Week 7 Company Law PDF

**[Week 7 Company law ]** **[Company incorporation ]** **Birth of a company:** - Upon registration at companies house, the persons (subscribers to the memorandum of association) are transformed from a collection of subscribers to first members (shareholders) of a body corporate whic...

**[Week 7 Company law ]** **[Company incorporation ]** **Birth of a company:** - Upon registration at companies house, the persons (subscribers to the memorandum of association) are transformed from a collection of subscribers to first members (shareholders) of a body corporate which the registration creates. It thus follows that separate legal personality is an inevitable consequence of the incorporating of a company **Legal personality, members limited liability, 'piercing corporate veil':** - Saloman v Saloman 1987: establishing corporate veil: incorporations creates a new and separate legal entity, being capable of enjoying rights, exercising powers and incurring duties and obligations - Once registered they have a corporate veil Piercing or lifting corporate veil: - Looking behind the company farmwork to make the members liable, as an exception to the rule that they are normally shielded by the corporate veil - Prest v Petrodel Resources -- NOT SUCCESSFUL - Only 2 successful: Gilford v motor Co Ltd; Jones v Lipman **Pre-incorporation contracts:** S51 CA 2006: - Until a company is incorporated it cannot enter into contracts. Nor can it ratify once registered, remember company does not exist - 'director' (quoted as no director yet) or other signing this has personal liability for fulfilling it and only way to get out of it is novation (substitution of another contract) or other party agrees to termination pre-incorporation contract - The two ways above only way for person to get out of liability **Incorporation: registration of a company under companies act 2006:** [Part 2 of CA 2006: ss 7-16:] **Who can incorporate a private company?** - One or more legal (company can further incorporate company) or natural persons - A company can be formed by one or more persons: this means you can have a **single** member company (s7 CA 2006)(saloman v saloman) **Where are companies registered:** - Companies house: executive agency of the department for business, energy and industrial strategy, with registrars In England, wales, NI, and Scotland [CA 2006: ss9-13:] **Documents** that need to be delivered to registrar: - Memorandum of association - Articles of association -default provided by secondary legislation 'Model Articles' -can make changes to Model Articles provided does not contradict companies act 2006 - Application for registration - Others -statement of the type of the company (here statement of we are going to establish a private company limited by shares) -statement of compliance **[Memorandum of association:]** **Pre-CA 2006:** - A significant constitutional document (before CA 2006) - The company's 'objects' were listed in the memorandum. If a company exceeded its objects, it acted ultra vires: the transactions could be void and the directors could be personally liable - In practice, the memoranda included long lists of objects that the company may conceivably wish to engage in, to ensure that all transactions will be within company's authority **Post-CA 2006:** - S8: the memorandum of association is a document stating that the subscribers wish to form a company under the CA 2006 and agree to become members of the company, and in the case of a company with share capital, to take at least one share each. The memorandum must be in the prescribed forma and be authenticated by each subscriber - S17: states that unless the context otherwise requires, a company's constitution includes the articles of association of the company (and certain resolutions and agreements that affect a company's constitution) \[memorandum of association not included\] - This does not include memorandum, constitution only includes articles of association and other resolutions or shareholder agreements, the memorandum is now not the company's constitution - Memoranda of companies incorporated under EARLIER companies acts -- to be treated as provisions of the company's articles of association (in this case, they can be treated as provisions of the company's articles of association) **[Articles of association -- part of company's constitution (rulebook for operation of company):]** Unless the context otherwise requires, references in the companies acts to a **company's constitution include:** a. The company's articles of association b. Any resolutions and agreements that affect a company's constitution Articles are a public document and open to inspection at Companies house **[Shareholder agreements:]** - Articles of association cannot cover every detail and in practice some shareholders want to have a small group within the company so they have a shareholder agreement. (example, gia and mia make a contract they will vote together) - Directors exercise management power of the company on behalf of the shareholders in articles of association - Shareholder agreements are quite common: a private contractual document signed by some/all shareholders - If the shareholders breach the terms, the other shareholders can sue for breach of contract - Common terms include: not to sell shares to outsiders, all shareholders in the 'block' to vote in a certain way for certain matters, when leaving for specific reasons, sell shares to other members at a price agreed **[Article of association]** What is it? The company rule book: - The act does not deal with certain issues so shareholders and directors can adapt things - Must not contradict the act Coverage? Some issues (and how they may be changed): - The companies (model articles) regulations 2008 -- if no changes these default rules will apply for the articles of association for your company - MA 3: subject to the articles of association, directors exercise all the powers of the company on behalf of the shareholders - MA4: by special resolution, shareholders can direct directors to do/not do something. This does not invalidate what directors have done - MA 5: directors may delegate some of their powers Coverage of Model articles: - Decision making by directors (MA 7-16) -how they will vote/call board meetings/quorum/chairs - Appointment of directors and termination issues -- supplements the CA 2006 - Different class of shares available and procedure of releasing profits as dividends - Shareholders ultimate owner of the company, so their decisions are covered by the companies act and the directors are covered by the model articles **[Articles of association: Status? ]** - Binding on the company (including its directors/officers), a contract between the company and the members and members inter se (articles of association are a rule book, must be followed by directors and officers and members, kind of like a contract between them all; and shareholder agreement is a small group between them) - Effect of company's constitution S33: - The provision of a company's constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions - Money payable by a member to the company under its constitution is a debt due form him to the company. In England and Wales and Northern Ireland it is of the nature of an ordinary contract debt **[Articles of association -- example of breach by company towards members and members towards other members:]** - **Qua member** -- being removed as a director when one is a shareholder is NOT a breach - **NOT mere internal irregularity** -- typical breaches: notice requirements/dividend requirements/pre-emption rights on transfer of shares - Must be a breach by a director or officer of the company to someone who is a shareholder - Breach one member against another in breach of the article should be pursued through the company (a breach by a single member can only be pursued through the company and not the member itself) -but where the right is personal to a member a direct action can be taken (e.g. articles provide for members to purchase shares before being offered to an outside investor. This was not followed) **[Amendment of the Articles of Association ]** - By special resolution of the members (s21 CA 2006) - Restriction: the size of shareholders investment in the company is a matter for the shareholder individually s25 (no alteration of the articles of association after a person becomes a member can bind him to take up more shares than he held at the date when the alteration was made, or in any way increase his liability as at the date when the alteration was made, unless he agrees in writing, either before or after the alteration was made) **[Entrenchment: a possible way to protect minority shareholders?:]** (75% and the remaining 25% minority)(entrenchment can be added in articles to add some provisions to make it harder to change it) Entrenchment (s22): - To entrench = contains provisions in the articles, making it more difficult to amend or remove certain provisions How can provisions in the articles be entrenched? By informing Registrar of Companies (s23) -- very rare today - Even If there is a provision for entrenchment, this may be overridden if all shareholders agree (unanimously) or if the court orders that it should be overridden **[Certificate of incorporation]** - Conclusive evidence that the requirements of the Act as to registration have been met - A trading certificate is conclusive evidence that the company is entitled to do business as a company **[Transacting company business -- decision making:]** - Companies are artificial legal entities, they have similar powers to real persons (separate legal responsibilities vs members within them, companies have duties like human beings) - Real people confirm their decisions by positive actions: signature, handshake or conduct - How can we confirm that companies have made a decision: -companies have numerous stakeholders -directors, officers, employees and agents working for the company -distinguishing between decisions made on behalf of the company (agency) with decisions made by the company itself - Decision making power is the power to make decisions recognised by law (may involve contracts, or conduct that has legal consequences) **[Distribution of decision making power]** - Company's decision making power is given to the decision making organs -board of directors -members in a general meeting - Decision making power can be distributed by: -Articles of association (refer to model articles) -companies act 2006 - Note: some powers may be limited by contract -delegation -shareholders agreement The companies (Model articles) regulations 2008 (default distribution of decision making power: - MA 3- directors general authority: subject to the articles, the directors are responsible for the management of the company's business, for which purpose they may exercise all the powers of the company - MA 4- shareholders reserve power: the shareholders may, by specific resolution, direct the directors to take, or refrain from takin specified action. No such special resolution invalidates anything which the directors have done before the passing of the resolution (reserve power is used by special resolution)(reserve power can only affect future decision possibly made by directors) - Constitutional distribution of power (mainly decided by articles of association or model articles, this is the constitution of distribution of power) **[Effect of distribution of power]** Limitations on members' power in articles cannot be disregarded, unless formal alteration of the articles - Disregarding articles limitations on members power vs altering articles by special resolution then disregarding previous limitations (we must first amend articles and then remove previous limitations - **Imperial Hydropathic Hotel co Blackbool v Hampson:** now CA 2006 s168 gives the general meeting power to remove directors by ordinary resolution with special notice...but principals in this case still valuable **FACTS:** the article of association provided that the directors could not hold office for a period of three years and then retire by rotation. At a general meeting which had been called for the purpose along with other matters, resolutions were passed to remove two directors who were not due to retire under the terms of the articles. Furthermore, they were to be replaced by two other individuals. The company claimed that the directors had been validly removed from office **HELD:** the company's articles of association could not be disregarded in this manner (shareholder resolution) where a company's articles limit the general meeting's power, the articles must be formally amended first, and may not simply be ignored, even with a majority large enough to change the articles. - **Boschoek pty ltd v fuke \[1906\]** FACTS: The directors of Boschoek Pty Ltd purported to appoint Fuke as managing director at a remuneration of 700p per annum notwithstanding that he did not hold in his own right the number of qualification shares prescribed by the articles and that the maximum remuneration of the whole board was fixed by the articles at 500p. The company later confirmed the appointment by general meeting resolutions; but the court ruled the resolution were invalid. HELD: the members could only do this after the articles had been altered by special resolution **Example:** Nia Ltd has an Article of Association that states, 'any decision to sell company assets worth more than 1millionp must be approved by a 75% majority of the shareholders.' A group of shareholders, holding 60% of the shares, wants to sell a company asset worth 1.5millionp without seeking the required 75% approval. Then they make this decision through a general meeting resolution. Is the resolution valid? 'limitations on members' power in articles cannot be disregarded, unless formal alteration of the articles' As per case law above of imperial and boschoek, the resolution would be invalid as where the company's articles limit the general meetings powers, the articles must be formally amended first, and may not simply be ignored, even with a majority large enough to change the articles as per Imperial. Members cannot give directions to the board/overrule the board's business decisions by ordinary resolution, unless taking away such power from the board by formal alteration of the articles - Are the directors mere agents of the members -- **NO** (directors are not agents of the members, in this way they cannot give directors to board members to make decisions or not) - **Automatic Self-cleansing filter syndicate co ltd v cuninghame \[1906\]** **-FACTS:** McDiarmid was a shareholder in the Automatic Self-cleansing company. McDiarmid established a new company, for which he wished to acquire assets owned by Automatic. McDiarmid drew up a sale contract and presented it to the company after requisitioning a members' meeting to vote on the sale. McDiarmid and his associates passed an ordinary resolution at a members' meeting that required the board of directors to sell the particular assets. When the directors refused to comply with the direction of the members' meeting, McDiarmid sought court orders to compel the sale. **-HELD:** court held that the directors were not bound to follow a majority resolution. If the members wanted to take away the management power from the board, they would have to do it by changing the constitution. The board are not the agents of the members. - **John Shaw & Sons (Salford) Ltd v Shaw \[1935\]** -**FACTS:** 3 brothers (shaw) were directors of the company and owed money to it. In a settlement with the company the brothers agreed to pay back the money over time and to appoint new directors to control the company (these were called permanent directors). 2 of the brothers subsequently refused to sign the settlement deed and the permanent directors brought proceedings against them. The members in a general meeting then passed a resolution directing the Chair and the board to discontinue proceedings. **-HELD:** the court held that as the management of the company was vested in the board, then the shareholders could not direct the board to not take legal action **-QUOTE FROM CASE:** 'A company is an entity distinct alike from its shareholders and its directors/ Some of its power may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. **The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles,** or if, an opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body fo shareholders' **Example:** Nia Ltd has an article of association that states, 'the board of directors has the exclusive authority to make decisions regarding the company's strategic direction.' A group of shareholders, holding 55% of the shares, disagrees with a recent strategic decision made by the board. They then pass an ordinary resolution to direct the board to reverse this decision. Does the board need to follow the resolution? The board does not need to follow the resolution, 'members cannot give directions to the board/overrule the board's business decisions by ordinary resolution, unless taking away such power from the board by formal alteration of the articles' RESERVE POWER: ONLY if necessary (i.e. deadlock), members can exercise the board's power (because a company needs operation and if something happens and directors cannot make decisions, in this rare cases the members can exercise the boards power) Quorum Meaning: relates to the minimum of persons suitably qualified who must be present at a meeting in order that business may be validly transacted - **Barron v Potter (1914)** **-FACTS:** 2 directors Barron and Potter were not on speaking terms, so that effective board's meeting could not be on hold. Barron had requisitioned a members meeting, appointing additional directors. Potter said the power to appoint directors was vested by company articles in directors, not in members. **-HELD:** it stands for the principle that when the board is incapable of taking action, power to conduct the company's affairs will revert to the (SH) general meeting **MA 11: if quorum (minimum number requirement for board meeting, say 2 directors but only 1 director the quorum is not satisfied)** cannot be satisfied for the board's meeting, directors can call a general meeting so as to enable the members to appoint further directions **Example:** Nia Ltd has an Article of Association that states, 'the board of directors has the exclusive authority to make decisions regarding the company's financial investments.' The board of directors is evenly split on a crucial decisions about a significant financial investment. Half of the board members support the investment, while the other half oppose it. This deadlock prevents the board from making a decision. Then the shareholders call a general meeting to resolve the issue. Is that okay? Yes this is okay, as per MA11: if quorum cannot be satisfied for the board's meeting, directors can call a general meeting so as to enable the members to appoint further directions. (better to have uneven appointed directors to avoid this problem) **[How to make decisions:]** - formal decision making through meetings (board meeting and general shareholder meeting) - informal decision making by **unanimous assent** -- **'Duomatic Principle'** - Re Duomatic LTD 1969 -a formal general meeting or written resolution is unnecessary if all the members entitled to vote on the matter informally assent to this matter -the unanimous assent -- either simultaneously/given at different time -effective as ordinary and special resolution (cane v jones 1980) -apply to shareholders resolution and board resolution Limitation/tricky things of the Duomatic principle: - It can ONLY apply if all registered members do indeed agree (registered members to agree, if one shareholder passed away but he still is on the register and still is a registered shareholder then it is not possible for company to use unanimous assent) - All members must in fact agree - Members consent must be real and fully formed - The consent must be capable of being **objectively** determined - If one member holds shares for not only himself but also shares for others, the consent can only reach his own shares - Duomatic principal is stricter than written resolution **[Transacting Company Business (meetings and resolutions)]** **[Transacting company business ]** Decisions on the day-to-day activities of the company usually taken by directors subject to: - Any limitation to MA 3 in the articles (subject to the articles, the directors are responsible for the management of the company's business, for which purpose they may exercise all the powers of the company) - Direction by pursuant to MA 4 (4(1) the shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action. (2) no such special resolution invalidates anything which the directors have done before the passing of the resolution) Other time: interaction of the board and the shareholders key feature: - General meeting - Shareholders - Board Meeting -- Board of directors Who does what is determined by the companies act 2006: - Act may state to allow articles to alter the position of the act - Model article -- default rule **[Types of resolutions (decisions made by decision making organs)]** Shareholders resolution: -Ordinary resolution (OR) -- requires **more than** 50% to pass -- **simply majority** **(\>50%) (doesn't include 50%)** -Special resolution (SR) -- requires **at least** 75% to pass **-- absolute majority ([\>] 75%) (75% is enough here)** **Example:** Nia Ltd has 5 shareholders with 20 shares each (100 in total) How many shareholders needed for an OR to pass? 3 How many shareholders needed for an SR to pass? 4 How about if a company only has two members with the same shareholding (50:50) (one alone could not pass either resolution??) **OR: if passing ordinary resolution need more than 50% this does not include 50%, they need two member agreements to pass OR and SR** **SR: same here as well** **[Board resolutions]** - Where the act says the company they usually mean the board - Model articles allows the directors to take decisions by a simple majority -- i.e. over 50% (companies can change this, but they must change the model articles and make own articles of association) - Alternatives to majority and unanimity (company can make own decisions, first change model articles) To make the Model Articles more suited to your company: - Example: MA 11(2) 'the quorum for directors' meetings may be fixed from time to time by the decision of the directors, but it must never be less than two, and unless otherwise fixed it is two' - Example: MA 4 -- put exceptions to the general powers of directors - These can only be changes by shareholders, by special resolution Removal of directors: - S168 by ordinary resolution after giving special notice (28 days special notice) Changing company name (Shareholder approval and special resolution): - S77 -- by special resolution or as provided by articles -MA has no basis for changing the company name -members may want/not want to pass special resolution to alter the articles to set out different procedures **[How to run general meetings and board meetings:]** **Who calls:** general meetings are normally convened by board of directors, or court in certain circumstances, further to this, states that members holding at least 5% of such a companies paid-up capital as carries voting rights at the general meetings of the company can requisition a meeting. Board meetings notice should be given to all directors and the time must be reasonable **At what notice:** usually laid out in company's articles, but the companies act provides any provision in the company's articles as void if it provides calling of the meeting of the company shorter notice than, in the case of annual general meeting not less than 21 days notice in writing, or in the case of meeting other than annual general meeting 14 days notice **Quorum:** concept relates to the minimum number of persons suitably qualified who must be present at a meeting in order that business may be validly transacted, if articles do not lay down the quorum required for general meetings, s318 ca2006 provides in the case of private and public companies, two members personally present shall be a quorum, or one member companies one member present **Chair:** duty is to preserve order, to call on members to speak, to decide points of order, such as acceptability of amendments and to take the vote after a proper discussion in order to ascertain the sense of the meeting **Who deals with the minutes and other post-meeting matter:** every company must keep minutes of all proceedings of directors meetings **[General meeting (regulated by companies act)(board meeting MA)]** - Can be called by the board (first instance) or requisitioned by shareholders themselves (if board of directors fails to do so) - Board members calling a physical/virtual general meeting, must, inter alia: Full text of a special resolution -- REQUIRED Full text of ordinary resolution -- good practice electronic, hardcopy, or website NOTICE: **14 clear days** (day of notice and day of meeting excluded) -- can be changed to **longer notice by Special Resolution to articles.** OR short notice if 90% of shareholders consent (or specified in articles, but \