Company Law

Question 1

When does a person become a shareholder?

Answer 1

When their name is entered in the company’s register of members as a holder of shares - s.112 CA 2006

Question 2

Who can be a director?

Answer 2

Directors can be natural persons or other companies.

But at least one director must be a natural person - s.155 CA 2006.

Question 3

What decisions must be taken by the shareholders?

Answer 3

• Making changes to the company’s constitution (articles)
• The approval of certain transactions between the directors and the company
• The declaration of final dividends

Question 4

What is the memorandum of association?

Answer 4

No longer a constitutional document - s.17 CA 2006.
Provides a snapshot of the company on incorporation.
All companies must have one - s.8 CA 2006.

Question 5

What are the articles of association?

Answer 5

The main constitutional document.
Main purpose is to regulate the relationship between the shareholders, directors and company.
All companies must have them - s.18 CA 2006.

Question 6

What are the main methods for forming a new company?

Answer 6

• Online incorporation.
• Internal company search unit within a law firm, or third party incorporation agent used by law firms.
• File paper copies at Companies House.

Question 7

What must be given to the Registrar for a company to be registered?

Answer 7

• A copy of the memorandum.
• An application stating: company name, location of registered office, liability of members, public or private, copy of articles, statement of capital and shareholdings, proposed officers and any PSCs.
• A statement of compliance (s.13)
• The fee

Question 8

What is set out by the certificate of incorporation?

Answer 8

• Name of the company
• Registered number
• Date of incorporation

Question 9

What should a company’s statutory books include?

Answer 9

• A register of directors and secretaries
• A PSC register (Part 21A CA)
• Copies of all directors’ service contracts (s.228)
• Register of members (s.114)
• Record of shareholder and board meeting minutes and resolutions (s.248 & s.355)
• Copies of charge instruments

Question 10

What changes will have to be made to a ready-made company?

Answer 10

• Name of company
• Articles of association
• Shareholders (using stock transfer form)
• Directors (by board resolution)
• Registered office
• Accounting reference date
• Auditor
• PSC register

Question 11

What is a private limited company?

Answer 11

Any company that is not a public company - s.4(1) CA.

Ends with the word Limited or Ltd - s.59.

Question 12

What is a public limited company?

Answer 12

A company whose certificate of incorporation states that it is a public company - s.4(2) CA.
Ends with the words ‘public limited company’ or ‘plc’ - s.58.

Question 13

What are the principal differences between a private and public company?

Answer 13

• Name (ltd/plc)
• Share capital: no requirement for a private company to have any minimum share capital. Public companies must have at least £50,000 (£12,500 paid up).
• Number of directors: private company needs only 1 director, while public company must have two
• Company secretary: private company is not obliged to have a secretary.
• Annual general meetings: private company is not obliged to have an annual general meeting.
• Regulation: public company subject to greater regulation.

Question 14

Which provisions are to be treated as part of the articles of association under s.28 CA 2006?

Answer 14

• Statement of authorised share capital: no longer necessary to have a cap on number of shares it may issue. This can be removed from the articles by an ordinary resolution.
• Statement of the company’s objects: may be removed by special resolution.
• Company’s name: not necessary to amend the articles if the name is changed.
• Statement that liability is limited: should always be included in the articles

Question 15

What is the legal effect of the articles of association?

Answer 15

The articles of association are binding on both the company and its members - s.33(1) CA.
But members cannot enforce any rights contained in the articles that are not relevant to their capacity as members. I.e the protection afforded to shareholders is limited.
Conflicting authority as to whether members can enforce the articles against each other directly. A shareholders’ agreement is advised.

Question 16

What restrictions are there when altering the articles?

Answer 16

Case law - any alteration must be bona fide in the interests of the company as a whole.
Statute - protection of minority shareholders (s.25(1)).
Entrenchment - specific articles may be entrenched.

Question 17

What are the different types of directors?

Answer 17

Executive directors - both a director and an employee e.g managing director, finance director etc.
Non-executive directors - not an employee. Their role is to provide independent guidance and advice.
Shadow directors - a person ‘in accordance with whose directions or instructions the directors of the company are accustomed to act’ (s.251). Not a someone acting in a professional capacity e.g a bank manager.
Alternate directors - can act in the place of an actual director in meetings.

Question 18

How is a director appointed?

Answer 18

By ordinary resolution or by a decision of the directors - Art 17.

Question 19

What powers do directors have?

Answer 19

Directors are responsible for the management of day-to-day business activity, subject to any restrictions in the articles - Art 3.

But when a director acts outside their powers in relation to a third party, the transaction is still binding on the company if the third party acted in good faith - s.40 CA.
The director may still be liable to the company for a breach of powers.

The board as a whole can delegate their powers to an individual (Art 5), but individual directors cannot delegate their duties.

Question 20

How is authority granted to a director to act on the company’s behalf?

Answer 20

S.43 CA - authority can be express or implied

Actual express authority - authority is given formally, usually using a board resolution.
Actual implied authority - authority is implied where it is normal for the agent to undertake these duties e.g finance director dealing with company accounts.

A managing director is accepted as having the authority to act alone and bind the company on routine commercial transactions.

Question 21

What are the statutory duties of a director?

Answer 21

• Duty to act within powers (s.171)
• Duty to promote the success of the company for the benefit of the members as a whole (s.172)
• Duty to exercise independent judgement (s.173)
• Duty to exercise reasonable care, skill and diligence (s.174)
• Duty to avoid a situation where he has an interest which conflicts with the interests of the company (s.175)
• Duty not to accept benefits from third parties (s.176)
• Duty to declare any direct or indirect interest in any proposed transaction (s.177)

Must be interpreted and applied in line with common law - s.170(4)

Question 22

What are a director’s common law duties?

Answer 22

Prior to CA 2006, the overriding duty was to act bona fide in the interests of the company. 
Also had a duty:
- To act for the purpose intended 
- Not to misapply company property
- To account for any secret profit

Question 23

How can the actions of a director be ratified?

Answer 23

Acts within the powers of the board can be ratified by the board.

Shareholders can ratify by ordinary resolution conduct which amounts to:

• negligence
• default
• breach of duty
• breach of trust
  s. 239(2) CA.

Question 24

Which actions of a director cannot be ratified?

Answer 24

Acts which cannot be ratified by ordinary resolution:

• act involving lack of good faith
• an illegal act
• an act done in breach of a specific procedure laid out in the articles
• an act involving a fraud on the minority
  s. 239(7) CA preserves the common law.

Question 25

How are decisions taken at board meetings?

Answer 25

Majority vote. There must be at least two directors present for the meeting to be quorate - Art 11(2).

Chairman of the board has the casting vote - Art 13.

Question 26

How are decisions taken at a general meeting?

Answer 26

Ordinary resolution (more than 50% of votes) or special resolution (not less than 75% of votes).

Where the CA does not specify the type of resolution needed, then an ordinary resolution is sufficient.

Votes can be taken either by a show of hands or a poll.

The quorum for a general meeting is 2 members - s.318(2).

Question 27

When should an issue be referred to the shareholders?

Answer 27

When it is outside the powers of the board of directors and needs a resolution by shareholders

Or when it is inside the powers of the board, but requires approval of the shareholders.

Question 28

What is the procedure for referring a matter to the shareholders?

Answer 28

1. A board meeting is held to decide on the issues to be considered at general meeting. Notice for the general meeting is circulated (14 clear days).
2. The general meeting takes place and shareholders vote.
3. Another board meeting is held to inform the directors of the outcome.
4. The post-meeting matters are handled with.

Question 29

How is a general meeting called on short notice?

Answer 29

Must be agreed to by a majority in number of shareholders who hold shares with a value of at least 90% - s.307(5) and (6).

Question 30

How does a written resolution work?

Answer 30

Ordinary - members holding a simple majority must vote in favour.

Special - must state it is a special resolution, and signed by members holding not less than 75% of voting rights.

Requirements:

• must state how to signify agreement
• must state the date on which the resolution must be passed before it lapses (28 days).