02/12/2020

Introduction to Company Law

Chris Howard
Director of Professional Legal Education
King’s College London

Suggested Reading
• Company Law, Alan Dignam & John Lowry
(OUP)
• Company Law, Brenda Hannigan (OUP)
• Cases & Materials on Company Law, Sealy &
Worthington (OUP)
• Companies House website:
http://www.companieshouse.gov.uk/

1
 02/12/2020

Overview
• Why is Company Law important?
• What is a company?
• Advantages of the company form
• The veil of incorporation
• The legal nature of a share
• Types of company
• Corporate Finance

Overview (cont..)
• Corporate Governance - Constitution
• Directors’ Duties
• Minority Shareholder Remedies
• Corporate Governance and Society
• Corporate Manslaughter
• The death of a company

2
 02/12/2020

Why is Company Law important?

• Critical importance of this legal
abstraction to commercial
contracting
• Establishing liability
• Dangers of corporate failure -
insolvency

What is a Company? Historical Context

• Origins and genesis:
• Venture capital projects – 2000 BC
• ‘Campagnia’ – Italy 12th Century
• Early ‘incorporated’ entities – Guilds etc.
• Chartered Companies – 18th Century
• South Sea Bubble – early example of corporate
collapse
• Companies Act 1862 – birth of modern ‘free’
limited company

3
 02/12/2020

What is a Company? Key features

• Shares
• Limited Liability
• Separate Legal Personality

Separate legal personality

• AKA the veil of incorporation
– legal entity distinct from members (i.e.
shareholders)
– limited liability
• Salomon v Salomon & Co (1897)
“The company is at law a different person
altogether from the subscribers
Lord Macnaghten

4
 02/12/2020

The Advantages of the Company Form

• Benefits of separate personality:

- Rights and obligations – may sue or be sued

- Perpetual succession

• Benefits of Limited Liability

- encourages investment
- creates possibility of a market for shares
- partitioning of assets (Macaura v Northern
Assurance Co (1925)

• Other practical benefits – tax rates, floating charges

The Veil of Incorporation

Mr Salomon The creditors

(shareholder)

Salomon & Co

10

5
 02/12/2020

‘Piercing the Corporate Veil ‘

11

Piercing the Corporate Veil

• Lord Denning in Littlewoods v IRC [1969]:
“The doctrine in Salomon v Salomon has to be
watched very carefully. It has often been supposed
to cast a veil over the personality of a limited
company through which the courts cannot see but
that is not true. The courts can and often do draw
aside the veil.”
• Reassertion of orthodoxy in Adams v Cape (1990)
• Recent discussion – Petrodel v Prest (2013)

12

6
 02/12/2020

Piercing the Corporate Veil

• So how / when can the veil be pierced?
• Façade exception – Jones v Lipman [1962]
• Limited statutory group liabilities – e.g. group
accounting
• Tortious liability?
• Chandler v Cape [2012]/Thompson v The Renwick
Group [2014]/ Lungowe v Vedanata Resources [2017]
• Williams v Natural Life [1998]/ Standard Chartered
Bank v Pakistan National Shipping Corp (No 2) [2003]
• Arguments for wider ‘enterprise liability’ in context of
group companies / multinational enterprises
• Fraudulent Trading / Wrongful Trading
- s213 / 214 IA 1986

13

What is a share?
• What is a share?
• A chose in action
• Borland’s Trustee v Steel Bros & Co Ltd (1901)
Farwell J:
• ‘A share is the interest of a shareholder in the
company measured by a sum of money, for the
purpose of liability in the first place, and of
interest in the second, but also consisting of a
series of mutual covenants entered into by all
the shareholders inter se in accordance with
[s33 Companies Act 2006]’
14

7
 02/12/2020

What is a share?
• Shareholder rights / obligations:
• Rights:
- Dividend
- Vote in General Meeting
- Right to participate in surplus on
dissolution
- s33 rights
• Obligations?
- s33 liabilities
- Allen v Gold Reefs
- Shareholder Agreements
15

Classes of share
- Ordinary
- Preference
- Redeemable
- Convertible

Important point - not all shares carry

equal rights

16

8
 02/12/2020

17

Defining classes of share / variations

• Classes: rights attached to categories of
share OR categories of shareholders
Cumbrian Newspapers v Cumberland &
Westmoreland Herald [1986]
• Do not include outsider rights
Eley v Positive Life Assurance Co. (1876)
• Problem of defining variations
White v Bristol Aeroplane Co Ltd [1953]

18

9
 02/12/2020

Types of company
• Companies limited by shares (Plc or Ltd,
closely held or dispersed ownership)
• Companies limited by guarantee
• Community Interest Companies
• Unlimited companies
• Statutory and chartered companies
• EEIGs / ‘Societas Europaea’ (SE/SPE)
• OEICs

19

Other Corporate Forms

• Other ‘incorporated’ entities which are not
classed as companies but share similar
regulation:
• LLP – Limited Liability Partnership (Limited
Liability Partnerships Act 2000)
• Registered Societies (Co-operative and
Community Benefit Societies Act 2014)

20

10
 02/12/2020

Multinational Enterprises
• Companies/Groups/JVs with transnational reach,
taking advantage of locational advantages
• Difficulty of definition – multiple forms of MNE
(e.g. see OECD definition)
• Problems with enforcement
• Particular problem areas e.g.:
– Use of tax havens / transfer pricing
– Employment rights
– Potential for human rights abuses / corruption
• The difficulties of multilateral regulation – e.g.
failure of Multilateral Agreement on Investment
• The solution - soft law / self-regulation?

21

Corporate Finance – Share Issue

• Private Co (Ltd) – minimal regulation:
- Minimum 1 director
- No requirement for qualified secretary
- Civil offence to advertise shares (CA ss755-
760)
• Public Co (Plc) – more heavily regulated:
- 50K min issued share capital
- May offer shares to the public
- Min 2 directors + Company Secretary

22

11
 02/12/2020

Corporate Finance – Share Issue

• Equity finance - initial offering / share issue
• Strategic Choice of which market to list on
• Main Market of the London Stock Exchange
– Prestigious market
– But very heavily regulated
– Detailed prospectus required (Prospectus
Directive 2003)
• AIM (Alternative Investment Market)
– New businesses, higher risk
– Less heavily regulated

23

Corporate Finance - Debt

• Debentures
• Secured loans:
– Fixed charges
– Floating charges – Re Yorkshire Woolcombers
(1903)
– Charges over book debts – National Westminster
Bank v Spectrum Plus (1996)
– Importance of registration
• Unsecured loans

24

12
 02/12/2020

The Constitution of a Company

Basic constitutional documents (s17 CA 2006) :
• Articles of Association (Table A / Model Articles /
bespoke)
• Certain important resolutions (e.g. variations of class
rights)

Other relevant documents:

• Memorandum
• Certificate of Incorporation
• Shareholder’s Agreement (if there is one)

25

The Constitution of a Company

• Primary power-base – the shareholders
• Exercise of power through General Meetings
• Ordinary resolution +50% Special resolution
75%+
• Key shareholder powers:
• Appointment (s17 MAs) and removal (s168
CA) of directors
• Residual Decision-making by SR (s4 MAs)
• Day-to-day control of activies – the Directors
(s3 MAs)
• Decisions made in Board meetings
• Vote on show of hands

26

13
 02/12/2020

The Constitution of a Company

• Sensitive relationship between the company
as an entity and the shareholders / directors.
• Judicial reluctance to allow limitations on
Company’s statutory powers
• Impact of shareholder’s agreement:
• Russell v Northern Bank Development Co.
[1992]
• Entrenching the status of Directors:
• Bushell v Faith (1970)

27

The Constitution of a Company

• Special rules on amending the articles
• Requires Special Resolution - s21(1) CA 2006
• Higher threshold an be set – ‘entrenchment’ – s22 CA 2006
• Common law limit on power:
• ‘bona fide for the benefit of the company as a whole’: Allen
v Gold Reefs of West Africa Ltd [1900]
• ‘bona fide’? Shuttleworth v Cox Bros [1927]: subjective test
with objective limits
• ‘company as a whole’? Greenhalgh v Arderne [1950]
• Problems with expropriation amendments:
• Brown v British Abrasive Wheel Co [1919]
• Sidebottom v Kershaw, Leese & Co [1920]
• Dafen Tinplate v Llanelly Steel Co [1920]

28

14
 02/12/2020

Corporate Governance
• Company activities carried out by employees

• Other stakeholders:
• Creditors
• Customers / Clients
• Inland Revenue
• Wider Community

29

The Role of a Director

• No specific definition of what a Director is:
– s250 CA 2006
• Name of role is unimportant
• De jure directors – formally appointed
• A company can be a director, but must be at
least one human director (s156 CA 2006)
• De facto directors – Re Paycheck Services Ltd
• Shadow directors – s251 CA 2006

30

15
 02/12/2020

The Role of a Director

• Fiduciary responsibility
• Specific duties codified in the Companies Act 2006
• Duties owed to the company not the shareholders
s170 / Percival v Wright (1902)
• Coleman v Myers [1977] – limited duty to
shareholders where ‘special factual relationship’
• Peskin v Anderson [2001] – no ‘special factual
relationship’ was demonstrated.
• Echoes of Tort

31

Director’s Duties
• s171 – duty to use powers in accordance with the
constitution, for ‘purposes for which they are
conferred’
• Determining ‘proper purposes’ - Howard Smith v
Ampol [1974]
• To act in good faith to promote the success of the
company s172
• Determining ‘good faith’ – subjective test, but requires
evidence: Regentcrest v Cohen [2001]
• Defining ‘success’ – s172 (1) (a) – (f)
• Success of the group? Charterbridge v Lloyds [1969]

32

16
 02/12/2020

Director’s Duties
• s173 – duty to exercise independent judgement
• s174 – duty to exercise ‘reasonable skill & care’
– Test for ‘reasonable’ ss 174(2)(a)-(b)
– Dorchester Finance v Stebbing [1989]; Re Barings [1999]
• s175 – Duty to avoid conflicts of interest and not to
take advantage of corporate opportunities (no
conflict, no profit rule)
• s176 – Duty not to acceptance benefits from third
parties conferred by reason of being a director
• S177 – disclosure of interest in transactions with the
company

33

Minority Shareholder Remedies

• Vulnerability of minority shareholders
• Need for special protection
• Personal actions – s33 CA 2006
– Defining personal rights
• Unfair Prejudice – s994 CA
• O’Neill v Phillips [1999] – Hoffmann principles
• Examples of unfair prejudice:
– Breach of directors duties:
– Grace v Biaglioli [2006]; Re Macro [1994]
– Breach of equitable arrangement: Brownlow v Marshall [2000]; Croly
v Good [2010]; Re Metropolis Motorcycles [2007]
• Range of remedies, most commonly buy-back: s996 CA
• Difficulties of calculating value: Re Precision Bellows Ltd [1984]

34

17
 02/12/2020

Minority Shareholder Remedies

• Derivative actions – s260 CA 2006
• Solution to the problem of the rule in Foss v
Harbottle
• Two-stage process – prima facie case,
permission to proceed
• Mandatory bars (263(2)), Discretionary Bars
(263(3)
• Importance of possible ratification /
authorisation

35

Minority Shareholder Remedies

• Just and equitable winding up – s122
Insolvency Act 1986
• Ebrahimi v Westbourne Galleries [1972]
• Re Yenidje Tobacco Co Ltd [1916]

36

18
 02/12/2020

Corporate Governance and Society

• Mid 19th Century – early 20th Century: Transition from
private ownership to dispersed ownership
• Merrick Dodd – the corporate realist school
• Adolf Berle – aggregate theory
• Updating aggregate theory: ‘nexus of contracts’ –
Alchian & Demsetz
• Return to corporate realism with volatility of 1980s
• Continuing challenges:
• Taxation
• Environmental impact
• Wealth creation / distribution
• Technology and automatization
• Transnational dominance

37

Corporate Governance and Society

• Modern UK developments, arising from
Reports – Greenbury, Hampel, Higgs
• The Combined Code – importance of Non-
executive Directors
• Company Law Review Steering Group
• Companies Act 2006 – enlightened
shareholder value (s172)
• Post – 2008 crisis: Walker Report
• UK Corporate Governance Code
• Stewardship Code
• International dimension – EU & US
38

19
 02/12/2020

Corporate Manslaughter
• Criminal sanction
• Historic difficulties in attributing criminal
liability to corporate entities – Tesco v Natrass
(1972)
• Corporate Manslaughter and Homicide Act
2007 (the Act) follows public outcry
• Conglomeration of ‘senior management’
• Slow start to enforcement
• Is corporate conviction a worthwhile goal?

39

The Death of a Company

• Winding Up / Liquidation – voluntary or
compulsory
• Solvent Liquidation / Insolvent Liquidation
• Corporate rescue – Administration /
Company Voluntary Arrangement

40

20