Company Law Notes PDF

Company Law Revision Notes **[Introduction \[][source](https://www.youtube.com/watch?v=CeuHIjsAN4Q)[\]]** - The company is a creation of law - 2 KEY TERMS: separate legal personality + limited liability - Company has a separate legal personality from its shareholders (legal owners) - Limited liability -- - Liability: legal responsibility - Limited: money put into company by its owners - company's maximum loss is money put into company by shareholders **[Shares and Shareholders \[][source](https://www.youtube.com/watch?v=YQ5jL1gJoNo)[\]]** - shareholders own shares of the company - share = control over the company - so, shareholders in a company share their control over the company - the better a company is performing, the more people are willing to buy shared in it - that also means the more these people are willing to PAY - SO when a company does well, share value goes up - Share value is tied to the company's performance **[Directors and the General Meeting \[][source](https://www.youtube.com/watch?v=4F80a5uXQSk)[\]]** - Shareholders of the company don't always run it themselves on a daily basis - E.g. large companies have 1000 shareholders -- not all of them run the company - Directors of company: cherry picked group of people placed in charge of running the business of the company on a daily basis - They swear their loyalty by taking up fiduciary duties -- accepts legal responsibility for duties of care, loyalty, good faith, confidentiality, etc - It is their job to make sure company's business does well - So technically directors control company, not shareholders -- BUT shareholders appoint directors - Owning shares grants shareholders the power to appoint directors by voting - General Meeting: when shareholders come together to vote on anything **[Salomon v Salomon: The "One-Man Company" \[][source](https://www.youtube.com/watch?v=QR09yHhcWLY)[\]]** - Possibly most important case in company law - Mr Salomon owned 20,001 shares out of 20,007 shares - Mr Salomon borrowed lot of money from various people in the name of the company - The company then went bust - [ ] Principle of separate legal personality entails that a company is a distinct legal entity from its shareholders - A company with limited liability can only lose as much money as its shareholders put in - Under these circumstances, if you lent money to the company and not Mr Salomon then you can't demand money from him - Instead, you need to get your money back from the company -- huge problem when company is bust and has no money - BUT setting up the company didn't change Mr Salomon's business - Before he ran a one-man business - After he ran a one-man company - Does it make sense then that Mr Salomon does not have to pay the loans taken by his one-many company when he would've had to repay the loans himself if the company never existed? - Would the law open its eyes to the reality of the one-man company or would it upheld the principle of separate legal personality? - This went on appeal all the way to highest level court of UK -- House of Lords - **Salomon v A Salomon & Co Ltd \[1897\] AC 22 (UKHL)** - HELD (unanimous) - principle of separate legal personality would stand - Reasons given -- companies exist to make business less risky -- whole purpose of separate legal personality - Mr Salomon was legally entitled to take advantage of these benefits - BUT principle of separate legal personality can be disregarded in exceptional situations (veil-piercing) **[Competition Law \[][source](https://www.youtube.com/watch?v=pDoNWPhRlWY)[\]]** - Market competition is good for society (specifically consumers) as drives costs down - BUT companies try and get around it -- hence why competition law exists - Anti-competitive agreements -- stops companies from making deals that they'll both sell their respective products at the same, hiked up price - Competition law prohibits mergers which substantially lessen competition -- stops companies merging to become one business - Competition law prohibits abuse of dominant position -- \[several examples\] **WORKSHOP 1** **NOTE: when confused about OR or SR, remember that SR needs to be filed at CH -- ask yourself does it make sense for this to be a publicly listed issue?** - **i.e. ratification of director breaches by shareholders is by OR cause why would u want that public (s239)** **[Different legal forms of business ]** Profit -- is made provided the income generated exceeds the expenses of the business - Portion of the profit is likely given to the owners of the business, rest retained in the business to help it grow Why businesses raise finance: - To purchase: premises to operate from, plant + machinery, stock or raw materials, computer hardware and software to manufacture + sell goods, provide a service - Employ staff - Obtain advice of professional advisers (accountants) - Expand and grow by - acquiring other businesses, investing in new premises/equipment, carry out marketing activities How businesses raise finance: - Owners may invest in it by making contributions of capital to the business - Outside investors may make a capital contribution to the business (to share its future profits) - Business may borrow money from a bank - Proportion of profit generated likely to be retained within the business to help it grow Forms of business/business models: - Sole trader - Partnership - Limited partnership - Limited liability partnership Key considerations when forming a business: CRSFPF - COSTS -- how much does this business model cost to set up? - RISK -- will participants in the business have personal liability for debts of the business? - STRUCTURE -- does the business model provide have a clear organisation structure? Is it flexible? - FORMALITIES -- are there legal formalities that must be followed in running the business? How flexible is this? - PRIVACY -- to what extent is information about the business required to be publicly disclosed? - FINANCE -- how can the business raise capital? [Sole traders] - Sole trader is not a separate legal entity -- contracts formed between individual themselves and third parties - No set up costs - No formalities -- sole trader can start trading straight away - Unlimited personal liability -- personal assets (home, cars) are potentially liable to be sold to meet debts of the business - No formal structure -- individual can choose how to run their business - No Companies House filing or procedural requirements for running the business - Complete privacy -- no need for publicly filed accounts [Partnerships ] - A partnership isn't a separate legal entity -- contracts formed between the partners in the partnership as individuals and third parties - No set up costs - No formalities -- partnership can start treading straight away - Partnerships can be formed without any formal agreement or even intention - Unlimited personal liability -- partners have unlimited joint (in contract) or joint and several (in tort) liability for debts and obligations incurred - personal assets (home, cars) are potentially liable to be sold to meet debts of the business - No Companies House filing or procedural requirements for running the business - Complete privacy -- no need for publicly filed accounts - Governed by Partnership Act 1890 (PA 1890) Formation: - PA 1890 -- partnership is "the relation which subsists between persons carrying on a business in common with a view to profit" - There doesn't need to be any intention to form a partnership -- 2 or more people working together with a view to profit automatically forms a partnership - Hence no formalities Determining the existence of a partnership: - Section 2 PA 1890 - Factors -- whether profits and/or losses are shared, whether loan is made from 1 partner to another, whether property is jointly held, etc - Evidence of profit sharing will be prima facie evidence of a partnership, not conclusive evidence - Loan itself also doesn't create a partnership - no 1 factor alone suffices to create a partnership - doesn't need to have written agreement, can be expressed verbally too - *Northern Sales (1963) Limited v Ministry of National Revenue (1973)* -- if there is an agreement to share losses as well as profits, this makes the existence of a partnership more likely - Case law has also held that if person is not being held out as a partner, this makes existence of partnership less likely - *Walker v Hirsch \[1884\]* -- clerk lent money to the partnership, was paid a fixed salary and took 1/8^th^ of the profits + losses but was never held out as partner -- no partnership was found to exist Terms of a partnership \[PA 1890\]: - Although there are no required formalities to form a partnership it is advisable to have a partnership agreement drawn up by a solicitor - Otherwise it will be governed by the default provisions of PA 1890 - Section 24(1): Profits and losses - Partners are entitled to share equally in the profits of the business, and must share equally in the losses of the business, even where the parties have contributed to the capital unequally - Therefore there should be an express provision in the agreement, setting out a profit sharing ratio - Section 24(6): Remuneration - Partners are not entitled to a salary - Section 24(8): Decision Making - Decisions are to be decided by a majority, except for any change to the nature of the partnership business -- this requires unanimity - Section 25: Expulsion - A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this - Section 26: Effect of partner leaving partnership is dissolution of the partnership Partnership Agreements - Section 19 PA 1890 -- the partners' mutual rights and obligations can be varied at any time by their unanimous consent - This means that partners can themselves draw up a partnership agreement - It is important in modern partnerships, partners seek legal advice and enter into a binding agreement governing terms of their business - Key principles dealt w in a partnership agreement: - Profit sharing ratio - Salaries - Decision making -- e.g. are certain partners able to make decision on particular issues alone or in small committees? - What happens when a partner leaves a partnership - How new partners may be appointed - How partners may be removed [Limited Partnerships (LP)] A LP has 2 diff types of partners: - Limited partners - Have limited liability - Must not be involved in management Of the business -- often called sleeping partners (e.g. passive investors) - If they get involved in management they lose their limited status and become general partners with unlimited personal liability - General partners - Have unlimited liability (as in traditional partnerships) - Run the business - There must be at least 1 limited and 1 general Key characteristics: - LPs governed by the Limited Partnership Act 1907 (as amended) - Must be registered at Companies House but no requirements to file accounts - Not commonly used for general business gut often used for investment vehicles - Popular joint venture business structures where an investor (limited partner) puts money into a business run by the general partner Note: 6 April 2017 -- new sub-category of limited partnership, called private fund limited partnership, was created - These are now commonly used for investment vehicles [Limited Liability Partnerships (LLPs)] Key characteristics: - LLPs introduced by the Limited Liability Partnership Act 2000 (LLPA 2000) - Key difference between this and LPs (+ sole traders + partnerships) -- LLP has a separate legal personality - Can own property and enter into contracts on its own behalf - However for tax purposes, it is treated as a partnership and the members as taxed as partners - Each are liable to pay tax on their shares of the income or gains of the LLP -- tax transparency - Section 2(1)(a) LLPA 2000 -- 2 or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP - 'person' in this context can be a company as well as an individual - All partners have limited liability - their liability to third parties is limited to the amount they have agreed to pay under terms of partnership agreement - Must be registered at Companies House + required to file accounts and other information (as companies do) LLPs are in effect a hybrid between a traditional partnership (with procedural flexibility) and a company (with limited liability) - Examples of LLPs -- law firms and accountancy firms Organisational structure of an LLP is very flexible - Should be decided between the partners in a formal written Members' Agreement - In absence of this, Regulations 7 and 8 of the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) contain default provisions - Members share equally in capital and profits - LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP - Every member must take part in management but no member is entitled to remuneration for managing the LLP - No person can become member or assign their membership without consent of all existing members - Ordinary decision making may be by majority of the members - Any proposed change to nature of the business requires consent of all members - No implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in the Members' Agreement - Limited Liability Partnerships Act 2000 - If there are only 2 directors, and 1 leaves, the LLP can carry on with 1 for 6 months only \[s 4(a)(2)\] +-----------------------------------+-----------------------------------+ | Pros of LLP | Cons of LLP | +===================================+===================================+ | - Partners have limited | - Partners have to ensure | | liability instead of being | annual accounts + other info | | personally liable | are filed at Companies House | | | | | - Partners have tax | - Do not have complete privacy | | transparency | | | | | | - Partners have procedural | | | flexibility | | | | | | - Able to prescribe their own | | | management structure + set | | | out how they wish profits to | | | be shared, salaries of staff, | | | etc | | +-----------------------------------+-----------------------------------+ DO WHEN REVISING Sole trader Partnership LP LLP ------------- ------------- ------------- ---- ----- Cost Risk Structure Formalities Privacy Finance **[Introduction to companies ]** Companies -- most popular business model in England and Wales - Over 3 million private limited companies registered w Companies House in 2018 Key characteristics: - Separate legal entity -- distinct from their owners (shareholders/members) - Company owns property, enters into contracts and can sue or be sued in its own name - Profits + losses belong to company, not shareholders - Company liable for own debts, not shareholders - Limited liability -- liability of shareholders limited to the amount unpaid on their shares -- this protects shareholders and facilitates investment - Governed by the Companies Act 2006 (superseded Companies Act 1985) -- contains detailed requirements regulating how companies are run + filings/disclosures that must be made at Companies House - These formal procedural requirements can be onerous, esp for small private companies where shareholders + directors are often the same individuals Shareholders/Members - Owners of company - Invest money in return for shares + possibility of dividends - Not involved in day to day management - Usually have voting rights and control key decisions Subscribers - First shareholders in a company who invest in it when its incorporated Directors - Officers/managers of the company - Involved in day to day management/running - Collectively known as the board - In small companies, directors are often also shareholders Persons with significant control (PSCs) - Details of PSCs must be provided to Companies House (CH) - Generally, PSCs are shareholders with over 25% of shares Other stakeholders - Employees, creditors, etc - Anyone interested in the company [Companies Act 2006 ] - Key legislation governing companies in England and Wales - Statute replaced CA 1985 - Primary aim of CA 2006 -- simplify law for private companies Key changes from 1985 - Removal of requirement for priv companies to hold AGMs or submit Annual returns (replaced w simpler annual Confirmation Statement) - Codification of directors' duties so directors of small priv companies can more easily understand their obligations - Allowing priv companies to pass shareholder resolutions in writing -- removing requirement for meetings (GMs) [Private Companies ] Private companies limited by shares (Ltd) - Most common type of company - No minimum share capital requirements - Prohibited from offering shares to public - Can be formed by 1 person Private companies limited by guarantee - No share capital - Liability of members limited to amount that they agreed to contribute in event of a winding up - Membership not transferable - These are rare Unlimited companies - Liability of members is unlimited - These are rare Private limited company vs Public limited company - Section 4(1) of CA 2006 -- 'a priv company is any company that is not a public company' - Priv companies' names end w Limited or Ltd (s 59(1)) - Section 4(2) of CA 2006 -- 'a public company is a company... whose certificate of incorporation states that it is a public company' - Public companies' names end w Public Limited Company or Plc (s 58(1)) - Main difference -- generally, only Plcs can offer their shared to public - E.g. through public listing on recognise stock exchange -- London Stock Exchange -- permitting trading to take place in its shares - Public companies also subject to more onerous regulatory environments [Listed Companies ] Shareholders of priv company may convert a company into a public limited company (Plc) in order to raise greater funds, as they can offer shares to the public at large After converting to Plc status, a company may seek a listing of its shares on a stock exchange - These are known as listed companies, as their shares are listed - Stock exchange listings allow commercial investors to deal freely in their investments which they like - Makes company more attractive as an investment A company must be public before it applies to have shares listed on stock exchange - But not all public companies apply, so now all Plcs are listed companies [Principal differences between private and public company ] - Name: Ltd versus Plc - Share capital: - Priv -- no requirement to have any specified minimum amount of share capital - In practice, many are incorporated with share capital of £1, that is with one share that has a nominal value of £1 - Public -- must have hare capital w nominal value of at least £50,000, of which 1 quarter must be paid dup (paid at time of purchase) \[s 586 and s 763 CA 2006\] - Number of directors: priv only needs 1 director, public must have minimum of 2 \[s 154 CA 2006\] - Company Secretary: priv company not obliged \[s 270(1)\] and directors can do anything secretary is required/authorised to do but public company **MUST** have one \[s 271\] - Person appointed must have requisite knowledge + experience + hold 1 of qualifications specified in s 273(2) - Annual general meetings: - Priv -- no requirement to hold AGM anymore, but can do if they wish - Public -- required to have 1 each year \[s 336\] - AGM provides members who are not directors w opportunity to question directors, particularly on issue of company's finances - Regulation: - Public -- as they are potentially able to offer their shares to the public, they are subject to higher level of regulation than priv companies - More than CA 2006 requirements A close-up of a pie chart Description automatically generated **[The company's constitution ]** CA 2006 came into force 1 Oct 2009 - Prior to this, companies governed by CA 1985 - Must understand these principals as many companies were incorporated prior to CA 2006 - CA 1985 required companies to have 2 constitutional documents -- Articles of Association and Memorandum [Memorandum ] Under s 17 CA 2006, memorandum no longer forms part of company's constitution - Only required as part of procedure to register company at CH - For companies incorporated under CA 2006, it simply amounts to declaration from subscribers that they wish to form a company and agree to become members of that company \[s 8\] Under CA 1985, memorandum was more complex document + formed part of company's constitution - Companies could set out constitutional restrictions in it - Required to include an objects clause setting out purposes for which company has been formed - Acting outside this purpose was described as acting ultra vires/outside company's capacity Under CA 2006, companies have unrestricted objects \[s 31\] unless objects are specifically restricted in Articles - Ultra vires rule therefore not applicable to a 2006 Act company S 28 CA 2006 states that memorandum + objects clause of companies incorporated under CA 1985 continues in force - Operates as a limitation on that company's capacity unless Articles are amended to remove its objects clause [Articles of Association (AoA) ] S 18 -- all companies must have AoA - Under CA 2006, Articles form main constitutional document of company - Purpose -- regulate relationship between shareholders, directors and company Examples of provisions included in AoA - No of directors require to transact business, such as: - To form quorum at board meetings - To take decisions at board meetings - Method of appointment of directors - Powers of directors - How board meetings are to be conducted - Any special rights attaching to shares - How shareholder meetings are to be conducted - How + to whom shareholders may transfer shares Relationship between CA 2006 + Articles - Considerable overlap between provisions set out in CA 2006 and company's AoA - **Legality test - AoA must comply w minimum provisions of CA 2006** - In certain circumstances, company may provide a procedure in its Articles which is more onerous than that contained in CA 2006 - E.g. s 154(1) provides a priv company must have minimum 1 director but a company could provide in its Articles that it requires 3 directors - Company needs to comply w Articles rather than CA 2006 - Some CA 2006 provisions override anything in AoA - E.g. s 321 cannot be removed in Articles -- right to demand a poll vote at a general meeting \+ there are some powers available to companies by default under CA 2006 unless Articles provide otherwise -- e.g. power of priv company to issue redeemable shares Form of Articles - Model Articles (MA) / Table A - S 19 -- sec of state has prescribed MA for diff types of company - S 20(1) -- if new company doesn't register Articles at CH, relevant MA will constitute company's Articles in default - CA 1985 -- similar provision in this -- for companies incorporated under CA 1985, default articles known as Table A - Amended MA - Many companies choose to adopt MA as their Articles but exclude or modify some of its provisions - Tailor made Articles - Client instructs solicitor to draft Articles tailor-made for particular company - Law firm often have precedent form of Articles that can be adapted for this purpose - However this is generally a very time consuming process + therefore costly for client, although end product can often be more useful in the long run - Most small companies prefer to adopt MA w certain amendments [Amending the Articles ] Company able to alter AoA at any date by special resolution \[s 21(1)\] - Decision of the shareholders Entrenchment - An entrenched provision of company's AoA is 1 which can be amended or repealed if: - specific conditions are met or - procedures more restrictive than a special resolution are complied with - s 22 permits entrenchment of specific provisions, but this occurs rare in practice - entrenched articles can always be amended by agreement of all members or by a court order \[s 22(3)\] Great deal of case law -\> basic rule: for alteration of AoA to be valid, it must be made bona fide in interests of company as a whole - *Allen v Gold Reefs* \[1990\] 1 Ch 6656 *Shuttleworth v Cox* \[1927\] 2 KB 9: court held that an amendment to Articles is not valid if no reasonable man could consider it to be for the benefit of the company *Sidebottom v Kershaw, Leese & Co Ltd* \[1920\] 1 Ch 154 (Court of Appeal) - Defendant company had altered its articles by introducing provision which gave directors power to buy out, at fair price, the shareholding of any member who competed w the company's business - Plaintiffs (minority shareholders) -- carried out competing business, and unsuccessfully challenged validity of the alteration - Court of Appeal found that alteration was initiated in good faith and bona fide in interests of company - Allowed this to stand to protect the company *Re Charterhouse Capital Ltd* \[2015\] EWCA Civ 536 (Court of Appeal) - This was held to be valid - Amendment of company's articles to permit the shares of a minority shareholder to be compulsorily acquired under a takeover offer - Why? -- consistent w terms of a shareholders' agreement - Not open to challenge on other grounds such as unfair prejudice - Court of Appeal held that amendment was no more than a 'tidying up' exercise which had been consistent w initial bargain of founding members, which included appellant himself - In absence of finding bad faith, improper motive or irrationality, there was no basis to challenge validity of amendment [Legal effect of the Articles ] S 33(1) -- sets out nature of contract established by AoA - Provides that provisions bind company and its members - Whatever form AoA take, they will be bineidng on both the company and its members + enforceable Predecessor to s33(1) CA 2006 -\> s 14 CA 1985 -\> subject to large amount of case law -\> generally established rule -\> Articles evidence a contract between the company and its members in their capacity as members and with respect to their rights and obligations as members - *Hickman v Ken or Romney Marsh Sheep-Breeders' Association* \[1915\] I Ch 881 ![A purple rectangular sign with white text Description automatically generated](media/image2.jpeg) [Articles as a contract between: ( I need to clarify this )] 1 -- the company and its members 2 -- the members themselves **1: Articles as a contract between the company and its members** - Courts have been willing to prevent a company from infringing its members' rights in breach of the Articles by granting an injunction. - Simplified version: **If the company tries to violate a member\'s rights as outlined in the Articles, courts can step in and stop the company by issuing an injunction.** - Each member, acting in his capacity as a member, is similarly obliged to the company to comply with the Articles. However, a member may not enforce any rights contained in the Articles against the company that are not relevant to his capacity as a member. - Simplified version: **Similarly, members are also required to follow the Articles in their dealings with the company.** - **However, a member can only enforce rights under the Articles if those rights relate to their role as a shareholder.** - Rights contained in the Articles that would probably be enforceable by members under s 33 CA 2006 would be the right to vote or the right to receive a final dividend once it has been declared (ie approved by a resolution of the shareholders). - Simplified version: **For instance, members can likely enforce rights like: The right to vote at shareholder meetings or the right to receive a dividend once it has been approved by the company.** - **If a right in the Articles is unrelated to being a member (for example, a personal employment right), the member cannot enforce it under section 33 of the Companies Act 2006.** - **E.g** In *Eley v Positive Government Security Life Assurance Company (1876) 1 Ex D 88 (CA),* a member of the company who had inserted a right into the company's Articles for him to be employed as the company's solicitor for life could not enforce this provision (under a forerunner of s 33 CA 2006) as this was not a right which he held in his capacity as a member, but rather in his capacity as the company's solicitor - Simplified version: **In this case, a member who had arranged for the company's Articles to give him a job as the company's solicitor for life could not enforce that right. This is because the right to be the solicitor was related to his role as a solicitor, not as a shareholder. So, section 33 did not apply.** **2: Articles as a contract between the members themselves** - Although the courts have acknowledged that the forerunners to s 33 CA 2006 provide that the Articles constitute a contract between the members themselves, as well as between the company and its members, there is conflicting authority as to whether one member may enforce the Articles against another member directly (*Rayfield v Hands* \[1960\]Ch 1 (Ch)) or only through the company itself, ie by requiring the company to enforce the provisions against the member (*Welton v Saffery* \[1897\] AC 299). - The particular facts of *Rayfield v Hands* would suggest that, if a member accepts a personal obligation to another member through the Articles (eg to transfer shares), that member can enforce the right against the other member directly. Otherwise the courts appear to be of the opinion that members will only be able to enforce provisions contained in Articles through the company itself. - If a member is likely to wish to enforce rights against other members, he/she should be advised to enter into a shareholders' agreement. A shareholders' agreement is a private agreement between the shareholders which is enforceable as a contract between the members. You will consider shareholders' agreements later on this module. **Simplified version:** - The Articles of Association are generally seen as a contract not only between the company and its members but also between the members themselves. However, there is debate about whether one member can directly enforce the Articles against another member. - In some cases, like Rayfield v Hands (1960), courts have allowed one member to enforce a personal obligation in the Articles directly against another member. For example, if the Articles require one member to transfer shares to another, the member can enforce this directly. - In contrast, the Welton v Saffery (1897) case suggests that members can only enforce the Articles against another member by going through the company. In other words, the company itself would need to enforce the rule on behalf of the members. - Therefore, unless there is a clear personal obligation between members stated in the Articles, courts tend to believe that members can only enforce provisions through the company. - Advice: If a member expects to need to enforce rights directly against other members, it's a good idea to create a shareholders' agreement. Unlike the Articles, which focus more on the company's governance, a shareholders' agreement is a private contract between members that can be directly enforced between them. **[Incorporation ]** Formation of a company -- 2 ways - Incorporation from scratch -- by submitting relevant info to CH/online - Shelf company conversion -- purchase of shelf company followed by formalities to enable necessary changes Incorporation from scratch: Step ONE - In order to incorporate from scratch, application must be made to Registrar of Companies to have new company registered at CH - Traditionally, this method slower than purchasing shelf company - However now you can incorporate a company online so many law firms now increasingly doing this rather than shelf company procedure Advantages -- company tailor-made to meet your client's requirements from the outset s 9 CA 2006 -- following must be delivered to the Registrar of Companies at CH for a company to be registered: - Copy of company's memorandum - Articles if company doesn't intend to use MA - The fee -- applications may take Registrar up to 5 days to process but to ensure company registered same day as incorporation docs are submitted, applicant may pay higher fee for a premium same-day incorporation service - Form IN01 Incorporation from scratch: Step TWO - Form IN01 -- application for registration - Stating company's proposed name, company's registered office is to be situated in England, Wales, Scotland or NI, whether liability is limited, private or public - Registered office is address at which company's legal proceedings can be served - Application must contain: - Statement of capital and initial shareholding (s 10) - Statement of company's proposed officers (directors, company sec) (s 12) - If company is to be limited by guarantee, details must be given of the guarantee (s 11) - Must contain statement of compliance stating that the requirements of CA 2006 have been complied with (s 13) Incorporation from scratch: Step THREE - Once Registrar of Companies has approached application for incorporation of the company, company is sent certificate of incorporation authenticated by Registrar's official seal - Certificate sets out: - Name of company (can be changed later) - Company's registered number -- will never change, used to identify company - Date of incorporation Company becomes legal entity from date of incorporation set out in certificate of incorporation (s 15) Purchasing a shelf company: Step ONE - Used to be more common traditionally for solicitor to purchase a shelf company on behalf of client than incorporate from scratch - Changing due to online incorporation services - Shelf company -- set up in advance by company registration agent or law stationer - Many law firms also operate an in-house service that sets up shelf companies for sale to clients Advantages -- avoids need to draft and submit incorporation documentation, can be done quickly - BUT due to online incorporation from scratch, the difference in speed between both methods is now negligible - However, conversion of shelf company retains advantage of being an available option all time of every day of the year - Whereas online incorporation can only take place during CH opening hours Purchasing a shelf company: Step TWO - Changes to make to the shelf company to meet their requirements - Name -- most shelf companies will have a name that has no connection with client or its business - change to a name selected by your client - Can be changed by special resolution of the shareholders or other means provided by AoA (e.g board resolution) - Articles -- common for shelf company to have been incorporated w MA -- might need to amend these to meet specific requirements of client - Can be altered by special resolution \[s 77 (1)\] - Registered office - substitute client's chosen address for the first registered office in accordance w s 87(1) CA 2006. Purchasing a shelf company: Step THREE - Representatives of the company registration agent or law firm will have become the first members/subscribers/etc - Essential that: - Shares held by subscribers are transferred to your client - Client's representatives are appointed as director(s) and company sec - First director and company sec resign from their positions Purchasing shelf company has traditionally been regarded as cheaper way to form a company for your client - BUT once legal fees are factored in, costs of 2 methods are not materially different **[Stakeholders in a company]** Key stakeholders -- shareholders/members, directors, PSCs Shareholders - Owners/members - First -- subscribers as they subscribe to company's memorandum of association - Invest money (share capital) in the company in return for a share in ownership of company -- evidenced by share certificate - Shareholder rights (voting rights, rights to a dividend) set out in AOA + SHA - Membership begins when members name is entered into company's register of members \[s 112(2)\] - Shareholder =/ human being - Company can own shares in another company (as it has separate legal identity + can own property in its own name) - If Company A owns all the shares in Company B, B is a wholly owned subsidiary of A (A is the parent or holding company) - If A owns some but not all of the shares in B, B may still but a subsidiary of A, but not wholly owned - A and B form group of companies - No limit to number of companies that form a group - Thus A could have multiple subsidiaries or B could have its own subsidiary - Group structures used to isolate risk/mitigate tax liabilities Shares - Bundle of rights - By investing in share capital of a company, the investor (shareholder) becomes a part owner of the company + will often have voting rights in shareholder meetings - Several diff classes of shares that a company may issue - Different classes carry diff rights + entitlements -- set out in AoA - Most common type -- ordinary share - Entitles its holder to vote at shareholder meetings + receive share of profits and surplus assests of company after its wound up Nominal or par value of a share - Is the minimum subscription price of that share - represents unit of ownership rather than actual value of share - Shares in limited company having share capital must have a fixed nominal value - Common nominal values for ordinary shares -- 1p, 5p, £1 - Share may not be issues/allotted at discount to nominal value - Can be issued for more than its nominal value - excess over nominal value is known as the premium - market value of share (amount at which share is traded between shareholders) will often be much higher than nominal value of share Issued, paid-up and called-up shares - issued share capital: total amount in value (nominal and premium) of all shares in issue at any time - this is amount of share capital that will be shown in company's accounts - not always necessary for shareholders to pay full amount due on their shares immediately - amount paid is known as 'paid-up share capital' - amount outstanding can be demanded by company at any time - one demanded, payment has been 'called' A purple and white paper with text Description automatically generated Share capital - A company's issued share capital is made up of: - Shares purchased by first members of company -- subscriber shares - Further shares issued after company has been incorporated, to new or existing shareholders - New shares can be issued at any time Allotment - S 558 - shares are considered \"allotted\" when someone gains the unconditional right to have their name entered in the company's register of members for those shares. - People often use \"allotment\" and \"issue\" of shares as if they mean the same thing, but they are different. - \"Allotment\" happens when the right to the shares is granted. - \"Issue\" occurs later---once the shareholder\'s name is officially entered in the company\'s register of members, and their ownership of the shares is fully completed. - distinction means that while shares are allotted when the right to them is given, they are only officially issued once the shareholder's title is recorded in the company's books. Diff classes of shares - e.g. may be 2 classes of ordinary share, each carrying different voting rights or none at all - preference shares -- entitle holder to a preferential right - e.g. first claim to dividend or return of capital on a winding up - note: return of capital means the return of money the shareholders had invested in their shares - rights depend on terms of issue + usually set out in AoA and SHA - relevant when determining which shareholders can vote at GMs, who has enhanced voting rights Limited liability - total nominal value of shares held by a shareholder = total amount of that shareholder's liability to contribute to assets of company if it becomes insolvent - that means that if all the shareholder's shares are fully paid, he won't have to contribute to company on insolvency - this is limited liability PSC - UK companies required to identify its PSC(s) - These are individuals who: - Own more than 25% of the shares or voting rights in the company - Have power to appoint/remove majority of its Board - Otherwise exercises significant influence or control over company - Companies must maintain register of its PSCs + this must be open to public inspection \[s 790\] - Purpose -- increase transparency to help combat tax evasion, money laundering and terrorist financing - Must be filed at CH along w confirmation statement Directors - Responsible for day-to-day management and running of company \[MA 3 and 5\] - Agents of company - Their conduct is governed by statue + common law principles of agency - Owe fiduciary duties to company -- codified in CA 2006 - Directors together constitute board of directors - Some fundamental decisions reserved for shareholders, directors cannot make these (e.g. changes to AoA \[s 21\]) Number + nature of directors \[S 154-157\] - Priv -- at least 1 directors - Public -- at least 2 - At least 1 must be a natural person -- ensure there is always 1 individual in place to aid accountability - Gov enacted legislation providing that all corporate directors (so directors that are companies) will be prohibited - General rule = all directors have to be individuals (there are exceptions) - not yet incorporated into CA 2006 - minimum age limit for directors -- 16 years - Role of director separate from shareholder but in small priv companies, they are often same person - Individual must wear different hats when acting different roles Types of directors Note: all types owe same duties to the company + subject to same responsibilities under CA 2006 - Executive directors - Appointed to executive office (e.g. Finance Director, Managing Director) - Spends majority of working time on business of company - Both an officer + employee of company - Non-executive director - Officer but not employee of company - Doesn't take part in day to day running - Role -- provide independent guidance and advice to board + protect interests of shareholders - Shadow directors s 251 - CA 2006 defines it as a person "in accordance with whose directions or instructions the directors of the company are accustomed to act". - However, a person is not deemed to be a shadow director only because they act on advice given by them in a professional capacity - legislation is designed to prevent a disqualified director from getting around the prohibitions placed on him and + being involved in the running of a company, by running it and acting behind the scenes - Alternate directors - Attends board meetings + acts in director's place if actual director is incapacitated, busy or out of country - Is usually a fellow director of the company or someone who has been approved by a resolution of the board of directors - Companies may provide in their AoA for appointment of alternate directors - De facto directors - Assumes to act as director but has not been validly appointment and is therefore not a de jure (legal) director Appointment of directors - CA 2006 doesn't stipulate procedure for appointment of directors - Governed by AoA instead - MA Art 17 states appointment can be permitted by ordinary resolution (of shareholders) or decision of directors - 2^nd^ procedure easier to put in effect -- usual means of appointment unless ordinary resolution necessary - Companies not following MA may have customised articles detailing different procedures Directors' service contracts - Exec director -- employee of company -- should be given written contract of employment (service contract) -- setting out T&Cs of employment (duties, remuneration package, notice provisions) - MA Art 19 -- terms of service contract are for board to determine - General rule -- directors service agreement will only require approval of a resolution of board - But shareholder approval may be required to enter into long term service contracts Directors' long term service contracts - Is or longer than 2 years - The requires shareholder approval \[s 188 CA 2006\] - Would apply if director has service contract for 1 year and had option to renew contract for further 2 year term at their sole discretion - Can be done using ordinary resolution - If contract violates s 188, that part of contract becomes void under s 189 - Under s 189, company will automatically have right to end contract at any time w reasonable notice, even if this wasn't initially part of the agreement - Ensures shareholders have control over long term commitments to directors **[Resolutions]** - Decisions of directors are taken by passing Board Resolutions in Board Meetings (BM) - Decisions of shareholders are taken by passing Shareholder Resolutions in General Meetings (GM) or in writing Directors: Board Resolutions - MA7(1) -- any decision of directors can be made by majority decision at BM - Usual procedure - Decisions usually taken by majority vote on show of hands - E.g. if there are 4 directors participating in BM, 3 must vote in favour for resolution to be passed - MA Art 13 -- in event of deadlock (2 v 2 votes), chairman of BM (if appointed) will have casting vote Chairman of the Board - Chosen by directors from amongst themselves (Art 12) - Has considerable power -- can tip the balance if a resolution fails due to deadlock - In company w 2 directors, chairman w casting vote effectively able to make decisions alone - For this reason, company's members can amend AoA by removing chairman's right to casting vote in some circumstances Quorum in board meetings - Quorum -- no of people required to attend a meeting in order for meeting to be valid - Meeting is quorate is sufficient no of people attend the meeting - Art 11 -- no proposal may be voted on at BM unless quorum is participating in meeting - Art 11 (2) -- quorum for BM may be fixed from time to time by decision of directors but must never be less than 2 - And unless otherwise fixed, its 2 Alternative procedure - Art 8 -- makes provision for directors to make decisions by unanimous agreement, without having to hold BM - This requires directors to indicate to each other that they share a common view on the matter - Can indicate this by any means -- e.g. written resolution, phone convo (written record of decision must be kept \[Art 15\]) - Companies w only 1 director: sole director can take decisions on their own \[Art 7(2)\] [Shareholder resolutions ] Fundamental decisions cannot be taken by directors until they receive authorisation from the shareholders to do so: - Making of changes to company's constitution - Approval of certain transactions between directors + company - Formal declaration of dividends Types of shareholder resolutions - 2 types w diff voting thresholds - Where CA 2006 doesn't specify type of resolution, then ordinary resolution is sufficient unless company's AoA require higher majority \[s 281(3)\] - Ordinary resolution -- resolution passed by a simple majority (more than 50% of votes are cast in favour of resolution) \[s 282(1)\] - Special resolution -- requires majority of not less than 75% Shareholder resolutions: voting - On a Show of hands - Each shareholder present at meeting entitled to 1 vote (provided they shares they have has voting rights under AoA) - On a poll - Every shareholder at the meeting has 1 vote in respect of each share held by them \[s 284\] - Right to demand a poll vote - Makes significant difference when shareholders are not in agreement over a resolution - S 321 -- sets out conditions that must be met in order for shareholder to be entitled to demand a poll - These conditions may be replaced by provision in AoA, and are in MA Art 44 - Key example where Articles less onerous than CA 2006 - Right to appoint a proxy - Member of company entitled to appoint another person as their proxy to exercise all/any of their rights -- attend, speak and vote at GM in their place \[s 324\] Quorum for a GM - Quorum required for a GM is 2 qualifying persons - This includes proxies and representatives of corporate shareholders -- e.g. directors of that company can authorise a person to act as its representative at any meeting - Companies w only 1 member: 1 qualifying person present is sufficient to constitute a quorum for a GM \[s 318(1)\] Written resolutions - Method of voting (not type) - Priv companies can pass shareholders' resolution without holding GM by using written resolution procedure - When votes are cast in writing, majority is counted out of all shareholders entitled to vote (rather than those present and voting at a GM) - 2 resolutions not passable by written resolution \[s 288(2)\] - Removal of a director under s 168 - Removal of an auditor under s 510 - Because person concerned has right to address shareholders in GM **[Introduction to Company Procedure]** Time to time, necessary for specific authority to be given to director to enter a contract OR matter must be approved by shareholders [Board meetings] - MA Art 9 -- gives directors flexibility in regulating their meetings - Any director may call BM or require company sec to do so at any time Notice - Reasonable notice of BM is necessary - Held by court in case of *Browne v La Trinidad* (1887) 37 ChD 1 - E.g. if all directors are in same building, meeting can be called immediately but if in diff countries, couple days or weeks notice may be required Quorum - MA Art 11(2) requires minimum 2 directors to be present for BM to be quorate (unless AoA provide otherwise) Voting - Majority vote by show hands - Chairman may have casting vote to prevent deadlock Matters to be referred to the shareholders - If matter is outside power of directors + needs shareholder resolution - E.g. amending AoA \[s 21\] -- special resolution needed - If matter is within powers of directors BUT requires prior approval of shareholders before directors are authorised to act - E.g making loan to director of company \[s 197\] -- shareholder approval by a resolution needed - Then matter referred back to Board and Board will actually make loan to director, on behalf of company General meetings + meaning of NOTICE - Board's responsibility to call GMs + decide when/where it takes place - S 307 prescribes minimum notice period - For priv, 14 clear days notice needed - Here, notice refers to **period of time** - To call GM, board must inform where/when its taking place by give notice to shareholders - Here, notice refers to a **document** inviting shareholders to attend GM - Drafted in accordance w relevant provisions of CA 2006 - Directors must approve form of notice and authorise circulation to shareholders Sequence of meetings - After GM, a 2^nd^ BM will be needed to allow directors to implement matter shareholders voted on - Sequence of 3 meetings -- BM, GM, BM - Why? - Allow directors at first BM to propose changes or decision + convene a GM - Obtain shareholder approval in GM - Allow Board to implement shareholders decision at 2^nd^ BM Short notice GMs - Can be called if sufficient members agree - For priv, it may be called if agreed by majority of members who together hold shares w nominal value of not less than 90% of total nominal value of shares which give right to attend and vote at GM \[s 307(5)\] - \% can increase to 95% by provision in AoA, but no such provision in MA ![A screenshot of a document Description automatically generated](media/image4.png) For companies w few shareholders, the above sequence can happen well under an hour Written resolution procedure f[or priv companies ] - MA Art 8 allows directors to take decision in form of directors' written resolution - Uncommon in practice - Only priv may pass shareholders resolutions by written resolution \[s 281\] - Written ordinary resolution - passed by simple majority of total voting rights of eligible members \[s 282\] - Written special resolution -- passed by majority of members not less than 75% \[s 283\] - Where a company has a share capital, every member has 1 vote in respect of each share held by him when voting on written resolution \[s 284\] - Resolutions to remove director/auditor may not be passed by way of written resolutions \[s 288\] Post meeting documentation - Copies of all resolutions affecting constitution must be sent to Registrar within 15 days of their being passed - All special resolutions must be filed -- all form part of constitution - As do a few ordinary, specified in CA 2006 - Copies of amended articles also filed, together w company forms - CA 2006 refers in numerous places to requirements for notice - Company sec/director responsible for updating statutory books -- registers of members + directors, BM/GM minute books Importance of following correct procedures - If not followed, resolutions passed may be invalid - May also be criminal sanctions -- if company fails to record mins of meetings in statuary books, every officer in default is liable to a fine \[ss 248(3), (4)\] **WORKSHOP 2** **[Introduction to corporate personality + lifting the corporate veil ]** Very limited circumstances in which courts are prepared to 'go behind' the corporate veil to make shareholders/members liable EVEN IF EVASION PRINCIPLE APPLIES, COURT WILL NOT PIERCE THE VEIL IF THERE ARE ALTERNATIVE REMEDIES - e.g. through statute (tax -- ***Hurstwood***) or tort of fraudulent/negligent misrepresentation (***VTB***), etc **[Legal personality and limited liability ]** Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd \[1915\] - *"a company is an abstraction. It has no mind of its own any more than it has a body of its own*" - Viscount Haldane LC Limited liability - Liability of shareholders to pay debts incurred by company is limited - NOT liable to pay debts which company owes to its creditors - It is the obligation of the company to pay this (usually through a contract) - So creditors must claim against the company if they are owed money - If company has insufficient funds, creditors cannot pursue claims against shareholders \[Salomon v Salomon \[1897\] Insolvency - If company becomes insolvent, shareholders are liable to lose the money that they have invested in subscribing for the company's shares - They are also liable to make payment for any shares they have not fully paid for - S 74 Insolvency Act 1986 - Enshrines concept of limited liability -- confirms that shareholders of a limited company are NOT liable to a liquidator Separate personality - Legal entity is distinct from its shareholders/owners - Directors owe duties to the company, not the shareholders - Shareholders usually have rights against the company, rather than against the directors - 3^rd^ parties -- business contract w the company despite negotiation w the directors - Company continues to exist even if shareholders and directors change Consequences of company being an independent legal person - It owns its own property - Enters into its own contracts - Sues and is sued on its own liabilities [Significance of limited liability ] - Allowed companies to become useful commercial tools **[Concept of limited liability is fundamental to:]** - Passive investment - Shareholders can invest in a company (following assessment of risks of losing that assessment), knowing that the rest of their personal assets are safe + w/o having to take an active role in management - Why many entrepreneurs seek to conduct business through the medium of limited liability company - Why groups of companies have developed - Riskier business divisions can be conducted through separate companies within the group w/o less risky companies becoming vulnerable to creditors of the riskier companies [Salomon v A Salomon & Co Ltd \[1897\]] Facts: - Mr Salomon (S) - sole trader who specialised in manufacturing leather boots. - For many years he ran his business as a sole proprietor - In 1892 S decided to incorporate his business as a limited company, A. Salomon & Co. Ltd (the \'Salomon Company\') - sold the sole trader business to the Salomon Company for almost £39,000. - S was paid £9,000 in cash, £20,000 in shares and £10,000 by way of debenture for the business. - At this time incorporation was governed by the provisions of the Companies Act 1862, which required that at least 7 people subscribe as shareholders of a company - incorporation satisfied these requirements - members were - S, his wife, daughter and 4 sons. Each had 1 share - family did not have any formal or active role in running the business - From the outset, S was a shareholder, director and creditor. - Following incorporation there was a decline in boot sales, in part as a result of strikes which forced the gov (a major customer) to cancel some contracts - company ran into financial difficulty and S sold his debenture for £5,000 to Mr Broderip (B) - company became insolvent + defaulted on the payment of interest to B on his debentures - B brought a claim against the assets of the company - company then went into liquidation + the liquidator brought a defence against B\'s claim on behalf of the creditors collectively, seeking to dispute the validity of the debentures and asserting that S was personally liable for the debts of the company The Salomon case was appealed. At first instance and at the Court of Appeal, it was held that S was liable for the debts of the company, but for different reasons. The decision of the High Court - Vaughan Williams J: agent-principal analysis (the company was an agent of S) with S being required to indemnify the company for the losses sustained. - also claimed the other subscribers (family members) were mere dummies + no interest in the business The decision of the Court of Appeal - Lindley LJ: the company as a trustee for S as beneficiary -- a trustee improperly brought into existence. - Due to the requirements of the legislature not being complied with (i.e. 7 [active] members) the company was created for an illegitimate purpose. - must therefore follow that the company did not exist - \^ BUT this is a purposive interpretation of the statue, not the literal rule -- as statute doesn't state 'active' or 'passive' The decision of the House of Lords (so SC) - Lord Macnaghten delivered the leading judgment, but all were in agreement - a literal interpretation of CA 1862 should be used - the company was validly incorporated and therefore had a separate legal personality. - S was liable neither to the Salomon Company nor to creditors of the Salomon Company - debentures were validly issued - HoL noted that after registration of a company, in law the company is not an agent of the subscribers or members - Once the memorandum is signed and registered correctly the company 'attains maturity on its birth' - He stated - nothing in the Act requiring the shareholders to be independent or unconnected. - From the moment it is incorporated the company is at law a separate legal entity and not the agent of the subscribers or trustee for them. Significance: Following this judgment, it is clear that a company is a separate person and not the agent or trustee of its controller. - The fact that some shareholders may take no part in the management of the company is irrelevant. - Companies can therefore be validly used by individuals to carry on what is in economic reality the business of an individual. [ Consequences of separate legal personality ] - 1:It owns its own property - 2:Enters into its own contracts - 3:Sues and is sued on its own liabilities 1: The company owns its own property - **Macaura v Northern Assurance Co \[1925\] AC 619** - Macaura (M) was the owner of the Killymoon estate in County Tyrone, Ireland - He sold the whole of the timber on the estate to a company which he set up - 42,000 fully paid £1 shares. - M and his nominees owned all the shares in the company, and M was also a creditor of the company in the amount of £19,000. - M took out [insurance policies in his own name] with Northern Assurance Co, covering the timber against fire - 2 weeks later a fire destroyed almost all the timber - M brought a claim on the insurance policy - House of Lords held that the [timber belonged to the company and not to M,] therefore he was unable to claim on the insurance policy, despite owning almost all the shares in the company 2\. The company enters into its own contracts - **Lee v Lee\'s Air Farming Ltd \[1961\] AC 12 (Privy Council)** - Mr Lee (L) incorporated Lee\'s Air Farming Ltd in New Zealand in 1954 - nominal capital of the company - £3,000 divided into 3,000 shares of £1 each. - L held 2,999 shares + final share was held by a solicitor (as the NZ legislation at the time required companies to have 2 shareholders) - L was also the sole director of the company + was appointed as an employee (the chief pilot) in the company\'s articles. - In 1956 L was killed in a plane crash whilst working, leaving a widow and 4 infant children. - L\'s widow brought a claim under the Workers\' Compensation Act 1922 - Privy Council found that the company and L were distinct legal entities - therefore L (under his contract of employment) was a \'worker\' as defined under the Act - widow was entitled to compensation and it was irrelevant that L was also the vast majority shareholder and sole director Legal principle -- A company is a separate legal entity, so that a director could still be under a contract of employment with the company he solely owed (the 2 are distinct) 3\. The company sues and is sued on its own liabilities - **Adams v Cape Industries plc \[1990\] Ch 433 (Court of Appeal)** - Cape (English company) - parent company of a group of wholly owned subsidiaries - some subsidiaries mined asbestos in South Africa and others marketed the asbestos in other countries, including the US. - The employees of the Texas subsidiary company NAAC became ill with asbestosis - sued Cape and NAAC in the Texas court. - Judgment was entered for breach of duty of care. - issue before the Court of Appeal - whether the judgment could be enforced against the much wealthier parent company, Cape, in the English court, since Cape\'s assets were all based in England. - NAAC had by that time been closed down by Cape. - The requirement for this was either that Cape consented to the Texas jurisdiction (which it did not) or that Cape was \'present\' in the US in Texas. - The claimants argued a) that Cape and its subsidiaries should be treated as a single economic unit, b) that the subsidiaries were used as a façade concealing the true facts and that c) an agency relationship existed between Cape and NAAC - Court of Appeal rejected all these arguments + held that the judgment could not be enforced against Cape. - *Note: this case was a leading authority on \'piercing the corporate veil\' prior to the 2013 case of Prest v Petrodel* [Legal personality -- current position ] - S 16 CA 2006 -- company becomes legal person/body corporate from date of incorporation -- OWN legal personality - i.e. date on which Registrar issues certificate of incorporation - priv limited company can be formed w just 1 director and 1 shareholder -- company continues to exist if they change - shareholders - pay for their shares - entitled to profits/dividends dependent on their shareholding - BUT no entitlement to company's property - directors - have day-to-day control of company under MA Art 3 - as company is inanimate, it must act through human beings [Limited liability -- justification and issues ] +-----------------------------------+-----------------------------------+ | **[Justifications]** | **[Issues]** | +===================================+===================================+ | Encourages investment + taking | Creditors + claimants risk being | | risks -- generates income and | unable to receive monies as | | benefits community | concept of limited liability | | | prevents them from going being | | | corporate structure to seek | | | monies from those controlling the | | | company | +-----------------------------------+-----------------------------------+ | Creditors will be aware they are | Accounts are only filed once a | | contracting w a limited company | year -- might not represent | | | current position | | - s 59 and 60 of CA 2006 -- all | | | companies must end in Ltd or | - \+ small priv companies' | | Plc | accounts don't give much info | | | | | SO creditors are on notice AND | | | have the opportunity of assessing | | | financial viability of a company | | | by checking at filings at CH | | +-----------------------------------+-----------------------------------+ | | | +-----------------------------------+-----------------------------------+ **[Piercing the corporate veil ]** Piercing/lifting the corporate veil -- refers to situations in which courts may go behind the corporate framework and company's separate legal personality to make shareholders liable - This is the exception to the rule that shareholders' liability is limited to unpaid amount owing on their shares Prior to *Prest v Petrodel Resources Ltd* there was uncertainty + inconsistency in case law and if doctrine even exists - Supreme Court decision clarified that doctrine exists - Can be invoked on public policy grounds but in extremely narrow circumstances where there is no alternative remedy - Past cases where members were found liable can be explained on general legal principles w/o need for corporate veil to be pierced Law -- Court may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up that company [Historical development ] - Prior to *Petrodel* there was a lack of coherence whether + when court can look behind corporate veil - BUT clear that ability for court to do this has always been a very narrow jurisdiction - Used sparingly to maintain certainty + respect the principle of separate legal personality \[*Salomon*\] - When courts concluded that veil should be pierced, members found liable only to the extend required to right the wrong Cases up to 2013 can be divided into 3 categories - Application of statute - Common law - Application of a contractual term (intention of parties -- rare) [Statutory examples] Number of instances where statues allow members to become liable in certain situations - NOT examples of piercing veil - Instead they are instances in which those behind a company can be treated by statue as liable in specific circumstances 1: Taxation - Tax legislation recognises that group structures need to be treated differently for disclosure + financial reporting purposes - E.g. s 399 CA 2006 -- requires parent companies to produce group accounts - S 409 requires parent companies to provide details of the names of subsidiaries + the shares they hold in a subsidiary 2: Employment - Employment Rights Act 1996 protects employees' statutory rights when transferred from 1 company to another within a group, maintaining continuity of employment 3: Corporate insolvency - Insolvency Act 1986 (s 213-215) -- provide offences of fraudulent trading + wrongful trading where those involved in a company may in certain circumstances be liable to contribute to debts of an insolvent company - more likely to pursue wrongful trading rather than fraudulent [Cases in which court has been requested to allow lifting of the veil:] - Façade or sham - Single economic entity - Agency - Tort [Façade or sham?] If a company is a deliberately created façade, shareholders may be liable ***Gilford Motor Co Ltd v Horne \[1993\]*** - Former employee who was bound by a restrictive covenant not to solicit customers from his former employers set up a company to do so - Court held that the company was merely a front or sham - Issued an injunction preventing trading ***Jones v Lipman \[1962\]*** - L had entered into a contract w J for the sale of land - Later changed his mind and didn't want to complete sale - Formed a company in order to avoid the transaction -- transferred the land to the company - Claimed he could not comply w the contract as he was no longer the owner of the land - Court found the company was merely a façade - Granted an order for specific performance - \^ so here, veil is not pierced because there are alternative remedies (specific oerformance) ***Trustor AB v Smallbone (No 2) \[2001\]*** - S was the former managing director of T - S had transferred various sums of money (approx. £20M) to a company he owned and controlled - T applied to court to pierce veil + treat receipt by the 2^nd^ company a receipt by S on grounds that the company had been a sham created to facilitate the transfer of money in breach of duty - The company had been involved in improper acts + interests of justice demanded this result - Court found that company was a sham -- device through which impropriety was conducted - Improper motive -- court could lift veil and find S liable Legal principle - when a company is a deliberately created a facade and is found to be sham, the court could lift the corporate veil and find the company's shareholders liable [Single Economic Entity] Despite debate previously, it is now established that **parent companies are NOT liable for their subsidiaries** other than in specific statutory circumstances - Case law makes it clear that single entity argument is NOT a basis for piercing the corporate veil ***DHN Food Distributors Ltd v Tower Hamlets* \[1976\]**: - Denning LJ held that a group of companies is a single economic unit and should be treated as such. ***Woolfson v Strathclyde Regional Council* \[1978\]**: - The House of Lords doubted Denning's decision in DHN - Held that veil of incorporation will be upheld unless it is a sham or façade created specifically for the purposes of avoiding liability - thereby confirming that each company in a group is its own distinct entity. ***Adams v Cape Industries PLC* \[1990\]** - CoA refused to allow the corporate veil to be lifted to allow the judgment to be enforced against the parent company - A consequence of the separate legal entity principle is that enterprises may purposely use company group structures to place more risky ventures / liability in (foreign) subsidiary companies removed from the parent company, as was the case here [Agency] - Liability based on law of agency is NOT lifting the corporate veil From workbook: *Although it is possible that the company may act as an agent for its parent company or shareholder and therefore the parent company or shareholder may be found liable on this basis, there is no presumption that this is the case. Cases will turn on their facts and are based on the common law of agency, **not the doctrine of lifting the corporate veil.*** *A company has the power to act as an agent for its parent company or its individual shareholders if authorised. However, there is no presumption that this is the case and in the absence of express agreement, it is very difficult to establish liability of the shareholder or parent on this basis. Even where such liability has been established, the argument in these cases is based on the law of agency and therefore is not a true example of a situation in which the court has ordered the piercing of the corporate veil. The House of Lords judgment in **Salomon** considered and expressly disregarded this ground on the facts of that case.* From CHATGPT: - **Agency vs. Corporate Veil**: The passage explains that in some cases, a subsidiary company might act as an *agent* for its parent company or shareholders. If this is established, the parent company or shareholders could be liable for the subsidiary\'s actions because of the agency relationship. However, this situation is *not* the same as piercing the corporate veil, because agency liability is based on a different legal doctrine---*the law of agency*---not the doctrine of lifting the corporate veil. - **No Presumption of Agency**: There is no automatic assumption that a company is acting as an agent for its parent company or shareholders. To prove that an agency relationship exists, there must be clear evidence, usually in the form of an express agreement authorizing the subsidiary to act on behalf of the parent company or shareholders. Without such evidence, it is difficult to hold the parent company or shareholders liable on this basis. - **Distinction from Piercing the Corporate Veil**: Even when a parent company or shareholder is found liable through an agency relationship, this is not considered an example of piercing the corporate veil. The distinction matters because piercing the corporate veil is much rarer and only happens in special cases where the court decides to ignore the legal separation between the company and its owners. - **Salomon v. Salomon**: This is a landmark case in UK corporate law where the House of Lords upheld the principle that a company is a separate legal entity from its shareholders. The court in *Salomon* rejected the argument that a company could be automatically considered an agent of its shareholders, establishing the foundation for the strong separation between a company and its owners. [Tort ] Parent companies may be liable to those dealing w their subsidiaries on the basis of tort but this is NOT an example of lifting the veil ***???VTB Capital plc v Nutritek International Corp and others* \[2013\] UKSC 5** - The claimant (VTB) lent Russagroprom LLC (RAP) money to fund the acquisition of 6 Russian dairy plants and 3 associated companies from the first defendant (Nutritek) - RAP defaulted on the loan. - VTB claimed it only lent the money on the basis of misrepresentations made by Nutritek for which the other defendants were jointly liable. - It claimed that RAP was in fact under the control of the defendants and that once the corporate veil was pierced, the defendants could be seen to have been parties to the contract, on the agency argument. - This was rejected by the court. - In this case the court left open the question of whether there exists any principled basis on which courts can pierce the veil, but refused to pierce the veil in this case, as it found that VTB could claim damages against the other defendants on the basis of the tort of fraudulent misrepresentation. - The veil was not pierced in this case because of the existence of the alternative remedy in misrepresentation. - The issue of whether there is a principled basis for piercing the veil was tackled shortly after by the Supreme Court in the case of ***Prest v Petrodel*** Legal principle: Where there are other routes to infer liability on shareholders, in this case tortious liability (e.g. tort of fraudulent misrepresentation), which do not ignore the company\'s separate legal person, the courts will infer liability on these principles. ***Adams v Cape Industries PLC* \[1990\]** - CoA refused to allow the corporate veil to be lifted to allow the judgment to be enforced against the parent company. Cases below have altered the general rule created by Adams v Cape (parent companies would not be liable for their subsidiaries) DIFFERENT OUTCOME/NOVEL AREA OF LAW: ***Chandler v Cape plc* \[2012\]** - parent company was held to be liable in tort for asbestos-related injuries suffered by the employees of their subsidiary - the parent was held to owe a duty of care to the subsidiary\'s employees through its control over the subsidiary\'s health and safety policy. **It was held that four conditions were needed for such liability:** - a\) both companies were in the same line of business, - b\) the parent company had much experience in the industry and superior knowledge of health and safety, - c\) the subsidiary's system of work was unsafe, and the parent company knew this, - d\) the parent company ought to have foreseen that the subsidiary and its employees would rely on the parent company's superior knowledge for protection. ***Lungowe v Vedanta Resources plc* \[2019\] UKSC 20** - issue of when an English parent company may owe a duty of care to people who are harmed by the activities of an overseas subsidiary has been litigated extensively in recent years - in this case, SC stated that ***Chandler*** provided examples of when a duty of care may be imposed on a parent company. - In ***Lungowe***, an English parent company of a Zambian subsidiary company was held to owe a duty of care to the claimants, a neighbouring community, whose health and farming activities were harmed by discharge of toxic material from the mine of a subsidiary company. - The parent company intervened sufficiently in the affairs of its subsidiary for it to assume a duty of care to the claimants. - Relevant factors included that the parent company was responsible for: - \(1) establishing group-wide environmental control and sustainability standards - \(2) for their implementation throughout the group by training - \(3) for their monitoring and enforcement - \(4) there was a management agreement between parent and subsidiary Similarly: ***Okpabi v Royal Dutch Shell plc* \[2021\] UKSC 3** - SC held that an English parent company of a Nigerian subsidiary company may owe a duty of care to local inhabitants who were harmed by oil leaking from its subsidiary's pipelines causing water pollution and environmental damage. - Whether a duty of care is imposed on a parent company turns on the extent to which it assumes responsibility for managing the relevant activity of the subsidiary and/or controls relevant activities of the subsidiary. - It was further held that a parent company can incur a duty of care by - \(1) maintaining groupwide environmental and safety policies and guidelines which impose mandatory standards - \(2) the parent company monitors and reports on the subsidiary's compliance with those standards - \(3) the parent company's CEO has overall responsibility for implementing groupwide health and safety standards. [Prest v Petrodel Resources Ltd \[2013\]] A document with text on it Description automatically generated Facts: Seminal case, established doctrine - Family law case concerning distribution of assets on a divorce - Husband wholly owned + controlled group of companies - Owned no of residential properties worth over £50M, including matrimonial home - Wife sought an order to transfer the properties to her on basis that they were held by the company on trust for her husband Case went to Supreme Court -- case law considered in detail - Lord Sumption -- leading judgment in SC - Affirmed key principle in *Salomon --* company is legal entity distinct from its shareholders (property belongs to company, not shareholders\_ - Concept of piercing veil -- true exception to *Salomon* -- courts will look behind separate legal personality to hold shareholders liable Found that there are 2 historically separate principles where this was alleged - 1: Concealment principle - This DOESN'T involve piercing veil -- instead describes cases where corporate structure conceals real actors so court will look behind corporate structure to discover real facts - arguably this is LIFTING rather than piercing -- but terms are used interchangeably - 2: Evasion principle - Court may pierce veil if person deliberately attempts to evade an existing legal obligation he is under by interposing a company which he controls - basics where a shareholder puts a company in between themselves and a legal right to evade said legal right - *\[e.g. Gildford Motor v Horne \[1993\]\]* Lord Sumption concluded that veil can only be pierced to prevent abuse of corporate legal personality - E.g. when someone deliberately frustrates the enforcement of an alternative remedy by putting a company into place - *"I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control."* - *"The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company\'s legal personality.\"* **If there is another legal remedy then piercing corporate veil will NOT be necessary or available.** Held: In ***Prest*** there was no impropriety in the company holding the properties for tax purposes so piercing the corporate veil was not necessary. - However, he held that the properties were held by the company on trust for husband as beneficiary, so an order was made for the sale of the property and for the money to be given to the wife. [Does the doctrine have any real application?] - VERY rare that it will be invoked - only pierce if there are no alternative remedies - Prest/Lord Sumption has streamlined the law to the evasion principle ***Hurstwood Properties Ltd b Rossendale BC \[2021\]*** - SC refused to pierce the veil because another remedy was available under statute - Hurstwood, a developer, leased properties to companies it owned. - These companies became liable to pay tax to Rossendale, the local authority. - The companies were wound up or dissolved and the local authority sought recovery of the tax unpaid by the companies -- 1 argument was to pierce the corporate veil - SC held that the veil did not need to be pierced as liability for tax remained with Hurstwood under statute (s45 and s65 Local Government Finance Act 1988). - Having established Hurstwood was liable under statute, SC rejected the need to pierce the veil - SC stated "*whether the evasion principle is needed or provides the best justification of cases such as Gilford Motor v Horne and Jones v Lipman is itself open to debate"* - SC was "*inclined to share Lord Walker's doubts"* (in *Prest*) as to whether piercing the veil "*is a coherent principle or rule of law at all."* - Perhaps these comments further reduce future possibilities to pierce the veil. - SC held: the facts did not justify piercing the veil as the evasion ground requires [imposing a company to avoid a liability] but here the abuse was that the companies were wound up or dissolved to avoid liability. In *Prest*, SC confirmed that: - piercing the veil may exist as a matter of law but extremely rare that the principle will be invoked - reviewed historic cases where court pierced veil + stated that in each case, liability could in fact be established under general principles without the need for the corporate veil to be lifted. Summary: where other routes to infer liability on shareholders are available (e.g. tortious liability or the law of trust or agency) which do not ignore the company\'s separate legal person, the courts will infer liability on these principles. - **Only circumstance where courts may pierce the veil is where a person under an existing legal obligation or restriction deliberately evades/frustrates that obligation or restriction by setting up a company** ***Antonio Gramsci Shipping Corpn v Recoletos Ltd* \[2013\]**. - a company had entered into a contract containing an exclusive English jurisdiction clause - CoA following ***Prest***, held that veil could not be pierced to regard the company\'s controller as having consented to the jurisdiction of the English courts on this basis. **WORKSHOP 3 -- Capacity and Authority** **[Contractual liability of a company ]** Key Q: When do the acts of human directors or employees bind the inanimate company to obligations to third parties, and does the company have the capacity to be bound? Historically, power of company to enter into a transaction was limited in 2 ways - 1: Capacity - Was the act within the power of the company? - Necessary to check objects clause in the memorandum to ascertain what acts/business the company was empowered to participate in - if transaction was outside company's powers, it would be void + unenforceable -- ultra vires - this holds even if shareholders attempt to ratify the act - *Ashbury V Riche 1875* -- why? because company was not incorporated w the requisite capacity - 2: Authority - If company had capacity, next Q is whether the individual who contracted on the company's behalf authorised to do so? - if so -- transaction valid - if not -- transaction would be voidable at the instance of the company Note: *capacity Q has far less relevance to companies incorporated under CA 2006 (no objects clause -- company's objects are unrestricted)* [Capacity] Historical reasoning behind the objects clause - derived from period where companies first came into existence - formed by charters from Crown or Parliament for specific ventures in public interest - 19^th^ C -- companies seen as bodies -- their ventures seen to promote public interest - to control scope of ventures, they were required to act within the powers for which they were incorporated - i.e. comply w objects clause in memorandum -- e.g. to mine coal [The doctrine of ultra vires ] - refers to a situation where a body purports to act outside its powers - derived from public law -- public bodies granted certain powers by Parliament + not permitted to go beyond these - purpose -- protect creditors and shareholders - theory behind this -- companies should be restricted in their activities to those which shareholders/creditors had initially provided money to fund Thus companies NOT permitted to act outside their objects clauses - acts outside the objects = ultra vires = held to be void If a company was unable to achieve its stated object, then it was vulnerable to winding up by the court - *Re German Date Coffee Co (1882)* - company\'s object was to acquire and exploit a German patent for producing coffee from dates - company failed to get the German patent but managed to get a Swedish patent + had a profitable date coffee business - however, the company was wound up by the court since it could not achieve its stated object [Problems resulting from the doctrine of ultra vires] 1: Objects clause was initially not permitted to be altered - later legislation allowed alteration but only in very limited circumstances until 1991, when amendments made to CA 1985 came into force 2: Registered companies often did diversify and change their business - this then led to problems - Diversification is often key to businesses to protect for the future. 3: The doctrine of constructive notice combined w the ultra vires rule to cause problems for third parties seeking to enforce contracts against companies. - Anyone dealing w a company was deemed to have knowledge of its objects clause - so wouldn't be able to argue that they didn't know that the company lacked capacity to enter a transaction as it fell outside the scope of the objects clause - despite it being unrealistic to expect third parties to make checks at CH, this was the case - in the past such checks had to be made by a company agent, who would expect payment - \+ memorandums were often not easy to interpret The doctrine of constructive notice - applies to all publicly available documents (e.g. company\'s memorandum + articles) + deems anyone dealing with registered companies to have notice of the contents of their public documents 1960s -- 1991 - due to all these issues, companies had very long objects clauses during this time period - set out all possible types of business the company may want to engage in in detail - \+ by supplementary objects or powers covering all the standard activities of a company (interests in land, borrowing money, etc) - purpose -- avoid effects of the ultra vires rule *Bell Houses Ltd v City Wall Properties Ltd \[1966\]* - the court accepted as valid an objects clause which concluded with the statement: *\'to carry on any other trade or business whatsoever which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above businesses or the general business of the company.\'* 1991 and 2009 - ordinary trading companies registered between this time period usually specified in the memorandum that the company was a *\'general commercial company'* - permitted under s 3A CA 1985 - meant that the company could carry on any trade or business and had power to do all such things as were incidental or conducive thereto - 1991 - when amendments were made to CA 1985, introducing new s 3A + s 4 - 2009 - when final part of CA 2006 came into force Although these wide objects clauses meant that issues of ultra vires were less frequent, cases still came before the courts. *Re Introductions Ltd v National Provincial Bank \[1970\]* - company incorporated in 1951, at time of the Festival of Britain - object - providing foreign visitors with accom + entertainment - company later diversified into pig breeding, which was (understandably) not covered by the objects clause - bank were unable to enforce a debenture as a secured creditor or claim as an unsecured creditor in the company\'s liquidation since the company was held to have acted ultra vires Following this, there were reccs for reform of the law in this area to protect 3rd parties - finally started to take place following the UK joining the European Community, 1973 - First European Community Company Law Harmonisation Directive r**emoved the doctrine of constructive notice** where it concerned the memorandum and articles - also contained a saving provision for ultra vires transactions where the transaction was dealt with by the directors and the 3^rd^ party was acting in good faith - now incorporated into s 40 CA 2006 [The reform of ultra vires] CA 1985 (further to amendments which came into force in 1991) introduced no of changes: - memorandum could be altered by special resolution, allowing companies to change their objects clause (s 4) - companies were permitted to have a general objects clause - \'general commercial company\' (s 3A) Further changes introduced by CA 2006. Two key changes were: - introduction of a provision in s35 CA 1985 - removed doctrine of constructive notice in relation to a company\'s memorandum and articles - is now enshrined in s 39(1) CA 2006 which states: - *\'The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company\'s constitution.\'* - CA 2006: requirement for an objects clause in the memorandum was completely removed. - s 31 states that the default position is now that all companies have unrestricted objects - company may still choose to insert a limitation on its capacity in its articles but this is rare Companies formed prior to CA 2006 - pre-CA 2006 companies objects clauses - treated as if they were a provision of the articles (s 28(1) CA 2006) + will continue to bind the company unless altered by special resolution - If the company adopts new articles then this also treats the objects clause as having been removed - therefore still necessary to check the position, but any issues of ultra vires are now rare Note: any constitutional restrictions on a company\'s capacity have no bearing on liability in tort or crime [Agency and authority] after establishing capacity to enter into the contract, next stage is to consider authority - i.e. whether the individual entering into the contract on the company\'s behalf was authorised to do so As a company is inanimate and therefore cannot act itself, the company\'s directors or employees must therefore act as its agents. Under general agency law, an agent is appointed by a principal to act on their behalf - an agent contracts on the principal\'s behalf - contract will be entered into between the principal + 3^rd^ party, not the agent, who merely acts to represent the principal. In order to validly represent the principal and to bind the principal, an agent needs **authority**. authority may be actual (express or implied) or deemed (either by statute or under common law (ostensible authority or the indoor management rule)). [Example of a classic agency arrangement ] ![A diagram of a company Description automatically generated](media/image6.png) [Actual authority -- express or implied] The actual authority of an agent is the authority that has been actually conferred on them by the principal. *Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd \[1964\]* - Diplock LJ: *\'actual\' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts...\'* AoA typically give the board of directors the authority to manage the business of the company. MA 3 states: - Directors\' general authority - *Subject to the articles, the directors are responsible for the management of the company\'s bu

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