forming a company Flashcards
(29 cards)
1
Q
Types of company
A
- Private limited by shares – LTD
- Private limited by guarantee – CLG
- Designated Activity Company – DAC
- Public Limited Company – PLC
- Unincorporated Company – UC
2
Q
Constitution of the Company
A
- Adopted by the Companies Act 2014
- Instead of two documents – one
- The type of constitution will depend on the type of the company
3
Q
Limited Companies
A
- Has one Constitution containing both the memorandum of association type clauses and articles of association type regulations.
- The Constitution must state:
a) The company’s name
b) That it is a private company limited by shares registered under this Part
c) That the liability of its members is limited
d) As aspects of its share capital, either –
i. The authorized shared capital, and the division of that capital into shares of a fixed amount specified in the constitution, or
ii. Without stating such amount, that the capital of the company shall, at the time of its registration, stand divided into shares of a fixed amount specified in the constitution.
e) The number of shares (not less than one) taken by each subscriber of the Constitution; and
f) If the company adopts supplemental regulations, those regulations - The constitution of an LTD must be set out as per Schedule 1 of the 2014 Act and signed by the subscribers.
- Once adopted – cannot be amended except to the extent provided for under s 32(1) of the act – special referendum by a special resolution
- No object clause – s 38
- The constitution of the LTD does not need to prescribe an authorized share material
4
Q
Other Types of Companies
A
- The rest of the companies must have two parts in the constitution: the memorandum of association (external activities of a company) and the articles of association (internal activities of the company) – s 967 – together make a DAC company
- The memorandum is predominant
5
Q
Memorandum of Association
A
- S 967 provided the inclusion of the following clauses (differences with LTD in bold)
o Its name
o That it is a DAC limited by shares or guarantee
o Its objects
o That the liability of its members is limited
o The amount of share capital and the division of that share capital into fixed amounts
o The number of shares taken by each subscriber
o The association of subscription clause - Must be printed in a single document – Schedule 7 (schedule 8 if limited by guarantee)
6
Q
Differences between an LTD and DAC
A
- The difference is primarily in the objects clause and the details of the share capital
7
Q
The name clause
A
- Every company must have a name
- The name of an LTD company must end with ‘limited’ or ‘teoranta’ – s 26
- The name of an DAC company must end with ‘designated activity company’ or ‘cuideachta ghníomhaíochta ainmnithe’ or abbreviation – s 969
o Automatic exception if for charity - It is an offence to trade under a misleading name
8
Q
The objects clause (not for LTD)
A
- Section 967 – the memorandum must have the objects of the company – possible business activities. S 1006 – PLC
- The requirement exists so that:
o Prospective investors know the business of the company
o Members can be assured any plans to enter new areas of business will require alteration and approval at general meeting
o Creditors know which types of contracts are authorized and therefore enforceable against the company
o Directors as agents know the type of transactions to which they can bind the company
9
Q
Infringement of objects clause
A
- Company conducting activities outside the objects clause are ultra vires and the contract in such cases will be deemed void. However, s 973(1) of the act says that the validity of any act done by a DAC shall not be called into question on the ground of lack of capacity by reason of anything contained in its objects.
- Section 973(2) provides that a member of a DAC may bring proceedings to restrain the doing of an act that is otherwise ultra vires but this appears to be limited as the members do not appear to be entitled to bring such proceeding once the company has entered a legally binding agreement
- Directors who act outside of the objects of the company may find themselves personally liable
- There is no longer a doctrine of constructive notice
- No limit to the number of objectives
10
Q
Amendment of objects clause
A
- Special resolution AGM or EGM – 75%
- Must be bona fide and in interests of the company – Re Cyclists Touring Club 1907
- S 974(2) – appeal of any amendment
11
Q
The liability clause
A
- Constitution must state whether the liability of members is to be limited or unlimited
- The liability of the members to the debts of the company is limited to the amount, if any, unpaid on their shares or in the case of a DAC limited by guarantee, to the mount of the guarantee
- S 32 – no member is bound by a change in the memorandum that requires him to subscribe for more shares, but can waive this protection
- Capital clause (detail of capital not required for a LTD)
- The level of capitalization of the company and how the company is divided
- S 967(2)(e) – the share capital clause must set out the total authorised share capital
- Issued capital – is a part of the authorised capital
- Authorised capital – is the max amount that a company is allowed to raise form public
12
Q
Association clause
A
- Statement by the subscribers of their wish to form a company and to take shares in the amount set out opposite their names.
13
Q
Entrenched provisions
A
- The act enables the constitution to provide that certain clauses may be expressed to be unalterable
14
Q
Articles of association
A
- Internal clauses (how things should be done, voting, transfer of shares, payments of dividends, directors powers, pay).
- S 968(3) provides that DAC can include any type of regulation that it wishes to apply to its internal rules if not prohibited by law or in contrary to mandatory provisions.
- Articles are publicly registered. The standard areas addressed by the Article:
o Share capital and variation of rights;
o Transfer of shares;
o General meetings
o Votes of members
o Directors
o Borrowing
o Powers and duties of the directors
o Dividends
o Winding up
15
Q
Altering the articles
A
- Section 977 allows the articles to be amended by a special resolution, but can be circumvented by:
o Additional or weighted votes being given to a member
o A restriction in the memorandum
o A quorum requiring a particular member - Amendment can also be made informally – by unanimous agreement orally or in writing the members can make a decision on any matter, subject to two conditions – that the action is intra vires and honest
- Sections 191 and 193
16
Q
Restricting the right to alter the articles
A
- The shareholders’ powers are not of a fiduciary character – not required by law to at in the interest of others, even in the detriment of the company.
- Doesn’t mean there is not constraint:
o Alterations must be bona fide and in the interest of the company as a whole
o Alterations cannot be contrary to law
o Section 32 – member cannot be required to subscribe to additional shares or to accept additional liability unless the member so consents
o Variation of rights of a class can only be made with consent of members holding that class of share
o If the court amends an article, the members cannot subsequently make any amendments inconsistent therein w/o court’s approval
17
Q
Bona fide in the interest of the company as a whole
A
- Onus is on the objector to show that a proposed alteration is invalid
- The principle originates in the UK case – Allen v Gold Reefs 1900
o Gower describes it as misleading and difficult to apply
o Shareholder died owing money
o Lindley MR held that the exercise of the power was subject to ‘those general principles of law and equity which are applicable to all powers conferred to majorities and enabling them to bind minorities. It must be exercised bona fide and, in the manner, required by law.
o Two conflicting principles: democratic right of a majority within a company to make decisions, and a right of a shareholder to exercise their voting rights as selfishly as they choose vs the right of the minority not to have one’s shares compulsorily acquired or expropriated by the majority.
18
Q
Meaning of the ‘company as a whole’
A
- As a separate legal personality or to the members as a general group.
- In Allen – as a separate entity
- The beneficiaries are those members proposing alteration and the courts have interpreted the term as the members as a general body – interests of the minority conflict with the majority
- The courts interpreted the test as a benefit to the general body of the shareholders
- Greenhalgh v Arderne Cinemas 1950 – the defendant company’s articles gave pre-emption rights to other shareholders.
o The majority sought to sell their shares to an outsider but first had to expunge the right of pre-emption from the articles of association.
o G was the minority and argued that it would sacrifice the rights of the minority for those of the majority.
o Held that the amendment was lawful because all members including G could sell their shares and it did not restrict the minority’s ability to sell their shares - G & S Doherty Limited v Doherty – held that for the benefit of the company refers to the shareholders as a whole – upheld in SC but the issue not considered
19
Q
Is the test objective or subjective?
A
Subjective
- Allen v Gold Reefs – bona fide might indicate that it is subjective – it is enough to show that a sufficient majority honestly believes that the alteration is in the interest of the company as a whole.
- Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd – the articles stated that five directors were to be appointed for life unless certain events occurred
o One of the directors failed to account for company money he spent
o The others sought to remove him, but his conduct was not one of the types authorising removal – an amendment was proposed
o The court held that ‘The question is whether or not the shareholders honestly intend to exercise the powers for the benefit of the company…in my view the question is solely for the shareholders acting in good faith.’
o ‘…it may be that their decision must be one which could be taken by persons acting in good faith with a view to the benefit of the company’ – element of objectivity.
o Held that the alteration was bona fide and in the interest of the company
- Sidebottom v Keeshaw, Leese & Co
o The articles of the defendants company allowed the directors to purchase the shares of any member who was competing with the company
o S was a minority shareholder and opposed the alteration because it gave the majority the power to expel a minority
o No bad faith – amendment lawful
- When the alteration affects one member or a class of members only – it may clearly be a case of bad faith.
20
Q
Objective test
A
- The court looks at what the majority did and asks if a reasonable shareholder could have thought that the actions of the majority were in the interests of the company as a whole. Shuttleworth – if there are no reasonable grounds for deciding that the alteration is for the benefit of the company, this itself may be sufficient evidence of lack of good faith.
- In Greenhalgh – objective:
o ‘The case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit’
21
Q
Company v members
A
- Courtney at p 125 – where the alteration causes a conflict between the company and its members the suitable test is the objective – Shuttleworth
22
Q
Member v member
A
- Greenhalgh v Alderne Cinemas – the court could not interfere once the majority honestly believed the alteration would benefit the company as a whole
o His test was that it was lawful provided it did not discriminate between majority and minority shareholders in such way as to give the former an advantage not enjoyed by the latter. - In cases where the members are not motivated by what is in the interests of the company but in their own interest, here, there is no benefit to the company, rather, a conflict between the right of shareholders to vote selfishly.
- Re Williams Group Tullamore Ltd – ‘the problem is the degree to which the shareholders are entitled to disregard the interest of other shareholders’
- Courtney concludes that the test is whether he majority benefit at the expense of the minority
23
Q
The traditional test – critique and search for alternatives
A
- Courtney writes the test in Allen is far too generalized to be applied to all types of alterations and suggests an entirely different approach and flexible approach that first and foremost has regard to the circumstances of the case.
- He sites Clemens v Clemens brothers Ltd where the judge said, above all, the case law shows that a majority shareholder cannot exercise his vote in any way he wishes.
o The right is ‘subject…to equitable considerations…which may make it unjust…to exercise it in a particular way.’
24
Q
the petitioner case
A
- In Re Charterhouse Capital Ltd – CoA in London has provided a helpful overview of the relevant principles governing amendments to the Articles of Association/Company Constitution
o Facts: The petitioner, a retired partner and minority shareholder of Charterhouse Capital Limited, filed a petition claiming that a proposed amendment to the Company’s Articles of Association was unfairly prejudicial to his interests.
o The petitioner was an original shareholder and had entered into a Shareholders Agreement with the other founders. Following his retirement as a director in 2008, the Company’s active executives planned to purchase shares from existing shareholders, including the petitioner, due to concerns over misalignment between shareholders and managers.
o In 2011, an offer of £15.15 million was made to buy the shares, conditional on adopting amended Articles. By December 2011, all founders except the petitioner accepted the offer. The transfer of shares occurred in February 2012. In April 2014, the petitioner challenged the offer, alleging that the purchase and amendments were done improperly to expropriate his shares at an undervalue.
o HC: rejected the petition, finding no evidence of bad faith or improper motives by the respondents. 1) The compulsory transfer provisions in the Articles existed before the amendment and were part of the original agreement between the Founders, including the petitioner. 2) The lack of alignment among shareholders was a serious issue that needed resolution for the Company’s future stability. 3) The court also found that amending the Articles to facilitate the sale was in the best interests of the Company and a hypothetical member.
o CoA – dismissed the petitioner’s appeal and extracted from previous judicial authorities the following principles when considering the limitations on the exercise of the power to amend a company’s articles of association:
1) The framers of the power of a majority to bind a minority will not, in the absence of clear words, have intended the power to be completely without limitation
2) A power to amend articles will be validly exercised if it exercised in good faith and in the interest of the company
3) It is for the shareholders and not the court to say whether an alteration of the articles is for the benefit of the company, but it will not be for the benefit of the company if no reasonable person would consider it to be such.
4) The court will not investigate the quality of the subjective views of the shareholders.
5) The mere fact that the amendment adversely affects, and even if it is intended adversely to affect, one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company.
6) A power to amend will also be validly exercised, even though the amendment is intended only to directly benefit some or all of the shareholders, provided that the amendment does not amount to oppression of the minority or is otherwise unjust or is outside the scope of the power
7) The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so
25
Australian approach
- Gambotto v WCP Ltd – HC is the highest court in Australia
o The test involves two questions:
1) Is the purpose defensive in seeking to prevent negative effects?
2) If so, is exploitation fair? Fairness requires of all relevant information to the minority being expropriated and also the payment of market value or above. Furthermore, the onus of prove is on the expropriators.
o It is important to note that the significance of the difficulty of reconciling the case law on altering the articles of association must be seen in light of the alternative remedies available to aggrieved members. Relief is available under section 212 of the Act which enables a minority to 17 petition the court on the ground that the affairs of the company are being conducted in disregard of their interests.
o Moreover, if alteration involves variation of rights attached to a class of shares section 89 of the Act permits an application for cancellation of the variation to be brought by not less than 10% of the holders of the issued shares in that class.
26
Statutory Contract
- Section 31 provides that the constitution binds the company and its members to the provisions of each document as if all parties had individually signed and sealed the documents:
(a)the company is bound to the members
(b) the members are bound to the company; and
(c) the members are bound to each other
- Clark v Workman – ‘it is a contract of the most sacred character and it is on the faith of it that each shareholder advances money’
- It is to be understood as different to a conventional contract – Bratton Seymour Service Co. Ltd v OxBorough the English equivalent to s. 31 is:
It is a contract arising from statute rather than a bargain between the parties
1. It only affects the rights and obligations of members in their capacity as members.
2. Provisions addressing matters other than rights and obligations of the members are not enforceable as part of the contract.
3. Of such provisions, in particular provisions affecting outsiders are not part of the contract between the members and the company even if the outsider is also a member
4. It can be altered by special resolution
5. It is not defeasible or ended by some of the common grounds of misrepresentation, mistake, duress, nor can it be rectified on the grounds of mistake.
- The UK statute has three effects: it binds the members and the company; it binds members to other members; it is only enforceable by and against members acting qua member
27
Binds company and members
- S 31 entitles a member to enforce against the company the personal rights he enjoys as a member – Hickman v Kent Marsh Sheepbreeders Association – held that a plaintiff who had instituted court proceedings against the company was bound by the provision in the articles that any dispute between him and the company goes to arbitration.
28
Binds members inter se
- A member can sue another for breach of the articles or memorandum – Rayfield v Hands – the articles provided that a director must purchase shares at a fair value from any member wishing to transfer them. One member sought to do so but the directors refused to purchase. The court ordered the sale, interpreting the reference in the articles to ‘directors’ to include as a class of member persons who are also directors.
29
Section 31 cannot be enforced against outsiders
- Beattie v Beattie in which the articles provided that disputes between a member and the company must go to arbitration. The company instituted court proceedings to recover monies owed by the managing director, who in turn sought to rely on the said provision to stay the action pending arbitration. The court held against him as the claim related to him in his capacity as managing director, not as a member.
- Another example would be the difference between one’s rights as a member and a provision in the articles appointing one as the solicitor for the company.
