Company Law - Lecture Notes
Company Law - Lecture Notes
Company Law - Lecture Notes
I. INTRODUCTION TO INCORPORATION
1. Definition of a "Company"
A company thus has legal rights and obligations in the same way that a natural person
does.
(b) A company incurs greater expenses at formation, throughout its life and on
dissolution, though these need not be excessive.
(c) A company is an artificial legal person distinct from its members. Although
in Scotland a partnership has a separate legal personality by virtue of s.4(2) of
the Partnership Act 1890, this is much more limited than the personality
conferred on companies.
(d) A company can have as little as one member and there is no upper limit on
membership. A partnership must have at least two members and has an upper
limit of 20 (with some exceptions).
(f) Members of a company are not entitled to take part in the management of
the company unless they are also directors of it. Every partner is entitled to take
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part in the management of the partnership business unless the partnership
agreement provides otherwise.
(h) The liability of a member of a company for the debts and obligations of the
company may be limited. A partner in an ordinary partnership can be made
liable without limit for the debts and obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely
regulated by the Companies Acts and by its own constitution as contained in
the Memorandum and Articles of Association. Partners have more freedom to
alter the nature of their business by agreement and without formality, and to
make their own arrangements as to the manner in which the firm will be run.
(j) A company must comply with formalities regarding the keeping of registers
and the auditing of accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a
partnership - e.g. companies must file accounts which are available for public
inspection.
(l) A company can create a security over its assets called a floating charge,
which permits it to raise funds without impeding its ability to deal with its
assets. A partnership cannot create a floating charge.
(m) If a company owes a debt to any of its shareholders they can claim
payment from its assets rateably with its other creditors. A partner who is owed
money by the partnership cannot claim payment in competition with other
creditors.
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4. Types of Company
Promoters of the company petition the Privy Council attaching draft of proposed
charter to the petition.
Formerly used to incorporate public utilities such as gas, electricity and railways.
Formed by registration under the Companies Act 1985 (as amended) or one of the
preceding Companies Acts.
Registration is the most commonly used means of forming a company and virtually
the only method now used to form a trading company.
CA 1985, s.1(1): "Any two or more persons associated for a lawful purpose may, by
subscribing their names to a memorandum of association and otherwise complying
with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability."
Important Note
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"Limited Liability" - this refers to the liability of the members, not the liability of the
company. The company will always be liable to the full extent of its debts.
The liability of the members, whether limited or unlimited, is to the company, not to
the individual creditors of the company.
(i) Members have unlimited liability (If company is being wound up,
members can be made to contribute to the company’ s assets without
limit to enable it to pay its debts.)
(iii) Companies limited by guarantee are not usually formed for business
ventures.
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(iii)When the company is registered, its memorandum must state
the total nominal value of all the shares it is going to issue (called
the registered capital, or nominal capital or authorised share
capital).
(v) Shares are normally partly or fully paid for when issued, so
company will have a contributed capital.
CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that
it is to be a public company and which complies with the requirements of the Act for
registration as a public company."
Main requirements:
- A public company must have at least two shareholders and at least two
directors.
CA 1985 defines a private company as "any company that is not a public company".
A private company is only required to have one director and, since 1992, it can be
formed with only one member.
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Only Public Companies can have their shares listed on the Stock Exchange - but
Public Companies are regulated much more strictly than Private Companies.
1. Promoters
(a) Definition
In the 19th century, it was common for promoters to sell their own property to a
newly formed company at an inflated price, or to acquire assets for the company and
receive a commission from the seller.
The courts then began to impose a fiduciary duty on promoters similar to that imposed
on agents. A promoter must disclose any profit or potential conflict of interest to
either:
(i) Where promoter has sold his own property to the company, without disclosing this
- the company can rescind the contract and recover the purchase price:
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Erlanger v New Sombrero Phosphate Co (Case 3)
Right of recission is lost if restitutio in integrum is not possible.
(ii)The promoter may have to account to the company for any profit he has
made.
(iii)The company may be able to sue the promoter for damages for breach of
fiduciary duty.
The court can make a disqualification order against a person who has been convicted
of an indictable offence in connection with the promotion, formation or management
of a company.
2. Pre-Incorporation Contracts
At Common Law:
- if third party knew company was not yet in existence, he could make the
purported agent liable on the contract. (Kelner v Baxter).
- if it appeared that the contract was with a company already in existence, the
court might hold there was no contract at all, and neither the company nor the
purported agent could enforce it.
This means the "agent" will always be personally liable on the contract unless there is
agreement to the contrary.
Exceptions:
s.36C does not apply where promoter makes contract on behalf of existing company
he later buys. The company can then ratify the contract.
s.36C does not apply where a company has been in existence but has been struck off
the register. The section only applies where the company has never been in existence.
(ii)Promoter and third party could make an agreement for novation. (novation =
substitution of a new obligation for an old one)
Promoter could agree with third party that promoter’ s liability will end when the
company, once formed, enters new contract on same terms.
These are the documents which make up the constitution of the company. The
Companies (Tables A - F) Regulations 1985 give suggested forms for memoranda and
articles for different kinds of company.
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Public and Private companies limited by shares can adopt the articles in Table A of
the Regulations - Table A will also apply automatically so far as not modified or
excluded by the company’ s own articles.
3. Certificate of Incorporation
If Registrar is satisfied that requirements of the Act have been met, he registers the
documents and issues a certificate of incorporation. This is the company’ s "birth
certificate".
The Registrar publishes the issue of the certificate in the London or Edinburgh
Gazette.
Registrar is entitled to refuse to register a company where it has been formed for an
unlawful purpose:
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The court may also be petitioned to cancel a registration if it appears that the company
has been registered for purposes which are unlawful or contrary to public policy:
R v Registrar of Companies, ex p Attorney-General (Case 10)
Trading Certificates
Private companies can begin to trade as soon as the certificate of incorporation has
been issued.
Registrar will only issue s.117 certificate if satisfied that minimum capital
requirements for a public company have been met.
(This does not affect the validity of any contracts entered into by the company).
A company is a separate person in law from its members. This has several important
consequences:
The shareholders are not liable for the debts and liabilities of the company and cannot
be sued by the company’ s creditors. A shareholder can be a debtor or creditor of the
company and can sue or be sued by the company.
The fact that the company is a separate person from its shareholders makes limited
liability possible.
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(Remember: the company’ s liability is always unlimited - it is the members’
liability that is limited and that liability is to the company, not to the individual
creditors.)
A company owns its own property - the shareholders have no direct right to this or
any share of it.
Person who no longer wishes to be a member is only entitled to whatever price he can
get for his shares.
A shareholder has no legal interest in the company’ s property and cannot insure it
against theft, damage, etc.
A company has full contractual capacity - and only the company can enforce its
contracts.
(Companies may also be liable in negligence - shareholder cannot be made liable for
the negligence of the company, unless he was also personally negligent).
(e) Crimes
A company can be convicted of a crime, regardless of whether its directors are also
convicted.
Some limitations:
- it has been held that a company cannot be convicted of a crime which requires
the physical act of driving a vehicle:
- a company cannot be convicted of any crime for which the only available
sentence is imprisonment.
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There are particular problems with crimes which require mens rea ("a guilty mind") -
most common law crimes require mens rea, while many statutory offences involve
strict criminal liability.
In order to convict companies of common law crimes, courts may regard the mens rea
of those individuals who control the company to be the mens rea of the company.
However, the courts have been very restrictive in their use of this approach:
It is theft to steal from a company, even if those accused of the theft are also the
company’ s only shareholders:
Separate personality means that the existence of a company does not depend on the
existence of its members. Membership may change or members may die - the
company continues in existence until wound up.
(g) Borrowing
A company can borrow money and grant a security for a debt. Only a company can
create a floating charge.
Floating charge = a kind of security for a loan. The charge "floats" because is does not
attach to any particular asset, but floats over the company’ s assets as they exist from
time to time. Certain events cause the charge to "crystallise" and attach to whatever
assets the company has at the time.
2. Veil of Incorporation
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Separate legal personality of company operates as a shield - the courts will not
normally look beyond the façade of the company to the shareholders who comprise it.
The screen separating the company from its individual shareholders and directors is
commonly referred to as "the veil of incorporation".
Sometimes the law is prepared to examine the reality which lies behind the company
façade - this is described as "lifting" or "piercing" the corporate veil.
(a) Statute
Some statutory provisions have the effect of piercing the corporate veil to make
directors personally liable.
Presumption is in favour of separate personality and courts will not normally infer that
legislation is intended to pierce the corporate veil.
(i) Companies Act 1985 s.24 - where membership of a company falls below two for
more than six months. Member who knows he is the sole member but continues to
trade will be jointly and severally liable with the company for company debts
contracted after the six month period has elapsed. (s.24 no longer applies to private
limited companies)
(ii) Companies Act 1985, s.117(8) - where public company trades without obtaining a
trading certificate. If the company fails to comply with any obligations under a
transaction within 21 days of being called on to do so, the directors of the company
are jointly and severally liable to indemnify the third party against any loss.
(iii) Companies Act 1985, s.349 - if person acting on behalf of a company signs or
authorises the signing of a bill of exchange, cheque, order for goods or similar
document in which the company’ s name is not correctly stated, the person signing
will be personally liable if the company fails to pay.
Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (Case 21)
(iv) Insolvency Act 1986, ss.213 & 214
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s.213 applies where company is being wound up and it appears
that business has been carried on with intent to defraud creditors.
In either case, the court can order that those involved make a
contribution to the companies assets for the benefit of creditors.
The director of a company which has gone into insolvent liquidation cannot become a
director of another company with the same name within a five year period. If he does
he can be made personally liable for all the debts of the new company.
A person will be jointly and severally liable with the company for all the company’ s
debts if he takes part in the management of the company while he is under a
disqualification order.
NB: For the purposes of these provisions, "person" includes legal as well as natural
persons.
The courts are willing to pierce the veil of incorporation in some circumstances:
Courts will examine the reality behind the company where the company was set up
purely to evade a legal obligation, or to allow someone to do something he would not
be allowed to do as an individual:
(ii) Agency
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Court may lift the veil on the basis that one company is merely carrying on business
as the agent of another - so that transactions entered into by the subsidiary can be
regarded as transactions of the holding company:
In the past, courts have been willing to lift the veil on the basis that a group of
companies was not a group of separate persons, but a single economic unit:
In times of war, courts may regard a British company as an enemy alien if the
company is controlled by nationals of an enemy country:
Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (Case 30)
(v) Justice and Equity
Courts have sometimes been prepared to pierce the corporate veil where they feel this
is in the interests of justice:
For a company limited by shares, the memorandum must contain the following:
CA 1985, s.25 - the name of a public limited company must end with the words
"public limited company", the name of a private limited company must end with the
word "Limited". Abbreviations may be used instead: "plc" or "Ltd".
Under CA s.26, it is not possible to register a company name which includes the
words "public limited company", "limited", "unlimited" or their abbreviations
anywhere except at the end of the name.
(i) Under s.26, a company cannot be registered under a name which is identical to a
name already registered.
(iii) A company cannot be registered under a name which suggests that the company
is connected with the government or a local authority - or under any name including a
word listed in the Company and Business Names Regulations 1981 - unless the
Secretary of State gives permission for the name to be used.
(iv)s.26 does not prevent the registration of a name very similar to that of another
company - but if the similarity is deceptive and likely to lead to confusion, the
established business may bring an action to restrain the new company from using the
name. This is called a "passing-off" action.
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Ewing v Buttercup Margarine Co Ltd (Case 35)
(v) A company must have its name printed on all business documents and it must be
displayed at the registered office and all business premises.
A company which wishes to trade under a name other than its registered name comes
within the provisions of the Business Names Act 1985.
(vi) Insolvency Act 1986, s.216 prevents the director of a company which has gone
into insolvent liquidation from taking part in the management of any business trading
under the same name as the insolvent company.
(vii) A company can change its name by special resolution (requires approval of
holders of 75% of the company’ s shares).
The Secretary of State can order a compulsory name change within 12 months of
registration if he discovers the name is the same as or too like one previously
registered.
The Secretary of State can order a compulsory name change at any time if he
discovers that the name gives a misleading impression of the activities of the
company.
This establishes company’ s nationality and its domicile, but not its residence.
Registered office is important because:
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- it is the address at which the company’ s registers and records must be kept
and made available for inspection by the public.
Company’ s memorandum must contain an objects clause - a clause which states the
purpose or purposes for which the company was incorporated.
If the company does something beyond the scope of its objects clause, this is said to
be ultra vires (beyond the powers of the company).
Previously this was of great importance - transaction entered into beyond the
company’ s powers was void and could not be enforced by or against the company,
and it could not be ratified. This was called the ultra vires rule.
The Rule has been abolished by statute as far as third parties are concerned.
s.35(1) CA 1985 - the validity of an act done by a company shall not be called into
question on the grounds of lack of capacity by anything in the company’ s
memorandum.
The rule still operates internally of the company - a shareholder can bring an action to
restrain the company from carrying out an ultra vires act.
(The court will not restrain the company from doing anything it is already under a
legal obligation to do)
A director may be liable to the company for any costs incurred by the company on an
ultra vires transaction.
Potential problems can be avoided: CA 1985 s.3A allows a company to state in its
memorandum that its object is to carry on business as a general commercial company.
It can then carry on any trade or business whatsoever.
Members (holding at least 15% of the nominal issued share capital) who did not
consent to the change can apply to the court to have the alteration set aside. (s.5)
Application must be made within 21 days of the resolution being passed. The
alteration will not then come into effect unless it is confirmed by the court.
Limited company with share capital must have a clause stating the total amount of
share capital with which it proposes to be registered and the division of that capital
into shares of a fixed amount.
No minimum capital for private companies; £50,000 minimum for public companies.
This is a clause stating that the subscribers are desirous of being formed into a
company in pursuance of the memorandum. This is followed by signatures of
subscribers (attested by one witness) and the number of shares each has agreed to
take.
Memorandum can be altered to change company from public to private and vice versa
- requires special resolution of shareholders.
CA 1985, s.17 - any provision in the memorandum which could have been contained
in the articles can be altered by special resolution.
When company resolves to alter its memorandum, a copy of the resolution, and the
amended memorandum, must be sent to the Registrar within 15 days - failure to do
this is a criminal offence punishable by a fine.
2. Articles of Association
The articles govern the internal management and organisation of the company.
The articles are secondary to the memorandum - if there is conflict between the
articles and the memorandum, the memorandum prevails.
(iii) It can exclude Table A entirely and write its own articles.
(Table A has existed in various forms since 1862 - a company which adopts Table A
will be bound by the Table A existing at the time it was incorporated, not a later
version).
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(iii)Signed by the subscribers to the
memorandum
(b)Alteration of Articles
CA 1985, s.9 - articles can be altered by special resolution, which must be notified to
the Registrar of Companies within 15 days.
Any provision in the articles which would have the effect of making them unalterable
is void.
There are certain restrictions on the company’ s power to alter its articles:
s.369(1) sets out notice periods for calling meetings and states this
cannot be shortened by a provision in the articles.
Certain sections of the 1985 Act give the court power to order that no alteration be
made to the articles.
(iv) Memorandum
The Power to alter the articles must be exercised bona fide for the benefit of the
company as a whole.
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A member cannot challenge an alteration carried out in good faith for the benefit of
the company, even if the alteration adversely affects his own rights.
The courts will usually allow the alteration, but have sometimes found that it is not
bona fide for the benefit of the company as a whole:
Brown v British Abrasive Wheel (Case 44)
The legal effect is described in s.14 CA 1985. The memorandum and articles operate
as a contract between the company and its members, which both parties are bound to
honour.
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(d) Provisions of the memorandum or articles can sometimes form
part of an extrinsic contract between the company and an outsider.
This can happen in one of three ways:
A share is the unit of measure for determining a member’ s interest in the company.
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The memorandum states the nominal value for each share - members must contribute
at least this amount.
Total value of shares the company is allowed to allot - also known as nominal or
registered capital.
Amount that members have paid on their shares, excluding any premium.
Uncalled capital is the amount owing on partly paid shares which members have not
yet been called on to pay.
Reserve capital is uncalled capital the company has resolved not to call unless the
company is wound up.
2. Classes of Shares
Member’ s rights are detailed in the Articles, but the following are typical:
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(b) Preference Shares
Give preferential right to a dividend of fixed amount or fixed percentage per share -
this dividend is paid before anything is paid to ordinary shareholders. Right to
dividend is normally cumulative.
CA 1985, s.80 - Directors cannot allot shares without authority given by the existing
shareholders or the articles.
The authority must state the maximum number of shares to be allotted. It is a criminal
offence to allot shares without proper authorisation, but the allotment remains valid.
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CA 1985, s.89 - existing shareholders must be offered the opportunity to buy any new
issue of shares before they are offered elsewhere. Shareholder must be given 21 days
to decide whether to buy. Private companies can avoid pre-emption rights.
4. Transfer of Shares
- if only part of shareholding is being transferred, form and certificate are sent
to the company instead, for certification.
- transferee sends form and certificate to company, which enters him on register
of members. New share certificate is issued after two months.
Shares of deceased shareholder transmit to his executor to deal with as directed by the
will or the rules of intestacy.
If shareholder becomes a patient under the Mental Health Acts and a public guardian
is appointed, the shares transmit to the public guardian.
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(iii) Bankruptcy of Shareholder
Holder of shares through transmission has the same rights and benefits as a member
even if not registered as a member - but he cannot vote. He can choose to be
registered and can then vote.
5. Capital Maintenance
Members are entitled to a dividend out of profits. A company cannot return capital to
the members. This provision operates to protect creditors.
CA 1985 sets out some legal methods by which the capital of a company can be
returned to the members.
CA 1985 ss.135-141
A company can reduce its capital if this is authorised by the articles and the reduction
is confirmed by the court. It also requires alteration of the share capital as stated in the
memoradum - this needs a special resolution.
The court will only confirm the reduction if satisfied that the company’ s creditors
have been paid or have consented to the reduction.
CA 1985 s.159(1)
The shares give a temporary membership of the company - the nominal value (and
sometimes a premium) is paid to the shareholder at the end of the period.
When shares are redeemed they must be cancelled by the company. The company
must make up its capital by issuing new shares or transferring funds from the profit
and loss account to the capital redemption reserve account.
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Private companies can pay for redemption completely out of capital - this needs a
special resolution and a declaration from the directors that the assets will exceed
liabilities after the payment is made.
Generally this is prohibited by s.143(1), but s.162 allows a company to buy its own
shares in the circumstances provided by the Act and if authority is given in the
company’ s articles.
This requires a special resolution approving the specific purchase contract. If the
company is a public company, the authority to buy must expire within 18 months.
When a company has bought its own shares it must cancel them and compensate for
lost capital by a new share issue or a transfer of profits to the capital redemption
reserve.
Day to day management of a company is in the hands of the directors, not the
shareholders - but the shareholders retain some important powers - many decisions
require a resolution of the shareholders and cannot be decided by the directors alone.
- date person became a member and, where applicable, the date he ceased to be
a member.
- the number of shares held by each member and the amount paid on them.
2. Kinds of Meetings
(i) CA 1985 s.366 provides that an AGM must be held every calendar year with not
more than 15 months between meetings. A newly incorporated company must hold its
first AGM within 18 months of incorporation.
(ii) CA 1985 s.367 - if a company does not hold an AGM as required, any member
can apply to the Secretary of State to call or to direct the calling of the meeting.
(iii) CA 1985 s.366A - members of a private company can choose to dispense with the
holding of an AGM by elective resolution - but any member of such a company can
require that an AGM be held in a particular year by giving notice at least 3 months
before the end of the year.
(i) Directors lay before the company annual accounts and reports for t the most recent
financial period.
(ii) Auditor's term of office ends at AGM, so they must be re-appointed or new
auditors must be appointed.
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(iii) Director's recommendation for the dividend to be paid to shareholders will be
voted on.
(iv) The Articles may provide that directors are to retire in rotation. Some directors
will retire at the AGM and must be re-appointed or replaced.
(v) Resolutions may be required to pay directors’ and auditors’ fees. (Now normally
fixed by contract).
(vi) Shareholders may have their own resolutions placed on the agenda.
Any meeting which is not an AGM. Table A provides that only directors can call an
EGM, unless there are too few directors in the UK to make up a quorum - then any
member can call one.
CA 1985, s.368 - directors must call an EGM if requisitioned by holders of 10% of the
paid up capital of the company.
CA 1985, s.371 - power of the court to order the holding of an AGM also applies to
EGMs.
CA 1985, s.142 - public company must hold an EGM if the company’ s net assets
have fallen to less than half of its called up capital. Meeting must be called within 28
days of the directors becoming aware of the loss of capital, and must be held within
56 days of that date.
CA 1985, s.392A - where auditor has resigned and has made a statement of
circumstances he thinks should be brought to the attention of creditors and
shareholders - the auditor can requisition the directors to hold an EGM so that he can
explain the circumstances of his resignation.
3. Convening Meetings
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(ii) Who must be notified?
Depends on the Articles. Table A provides that notice must be given to all
shareholders, directors and auditors.
Failure to notify someone entitled to notice will invalidate the meeting unless the
failure was purely accidental:
Articles can provide for any method - Table A requires written notice to be delivered
personally or by post.
Articles can set any length of notice, but by s.369, notice must be at least 21 days for
an AGM, or 14 days for an EGM - unless all members agree shorter notice period.
Set out by articles. Table A requires notice to specify date, time and place of meeting
and a general indication of business to be dealt with. Notice must state if meeting is an
AGM.
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Some kinds of resolution require special notice to be given:
Special notice = at least 28 days notice to the company of the intention to move the
resolution. The company must then give the members at least 21 days notice of the
meeting.
4. Conduct of Meetings
(a) Quorum
"Quorum" = the minimum number of persons who must be present before the meeting
will be valid.
Usual to have a chairman to preside over a meeting - Table A provides this should be
the chairman of the board or another director nominated by the board.
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Chairman has no casting vote unless given one by the articles. (Table A gives a
casting vote.)
(c) Minutes
Companies must keep minutes of general meetings at the registered office for
inspection by members.
Chairman signs the minutes - they then become prima facie evidence of what occurred
at the meeting.
CA 1985 s.372 - all companies must allow a member who cannot attend a meeting to
allow a proxy to vote in his place.
Appointment of proxy must be in writing and lodged with company at least 48 hours
before meeting.
Each member has just one vote regardless of number of shares he has - hands are
counted and the result declared by the chairman. Result is conclusive once recorded in
the minutes.
Proxies cannot vote on a show of hands unless the Articles allow this.
Members are entitled to exercise their votes according to their own interests.
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Northern Counties Securities Ltd v Jackson & Steeple (Case 59)
5. Resolutions
Requires vote of 75% of members present in person or by proxy, who are entitled to
vote and do vote.
Meeting at which resolution is proposed must have had at least 21 days notice, unless
shorter period was agreed by majority in number of members holding at least 95% of
the shares.
Certain matters can only be decided by special resolution and the articles cannot
provide to the contrary.
Printed copy of special resolution must be sent to Registrar within 15 days of it being
passed.
Same requirements as for special resolution except for notice period required, which
depends on type of meeting. (21 days for AGM, 14 days for EGM - shorter notice
possible by agreement).
- for voluntary winding up when company cannot pay its debts (IA 1986
s.84(1))
Apply only to private companies. s.379A CA 1985 lists circumstances - e.g. election
to dispense with AGM.
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An elective resolution can be revoked by an ordinary resolution - which must also be
filed with the Registrar within 15 days.
Most matters can be decided by ordinary resolution and some must be (e.g. decision to
remove a director).
Resolutions to remove a director or an auditor before his term of office has expired
cannot be taken by written resolution.
VIII. DIRECTORS
1. Appointment of Directors
CA 1985 s.282 - public companies must have at least two directors, private companies
at least one.
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(c) Persons Who cannot be Appointed Directors
- Person has been in persistent default in filing returns or documents with the
Registrar (Maximum 5 years).
- Person has been found liable for wrongful trading under s.214 Insolvency Act
(Maximum 15 years)
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- a person is director of a company which has become insolvent and that
person’ s conduct makes him unfit to be concerned in the management of a
company.
(Minimum 2 years, Maximum 15 years)
2. Proceedings of Directors
(a) Meetings
(i) Notice
Whatever the articles provide. A director with a personal interest in the matter being
discussed does not count toward the quorum:
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3. Powers of Directors
Directors have sole power to manage the business of the company, but power vests in
the shareholders if the directors are unable or unwilling to act:
Third parties are protected by CA ss.35A and 35B - can enforce transactions even if
directors exceed their powers.
4. Duties of Directors
Director’ s fiduciary duties are owed only to the company, not to the individual
shareholders.
(ii) A duty to use powers only for the purpose for which they were
conferred:
Howard Smith v Ampol Petroleum (Case 70)
(iii) A duty to avoid a conflict between his own interests and those of the
company.
Aberdeen Railway Co v Blaikie Bros (Case 76)
A director cannot vote on any matter in which he has a personal interest, and, by CA
s.317 a director with any interest in a proposed contract must disclose this to the
board:
Guinness plc v Saunders (Case 77)
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Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (Case 78)
(iv) A duty not to make a personal profit out of his connection with the
company.
If he does he must account for the profit to the company:
The shareholders can vote to permit the director to keep the profit
- unless there is a fraud on the minority:
More recent cases suggest a move to a tougher standard - the level of skill reasonably
to be expected from a person undertaking the same duties.
Norman v Theodore Goddard (Case 86)
(a) Age
A director of a public company must normally retire when he reaches the age of 70,
unless:
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- Articles of the company provide otherwise, or
- he becomes disqualified
- he is absent from board meetings for more than six months without
permission.
(c) Dismissal
Special notice must be given of a resolution to remove a director and the director has
the right to make representations at the meeting.
The articles may give a director’ s shares special voting rights - this may defeat the
operation of s.303:
The general rule in company law is that the wishes of the majority will prevail.
The courts will not usually hear an action brought by a member or members of the
company.
The company is the proper plaintiff (pursuer) in any action to right a wrong against it.
The courts will not interfere with the internal management of a company. It is for the
company to decide whether it is being properly managed.
A member cannot sue to rectify a mere informality where the act would be within the
company’ s powers if done properly and the wishes of the majority are clear.
The majority of shares often belong to directors.The majority are in the best position
to prejudice the company - then decide that the company will not bring an action
against them.
There is thus a need for minority protection - enforcement of minority rights falls into
three main categories.
(iii)The action falls within one of the recognised exceptions to the Rule
in Foss v Harbottle.
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Edwards v Halliwell (Case 90) identified four exceptions:
In reality, only the first of these is a true exception to Foss - the others are cases where
the Rule has no application.
"Control" = voting control (50% + 1 vote) - but some suggestion that de facto control
is enough:
Invasion of the shareholder’ s personal rights is not really an exception to the rule in
Foss v Harbottle - because the shareholder would be the proper person to bring the
action:
Any shareholder is entitle to bring an action to restrain the company from doing
something which is outside the company’ s objects.
General rule that the courts will not interfere with the internal management of a
company when an action is brought by a shareholder does not apply if the act done by
the company was one which required a special majority which was not obtained.
If this exception did not exist, the company would be able to act in breach of its own
constitution.
This allows a shareholder to petition the court where the company is being managed
in a way that is unfairly prejudicial to the interests of some of the members. (but only
to his interests in his capacity as a member).
No bar to petition that the pursuer’ s own conduct has not been beyond reproach - no
requirement for "clean hands".
The court will not hear a petition under s.459 brought on the basis of a procedural
irregularity that could easily be rectified. (As in Browne v La Trinidad (Case 66) and
Bentley Stephens v Jones (Case 67))
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(e) Grounds for a s.459 Petition
The concept that members have a legitimate expectation that the company will be run
in a was that differs from the articles of association will not normally apply to a public
company:
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The court has wide discretion - it can grant any order it thinks fitting in the
circumstances. In particular, it can:
- order the purchase of the aggrieved shareholder’ s shares. (The most common
remedy).
Insolvency Act 1986, s.122(1)(g) - a company may be wound up by the court if the
court is of the opinion that this would be just and equitable.
Any shareholder provided he has had his shares for at least 6 months during the
eighteen months prior to bringing the petition, or have inherited them, or have
obtained them by direct allotment from the company.
This is not defined by the Act - the courts have described it as a broad and flexible
concept. "Clean hands" are essential for a s.122(1)(g) petition.
This also applies only to quasi-partnership companies, where the members have a
legitimate expectation of taking part in the management of the company.
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Where shareholders have joined a small family company or quasi-partnership on the
basis that it will be managed in a certain way and this has not been done, the petition
may be granted where the shareholders have lost confidence in the management.
The court is unlikely to grant a winding up order if the petitioner could have had an
equally viable remedy under s.459. Winding up is a drastic remedy.
(i) Presentation of the petition freezes the companies affairs while the
matter is decided.
(ii) The company can apply for a validating order, which will allow it to
carry in business pending a decision.
(iii) The company can take out a cross-undertaking for damages against
the petitioner - the petitioner would then be liable for any loss suffered
by the company because of the petition if the petition eventually fails.
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