Workshop 2

Question 1

A company’s constitutional documents

Answer 1

Constitutional documents under CA 1985: Articles of Association and the Memorandum.

Constitutional documents under CA 2006: Articles of Association only.

Question 2

A compnay’s memorandum

Answer 2

Companies 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.

Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company’s Articles. The ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles.

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.

Question 3

A company’s articles of association

Answer 3

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. Examples of the types of provisions which are included in the Articles of a company are:
*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.

Question 4

Relationship between CA 2006 and the Articles

Answer 4

The Articles must comply with the minimum provisions of CA 2006 (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 e.g. s 154(1) CA 2006 provides that a private company must have a minimum of one director. A company may provide in its Articles that it requires three directors.
However, there are some CA 2006 provisions which override anything in a company’s Articles eg s 321 the right to demand a poll vote at a GM – this cannot be removed or varied.
There are also powers available to companies by default under the provisions of CA 2006 unless the Articles provide otherwise e.g. the power of a private company to issue redeemable shares.

Question 5

Form of Articles

Answer 5

A company effectively has three choices as to the form of its Articles:
1. Model Articles (MA) / Table A
There are prescribed MA for different types of company. 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. Note that there was a similar provision under the CA 1985. For companies incorporated under the CA 1985 the default Articles were known as Table A.

2. 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 in so far as the CA 2006 allows them to do so.
3. Tailor made Articles
   A client may wish their solicitors to draft Articles which are tailor-made for the particular company concerned. This is a very time-consuming process and therefore costly. Most small companies will prefer to adopt MA, subject to certain amendments.

Question 6

Amending the company’s articles

Answer 6

Once a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006).
There is quite a lot of case law relating to altering the Articles however, the basic rule is that, to be valid, any alteration must be made bona fide in the interests of the company as a whole.
Section 22 CA 2006 permits the entrenchment of specific provisions within a company’s Articles, though this occurs relatively rarely in practice.
An entrenched provision of a company’s Articles is one which can only be amended or repealed if specific conditions are met, or if procedures more restrictive than a special resolution are complied with. 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).

Question 7

Articles as a contract between the members themselves

Answer 7

Generally, 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.

Question 8

Articles as a contract between the company and its members

Answer 8

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 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).

Question 9

Incorporation of a company from scratch

Answer 9

In order to incorporate a new company from scratch, the following must be delivered to Companies House (s9):
*a copy of the company’s memorandum;
*Articles (if the company does not intend to use the Model Articles (MA));
*the fee (the applicant may pay a higher fee for a same-day incorporation); and
*an application for registration (Form IN01)

The “appropriate address” can’t be a P.O. Box

Once the Registrar of Companies has approved the application for incorporation of the company, the company is sent a certificate of incorporation authenticated by the Registrar’s official seal.

Question 10

What does the certification of incorporation lay out?

Answer 10

• the name of the company. 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.

Question 11

when does a company become a legal entity?

Answer 11

The company becomes a legal entity (s 16(3)) from the date on which the certificate of incorporation is issued by Companies House. The date of incorporation is set out in the certificate of incorporation (s 15 CA 2006).

Question 12

What is a shelf company?

Answer 12

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.

Question 14

What changes will most likely need to be made to a shelf company?

Answer 14

• Name
• Registered office
• Articles
• Members, directors, company secretary
• The shares held by the first members
• The client’s representatives are appointed as director(s) and the company secretary
• The first director(s) and company secretary (if there was one) resign

Question 15

Company name considerations

Answer 15

There are various commercial and legal considerations regarding a company name. The name:
- Must not be offensive (s 53(b) CA 2006);
- Must end in limited/ltd (for a private limited company - s 59 CA 2006);
- Must not be the ‘same as’ another on the index of company names (s 66 CA 2006);
- Must obtain approval if it suggests a ‘connection with government or public authority’ (s 54 CA 2006) or contains other ‘sensitive words’ (s 55 CA 2006). Companies House publishes guidance on these names from time to time, so it is advisable to refer to these each time you advise a client.

ECCTA amended CA 2006 and added additional restrictions on the choice of company name. A name may also be prohibited if it:
- In the opinion of the secretary of state, is intended to facilitate what would, in the UK (or potentially outside the UK), constitute an offence of honesty or deception (s 53A CA 2006);
- Suggests a connection with a foreign government or its off-shoots (eg NATO) (s 56A CA 2006);
- Consists of or includes what, in the opinion of the secretary of state, is a computer code (s 57A CA 2006);
- Is one that has already been subject to a direction by the Registrar to change and the company is seeking to re-register using that name (ss 57B and C CA 2006);
- Gives a misleading indication of its activities (s 76 CA 2006); or
- In the opinion of the secretary of state, has been used or is intended to be used for criminal activities (s 76A CA 2006).

Question 16

when does a new company name become effective?

Answer 16

A new company name becomes effective from the date on which the new certificate of incorporation on change of name is issued by the Registrar of Companies (s 81(1) CA 2006).

Question 17

Post incorporation steps

Answer 17

Once the new company has been formed, there are a number of practical issues that the directors will need to attend to as follows:
- Chairperson
- Accounting reference date
- Auditor
- Tax registrations
- Shareholder agreement

Question 18

Pre incorporation contracts

Answer 18

Pre-incorporation contracts: Section 51 CA 2006 - seeks to protect third parties who believe they are entering into a contract with a company which is incorporated and registered by making pre-incorporation contracts enforceable as personal contracts against the persons purporting to act on the company’s behalf (known as ‘promoters’).

Question 19

Company decision making

Answer 19

• As the company is inanimate, much of the standard day-to-day business of a company is carried out by the directors. Unless the power to take a particular decision has been delegated by the board of directors (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.
• 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 referred to the company’s shareholders. For example, where:
• a matter is outside the powers of the directors and must be effected by a resolution of the shareholders (eg amending the company’s Articles); or
• 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 (e.g. making a loan to a director of the company).

Question 20

Board resolutions

Answer 20

Decisions of the directors are taken by passing Board Resolutions at Board Meetings (BMs).
Board Resolutions – each director has one vote.
Board resolutions are passed by simple majority (MA 7) unless the directors have agreed that a particular decision requires unanimity (MA 8).
Note if all of the directors are in agreement with a decision, they can also pass a written Board Resolution which means the directors don’t have to waste time attending Board Meetings.

Question 21

Shareholder resolutions

Answer 21

Decisions of the shareholders are taken by passing Shareholder Resolutions.
Shareholder resolutions may be passed either:
* At a meeting of the shareholders (referred to as a General Meeting (GM)), or
* In writing (for private companies only under s 288 CA 2006).
* There are two different types of shareholder resolution:
o Ordinary Resolutions which are passed by a simple majority – so over 50%of the votes, and
o Special Resolutions which are passed by a majority of 75% or more of the votes.
Either CA 2006 or the Articles will stipulate what type of resolution is required.

Question 22

Shareholder voting – show of hands and poll votes at General Meetings

Answer 22

At a GM it is possible for shareholders to vote on a show of hands or on a poll. The votes are counted out of all the eligible shareholders who are present and voting at the meeting. Note that shareholders are entitled to appoint another person as their proxy to exercise all or any of their rights to attend and to speak and vote at any GM (s 324).
- 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) (s 284(2)).
- When the shareholders vote on a poll, every shareholder has one vote in respect of each share held by them (s 284(3)).
The right to demand a poll vote is very important and will make a significant difference when the shareholders are not in agreement over a resolution. Section 321CA 2006 sets out the conditions that must be met in order for a shareholder to be entitled to demand a poll although these conditions may be relaxed by a provision in the Articles and in fact they are relaxed in the MA (see Art 44 MA).

Question 23

MA44 Poll voting

Answer 23

MA 44(1) sets out that a poll on a resolution can be demanded either in advance of the GM where the vote will take place or at a GM either before a show of hands on that resolution or immediately after the result of that vote.
MA 44(2) sets out who can demand a poll as follows:
* The chairperson of the meeting;
* The directors;
* Two or more persons having the right to vote on the resolution; or
* A person or persons representing at least 10% of the total voting rights of all the shareholders entitled to vote on the resolution

Question 24

Voting on a written resolution

Answer 24

Under s 281 CA 2006 only private companies may pass a shareholders’ resolution by way of a written resolution.
Section 284(1) CA 2006 states that, where a company has a share capital, every member has one vote in respect of each share held by them when voting on a written resolution.
There are two types of written resolution:
* written ordinary resolution - passed by a simple majority of the total voting rights of eligible members (s 282(2) CA 2006).
* written special resolution - must state it is a special resolution and passed by a majority of members representing not less than 75% of the total voting rights of eligible members (ss 283(2) and (3) CA 2006).

Question 25

Who calls a board meeting?

Answer 25

MA 9 provides that any director may call a BM or require the company secretary (if the company has one) to do so at any time. Therefore, the process is fairly informal and, when acting for a company, it is important to consider what the usual practice is for its directors. Notice: In Browne v La Trinidad, 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. For example, if all the directors are in the same building, the meeting could be called almost immediately, if such notice is customary for the directors. Quorum: Directors may not validly consider business unless a minimum number of directors entitled to vote are present at the time the meeting takes place. MA 11(2)requires a minimum of two directors to be present for the meeting to be quorate (unless the articles provide otherwise). Voting: Board resolutions are passed by majority vote on a show of hands (MA 7(1)). Each director has one vote. The chair may have a casting vote to prevent deadlock (MA13 provides for this but it is possible for the company to amend this).

Question 26

Who calls a general meeting?

Answer 26

The Board will usually convene (ie call) a GM. Notice: For private companies, 14 clear days’ notice is required (s307(1) CA 2006)(subject to a shorter notice period – see later). In this context, the word ‘notice’ refers to a period of time (between the board’s act of convening a GM and its actually taking place). * Section 360(1) CA 2006 states that the clear-day rule applies to s 307(1) CA 2006, and in counting the days of the notice period, the day of the meeting and the day the notice is given are both excluded. Note: s 1147 CA 2006 provides that if the notice is posted or e-mailed, it is deemed to be served 48 hours after sending. * To convene the GM, the board must inform the shareholders of when (and where) it is taking place, by giving notice to the shareholders. * The directors must approve the form of the notice of the GM and then they must authorise its circulation to the shareholders. Quorum: the quorum for a GM is generally two shareholders (s 318(2) CA 2006), although it is one shareholder for single member companies (s 318(1) CA 2006).

Question 27

Company meetings 'the GM sandwich'

Answer 27

You saw above that it is generally the Board who will call a GM Where a shareholder vote is required for a certain transaction, it is therefore necessary for the company to hold a series of meetings (depicted below): * A BM is first required in order to call the GM; * A GM is then required for the shareholders to vote on the proposed resolution; * A further BM is then required to put into effect the outcome of the shareholder vote, and * There may be post meeting matters (PMM) to attend to such as filings at Companies House.

Question 28

Sequence of Meetings – full notice GM

Answer 28

Board Meeting 1 - 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. The notice of the GM will set out the wording of the resolutions to be put before the shareholders. The notice of the GM is then circulated to the shareholders by the company secretary (if the company has one) or by the directors. General Meeting - The GM will take place and the shareholders will vote on the resolutions set out in the notice. Board Meeting 2 - 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, or a director, to deal with the post-meeting matters. Post-Meeting Matters (PMMs) - The PMMs will then be carried out by the company secretary (if the company has one) or a director (if not). This means that copies of the relevant documents will be filed at Companies House, and the company’s internal records (minute books and registers) will be brought up-to-date. We will consider the PMMs further below.

Question 29

Shortening the notice for a GM

Answer 29

The CA 2006 allows for GMs to 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.

Question 30

Short notice GM

Answer 30

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 this can be dealt with in under an hour. * A BM is held to resolve to convene the GM, to approve the form of notice for the GM and the form of consent to short notice, and to authorise their circulation to the shareholders. The notice of the GM and the form of consent to short notice are then given to the shareholders who indicate their agreement for the GM to be held on short notice by signing the form of consent to short notice. The BM is then adjourned to enable the GM to take place. * The GM takes place immediately following the adjournment of the BM and the shareholders vote on the resolutions set out in the notice. * The BM is then reconvened. The directors are informed as to how the shareholders voted and they authorise one of their number to take the relevant action and deal with the post-meeting matters. * The PMMs will then be carried out.

Question 31

Written resolutions - procedure

Answer 31

Sections 288 - 300 CA 2006 contain the general provisions applying to written resolutions: * A written shareholder resolution (WR) can be proposed by the directors or the members of a private company and is passed when the required majority of the eligible members signify their agreement to it. * The required majority will depend upon whether it is an ordinary or a special resolution that needs to be passed. * An eligible member is a member (shareholder) who would have been entitled to vote on the resolution on the circulation date of the WR. * If the company does not receive a sufficient number of responses to pass the WR, it will lapse. For a company with MA, the lapse date is 28 days beginning with the circulation date. A company can choose another period of time in its Articles if it so wishes. * Section 288(2) CA 2006 provides that resolutions to remove a director or auditor from office may not be passed by way of WRs (essentially to allow the director or auditor the time and the opportunity to mount a defence). * WRs must be recorded in the minute books of the company in the same way as the minutes of a GM.

Question 32

Sequence of meetings - written resolution

Answer 32

* A BM is held to resolve to propose the use of the WR procedure and to approve the form of wording of the WR and to circulate the WR. The WR is then circulated to the shareholders (eligible members) with details of how to signify their agreement and when to respond by ie the lapse date. * There are two options to proceed: * If the shareholders are present (available immediately), the BM is adjourned. The approval of the WR takes place immediately following the adjournment of the BM and the shareholders vote on the resolutions set out in the WR by signing to signify their agreement, or not signing or abstaining (both of which constitute votes against the resolution); or * If the shareholders are not present and available (eg they are in different parts of the country/world), the BM is closed. The WR is circulated to the shareholders. The WR is passed once it receives the requisite level of shareholder support or it will deem to lapse after 28 days (for a MA company). * The BM is then reconvened if the first option was used or a second BM is called if the second option was used. The board is informed as to how the shareholders voted and it authorises one of their number or the company secretary to take the relevant action and deal with the post-meeting matters. The PMMs will then be carried out.

Question 33

Post meeting matters

Answer 33

Essentially the PMMs break down into three categories: Internal * Minutes of all meetings need to be kept for 10 years * Updating of statutory books eg register of members, directors, PSC register Filing at Companies House * All special resolutions must be filed. Generally ordinary resolutions do not need to be filed (but you will encounter some exceptions such as the authority to allot shares under s551). * Amended Articles must be filed, along with any forms that the Companies House requires eg Change of Name form. Record Keeping * You will come across various documents that need to be kept at the registered office, eg directors service contracts.