Lecture Outline

1.Follow up from the Lecture 5

2.Lecture 5: Chapter 9.Corporations & legal personality
Chapter 10 Company formation
Chapter 11 Constitution of a company
3. Practice
4. Q&A
Follow up Lecture 5
Quick question to discuss:
1. What is Agency?
2. List the Agency types
3. What is a difference between express, implied & apparent authority?
4. What is a partnership?
5. One of the partners invests funds without involvement in day to day
operations. Name the type of partnership.
6. In the Social Network movie, what kind of partnership types do you
notice?
Lecture 6: Chapter 9
COMPANIES ACT 2006

Ownership

Sole traders/sole
Corporation Partnership
proprietors

2 & more owners/ 2 or more limited

1 person owns &
different person owners/ all
runs a business,
(director) may run partners can run
even w/employees
the business business
 Lecture 6: Chapter 9: Sole Traders
Advantages
No formal procedures are required to set up in
business. However, for certain classes of business a
licence may be required (eg retailing wines and spirits),
and VAT registration is often necessary.
Independence and self-accountability
A sole trader does not need to consult anybody about
business decisions and is not required to reveal the state
of the business to anyone (other than the tax authorities
each year).
Personal supervision of the business by the sole trader
should ensure its effective operation.
All the profits of the business accrue to the sole trader.
This can be a powerful motivator, and satisfying to the
individual whose ability/energy results in reward.
Disadvantages
If the business gets into debt, a sole trader's personal
wealth (for example, private house) might be lost if the
debts are called in, as they are the same legal entity.
Expansion of the business is usually only possible by
ploughing back the profits of the business as further
capital, although loans or overdraft finance may be
available.
High dependence on the individual which can mean
long working hours and difficulties during sickness or
holidays.
The death of the proprietor may make it necessary to
sell the business in order to pay the resulting tax
liabilities, or family members may not wish to continue the
business anyway.
The individual may only have one skill
Lack of diversification, absence of economies of scale
and problems of raising finance.
Lecture 6: Chapter 9
ELEMENTS OF CORPORATION
1. PROTECTION FOR MEMBERS:
a) against creditors
b) business failure

formation may be 1. MEMBERS ASKED TO CONTRIBUTE

Legal personality by any of 3 ways: IDENTIFIABLE AMOUNTS:
distinct from its sole, chartered,
members and statutory, a) Company limited by shares: Any outstanding
registered
directors amount from when they originally purchased their
shares from the company. If the member's shares
are fully paid, they do not have to contribute
Form of anything in the event of a winding up.
Limited liability of
ownership: b) Company limited by guarantee: The amount
members
private & public they guaranteed to pay in the event of a winding
up.

2. LIABILITY OF THE COMPANY FOR TORT AND

CRIME: As a company has a separate legal identity,
it may also have liabilities in tort and crime.
Lecture 6: Chapter 9

TYPES OF
CORPORATION

COMMUNITY
PUBLIC PRIVATE INTEREST
COMPANY

QUOTED (listed on UNQUOTED (not LIMITED BY LIMITED BY

the Stock listed on Stock LIMITED BY GUARANTEE & GUARANTEE WITH
UNLIMITED
Exchange, limited Exchange, limited SHARES HAVING SHARE NO SHARE
by shares) by shares) CAPITAL CAPITAL
Lecture 6: Chapter 9
According to UK law Public Company
Capital • Minimum capital amount of £50,000
• raise capital by offering its shares or debentures
to the public
• offer to existing members first any ordinary
shares to be allotted for cash
Dealings in shares • can obtain a listing for its shares on the Stock
Exchange or other investment exchange.
Accounts • Reporting standards to produce its statutory
audited accounts is 6 months
• The accounting exemptions are not available
• Requirements to publish its full accounts and
reports on its website for listed companies
• Report to a general meeting annually
Commencement date • obtain a trading certificate from the Registrar.
General meetings • Must hold twice in a financial year
Names and Identification • PLC
Disclosure requirements • special disclosure and publicity requirements
Private Company
• no minimum capital
• is prohibited to raise funds from public
• offer to existing members first any
ordinary shares to be allotted for cash.
• May permanently disapply this rule.
• Not available
• Reporting standards to produce its
statutory audited accounts is 9 months.
• if qualified by its size, may have partial
exemption from various accounting
provisions.
• No requirement to have a general
meeting.
• business as soon as it is incorporated
• Not required
• LTD
• No requirement
Lecture 6: Chapter 9

According to
the size

Small
Micro-entities
Parent subsidiary Quoted companies Multinational
regime
regime
Lecture 6: Chapter 9
The importance of the parent and
CHARACTERISTICS OF A PARENT COMPANY:
subsidiary company relationship is
1) It holds a majority of the voting rights in the recognized in company law in a number of
subsidiary. rules.
2) It is a member of the subsidiary and has the
right to appoint or remove a majority of its a) A parent company must generally prepare
board of directors. group accounts in which the financial
3) It has the right to exercise a dominant situation of parent and subsidiary
influence over the subsidiary: companies is consolidated as if they were
• By virtue of provisions contained in the one person.
subsidiary's articles. b) A subsidiary may not ordinarily be a
• By virtue of a control contract. member of its parent company.
4) It is a member of the subsidiary and controls
c) Since directors of a parent company can
alone, under an agreement with other members, a
control its subsidiary, some rules
majority of the voting rights in the company.
designed to regulate the dealings of
5) A company is also a parent if: companies with directors also apply to its
• It has the power to exercise, or actually subsidiaries, particularly loans to directors.
exercises, a dominant influence or control over
the subsidiary
• It and the subsidiary are managed on a unified
basis
6) A company is also treated as the parent of the
subsidiaries of its subsidiaries.
Lecture 6: Chapter 9
VEIL OF INCORPORATION the corporation hides its members from the public.

-Liability for trading without a

trading certificate
Lifting the veil by statute to
-Fraudulent and wrongful trading
enforce the law -Disqualified directors
-Abuse of company names

-Evasion of legal obligations

Situations when -Public interest
the veil can be lifted ( personal Evasion of obligations -Evasion of liabilities
liability of directors) -Evasion of taxation
-Quasi-partnership

-Subsidiary acting as agent for the

holding company
-The group is to be treated as a single
Group situations economic entity
-The corporate structure is being used
as a sham
Lecture 6: Chapter 9
Factor Company (Corporation) Partnership

Entity Is a legal entity separate from its members Has no existence outside of its members

Liability Members' liability can be limited Partners' liability is usually unlimited

Size May have any number of members (at least one) Some partnerships are limited to 20 members

Succession change in ownership does not affect existence are dissolved when any of the partners leaves it

Owners' Members own transferable shares Partners cannot assign their interests in a partnership
interests

Assets Company owns the assets Partners own assets jointly

Management Company must have at least 1 director (2 for a public company) All partners can participate in management

Constitution Company must have a written constitution may have a written partnership agreement, but also may not

Accounts A company must usually deliver accounts to the Registrar Partners do not have to send their accounts to the Registrar

Security may offer a floating charge over its assets may not usually give a floating charge on assets

Withdrawal of Strict rules concerning repayment of subscribed capital More straightforward for a partner to withdraw capital
capital

Taxation Company pays tax on its profit; Directors are taxed through PAYE system; Partners extract 'drawings' weekly or monthly; No tax is deducted as
Shareholders receive dividends which are taxed 10 months after the tax income tax is payable on final profit for the year.
year.

Management Members elect directors to manage the company All partners have a right to be involved in mngt
Lecture 6: Chapter 10
A PROMOTER is one who undertakes to form a company with
reference to a given project and to set it going and who takes the
necessary steps to accomplish that purpose.
Company Formation:
1. formed by promoters Roles:
2. pre incorporation contracts (expenses) • Act, under instruction, to form a company
3. documents to be filed : • Prepare all necessary documentation
‣ application for registration
‣ memorandum Duties:
‣ articles ‣ act with reasonable skill and care
‣ disclose any profit or potential conflict of interest
‣ statement of compliance
• either to the first independent board of directors, or
‣ statement of capital and initial shareholders
• to the company’s existing or intended shareholders
‣ registration fee
‣ breach of duty – i.e non-disclosure - allows the company to
‣ certified translation rescind the contract and recover the purchase price
4. Certificate of Incorporation ‣ the company may require the promoter to pay over to the
company any undisclosed profits
‣ the company may sue the promoter and claim damages for
breach of fiduciary duty
Lecture 6: Chapter 10
BUYING “OFF THE SHELF”
Buying a company 'off the shelf' avoids the
administrative burden of registering a company.
• Normally the persons associated with the
company formation enterprise are registered as
the company’s subscribers, and its first
secretary and director. When the company is
purchased, the shares are transferred to the
buyer, and the Registrar is notified of the
director's and the secretary's resignation.
RE-REGISTRATION
• A private company with share capital may be
able to re-register as a public company, if the
share capital requirement is met. A public
company may re-register as a private one.
The following are needed:
• Resolution
• Application
• Approval
• Compulsory re-registration
• To trade or borrow, a public company needs a
trading certificate. Private companies may
commence business on registration.
 Lecture 6: Chapter 10
STATUTORY BOOKS AND
RECORDS
• The requirement for
public accountability.
Publish info in specific
journals, ie. the London
Gazette and company
letterheads.
• The Registrar of
Companies is a
department within the
government is usually
called Companies House.
• Statutory books. A
company must keep
registers of certain aspects
of its constitution,
including the registers of
members and directors.
Registration Accounting records Annual accounts
• People with significant control • Companies must keep • A registered company
both private and public sufficient accounting must prepare annual
companies (individuals who records to explain the accounts showing a true
own or control over 25% of a company's transactions and fair view, lay them and
company’s shares or voting • financial position; in other various reports before
rights, or who exercise control words, so a profit and loss members, and file them
over the company and its account and balance sheet with the Registrar
management in other ways) can be prepared. following directors'
• Directors and its Records of approval.
directors' service contracts. • Confirmation statements
The company should keep
copies or written memoranda
of all service contracts for its
directors, including contracts
for services which are not
performed in the capacity of
director
• Debenture holders
Lecture 6: Chapter 11

MEMORANDUM CONSTITUTION
The memorandum is a simple • company’s constitution comprises
document which states that the
‣ articles ( internal rules re management &
subscribers wish to form a company administration)
and become members of it.
‣ resolutions (decisions affecting the
• historically the memorandum of articles)
association was a major document ‣ agreements (affecting the articles
• since 2006, now just a matter of
record
• states that the subscribers:
‣ wish to form a company
‣ agree to become members
‣ agree to take at least one share
each
Lecture 6: Chapter 11

Articles – Alterability Articles – Procedure for Alteration

• basic rule – can only alter if for the benefit of the
company as a whole
• individual hypothetical member of the future
• no outside contract shall prevent a change, but
company may become liable for breach of that
contract
• even if proposed alteration adversely affects only one
member, it may still be valid
• alterations allowing compulsory purchase of minority’s
shares will be (normally) disallowed
• allowing expulsion of defrauding director
• allowing expulsion of competing members
• possible to prevent alteration by weighted voting
rights
• An alteration may be void if the majority who approve
it are not acting bona fide in what they deem to be
the interests of the company as a whole.
• Alteration of objects (aim & purpose)*
• special resolution
• 75% majority
• 14 days notice
• copy of resolution to registrar within 15 days
• copy of amended articles to registrar
• alteration is binding on all members
• articles may say that, for a meeting proposing
an alteration, the affected member must be
present
• so affected member can prevent alteration by
not attending
• articles may require a greater majority than
75%
• …but can never be drafted to prevent
amendment

*Ultra vires is where a company exceeds its objects and acts outside its capacity.
Lecture 6: Chapter 11
THE CONSTITUTION AS A CONTRACT
1. The articles constitute a contract between:
• Company and members
• Members and the company
• Members and members
2. The articles do not constitute a contract between
the company and third parties, or members in a
capacity other than as members
3. The constitution can be used to establish the
terms of a contract existing elsewhere.
4. Shareholders' agreements sometimes
supplement a company's constitution. Individuals
have a power of veto over any proposal which is
contrary to the terms of the agreement. This enables
a minority shareholder to protect their interests
against unfavorable decisions of the majority.
Company Names
• basic rule – company can have any name selected by
promoters, but there are restrictions, name may be restricted
by statute
• registrar may refuse to register a company with a name
which is misleading or offensive
• connection with royalty, banks…..
• name will not be allowed if the same as an existing
company, may be disallowed as a tort
• the word ‘limited’ ( or plc ) shall not appear anywhere except at the
end of the name
NAME CHANGE
• compulsory or voluntary
• may be required to change by order from the registrar
• within 12 months if the company has been, by mistake,
registered with a name too similar to an existing company
• within 5 years if misleading information was supplied
• at any time if the use of the name is likely to cause harm to the
public
• special resolution, 75% majority, 14 days notice
• copy of resolution and amended constitution to registrar within
15 days
• registrar issues new certificate of incorporation