16: Company Law Flashcards
(25 cards)
16.2.1: what are promoters and what are their duties?
Promoters are people who help set up a company and handle preparations before it exist
Two duties :
1. Duty of care and skill
2 Fiduciary duty ( act honestly, no secret profits )
- if they make secret profits, they must disclose them or face legal action
16.2.1.2: Explain pre-incorporation contracts
Contracts made before the company exist are not binding on the company
Promoters are personally liable unless stated otherwise
Eg: Phonogram Ltd v Lane
16.2.1.: Do they have third party rights
A future company can be given rights in a contract but not obligations
- useful in making sure the company can later enforce a contract
16.2.2: What is a shelf company?
A company that has already been formed but hasn’t done business
- you can buy one to avoid the hassle of setting up a new company
- often used to look more established to clients
16.2.3: Requirement of registering a new company ?
- Memorandum of association: shows agreement to form a company and take at least one share
- Application for registration: name, registered office, limited by shares/guarantee, private/public etc
- Company name rules: unique, ends with limited/Ltd/Plc, certain words require approval ( eg: university), displayed name on premises and documents
16.2.3.1-8: What other features of a company
- You can’t register a name that infringes another’s goodwill ( eg: Ewing v Buttercup)
- must declare in which UK jurisdiction the company is based
- Limited company: Owners liability is capped
1. By shares: shareholders risk what they invest, 2: by guarantee: members promise to pay a set amount of the company fails - unlimited company: owners have full liability for debts
- statement of capital and initial shareholdings : shows total, value and ownership of shrew
- statement of proposed officers: must list directs, secretary is optional for private, required for public
- Articles of association: these are companies internal rules
16.3: Explain the key constitutional document under CA 2006
Main document: Articles of association - a signed and numbered rule book for running the company
Other docs: special resolutions passed by shareholder, unanimous agreements between members
These documents control how the company operates internally
16.3: what do Model Articles include?
Set by Secretary of State, often adopted by private companies
1. Company name and object restriction
2. Director powers and appointments
3. Meetings and Voting rights
4. Dividends, accounts, share issuance and transfer
16.3.2.1: What are the documents and objects of companies under CA 20l6
Enforced in 2009 2 documents: Memorandum of Association ( external relations) & Articsl of Association ( internal relations)
Company objects (What a company can do):
- Had unlimited objects by default under CA 2006
- Restrictions can be added voluntarily in the Articles
- Charities and social enterprises often restrict their objects
- Usually pre-2006 companies had an objects c,AJS
— If they act beyond those objects, it’s called ultra vires
16.3.2.2: Explain companies acting beyond their powers ( ultra vires)
CA 2006 s39: A company’s act can’t be invalid just because they are beyond its stated powers
CA 2006 s40: Third parties dealing in good faith are protected, even if directors overstep powers
CA 2006 s.171: Directors must follow the company’s constitution; breaching thus can make them personally liable
Insider Transactions
- if a director or connected person involved, the company can; void the contract, require the insider to repay gains or cover loses
- exceptions if the insider wasn’t aware directors were exceeding powers, they may escape liability
16.3.3: The binding effect of Constitution
The articles act like a contract: between the company & its members, among the members themselves
Example cases:
- Hickman v Kent: Shareholder bound to use arbitration per articles
- Rayfield v Lushingtom - Directors forced to buy shares per articles
16.3.4: Requirements of the changing articles?
- Requires a special resolution ( 75% shareholder approval)
- must be m lawful, in good faith, for the benefit if the company
- Eg: Sidebottom vs Kershaw Lees: Valid to change articles to expel a competing shareholder
16.3.5: Explain entrenching provisions ?
Articles can be entrenched meaning some rules are harder to change
Entrenchment must:
- be set up on formation
- be agreed unanimously by all shareholders
- be notified to the registrar of companies
16.4: what are the 2 ways companies can raise capitals
- Selling shares ( Share capital): investors become shareholders and part owners of the company. They earn dividends ( profit payments)
- Borrowing money ( loan capital): investors become creditors and earn interest on the loan
16.4: what are the characteristics of debentures ( loans)?
- Lenders ( not members)
- Paid interest ( an expense)
- Can be secured
- Transferable
- Company can buy them back freely
- Paid back before shareholders if company closes
16.4: characteristics of shares.
- Shareholders ( members)
- Paid dividends ( from profits)
- Can’t be secured
- Transferable
- Restrictions on buybacks
- Paid after debenture holders
16.4.1: Requirements of becoming a shareholder?
- By buying shares
- Their name must be entered in the company’s register to become official
16.4.4: what are the rights of shareholders?
- Transfer shares ( if nit restricted)
- Receive dividends ( from profits only)
- Attend and vote at meetings
- Get company accounts/ financials
16.4.5: Explain issuing shares
New shares can be issued:
1. With shareholder approval
2. By directors, if if it’s a single-class private company and not restricted in articles
Pre-emption rights: existing shareholders must be offered new shares first, unless waived
16.4.6: what are the requirement ?
- Must be at least nominal value ( face value)
- Can be paid in cash or services
- Extra amount paid over face value is a premium, stored in a share premium account
16.4.8: What are the different share types ?
Ordinary shares: most common, voting rights, variable dividends
Preference shares: fixed dividends, paid before ordinary shares, often no voting rights
Redeemable Shares: Can be bought back later by the company
Treasury Shares: Bought back and held by the company, may be resold
16: what are the restrictions on buying back shares
Generally not allowed, but exceptions exist ( eg: redeemable shares, court order)
Public comapanies must always have at least £50,000 share capital remaining
16.4.9: Explain loan capital (debentures)
A debenture is a document for a loan
Can be: single loan, series of loan (equal rights), debenture stock ( public trading, like shares)
16.4.10: what is a charge?
When a company borrows ( usually through a debenture, the lender may ask for security over a company’s asset - it gives the lender a legal claim over a specific asset if the company doesn’t repay the loan
