an artificial legal entity and not a natural person.  Certain claims may therefore not be available for a company although available for a natural person. eg a claim for harm inflicted upon it. See DPP v Dzlurzynski All ER (D) 258 The Times, 8 July, ‘A’, an animal rights protestor was being prosecuted under an Act for harassing a company by filming its vehicles going in and out of its premises and making abusive remarks. Held: the prosecution must fail because a company could not be regarded as a ‘person’ for these purposes. The Act envisaged harassment of a human being.  However a company can be deemed a person for purposes of defamation – companies thrive on reputation, thus statements that impugn the reputation of the company may be actionable at the instance of the company. Companies can sue if the defamatory statement is in connection with its business or trading reputation and has caused or is likely to cause serious financial loss.  NOTE: A company has a reputation in the business sense and not as a person so that a company cannot be injured in its reputation for having committed murder or having committed adultery. See. South Hetton Coal Co. Ltd. v. North Eastern News Ass'n Ltd. ,1 QB 133 , Bognor Regis U.D.C. v. Campion 1QB 373  The common seal – the seal is the symbol of the company (its signature) that signifies the authority of the company for actions the company may undertake.  Perpetual succession – the company will continue to exist in spite of the death, bankruptcy, retirement or change in the membership of the company. Contrast with sole proprietorship and partnership.  It is managed by directors – As an abstract person, a company cannot manage itself. The company is therefore managed by directors. Under section 171 of Act 992, a company must have at least 2 directors.  It has Shareholders – Save companies with no shares (company limited by guarantee) members of the company are registered shareholders of at least one share.  Written constitution – A company is required to have a constitution to define key elements of the company structure and also stipulate the arrangements by which the company will be regulated and managed.  Capital – For companies with shares, The constitution states the maximum amount of share capital the company may issue. The company can increase its authorized share capital only through very specific processes as stated in Act 992.  Types of Companies – See Sec 7 1. Company limited by shares a. private company limited by shares b. public company limited by shares 2. Unlimited company a. private unlimited company b. public unlimited company 3. Company limited by guarantee 4. External company.  Limited by shares – A company which has the liability of its members limited to the amount unpaid, if any on the shares held by the members. (Sec 7(2)(a)  Unlimited company – a company which does not have a limit on the liability of its members. (Sec 7(2)(c  Company limited by guarantee – the liability of its members is limited to the amount of money the individual members have undertaken to contribute as the assets of the company in the event of winding up. Sec 7(1)(b)  External company – a body corporate formed outside Ghana which has an established place of business in Ghana. Eg. Branch office, a factory, registration office for shares etc. sec 329  Private company – If the Constitution (a) restricts the right to transfer its shares, if any; (b) members and debenture holder not to exceed 50 (exclude bona fide employees and former bona fide employees who became members during the time of employment (c) prohibits invitation to the public to acquire shares/debentures and (d) prohibits invitation to the public to deposit money for fixed periods/payable at call, whether interest bearing or not. Sec 7(5)  Public Company – A company which is not a private company – with the exception of a company limited by guarantee with membership of 50 or less.  The Process of Incorporation  Under section 12, a person aged 18 yrs and above may apply to the Registrar for the incorporation of a company.  The application for incorporation shall be made in the right form and include the information stated in 13(1) – read section 13.  Where the company intends to register a constitution, The application must be signed by the subscribers of the constitution indicating the number of shares subscribed to and the amount paid for the shares.  When the Registrar is satisfied that the application conforms to the requirements of the law, the Registrar shall after the payment of the appropriate fees certify under the seal of the Registrar that the companies in duly incorporated. See section 14(1)  The application for incorporation need not be accompanied by a constitution. See sec 23.  Where the company is incorporated without submitting a constitution then, the rights, powers, duties and obligations of the company, the Board, each director and each shareholder of the company shall be as provided in the 2nd Schedule (Private Company), 3rd Schedule(Public Company) and 4th Schedule (Limited by Guarantee). See sec 25  However, where the company opts to register a constitution, the constitution must be signed by one or more subscribers or the Company Secretary, and delivered to the Registrar by the subscriber or an authorized person.  NOTE: Nothing shall preclude a company to adopt a constitution after incorporation.  Where a company has duly registered a constitution, the rights, powers, etc of the company shall be as stated in the 2nd, 3rd and 4th schedule as the case may be, unless modified appropriately by the members.  Where a company opts to have a constitution at incorporation, The Constitution must have the following content (sec 26) 1. the name of the company, with the proper suffix as required by 21(1) ; 2. the names of the first directors of the company and their limitations in accordance with sec 189 3. the nature of the authorized business (OPTIONAL)  If the constitution is being adopted after incorporation, then a special resolution of the company indicating the intention to so adopt the constitution.  In the case of a company having shares, the number of shares with which the company is to be registered.  For a company without a registered constitution, its constitution as per the 2nd, 3rd and 4th schedule shall be deemed to include the name of the company, first directors, no. of shares with which the company is registered, the number of shares each shareholder has subscribed and whether paid for or not.  The registrar can refuse registration of the company on the following grounds 1. A constitution adopted by the company does not comply with the law; 2. The objects adopted by the company are unlawful 3. Any of the subscribers to the Constitution is an infant or of unsound mind; or 4. Any of the directors named in the Constitution is under section 173 of Law incompetent to be appointed a director,  The date in the certificate of incorporation shall be the birth day of the company and the company can from that day exercise all the function of an incorporated company.  The certificate of incorporation or a certified true copy shall be conclusive evidence that the company has been duly incorporated. See sec 15 Once incorporated, the company becomes a body corporate by the name contained in the application for incorporation and, subject to section 13, is capable of performing the functions of an incorporated company. 14(2) Under Sec 18 the company has full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction.  Effect of the Company Constitution Upon Registration. see sec 29 1. A contract under seal between the company and its members and officers and between the members and officers themselves unless altered in accordance with the provisions of the Law. 2. Where the Constitution empowers any person to appoint or remove any director or other officer of the company such power shall be enforceable by that person even though that person is not a member or officer of the company. (Usually, such powers are conferred on trustees or debenture holders.) 3. Any suit brought by a member or officer of the company for a breach of the Constitution shall be brought in a representative capacity on behalf of all the members or officers who may be affected by the said breach. 4. The Constitution shall be void to the extent that it contravenes or is inconsistent with the Act.  Adoption and Changing the Companies Constitution – s 30  The members of the company may by special resolution 1. adopt and register a constitution if one was not registered at the time of incorporation. 2. Alter or revoke the constitution subject to this Act.  In spite of the special resolution; 1. the company’s name cannot be altered except with the consent of the Registrar. 2. Changing the company’s share structure will have to be in compliance with sections 9 (conversion from LTD to Guarantee), 59 to 65 (Transfer of shares), 78 to 82 (Resolutions requiring court consent – reduction in stated capital and reduction or extinction of unpaid liability), 219 (Remedy against oppression), or 239 (Arrangement/Amalgamation with court approval). 3. Changing the authorized business of the company – sec 239. 4. An amendment shall not be made which conflicts with an order of the court under sec 219  The constitution may restrict or exclude the power of the company to amend all or any part of the constitution.  Except in accordance with the rules on Arrangement with court approval under sec 239, a member is not bound by an amendment to the constitution after becoming a member if the amendment requires; 1. the member to take on more shares than held by the member on the date of the amendment. 2. Increases the liability of the member as at the date to pay money to the company. 3. Increases or imposes restrictions on the right to transfer the shares of the member at the date of the amendment.  An amendment shall not be made to convert an unlimited company to a limited company or a company limited by guarantee to a company limited by shares.  An amendment may be restrained or revoked by the court in accordance with sections 218 and 219.  The court has enormous powers when it comes to alteration of the companies constitution. See - In Allen v. Gold Reefs of West Africa (1900) 1 Ch 656. Held: the court has jurisdiction to regard an alteration as invalid unless it is made for the benefit of the company as a whole.  Here the court looks at the generality of the company and where the company is heading. This test may operate to favor one class of shareholders against another. The courts usually assumes that those managing the affairs of the company (by necessary implication the majority) know better than the court when it comes to where the company is heading and what will be in the best interest of the company. Thus, although some class of shareholders may feel aggrieved by the alterations, the court may accept them as valid because they are in the best interest of the company. See - Greenhalgh v Arderne Cinemas Ltd (1951) Ch 286  The constitution originally had preemption rights. A majority group of the shareholders secured an alteration enabling members to sell their shares without first offering them to fellow members if the company so resolved by ordinary resolution. The purpose of the alteration was to make it possible for the majority to sell their shares to an outsider and to the outsider a controlling interest. Mr. Greenhalgh, a minority shareholder, objected to the alteration although outsider was prepared to pay the same price for each share held in the company.  Held: (CA) The alteration was valid even though its immediate effect was to enable the majority group to sell their shares to an outsider without first offering them to the minority shareholders, although the minority shareholders, not being able to pass an ordinary resolution, were still bound to offer their shares to the majority group before selling elsewhere.  Dafen Tinplate Co. v. Lianelly Steel Co. (1920) 2 Ch 124  The principal shareholders of the defendant company were other steel companies, and it was hoped that the member companies will buy their steel from the defendants, though there was no contract to that effect. On the whole the member companies bought their steel from the defendant company, but the claimant company began in 1912 to get its steel from another, a third company which the claimant had an interest. The defendant company then sought to alter its articles to expel the claimant company. The alteration provided that the defendant company could by ordinary resolution require any member to sell his shares to the other members at a fair price to be fixed by the directors. Ptf sought a declaration that the alteration was void.  Held: that the PTF company was entitled to such a declaration. The power taken by the articles was a bare power of expulsion and could be used to expel a member who was not acting to the detriment of the defendant company at all. Sidebottom V Kershaw, Leese (1920) 1 Ch 154 The defendant company altered its articles to require any member that carried on business in competition with the company to sell his shares at market value to a designated person. Held: the claimant might cause the defendant company loss by information which he received as a member and as the power of expulsion was restricted to competing, the alteration was for the benefit of the company as a whole and was therefore valid. See also Shuttleworth v. Cox Brothers (1927) 2 KB 9  Southern Foundries v. Shirlaw (1940) AC 702 Note: A company cannot escape liability for breach of contract if the alteration of the articles occasioned a breach of contract. Since the constitution operates as a contract between the members, the court can step in to interpret the terms and rectify mistakes like any other contractual document. See Scott v. frank ltd (1940) Ch 794 Folkes Group v Alexander (2002) 2 BCLC 254 Towards Incorporation  This section deals with all the formal steps or matters that take place as the business unit or business idea moves to become an incorporated company.  The period from when the idea to form the company is conceived to the day it shall receive its certificate of incorporation is known as the Promotion Period.  The person or persons who shall take all the necessary steps required to incorporate the company are called Promoters.  Under sec 10, Any person who is or has been engaged or interested in the formation of a company shall be deemed to be a promoter of that company. However, persons engaged in their professional capacity to assist with incorporation shall not be deemed promoters. Eg lawyers, accountants, etc  The law takes the view that w/n a person is a promoter is a question of fact and not a question of law and usually a term of business. Promoters usually have some controlling position during the pre-incorporation stage and also during the early days of the life of the company. The role of the promoter can be likened to a director on a company.  Promoters will therefore play roles such as authorizing the drafting of legal documents such as the constitution, may nominate accountants, directors (independent directors for regulated industries) lawyers, bankers and such other officers that may be necessary for the formation of the company.  Duties of the Promoter 1. The promoter stands in a fiduciary relationship to the company. The promoter should therefore not make secret profit at the expense of the company. Sec 10 (3),  Gluckestein v Barnes (1900) AC 240 In 1893 a company called Olympia which was being wound up. A syndicate was put together to raise funds to buy and resell Olympia. The syndicate decided to form a new company called the Olympia Company Ltd (OCL) to take over from the Olympia. The syndicate members were the first directors of OCL. The prospectus inviting people to buy shares in OCL stated that the syndicate which was promoting the company had purchased Olympia for 140,000 pounds and was selling it to OCL for 180,000 pounds thus disclosing a profit of 40,000. However, they failed to disclose what they termed vaguely as “interim investments”. The interim investments were some debentures they had purchased in the old company for less than their face value. These debentures were to be redeemed from OCL at their face value. The syndicate therefore made an additional profit of 20,000 pounds on the promotion. The company subsequently went into liquidation and the liquidator sought to recover the secret profit. Held: the profit of 20,000 should have been disclosed and the appellant was bound to account to the liquidator for it. Here, the promoters disclosed the 20,000 to the directors – but it was deemed useless because the directors were themselves – not different from the promoters. They should have disclosed it to an independent board.  Erlanger v. New Sombrero Phosphate Co (1878) 3 App Cas 1218  Erlanger, was the head of a syndicate that acquired a lease of an island in the West Indies to mine its phosphate deposits. The syndicate acquired the lease for 55,000 pounds. Erlanger and the syndicate then formed a new company and selected its first directors. Out of the directors was independent of the syndicate, two of the directors were abroad and the remaining directors were puppets of Erlanger. The lease was then sold through a nominee to New Sombrero Phosphate Co (NSP) for 110,000 pounds. This purchase price was then purported to have been ratified by the directors without inquiry 8 days after the incorporation of NSP. NSP subsequently floated shares of which many in the public purchased them. The real circumstances surrounding the lease and the sale were never disclosed to the public and never discovered until 8 months after the sale when the company had difficulties. The shareholders replaced the directors with new directors. The new directors then took steps to rescind the sale of the lease to the company.  Held: Promoters owed a fiduciary duties towards the company which included the duty to disclose all material facts relating to the contracts to an independent board of directors which may then choose to agree with the terms. Failing such disclosure by the promoters, a contract between the promoters and the company was voidable at the instance of the company.  NOTE: Under sec 10 of Act 992, Any transaction between a promoter and the company may be rescinded by the company unless the promoters make a full disclosure of the transaction to the company and the transaction is ratified on behalf of the company 1. An independent board of directors. 2. All the members/shareholders of the company. 3. Majority of the members/shareholders of the company at a general meeting vote to ratify the transaction. Here the promoter and holders of shares of which the promoter is a beneficial owners cannot vote.  Generally, there is no limitation for bring an action against a promoter for non- disclosure.  However, in a court action against the promoter for non-disclosure, a court may relieve the promoter form all liability or part only of the liability by taking into consideration the surrounding circumstances including the lapse of time. 2. The promoter shall observe the utmost good faith towards the company in any transaction with it or on its behalf. 3. shall compensate the company for loses the company may incur as result of the failings of the promoter. 4. Shall account for any profit made where such profit should have been made by the company instead of the promoter.  Where the promoter fails to disclose a material fact about the transaction, the company can rescind such transaction under sec 10(5) or keep the transaction and sue the promoter for negligence or sue to recover the secret profit. Eg 1. if P acquired a piece of property in 2011 for 10,000 when he was not a promoter and then sells it through a nominee to a company he is promoting for 20,000 without disclosing his interest – the company can decide to keep the property and then bring an action against the promoter for negligence – that is P’s breach of duty of skill and care. Eg 2. P is a promoter of a pharmaceutical retail company. At a meeting at Pharmacy Council as part of his work, P learns about the latest research that gaggling Hydrogen Peroxide (HP) twice a day reduces Covid-19 infections. P buys 5k pieces of HP for GHS 65k. P then sells same to the company for GHS 130k. The company is now able to retail the HP for GHS 390k. -- Here, the company can keep the HP and sue P for the secret profit.  The promoter will be deemed to have discharged his duty of full disclosure if he makes it once before an independent board of directors.  Re. British Seamless Paper Box co (1881) 17 Ch D 467 P disclosed profit he made during incorporation to the members (shareholders) of the company when the company commenced business. Held. P is under no duty to disclose his profit made during incorporation to new subscribers who were invited to subscribe to more shares 12 months later. Here the company cannot recover the profits from P if it failed to recover the profit earlier. The company will be deemed to have ratified the transaction and therefore will be estopped from claiming otherwise.  Pre-Incorporation Contracts  Contracts that are entered into between the promoter and another person before the company comes into existence and is purported to be for the benefit of the company.  A problem with pre incorporation contracts is that these contracts are made for the benefit on an entity that is not in existence at the time the contract is concluded. At this time, the company has no legal existence and therefore no capacity to make contracts. At the same time, these pre incorporation contracts can be very useful for the very survival of the company.  The question therefore is who bears the responsibility and liability for pre- incorporated contracts?  Common Law Position. The company is not bound by contracts before it comes into existence. The company cannot ratify the contracts even after its incorporation.  Kelner v. Baxter (1866) L.R 2 C.P. 174 (court of common pleas)  Newborne v. Sensolid (GT Britain) Ltd (1954) 1 QB 45  Mr. Leopold Newborne used a letterhead Leopold Newborne (London) Ltd for a contract to sell 200 cases of tinned ham to Sensolid Ltd. At the bottom of the contract was signed “yours faithfully, Leopold Newborne (London) Ltd. Mr. Leopold was the promoter of the company. Sensolid failed to take delivery of the goods when the market slammed. They argued that the company was not in existence at the time the contract was concluded. They argued further that the Mr. Leopold did not enter into the contract personally and could therefore not enforce the contract personally. Held: per Lord Goddard CJ “ In my opinion, unfortunate though it may be, as the company was not in existence when the contract was not signed, there never was a contract and Mr. Newborne cannot come forward and say: ‘well, it was my contract’. The fact is, he made a contract for a company which did not exist.  See also Phonogram LTD v. Lane (1981) 3 All ER 182  Ghana Position –  Section 11—Pre-incorporation Contracts.  Pre-incorporation contracts may be ratified by the company within 18 months after the formation of the company.  After ratification, the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of such contract or transaction and had been a party thereto.  Prior to ratification by a company the person or persons who purported to act in the name or on behalf of the company shall, in the absence of express agreement to the contrary, be personally bound by the contract or other transaction and shall be entitled to the benefit thereof.  See Panagiotopoulos v. Plastico Ltd (1965) GLR 176  JADBRANSKA SLOBODNA PLOVIDRA, SPLIT v. OYSA LTD. GLR 129- 137  Where counsel invoked section 13 of Act 179 (Now sec 11 of Act 992) to validate a pre incorporated contract, Amuah Sekyi J as he then was stated that “It seems to me that although section 13 was enacted to obviate the hardship and inconvenience which sometimes arises by a strict application of the English rules, the burden which lies on a claimant to prove ratification is a very heavy one. “There should be a clear and unequivocal act on the part of the company if ratification was to be inferred. Such an act might be a resolution of the company in general meeting adopting the contract, or a resolution to the same effect passed by the company in general meeting. A mere letter by the managing director would be insufficient to amount to ratification unless there was evidence that he was communicating a decision to ratify taken by the company in general meeting or by the board of directors which had been confirmed by the company in general meeting.”  Lifting the Veil of Incorporation The process or processes by which the veil of incorporation – the distinct/separate personality of the company – is put away so as to allow the court to fix liability on the members and/or officers of the company for acts or actions which would have ordinarily been deemed the acts or actions of the company.  Lord Macnaghten in Salomon v. Salomon what separates the company from the members that form it is loosely or figuratively referred to as the veil of incorporation – thus once incorporated, you cannot go behind the veil to attach liability to the members) The basis of the concept of lifting the veil of incorporation is the limited liability as well as the separate existence concept of the company.  For members of the corporation, this means their liability for any debts incurred by the company is limited to the amount they have paid or have agreed to pay to the company for their shares.  For companies limited by guarantee, it is the amount each member will be liable for in the event of debts which will be the amount each member has guaranteed. What is the rational for the limited liability concept? 1. It will encourage investment from the public. People with some disposable income and very little experience about investment will feel comfortable investing their money if they were assured that their liability will be limited to what they have invested already or agreed to invest 2. It assures the average investor that he should not be concerned about the personal wealth of the other members of the company. In the absence of limited liability, members will usually be jointly and severally liable for the debt of the company. Here, the shares of less wealthy member will be worth more to him than the shares of a relatively rich shareholder. 3. It ensures that shares are equal and trade at the same price on the stock exchange The concept of limited liability and separate existence can be subject to abuse ----- It may encourage and incentivise people to engage in overly risky behaviour. It can be used as smokescreen to engage in fraudulent behaviour. Third parties dealing with the company without recourse to ‘inside’ information are likely to be swindled. Subsidiaries can use the concepts to avoid debts by transferring assets between parent company and subsidiaries. It may erode confidence in dealing with the company Dealing with the abuses of the limited liability concept 1. Publicity - Third parties dealing with the company are almost always entitled to critical information about the shareholders of the company, the stated capital, constitution, objects, officers and any beneficial interests holders. 2. Regulator – the power of the regulator to get behind the company and see what happens on day to day operation and also the power to request information or documents. 3. Lifting the veil of incorporation to make the shareholders and directors liable for the debts as well as other obligations of the company. The Mechanics of Lifting the Veil of Incorporation 1.Via common law 2.Via statute  Lifting the veil through common law  Adams v. Cape Industries Plc (1990) Ch 433  Facts: Whether or not judgment obtained in the U.S against Cape an English registered company whose business was mining asbestos in South Africa and marketing it worldwide would be recognized and enforced by the English courts. The issue of submission to foreign jurisdiction on the part of Cape depended on whether Cape could be said to have been ‘present’ in the US. On the facts, this question depended on whether Cape could be said to be present through its wholly owned subsidiary or through a company (CPC) with which it had close business links. The court rejected all the arguments by which it was sought to make Cape liable. 1. Façade or Sham The veil will be lifted when the company has been set up as a mere façade/sham to escape legal obligations. The veil of incorporation is lifted to reveal the true identity of the persons who must be responsible.  The court decided in the Cape case that one of its wholly owned subsidiaries (AMC incorporated in Liechtenstein) was a façade. Scot J found that arrangements made in 1979 regarding AMC in the marketing of Cape’s asbestos “were part of one composite arrangement designed to enable Cape asbestos to continue to be sold in the US while reducing, if not eliminating the appearance of any involvement therein of Cape or its subsidiaries”.  The Court of Appeal found that motive was very relevant in arriving at the conclusion that AMC was a mere façade/sham. However, it was clear that motive alone was not enough to arrive at the conclusion that AMC was a façade. The deciding factor seem to be the fact that AMC was not only a wholly owned subsidiary of Cape but also no more than a corporate name which Cape or its subsidiaries used on invoices. Thus, third parties could pursue Cape through any failings of AMC. (Obiter)  Despite the fact that CPC was part of the same arrangement as AMC and it could well have been incorporated at the expense of Cape, that did not in itself make it a mere façade. Based on the facts, the court was satisfied that CPC was an independent corporation, wholly owned by its chief executive and carrying on its own business in the US and not the business of Cape or its subsidiaries.  Woolfson v. Strathclyde Regional Council UKHL 5. HELD: the veil could be lifted where special circumstances exist indicating that the company is a façade concealing the true facts.  Re Darby, ex Broughham 1 KB 95, D and G were undischarged bankrupts who had been convicted for fraud. They incorporated City of London Investment Corporation Ltd (LIC). D and G were the only directors and entitled to all profits. LIC purported to register and float a company Welsh Slate Quarries Ltd, for £30,000. It bought equipment for £3500 and sold it to another company, WSQ for £18,000. WSQ invited the public to take debentures to cover the equipment. The prospectus named only LIC although D and G were the ultimate beneficiaries. WSQ failed and went into liquidation. The liquidator claimed D’s secret profit, which he made as a promoter. D objected that the LIC and not him was the promoter. The court reasoned that LIC was a mere alias for D and G and therefore lifted the veil. D and G being fraudsters had incorporated companies to disguise their true involvement as sole beneficiaries of the scheme.  Gilford Motor Company v Horne, Defendant was formerly the MD of Gilford Motor Co Ltd. His employment contract stipulated a restraint after leaving Gilford Motor Co. Deft was fired. He initially set up a business to undercut the prices of Gilford Motor Company. When he was informed of his breach, he then set up JM Horne & Co Ltd, in which his wife and a friend called Mr Howard were the sole shareholders and directors. The company took over the defendant’s business. HELD: “… I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effect of carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a cloak or sham, to engage in business …”  In Jones v Lipman the defendant attempted to evade a contract for the sale of land by transferring it to a company. The court lifted the veil and required specific performance from both the defendant and company. 2. The Single Economic Unit Argument  It is now common to see many companies operating as a subsidiary of another company. For instance parent companies often chose to operate or run their businesses through subsidiaries in foreign countries.  Here, each subsidiary, going by the principle of limited liability will be a separate legal entity with its own legal personality which will be deemed different from the parent company.  However, it has been argued that under the right circumstances, the court will ignore such distinction and treat subsidiary companies as part of a single economic unit.  In looking at the arguments of the single economic unit, the Court in Adams v. Cape Industries Plc (1990) Ch. 433 per Scott J argued that  “to the layman at least the distinction between the case where a company trades itself in a foreign country through a subsidiary, whose activities it has power to control, may seem a slender one.”  The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit. Liabilities should therefore, be attached to the whole group as companies aimed to reach a single economic goal.  3. The Agency argument  A company may act as an agent for its parent company or for all or any of the individual members (companies) if it is or they authorize it to do so. If an agency relationship is established, then the parent company or the member or members, as the case may be, will be bound by the acts of its agent so long as those acts are within the actual or apparent scope of authority. However, there is no presumption of any such agency relationship between the company and shareholders in the absence of an express agreement between the parties.  In Cape, the ptfs tried to allege agency but it failed. 4. Controlling mind/alter ego The veil of incorporation will be lifted when the a shareholder and/or a director is deemed to be the alter ego or the controlling mind of the company. Here the ‘controlling mind’ argument must be linked to some impropriety.  Ben Hashem v Al Shayif & Anor Fam Law 665 https://www.bailii.org/ew/cases/EWHC/Fam/2009/864.html  The court reviewed the leading authorities on the corporate veil and summarized the main principles as follows: 1. Ownership and control of a company are not of themselves sufficient to justify piercing the veil. 2. The court will not lift the veil merely because it is thought to be necessary in the interests of justice. 3. The corporate veil can only be pierced if there is some impropriety. 4. Impropriety in and of itself is not enough. The impropriety must be linked to the use of the company structure to avoid or conceal liability. 5. Where there is impropriety, the motive of the wrongdoer in using the corporate structure as a tool for the impropriety is very important. 6. The court will lift the veil only if it is necessary to provide a remedy for the particular wrong which those controlling the company have done.  Lifting the veil through statutory Interventions (the list below is not exhaustive) 1. Reduction of Number of Members/Directors  Under sec 41, if a company carries on business at any time without at least one member, any person who is a director for the period that the company carried on business without a member shall be jointly and severally liable for any debts or liability the company may incur during that period.  Under sec 171(3) if a company carries on business for more than 4 weeks with less than 2 directors, every director and member or the company who knows or ought to know that the company is carrying on business with less than 2 directors shall be jointly and severally liable for any debt or liability the company may incurred during that time. Such directors and members shall also be liable to a fine for each day that they are in breach of this provision.  Under sec 8(2) If a company limited by guarantee conducts business for the purpose of making profits, other than for the purpose of furthering its objects , all officers and members who know or ought to know about such a practice shall be jointly and severally liable for any debts or liabilities the company may incur in carrying on such business and shall also be liable to pay a fine for everyday it shall carry on such business. 2. Misdescription of the Company/Publication of the name of the company  Under section 125, the company shall clearly fix its name on any premises that it operates and also on any business letters, invoices, cheques etc.  Where the company uses a stamp/seal, the name of the company must be legibly engraved therein.  All communication and publication of the company must include the name of the company.  If any company defaults in the foregoing, then the company and every officer in default shall be liable to a fine.  If an officer or any other person purporting to act on the officers behalf uses or authorize the use of a seal purporting to be a seal of the company and the name is not engraved as required by (subsection 1) the officer shall be liable to a fine.  If any officer of the company or other person acting on his behalf endorse or authorize an endorsement on behalf of the company on any negotiable instrument or order for money, goods or services and the name of the company is not accurately mentioned and inscribed on it, such person shall be liable to discharge the obligations thereby incurred unless the person is discharged by the company. 3. Error or omission in document Under sec 17, where there is an error or omission in the incorporation documents as per sec 13, the company and every signatory to the document is liable to pay a fine. 4. Failure to notify debenture holders secured by a floating charge and their trustees of a change in the object of business. Sec 20 Where a company changes its object(s) or business, the company must within 28 days of the passing of the special resolution to that effect give notice of the special resolution to debenture holders secured by a floating charge over any property of the company as well as the trustees of the debenture holders. When the company defaults in its ‘notice obligation’ above, the company and every officer of that company in default shall be liable to a fine payable to the Registrar of Companies. EOCO ACT 2010 (804) 60. (1) The Court shall treat as property of a person, property that in the opinion of the Court, is subject to the effective control of the person, whether or not the person has a legal title or is a shareholder or debenture in a company that owns the property.