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Business Law - 4 - Nature and Formation of Companies - Coggle Diagram
Business Law - 4 - Nature and Formation of Companies
Types of Registered Companies
Unlimited Companies
Not primary focus of SQE
Rare
Members are
personally liable for all debts of company
, like sole trader
However, does not have to publish its accounts -> more
confidentiality
than limited company
Limited Companies
Two types
Limited by Guarantee
Requires
members
(definition)
to pay fixed, guaranteed amount
(normally £1) when company
wound up
Used for not-for-profit organisations as there's
no need for members to make large capital contributions for business tobe capable of running
Eg charities
Naturally,
no shareholders
, but must have
at least 1 member
(or 'guarantor')
Limited by Shares
Shareholders do
not have any person liability for company obligations past what they paid for their shares
, even if the company becomes insolvent
If the Shareholder has
fully paid
for their shares, creditors cannot pursue them. If, however, they haven't paid fully for their shares, they can be pursued up to the unpaid value of their shares
Definitions:
Members = Owners of a company, Shareholders
promoter
- someone who
takes the necessary steps to form a company**
Subscriber: Signatory of Memorandum of Association
Officers: Those who run a company - Directors, Managers, Company Secretaries
Limited (by share) Companies - Public vs Private
Company will be private limited company (Ltd.) by default, as public limited companies (PLC) have different requirements
Public Limited Companies
(PLC)
May
issue
their shares to the public
, AND IF LISTED,
trade their shares on a stock market
Additional requirements necessary to be PLC - minimum nominal share capital of £50,000 and trading certificate
Must have
at least Two Directors
(contrast with Ltd)
Needs
a suitably qualified
Company Secretary
(contrast with Ltd)
Accounts
must be filed
within 6 months
of accounting reference date, AND
must be audited
Private Limited Companies (Ltd)
Not permitted to issue its shares to public
- can only be sold
by private agreement
Must have
at least one Director
(contrast with PLC)
Does
not need a company secretary
(contrast with PLC)
Accounts
must be filed
within 9 months
of accounting reference date
Certain small companies
are
exempt from audit
Formation of Companies and Promoters
Requires a
promoter
- someone who
takes the necessary steps to form a company
Arrange for investors and registration to bring company into existence
Professional advisors (eg solicitors, accountants) are
not
promoters
Promoter
creates a Memorandum of Association
Signed by those wishing to
become members of company
Signature indicates the
subscribers
(signatories)
wish to form the company and agree to become members of it
Memorandum must be
delivered to Registrar of Companies alongside Application for Registration
Promoter
owes a fiduciary duty to the company
Eg must disclose personal interest in any transactions entered into with/on behalf of the company, and account for any resulting profits
Promoter is
personally liable for Pre-Incorporation Contracts
Can protect themselves by:
Preparing the contract as a draft, not executing it until company is created
Enter a
novation agreement
between the company, promoter, and outside contracting party, where liability moves to the Company
Remember, benefits can be assigned to another without new agreement as long as parties to the contract are told
After the company is incorporated, have it
indemnify
the promoter for losses from the contract, and
assign it the benefits
of the contract
Company will reimburse promoter if they're held personally liable
Using a shelf company instead
One cannot contract with an entity that doesn't exist, and
contracts purported to be entered into by a company before it has been registered at Companies House
and a
certificate of incorporation received
are the
liability of the promoter
Promoters remain personally liable
even after company is created
, however, can take steps to protect themselves
Shelf Companies
Likely not suitable if company with bespoke Articles of Association is required
Pre-incorporated but have never traded; promoter can purchase and take over by changing a few details, such as the members
Application for Registration
Delivered to Registrar of Companies alongside
Memorandum
Application must include:
Proposed Company name
Location of
registered office
(where all notices/communications are sent)
Must be in same jurisdiction the business is in
Usually place company does business, or its solicitor or accountant's office
Details of company's business activity
and their SIC (Standard Industrial Code)
Whether the company is
limited by shares
OR
guarantee
Whether the company is
private
or
public
Details of subscribers
(Signatories of Memorandum of Association)
Statement of Capital and Initial Shareholdings
(if limited by shares)
See further info
Statement of Proposed Officers
(
Directors, Managers, Company Secretary
)
Including their residential addresses
Company Secretary's details also needed if PLC
The people who run the company
Details of
persons with signiificant control
Statement of
Compliance With Companies Act 2006
Payment of the relevant
fee
Company Names must follow these rules:
Cannot be
same as, or essentially same as
, name of
already-incorporated Company
Must end in Limited/Ltd, or Public Limited Company/PLC (or in Welsh equivalent if registered in Wales)
Companies limited by guarantee are exempt from this
- eg charities
Cannot be
deemed offensive
name
Approval required for:
Any name suggesting
connection to government or local authority
Any name
containing sensitive words
, eg Auditor, Charted, Medical Centre, Law Commission
Changing a Company Name Requires:
Special resolution
(75% of shareholders) of members (shareholders); or as articles provide
OF SHAREHOLDERS AT MEETING, as long as there is a quorum (typically 2)
Forward a copy of the shareholders' special resolution, or statement change was per articles, to
Registrar of Companies
Notify Registrar of
name
change
Pay fee
Statement of Capital and Initial Shareholdings
Must be included if company is limited by shares
Must include:
Statement of the
total number of shares
of the company to be
taken by the subscribers
of the
Memorandum of Assocation
Aggregate nominal value
of this total
number of shares
Need not be realistic (eg £1) - has nothing to do with how much shares are actually sold for
However, if
directors approve sale for less than stated value
, they can be
liable for breach of duty
If
shares are
divided into classes with varying rights
, a
description of those classes and rights
Amount paid up by shareholders
and therefore
any amount
left unpaid
for the shares
Certificate of Incorporation
Issued once Registrar has inspected registration documents and checked everything is in order
Certificate contains
Company's Unique Registration Number
Company comes into existence legally at moment of issue
of Certificate of Incorporation and can
start trading with Limited Liability Benefits
Constitution
(Articles of Association + Amendments)
These amendments can come from shareholders' resolutions/agreements
Every company must have a Constitution
Secretary of State prescribes
model articles
, including for
private companies limited by shares
Thus these
need not be filed at Companies House
Articles of Association: Usual Provisions
Directors' meetings
and decision-making
Appointment
and
removal
of
Directors
Share capital
(inc issuing, alloting, and
transferring
shares)
Rights
attached to shares, including
voting and dividends
Shareholder meetings
- eg
notice
and
quorum
requirements
Object(ive)s of the Company can be restricted by Articles
Directors have a
duty to adhere to the restrictions
Eg if company is a restaurant, Directors will breach duty if they arrange for it to sell tech
The company action will still be valid, however
, even if it's outside-of-scope
Directors may be liable for, if breached:
Injunction
preventing restricted action if not yet carried out
Equitable action
by company
for any damage caused
Note:
Model Articles
don't restrict Object(s)ives)
of company, so most new companies are unrestricted
Constitution is term used in Companies Act
Legal Effects of Articles of Association - Contract
AOA form
contract between company and each shareholder
, AND between
each shareholder
with each other
Consequently,
Articles of Association ONLY BIND SHAREHOLDERS
in
relation to their rights as shareholders
Eg 1
Scenario: A director, who is also a shareholder (member), has a dispute with the company in their role as a director.
What the Example is Saying: If the articles require disputes to go to arbitration, this only applies if the director’s dispute is about their membership rights. In this case, because the dispute is in the director's capacity as a director and not a member, they do not have to go through arbitration and can take the dispute directly to court.
Key Point: The director has dual roles, but the articles of association only bind them to arbitration if they are acting as a shareholder, not in their other capacity as a director.
Eg 2
Scenario: A shareholder who is also a member and employed as a solicitor for the company wants to enforce a provision in the articles that guarantees their employment.
What the Example is Saying: This provision would not be enforceable because the person is trying to enforce an employment right, which is a personal right, not a membership right. The articles of association only govern membership rights, not personal employment contracts.
Key Point: Membership rights and personal employment rights are separate, and articles of association do not extend to enforcing personal employment-related matters.
AOAs are
only enforceable in relation to MEMBERSHIP 'RIGHTS'
, such as
dividends
and
voting
Altering the Articles of Association
Done via a Special Shareholder Resolution
(75%)
However, cannot force a shareholder to subscribe to more shares
Entrenchment
Ordinary Shareholder Resolutions require
50+%
Special Resolutions require at least
75%
Companies Act lets some
article provisions be entrenched
- eg requiring approval by
ALL shareholders
Entrenchment can be
in Articles at formation
OR
passed by special resolution
The
Registrar
MUST have
NOTICE the articles INCLUDE SUCH A RESTRICTION
The restriction
cannot prevent amendment entirely
but can ignore
the 75% barrier
Alteration in the best interests of the company
Setting aside shareholder resolutions - best interests of company per reasonable person
Generally, shareholders decide whether an alteration is in the company's best interests
However,
if shareholders make an alteration no reasonable person would see as benefiting the company
, the
shareholder who didn't vote for it
can
challenge it by making an application to Court
for it to be
set aside
Court examines if amendments was made
bona fide
(genuinely/legitimately in good faith) in the
best interests of the company as a whole
Minority interests and shareholder amendments
However, the
alteration must not discriminate unfairly between different groups of shareholders
. The court will look at whether the
benefit from the alteration
is something that
any reasonable shareholder
could also enjoy, rather than
favouring only certain shareholders over
others.
Cannot be for
benefit of majority shareholders
over
company as a whole
If an
alteration to the articles negatively affects minority shareholders, this alone is not enough to object
, provided that the alteration was made in
good faith and
in the
best interests of the company
.
Legal Personality
Means company:
Owns property in own name
Enters into contracts in its own name
Can
borrow money
and
grant security
in its
own name
Is
taxed separately from its members
Can
sue
and
be sued
in its own name
Perpetual succession
- can carry on existence even with changes of members
The Veil of Incorporation and Lifting The Veil
Veil means shareholders cannot be pursued for company's debts
Very, very few exceptions, apart from:
Other legal provisions making shareholders/directors personally liable
Eg
if company
is formed to
carry out fraud
or
avoid an existing obligation
Employee had a non-solicitation clause in his contract.
After leaving, he set up a limited company to solicit ex-employer’s customers.
He was a director and shareholder of the new company.
The company's actions would still breach the non-solicitation clause.
Eg If PLC trades without trading certificate
Directors can be held personally liable for any losses
Fraudulent and Wrongful trading (sort of)
If Director causes company to trade
while knowing
company is
insolvent
, the director may be charged with
civil offence
of
wrongful trading
OR
criminal offence
of
fraudulent trading
, incurring
personal fines
and
other penalties
Group Accounts
Requirement
: If companies are in a
group (parent and subsidiaries
), they
may need to prepare group consolidated accounts
to reflect the link between the companies.
Liabilities
: Subsidiary companies are not liable for each other's debts, and the parent company is not liable for the debts of its subsidiaries.
Example
A man starts a food delivery business and expands by creating a parent company and multiple subsidiary companies (one for each car/driver).
After forming six companies (e.g., Foodie Dispatch Ltd, Foodie Delivery 1 Ltd), he needs to prepare group consolidated accounts for the parent and all subsidiaries.