Chapter 1: Different business models and introduction to companies Flashcards

Question

2.4 Different types of company Private Limited Company

Answer 1

Section 4(1) CA 2006 states that ‘a private company is any company that is not a public company’. Private companies’ names end with the word ‘Limited’ or ‘Ltd’ (s 59(1)). The vast majority of companies in England and Wales are private companies, and it is this type of company that this module focuses on.

Answer 2

Most common type of company. No minimum share capital requirements. Prohibited from offering shares to the public Can be formed by one person

Answer 3

No share capital Liability of members is limited to the amount that they agreed to contribute in the event of a winding up Membership is not transferable These companies are relatively rare

Answer 4

The liability of the members is unlimited; These companies are rare

Answer 5

Public limited company (plc): Section 4(2) CA 2006 states that a ‘public company is a company […] whose certificate of incorporation states that it is a public company. A public company’s name ends with the words ‘Public Limited Company’ or ‘plc’ (s 58(1)). For practical purposes, the main difference between a public and a private company is that generally only public companies can offer their shares to the public, eg through public listing on a recognised stock exchange such as the London Stock Exchange, therefore permitting trading to take place in its shares. Public companies are also subject to more onerous regulatory requirements (eg public companies are not able to pass shareholder resolutions by written resolution – you will explore this later in the module).

Answer 6

Can offer their shares to the public Need a minimum of two directors Minimum share capital requirement of £50,000 (s 763 CA 2006) Requires a trading certificate before it can trade (s 761 CA 2006)

Answer 7

Only public companies can be listed. Not all public companies are listed. ‘Listed’ means admitted on a regulated investment exchange such as the London Stock Exchange

Answer 8

To enable a company to raise greater funds by offering shares to the public at large, a private company’s shareholders may decide to convert the company into a public limited company (plc). After converting to plc status, a company may seek a listing of its shares on a stock exchange. Companies whose shares are listed on the London Stock Exchange are known as ‘listed companies’ (but note that it is not the company that is listed, but its shares). You should not therefore assume that a company whose name ends in ‘plc’ is a listed company.

Answer 9

As already mentioned, the name of a private company will end in ‘Limited’ or ‘Ltd’ and the name of a public company will end in ‘Public Limited Company’ or ‘plc’.

Answer 10

There is no requirement for a private company to have any specified minimum amount of share capital. A private company could be incorporated with just one share of 1p. In practice many companies are incorporated with a share capital of £1, that is with one share that has a nominal value of £1. A public company must have a share capital with a nominal value of at least £50,000 (or the euro equivalent), of which at least one quarter must be paid up (this means paid at the time of purchase) (s 586 and s 763 CA 2006).

Answer 11

A private company need only have one director, and a public company must have a minimum of two directors (s 154 CA 2006).

Answer 12

A private company may choose to have a company secretary but it is not obliged to have one (s 270(1) CA 2006). If a private company does not have a company secretary, the directors (or any person the directors authorise) may do anything that the secretary is required or authorised to do (s 270(3)(b) CA 2006). A public company must have a company secretary (s 271 CA 2006), and the person appointed to that post must have the requisite knowledge and experience and hold one of the qualifications specified in s 273(2) CA 2006.

Answer 13

A public company is required to have one annual general meeting (AGM) each year (s 336 CA 2006). Private companies are no longer required to hold an AGM, although they may do so if they wish. An AGM provides members who are not directors with an opportunity to question directors, particularly on the issue of a company’s finances.

Answer 14

Public companies are potentially able to offer their shares to the public. For this reason they are subject to a higher level of regulation than private companies. As well as the requirements of the CA 2006, further legislation governs public companies.

Answer 15

* In this element you have looked at the features of private limited companies, public limited companies and listed companies. * Private limited companies are the most popular business model. A key advantage of this business model is limited liability. You will learn more about this as you progress through the module. * The majority of companies in England and Wales are private limited companies. * Public limited companies are able to offer shares to the public and can also seek a listing of their shares on a recognised stock exchange. They have more stringent regulatory requirements than private companies. * Listed companies are a small subset of public limited companies, being those that have their shares listed on a recognised stock exchange.

Answer 16

CA 2006 came into force on 1 October 2009. Prior to this, companies were governed by the principles of the Companies Act 1985 (CA 1985). In practice you will deal with many companies incorporated prior to CA 2006 therefore it is important to understand some of the provisions of CA 1985 which still affect those companies. CA 1985 required companies to have two constitutional documents: the Articles of Association and the Memorandum

Answer 17

Under s 17 CA 2006 the memorandum no longer forms part of the company’s constitution - it is only required as part of the procedure to register a company at Companies House. The memorandum of a company incorporated under CA 2006 simply amounts to a declaration on the part of the company’s subscribers ie that the first members of the company wish to form a company and agree to become members of that company (s 8 CA 2006).

Answer 18

Companies could set out constitutional restrictions in their memorandum and were required to include an objects clause setting out the purposes for which the company has been formed. Acting outside of this purpose was described as acting ultra vires or outside the company’s capacity.

Answer 19

Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company’s Articles. So the ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles. You will learn more about this in the next Topic.

Answer 20

For older companies that were incorporated under the CA 1985, s 28 CA 2006 provides that any provisions in a memorandum must be treated as provisions of the company’s Articles. This includes the objects clauses included in the memoranda of all CA 1985-incorporated companies. Under CA 2006, therefore, the objects clause of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause.

Answer 21

All companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company.

Answer 22

* The number of directors required to transact business (both to form a quorum at board meetings and to take decisions at board meetings); * The method of appointment of directors; * The powers of directors; * How board meetings are to be conducted; * Any special rights attaching to shares; * How shareholder meetings are to be conducted; and * How and to whom shareholders may transfer their shares.

Answer 23

A company’s Articles must be interpreted in the light of relevant legislation. There is considerable scope for overlap between the procedures set out in CA 2006 and those that may also be contained in the company’s Articles. The Articles must comply with the minimum provisions of CA 2006 (this is known as the Legality Test). A company may in certain circumstances provide a procedure in its Articles which is more onerous than that contained in CA 2006.

Answer 24

(a) Model Articles (MA)/Table A The Secretary of State has prescribed MA for different types of company (under s 19 CA 2006). If a new company does not register Articles at Companies House, s 20(1) CA 2006 provides that the relevant MA will constitute the company’s Articles in default. (b) Amended MA: Not all of the provisions contained in the MA are suitable for all companies. Many companies therefore choose to adopt the MA as their Articles, but elect to exclude, or modify the effect of, some of its provisions. (c) Tailor made Articles The third option available to a client is to instruct a solicitor to draft Articles which are tailormade for the particular company concerned. Law firms often have a precedent form of Articles that can be adapted for this purpose. However, generally this is a very timeconsuming process and therefore costly for the client, although the end product can often be more useful to them in the long run. Most small companies will prefer to adopt MA, subject to certain amendments.

Answer 25

Once a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006). A special resolution is a decision of the shareholders. You will consider the different types of shareholder resolutions later in this module. Entrenched Articles can nevertheless always be amended by the agreement of all of the members, or by a court order (s 22(3) CA 2006). There is a great deal of case law relating to the alteration of a company’s Articles. The basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656). In Shuttleworth v Cox [1927] 2 KB 9 the court held that an amendment to the Articles is not valid if no reasonable man could consider it to be for the benefit of the company.

Answer 26

The defendant company had altered its articles by introducing a provision which gave the directors power to buy out, at a fair price, the shareholding of any member who competed with the company’s business. The plaintiffs, who were minority shareholders and who carried on a competing business, unsuccessfully challenged the validity of the alteration. The Court of Appeal found that the alteration was initiated in good faith and bona fide in the interests of the company and therefore allowed this to stand to protect the company.

Answer 27

The amendment of a company’s articles to permit the shares of a minority shareholder to be compulsorily acquired under a takeover offer was held to be valid as it was consistent with the terms of a shareholders’ agreement. It was not open to challenge on other grounds such as unfair prejudice. The Court of Appeal held that the amendment was no more than a ‘tidying up exercise’ which had been consistent with the initial bargain of the founding members, which included the appellant himself. In the absence of any finding of bad faith, improper motive or irrationality, there was no basis for the challenge to the validity of the amendment.

Answer 28

The nature of the contract established by the Articles of a company is set out in s 33(1) CA 2006, which provides that the provisions in the company’s Articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions.

Answer 29

The predecessor to s 33(1) CA 2006 (namely s 14 CA 1985) has been the subject of a large amount of case law. The generally established rule is that the 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 Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881 (Ch)).

Answer 30

Courts have been willing to prevent a company from infringing its members’ rights in breach of the Articles by granting 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. 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).

Answer 31

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.

Answer 32

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).

Answer 33

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.

Answer 34

* Although previously of constitutional significance, in companies incorporated since CA 2006 came into force the company’s memorandum is now merely a formality. * The main constitutional document for a company is its Articles. * The provisions in the company’s Articles bind the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions. * Companies may have the standard Model Articles under CA 2006 or these may be amended. The Articles must always be interpreted alongside CA 2006.

Answer 35

A client wishing to start a business through the medium of a company can either incorporate a new company from scratch or purchase and then convert an existing shelf company to conduct its business.

Answer 36

In order to incorporate a new company from scratch, an application must be made to the Registrar of Companies to have the new company registered at Companies House. This method was traditionally slightly slower than purchasing a shelf company. However, it is now possible to incorporate a company online and many law firms are now increasingly making use of this facility rather than using the shelf company procedure.

Answer 37

* A copy of the company’s memorandum; * Articles prescribing regulations for the company (if the company does not intend to use the Model Articles (MA)); * The fee – the required fee for incorporation can be found on the Companies House website. * An application for registration (Form IN01) stating the company’s proposed name, whether the company’s registered office is to be situated in England and Wales, Scotland or Northern Ireland, whether the liability is limited and whether the company is to be private or public

Answer 38

- A statement of capital and initial shareholdings (s 10 CA 2006) (where the company is to have a share capital and is not a company limited by guarantee). - A statement of the company’s proposed officers (directors, company secretary) (s 12 CA 2006). - If the company is to be limited by guarantee, details must be given of the guarantee (s 11 CA 2006). - It must also contain a statement of compliance stating that the requirements of CA 2006 have been complied with (s 13 CA 2006).

Answer 39

* The name of the company (although this may be changed at a later date); * The company’s registered number. The company’s registered number will never change and must therefore be used when drafting any legal agreements to which the company is a party to ensure that the company can be correctly identified following future changes to its name; and * The date of incorporation. The company becomes a legal entity (s 16(3)) from the date of incorporation set out in the certificate of incorporation (s 15 CA 2006).

Answer 40

A shelf company is one that has been set up in advance by a company registration agent or law stationer. Many firms of solicitors also operate an in-house service that sets up shelf companies for sale to clients. The greatest advantage of using the shelf company method to set up a company has been that it can be done quickly, as it avoids the need to draft and submit incorporation documentation. With the advent of online incorporation services, the difference in speed between converting a shelf company and incorporation from scratch is negligible.

Answer 41

* Name - most shelf companies will have a name that has no connection with your client or its business (eg ABC 123 Ltd). * Articles - it is common for a shelf company to have been incorporated with MA (though some firms and registration agents incorporate their shelf companies with a different form of Articles drafted in-house). * Registered office - you may need to substitute your client’s chosen address for the first registered office in accordance with s 87(1) CA 2006.

Answer 42

- The share(s) held by the subscriber(s) (the first members) is/are transferred to your client; - Your client’s representatives are appointed as director(s) and the company secretary (if there is to be one); and - The first director(s) and company secretary (if there was one) resign from their positions. Purchasing a shelf company has traditionally been regarded as the cheaper way to form a company for your client although, because your client is likely to instruct you to put changes into effect.

Answer 43

* A company may be incorporated from scratch directly with Companies House or converted from a shelf company. * Where a company is incorporation from scratch, the following documents must be sent to Companies House: - Fee - Form IN01 - Memorandum - Articles (unless incorporating using Model Articles) * Where a company is converted from a shelf company, meetings of the directors and shareholders must be held in order to make the necessary changes.

Answer 44

This section covers the roles and features of some of the key different stakeholders in a company: * Shareholders * Directors * Persons with significant control

Answer 45

The owners of a company are its shareholders, otherwise known as its members. Shareholders invest money (share capital) in the company in return for a share in the ownership of the company, evidenced by a share certificate. Shareholders’ rights such as voting rights and rights to a dividend are set out in the Articles (and sometimes also in a shareholders’ agreement.

Answer 46

Membership begins when the member’s name is entered in the company’s register of members (s 112(2) CA 2006). The first shareholders of the company are its subscribers under s 8 – so called as they subscribe to the company’s memorandum of association.

Answer 47

A shareholder need not be a human being. A company has a separate legal identity and can, amongst other things, own property in its own name. A company can therefore own shares in another company. Where company A owns all the shares in company B, company B will be a wholly owned subsidiary of company A. If company A owns some, but not all, of the shares in company B, company B may still be a subsidiary of company A but not a wholly owned subsidiary. Section 1159 CA 2006 gives the definition of a subsidiary.

Answer 48

A share is often described as a ‘bundle of rights’. By investing in the share capital of any company, the investor (shareholder) becomes a part owner of the company and will often have voting rights in shareholder meetings. All rights and entitlements in relation to shares of all classes are set out in the company’s Articles. The most common type of share is known as an ordinary share

Answer 49

Shares in a limited company having a share capital must have a fixed nominal value. Common nominal values for ordinary shares are 1p, 5p or £1. The nominal (or ‘par’) value of a share is the minimum subscription price for that share. It represents a unit of ownership rather than the actual value of the share

Answer 50

A share may not be allotted/issued by a company at a discount to its nominal value. A share may however be allotted/issued for more than its nominal value, and the excess over nominal value is known as the ‘premium’. The market value of a share (ie the amount at which a share may be traded between shareholders) will often be much higher than the nominal value of the share.

Answer 51

The total amount in value (nominal and premium) of all shares in issue at any time is known as the ‘issued share capital’. This is the amount of share capital that will be shown in the company’s accounts.

Answer 52

It is not always necessary for shareholders to pay the full amount due on their shares immediately. The amount paid is known as the ‘paid-up share capital’. The amount outstanding can be demanded by the company at any time. Once demanded, the payment has been ‘called’.

Answer 53

A company’s issued share capital is made up of: * Shares purchased by the first members of the company, known as the ‘subscriber shares’; and * Further shares issued after the company has been incorporated, to new or existing shareholders. New shares can be issued at any time provided that the correct procedures are followed.

Answer 54

‘Allotment’ is defined in s 558 CA 2006. Shares are said to be allotted when a person acquires the unconditional right to be included in the company’s register of members in respect of those shares. The term ‘allotment’ is often used interchangeably with ‘issue’ of shares but the two have different meanings. There is no statutory definition of ‘issue’ but it has been held that shares are only issued, and only form part of a company’s issued share capital, once the shareholder has actually been registered as such in the company’s register of members, and his or her title has become complete.

Answer 55

A company may create different classes of share. For example, there may be two classes of ordinary share, each carrying different voting rights, or perhaps one carrying no voting rights at all. There may also be preference shares, which entitle the holder to a preferential right, such as the first claim to a dividend or the return of capital (ie the return of money the shareholders had invested in their shares) on a winding up.

Answer 56

Class rights may be relevant when determining which shareholders can vote at general meetings and whether some shareholders have enhanced voting rights. It is also important to examine class rights where it is proposed to vary the terms of the rights attaching to a particular class of share.

Answer 57

The total nominal value of the shares held by a shareholder is equal to the total amount of that shareholder’s liability to contribute to the assets of the company if it becomes insolvent. This means that, if all the shareholder’s shares are fully paid, he will not have to contribute any further amount to the company on insolvency. This is the way in which a shareholder’s liability is said to be ‘limited’

Answer 58

Every UK company is required to identify its ‘people with significant control’ (PSC). Broadly, this term refers to any individual (ie human being) who: * Owns more than 25% of the shares or voting rights in the company; * Has the power to appoint or remove a majority of its board of directors; or * Otherwise exercises ‘significant influence or control’ over the company.

Answer 59

Every company must maintain a register of its PSCs, and this register must be open to public inspection (see ss 790A-790ZG CA 2006). The intended purpose of the PSC register is to increase transparency so as to help combat tax evasion, money laundering and terrorist financing. The PSC register must be filed at Companies House along with a company’s confirmation statement (annual statement confirming the company’s constitution and details)

Answer 60

The directors are responsible for the day-to-day management of the company. Directors are agents of the company and their conduct is governed by statute and the common law principles of agency. They also owe fiduciary duties to the company. These duties have been codified by the CA 2006. Some fundamental decisions cannot be taken by the directors but are reserved for the shareholders, for instance the making of changes to the company’s Articles under s 21 CA 2006.

Answer 61

Under s 154 CA 2006: * A private company must have at least one director; and * A public company must have at least two directors. At least one director must be a natural person (s 155 CA 2006). This is intended to ensure that for all companies, there will always be one individual in place to aid accountability. The Government has enacted legislation providing that all corporate directors (that is, directors which are, themselves, companies) will be prohibited subject to certain exceptions so that, as a general rule, all directors will have to be individuals. The role of a director is always separate from that of a shareholder though in small private companies they are often the same people. In this situation it is important to consider the two roles as separate – that individual wears different ‘hats’ when acting as a director and as a shareholder.

Answer 62

There are various different types of director: executive directors, non-executive directors, shadow directors, de facto directors and alternate directors. A brief overview is set out below. A key point to understand is that all of these directors owe the same duties to the company and are subject to the same responsibilities under CA 2006 and also under the insolvency legislation (Insolvency Act 1986).

Answer 63

An executive director is a director who has been appointed to executive office eg finance director, managing director. Such a director will generally spend the majority, if not all, of their working time on the business of the company and will be both an officer and an employee of their company (pursuant to a service contract).

Answer 64

A non-executive director is also an officer of the company, but will not be an employee of the company. Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders.

Answer 65

Shadow directors: Under s 251 CA 2006 a ‘shadow director’ is defined 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 by reason only that the directors act on advice given by them in a professional capacity (s 251(2) CA 2006). This legislation is designed to prevent for example a disqualified director from getting around the prohibitions placed on them and still being involved in the running of a company, by running it and acting behind the scenes.

Answer 66

Companies may provide in their Articles for the appointment of alternate directors. An alternate director attends board meetings and acts in the director’s place, if the actual director is incapacitated, otherwise engaged or out of the country. An alternate director is usually either a fellow director of the company or someone who has been approved by a resolution of the board of directors.

Answer 67

A de facto director is someone who assumes to act as a director but has in fact not been validly appointed and therefore is not a de jure (legal) director.

Answer 68

The CA 2006 does not stipulate a procedure for the appointment of directors, so this is something that will be governed by the Articles of the company. The MA deal with the matter simply, as follows: ‘Art 17(1): ‘Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director: (a) by ordinary resolution [of the shareholders], or (b) by a decision of the directors.’ The second of these two procedures is easier to put into effect than the first and therefore, unless there is a particular reason for using the ordinary resolution procedure, it is usual for the board of directors to appoint new directors. Of course, companies may not have followed the approach set out in the MA. They may instead have customised articles on this point which you must always check before advising on the appointment, retirement or removal of directors.

Answer 69

An executive director will be an employee of the company and should be given a written contract of employment (‘service contract’), setting out the terms and conditions of employment including duties, remuneration package, notice provisions etc. The effect of Art 19 MA is that the terms of an individual director’s service contract, including remuneration, are for the board to determine. As a general rule, a director’s service agreement will only require the approval of a resolution of the board of directors. However, shareholder approval may be required to enter into long-term service contracts.

Answer 70

Section 188 CA 2006 applies where a service contract provides for a director’s employment to have a ‘guaranteed term’ which is, or may be, longer than two years. If shareholder approval is not given, then the term incorporated into the service contract in contravention of s 188 CA 2006 is void under s 189(a) CA 2006. In addition, under s 189(b) CA 2006, the service contract will be deemed to contain a term entitling the company to terminate the contract at any time, by the giving of reasonable notice

Answer 71

* Shareholders are the owners of the company. A company can itself be a shareholder in another company. * A company may have different classes of shares. The rights attaching to each class of shares will be set out in the company’s Articles. * All companies must maintain a register which is filed at Companies House of Persons with Significant Control. This generally means shareholders with over 25% of the voting rights in the company. * Directors are responsible for the day-to-day management of the company and are agents of the company. * There are different types of director, but all are governed by the CA 2006.

Answer 72

Since a company is an artificial person, it is unable to make decisions or carry out company business itself. Instead, decisions are made on behalf of the company by its directors and its shareholders. Decisions of the directors are taken by passing Board Resolutions in Board Meetings (BM). Decisions of the shareholders are taken by passing Shareholder Resolutions, either in a meeting of the shareholders (referred to as a General Meeting (GM)) or in writing. There are two different types of shareholder resolution: Ordinary Resolutions and Special Resolutions.

Answer 73

The standard day to day decisions of the company are taken by its board of directors in board meetings. Unless the power to take a particular decision has been delegated by the board to a particular director or committee of directors, a decision of the board of directors of a company must be taken in accordance with the procedure set out in the company’s Articles.

Answer 74

Art 7(1) MA provides that any decision of the directors can be made by majority decision at a meeting of the directors. This is the usual procedure for directors’ decision-making. Decisions at BMs are taken by majority vote on a show of hands

Answer 75

The chairman is chosen by the directors from amongst themselves (Art 12 MA). Therefore, using the same example, if a resolution fails because there are equal votes, ie two for and two against, the chairman has considerable power. They can tip the balance. Furthermore, in a company with only two directors, a chairman with a casting vote is effectively able to take decisions alone. For this reason the company’s members may decide to amend the Articles by removing the chairman’s right to a casting vote in some circumstances.

Answer 76

The number of people required to attend a meeting in order for the meeting to be valid is known as the quorum. If a sufficient number of people attend the meeting then the meeting is said to be quorate. Art 11 MA confirms that no proposal may be voted on at a BM unless a quorum is participating in the meeting. Art 11(2) states that the quorum for a directors’ meeting may be fixed from time to time by a decision of the directors but it must never be less than two and, unless otherwise fixed, it is two.

Answer 77

Art 8 MA makes provision for directors to make decisions, by unanimous agreement, without having to hold a BM. Such a decision requires all the directors to indicate to each other that they share a common view on the matter and they can indicate this ‘by any means’ so this can include, for example, a written resolution or a telephone conversation (but note that a written record of the decision must be kept – Art 15). However since it is easy to hold a BM under the MA, in practice the preferred procedure for decision-making by directors is by resolution in a BM.

Answer 78

The requirements in the MA as to decision-making by directors do not apply to companies with only one director. In such companies the sole director can take decisions on his own (Art 7(2) MA).

Answer 79

Some fundamental decisions cannot be taken by the directors until they receive authorisation from the shareholders to do so, for instance: * The making of changes to the company’s constitution; * The approval of certain transactions between the directors and the company; and * The formal declaration of dividends.

Answer 80

* Ordinary resolutions; and * Special resolutions Where the CA 2006 does not specify the type of resolution to be used then an ordinary resolution is sufficient unless the company’s Articles require a higher majority (s 281(3) CA 2006).

Answer 81

Ordinary resolution: An ordinary resolution of the members of a company means a resolution that is passed by a simple majority (more than 50% of votes are cast in favour of the resolution) (s 282(1) CA 2006). Special resolution: Under s 283(1) CA 2006 a special resolution requires a majority of not less than 75%.

Answer 82

Shareholders may vote at a GM on a show of hands or on a poll. When the shareholders vote on a show of hands each shareholder who is present at the meeting will be entitled to one vote, regardless of the number of shares held by that shareholder (provided the share has voting rights under the Articles). When the shareholders are voting on a poll, every shareholder has one vote in respect of each share held by him (s 284 CA 2006). The votes are counted out of the shareholders who are present and voting at the meeting.

Answer 83

A member of a company is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote at any GM, in his place (s 324 CA 2006).

Answer 84

Show of Hands: If the shareholders were to vote on a show of hands at a GM of PGDL Publications Ltd then at least three of the shareholders would need to vote in favour of an ordinary resolution in order for the resolution to be validly passed as the resolution must have the support of more than 50% of the shareholders who are present and voting at the meeting.

Answer 85

Poll: If the shareholders were voting on a poll then Archie could pass the ordinary resolution on his own, even if the other three shareholders were to vote against the resolution, because he holds more than 50% of the total number of shares in PGDL Publications Ltd. On the other hand, if Archie were to vote against the ordinary resolution the other three shareholders would not be able to pass it even if they all voted in favour of it, because, together, they hold only 45% of the shares

Answer 86

Show of Hands: If a special resolution were proposed at a GM of PGDL Publications Ltd and the shareholders were to vote on a show of hands, the resolution would be validly passed if three of the four shareholders (ie 75%) voted in favour of it.

Answer 87

If the shareholders were voting on a poll Archie could not pass the special resolution on his own, but Archie and Grace together could pass the special resolution even if Clare and Saad both voted against it. As before, if Archie voted against the special resolution the other three shareholders would not be able to pass it since they hold only 45% of the shares between them.

Answer 88

According to s 318(2) CA 2006 the quorum required for a GM is two qualifying persons, and qualifying persons include proxies and representatives of corporate shareholders. As you know, a company can hold shares in another company. In fact very many companies have corporate shareholders because they are subsidiaries within a group of companies. Section 323 CA 2006 provides that if a corporation is a member of a company, it may by resolution of its directors authorise a person or persons to act as its representative at any meeting of the company.

Answer 89

Under s 318(1) CA 2006 where a company has only one member, one qualifying person present is sufficient to constitute a quorum for a GM.

Answer 90

Under s 281 CA 2006, private companies may also pass a shareholders’ resolution without holding a General Meeting by using the written resolution procedure (subject to s 288 CA 2006). When votes are cast in writing, the relevant majority is counted out of all the shareholders entitled to vote on the resolution (rather than those present and voting at the meeting as for votes cast at a general meeting).

Answer 91

Note that a written resolution is a method of voting, not a type of vote. Shareholders must always vote by ordinary or special resolution, but they may do this either at a meeting or (for private companies), in writing as a written resolution. There are two resolutions that may not be passed as written resolutions (s 288(2)), which are: * Removal of a director under s 168; and * Removal of an auditor under s 510. For both of these resolutions, the person concerned has the right to address the shareholders in general meeting.

Answer 92

* Decisions are made on behalf of the company by directors and shareholders. * Directors make decisions by passing board resolutions in board meetings. * Shareholders make decisions by passing shareholder resolutions (ordinary and special resolutions) in general meetings or by written resolution. * Shareholders can vote either on a show of hands (where each shareholder has one vote) or by poll vote (where each shareholder has one vote per share held). * An ordinary resolution is passed by a simple majority (more than 50%) of shareholders voting in favour. * A special resolution is passed by 75% or more shareholders voting in favour.

Answer 93

From time to time however, it will be necessary for specific authority to be given to a director (perhaps in connection with the execution of documentation on behalf of the company in respect of an especially important transaction). Alternatively, a matter may need to be approved by the company’s shareholders.

Answer 94

Olivia is a director of Ready Rentals Ltd (RRL). She wishes RRL to contract to purchase a new fleet of rental cars. RRL’s board of directors has the power to enter into such a contract without reference to RRL’s shareholders. Olivia therefore calls a BM of RRL, at which RRL’s directors review the terms of the proposed contract, resolve that RRL should enter into the contract, and authorise Olivia to sign the contract on behalf of RRL. No shareholder meeting is necessary. Art 9 MA gives the directors flexibility in regulating their meetings, providing that any director may call a BM or require the company secretary (if the company has one) to do so at any time.

Answer 95

In the case of Browne v La Trinidad (1887) 37 ChD 1, the court held that reasonable notice of the BM was necessary, and that this would be whatever notice is usual for the directors to give. Therefore, if all of the directors are in the same building, the meeting could be called almost immediately, if such notice is customary for the directors. If the directors are in various buildings or in other parts of the country, then a couple of days’ or even a couple of weeks’ notice may be required.

Answer 96

Directors may not validly make a decision on company business unless a minimum number of directors entitled to vote are present at the time the meeting takes place. Article 11(2) MA requires a minimum of two directors to be present for the meeting to be quorate (unless the articles provide otherwise).

Answer 97

Board resolutions are passed by majority vote on a show of hands. Each director has one vote. As we saw, the chairman may have a casting vote to prevent deadlock, depending on whether this is provided in the company’s Articles.

Answer 98

There will need to be a referral to the shareholders of the company in the following situations: (a) Where a matter is outside the powers of the directors and must be approved by a resolution of the shareholders (b) Where a matter is within the powers of the directors but requires the prior approval of the shareholders before the directors can be authorised to act.

Answer 99

If a shareholder resolution is required then there must be a shareholders’ meeting (also referred to as a ‘general meeting’ or GM). 14 day clear notice: It is the board’s responsibility to convene (ie call) general meetings. The board must decide when the GM is to take place. Section 307 CA 2006 prescribes minimum notice periods for GMs. For private companies, 14 clear days’ notice is required for the calling of a GM (s 307(1) CA 2006). In this paragraph, the word ‘notice’ refers to a period of time (between the board’s act of convening a GM and its actually taking place). Inform when (and where) it is taking place, by giving notice to the shareholders. In this paragraph, the word ‘notice’ refers to a document inviting shareholders to attend the GM, drafted in accordance with relevant provisions of CA 2006. The directors must approve the form of the notice of the GM (to confirm that it complies with the relevant statutory requirements) and then they must authorise its circulation to the shareholders.

Answer 100

The quorum for a GM is generally two shareholders (s 318(2) CA 2006) (although this is one for single member companies (s 318(1)). Notice: You should note that the word ‘notice’ is used above to bear two distinct meanings and that the expression ‘notice of a GM’ can, therefore, depending on its context, refer either to: * A document sent by the directors to the shareholders, announcing that a GM will take place; or * A period of time, which elapses between the directors’ act of calling a GM (by circulating the notice document to the shareholders) and the GM itself taking place

Answer 101

After the GM has taken place, a second BM will be necessary, to enable the directors to implement the matter on which the shareholders have voted. The net effect is that, if a company wishes to put into effect any change or business decision of a type for which shareholder approval is needed, there will be a sequence of three meetings (BM, GM, BM). This sequence is necessary to (i) allow the directors at the first BM to propose the changes or business decision and convene a GM, (ii) obtain shareholder approval in the GM, and (iii) allow the board of directors, at the second BM, to implement the shareholders’ decision(s).

Answer 102

After the GM, another BM will be necessary as it is the board’s responsibility to ensure that the shareholders’ decision is implemented and that all necessary follow-up action is taken. In this example, the CA 2006 requires the company to register its new articles at Companies House.

Answer 103

In the normal course of events, the process of holding a GM called by the board will involve four distinct stages. Step 1 BM – a BM is held to decide on the issues to be considered at the GM, to resolve to convene the GM, to approve the form of notice for the GM and to authorise its circulation. Step 2 GM - on the day appointed, the GM will take place and the shareholders will vote on the resolutions set out in the notice. Step 3 BM – a further BM will be held and the directors will be informed as to how the shareholders voted at the GM and whether the resolutions were passed. The directors will then authorise the company secretary (if there is one). Step 4 Post meeting matters (PMM) - the post-meeting matters will then be carried out by the company secretary (if the company has one) or a director (if not).

Answer 104

GMs may be called on less than the usual amount of short notice if sufficient members agree. Section 307(5) CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by a majority in number of the members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM. This percentage may be increased to up to 95% by a provision in the company’s articles of association but there is no such provision in the MA. Therefore, where companies have few shareholders, it is often possible for meetings to be held at short notice. If all the shareholders are available at the time the directors decide to convene a GM, the following sequence of events may be possible. All of this can be done in well under an hour.

Answer 105

Board resolutions: Art 8(2) MA allows directors to take decisions in the form of a directors’ written resolution provided the prescribed procedure is followed. This is uncommon in practice. Ordinary and special resolutions Under s 281 CA 2006 only private companies may pass a shareholders’ resolution by way of a written resolution. Section 282 CA 2006 states that a written ordinary resolution can be passed by a simple majority of the total voting rights of eligible members. Sections 283 CA 2006 state that a written special resolution can be passed by a majority of members representing not less than 75% of the total voting rights of eligible members. Section 284 CA 2006 states that, where a company has a share capital, every member has one vote in respect of each share held by him when voting on a written resolution. Section 288 CA 2006 provides that resolutions to remove a director or auditor from office may not be passed by way of written resolutions.

Answer 106

Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days of their being passed. All special resolutions must be filed as they form part of a company’s constitution (ss 17(b) and 29(1)(a) CA 2006), as do a few particular ordinary resolutions specified by the relevant provisions of the CA 2006. Copies of any amended articles must also be filed (s 26(1) CA 2006), together with various company forms. The CA 2006 refers in numerous places (eg s 87(1) CA 2006) to requirements for notice of certain events and/or decisions to be given to the Registrar of Companies. The directors will also be responsible for updating the statutory books, eg the registers of members and directors, and the BM and GM minute books. If the company has a company secretary they will update the statutory books.

Answer 107

If the correct procedures are not followed, then resolutions purportedly passed at meetings may be invalid. Similarly, if a meeting is not quorate, then resolutions will not be validly passed, nor will they be valid if the incorrect type of resolution is used. There may also be criminal sanctions. For example, ss 248(3) and (4) CA 2006 state that if a company fails to record minutes of meetings in the relevant statutory books, every officer in default is liable to a fine.

Answer 108

* Most of the day to day running of a company is carried out by directors. Individual directors can be delegated powers by the Board to enter into contracts etc. * Where one director does not have power to act alone, the directors will call a BM in order to pass a BR. * BMs can be called on reasonable notice and the quorum is generally two. * Where shareholder approval is necessary, directors at a BM will call a GM. 14 clear days’ notice is necessary unless the short notice procedure is used. The quorum for a GM is usually two. * Where shareholder approval is necessary, the sequence of events is therefore: BM, GM, BM, PMM. * As an alternative to holding meetings, private companies may choose to pass resolutions in writing (written resolutions). * If the correct procedures are not followed, any resolutions passed may be invalid and there may be criminal sanctions.