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Corporate Law Module Summary
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This summary details all of the relevant information needed on the corporate law module. All notes are grade 2:1 and above.
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Corporate LawLecture 1 – Introduction to Corporate Law
Corporate Law
Introduction to Company Law
Firstly, you need capital (money). Does it facilitate investment in the business? Second, no
business venture is guaranteed to succeed and so the second key question is whether the
form of business organisation mitigates or minimises the risk involved in the venture. The
third question relates to the fact that wherever you have money, risk and people combined
there is potential for disagreement, so does the form of business organisation provide a
clear organisational structure?
The Sole Trader
This is one person who operates the business on their own. They usually provide the capital
with personal savings or a bank loan. They contract in their own name and have personal
liability for all the debts of the business. If the business goes badly, the creditors can go after
his or her home, car, or other assets in satisfaction of the business debt. There is little risk of
disagreement and so there is no need for a formal organisational structure.
The Partnership
The Partnership Act 1890, s1 defines a partnership as ‘the relationship which subsists
between persons carrying on a business in common with a view of profit’. Partnership can
come about from an oral agreement, or it can be inferred by conduct, or it can be a formal
written agreement specifying the terms and conditions of the partnership. There is no
formal process of becoming partners. The minimum membership required for a partnership
is two, and the maximum since 2002 is unlimited, prior to this it was 20 unless you were a
professional firm who could exceed the maximum number. The assets of the firm are owned
directly by the partners. Under the Act, each partner is entitled to: participate in
management, an equal share of the profit, an indemnity in respect of liabilities assumed in
the course of the partnership business, and not to be expelled by the other partners. A
partnership will end on the death of a partner. Limited liability cannot be achieved through
a partnership agreement, because under the Partnership Act each partner is jointly and
severally liable for the debts and obligations of the partnership incurred while he or she is a
partner. For example, if a partner runs away with the clients’ funds, each individual partner
is legally responsible for the whole debt, not just a proportion of it. There are two types of
partnership that allow limitation of liability.
- ‘Sleeping partners’ – they take no active part in the running of the partnership.
Created by the Limited Partnership Act 1907, allowing certain partners to have full
limited liability.
- LLP - Created by the Limited Liability Partnerships Act 2000 and allows for partners in
these entities to achieve limited liability up to a point. This type of partnership was
designed to allow large professional firms, such as law firms, to achieve some
measure of protection for partners who were not involved in a negligent act.
The risk for partners is larger than for shareholders in a limited liability company, although
reduced in an LLP, but is at least shared by all the partners. Organisational structure is very
flexible as the agreement can facilitate in almost any situation.
,The Company
As an entrepreneur is pursuing a commercial venture, he or she would be forming a
company limited by shares. Setting up a company is governed by the Companies Act 2006,
ss7-15 and is a relatively simple process. The entrepreneur is required to provide the
Registrar of Companies with the constitution of the company, a memorandum of
association, its share capital, the address of its registered office, whether it is a private or
public company, that the liability of its members if limited, a statement of the company’s
directors’ names and addresses, and a statement of compliance with the Companies Act
2006. Prior to 1992, at least two people had to subscribe to become shareholders in a
private company. As a result of the Twelfth EC Company Law Directive (89/667),
implemented in 1992, private companies could be formed with a single member, but public
companies still needed at least two members. S7 of the CA 2006 now provides for single-
person private and public companies.
The Memorandum and Constitution
S8 of the CA 2006 has reduced the memorandum of association to a more limited function.
The memorandum is now a single document providing certain basic information and key
declarations to the public which state that subscribers wish to form the company and agree
to become members taking at least one share each. If the application to the Registrar is
successful, the subscribes become the first members of the company and the proposed
directors become its first directors. In S10 of the CA 2006, the provisions have been
streamlined and now only required a statement of the total number and nominal value of
shares to be taken on formation by the subscribers to the memorandum of association.
The value given to each share is known as its ‘par’ or ‘nominal value’. The shares may also
be paid for in goods and services and not necessarily in cash.
The company’s constitution or articles of association are a set of rules governing the running
of the company. They form the core of the organisational structure of the company, the
board of directors and the general meeting and generally allocate the powers of each organ.
Articles and the CA 2006 place shareholders at the centre of the corporate power structure.
The articles, according to S33 of the CA 2006 bind the members of the company, creating a
statutory contract between the members themselves and between each member and the
and the company. If all of the documentation is in order, then the Registration will issue a
certificate of incorporation and the company will then come into existence.
Private and Public Companies
The Companies Act 2006, recognises a distinction between two different types of company:
private companies where the investment is usually provided by the founding members
either through their personal savings or from bank loans, and public companies where the
intention it to raise large amounts of money from the general public.
- Private companies are private. The vast majority of companies in the UK are private.
If a member wishes to leave the company by selling their shares or a member has
died, the directors have a say in who replaces them. There may also be a pre-
emption clause in the articles which means that if a member wishes to sell their
shares, they must first offer the shares to the other members. Private companies
, cannot invite the general public to buy shares, but they also, unlike public
companies, have no minimum capital requirements. The members of a private
company have limited liability and so the word limited or ‘Ltd’ must appear after the
company’s name. Members are thereby liable only for the amount unpaid on their
shares and not for the debts of the company.
- Public companies have the aim of securing investment from the general public and
can advertise the fact they are offering shares to the public. In doing so, the
company must issue a prospectus giving a detailed and accurate description of the
company’s plans. There is a minimum capital requirement of £50’000. Public
companies are not necessarily listed on the stock exchange. Some public companies
do exist outside the stock exchange listing system, such as Sir Alan Sugar’s Amstrad
plc being a high-profile example. The application for registration for a public
company must state that it is public and, as with private companies the liability of
the members is limited thus the words public limited company or PLC/plc must come
at the end of its name.
Why would an entrepreneur form a company?
The subdivision of shares allows for a very large number of investors to become members of
the company. Those members have limited liability which minimises their risk. This in theory
makes capital easier as individuals may feel more secure in their investment. Technically,
the people who control the company are shareholders. They buy shares in the company
which entitle them to certain control rights exercised through the shareholders organ, the
general meeting. Shareholders can appoint or remove directors by a simple majority vote at
the general meeting. Day-to-day management of the business is carried out by professional
managers. In carrying out their function, the directors stand in a fiduciary relationship with
the company. They therefore act bona fide in the interests of the company and not for any
other purpose. The employees who are authorised to carry out the company’s business are
the company’s agents and therefore the company will be bound by their actions.
Courts have tried where possible to make allowances for these ‘quasi partnership’ type
companies. The removal in 2002 of the 20-partner limits has certainly enhanced the capital-
raising ability of the general partnership. However, the continued use of the corporate form
by small companies seems secure given the prestige attached to the tag ‘Ltd’.
Statutes
Main Act of Corporate Law is the Companies Act 2006.
Statue of Merchants 1285 – decreased punishments. Evasion of tax led to imprisonment
instead of death.
How Law Started
Corporate law started with the Manga Carta 1215. This was influenced by the Alblegensian
Crusade in 1209 which triggered the Magna Carta 1215. At this time, corporations and
companies were on-existent and there was no such thing as a financial / economical sector.
Many laws now involve the influence of human rights.
4-5th century – Contract rules and laws started to emerge. The genesis of Commercial Law is
closely related to the activity of guilds, freemasons and corporations of merchants which
arose in medieval towns in order to defend their common interests. Law created by
, merchants in order to solve legal problems between them because of the development of
their commercial activities.
Over time, the process of corporation through charters extended to local authorities and
crucially commercially organisations such as the Guilds of Merchants. The changing nature
of the power relationship between Parliament and the Crown was also reflected in the way
a charter was obtained. A charter could only be granted by an Act of Parliament.
Christopher Columbus 1480. Creation of the US states. Product of people who escaped from
Europe because of debts and tax evasion.
Bankruptcy Act 1542 – Led to significant legislation being enacted. Prior to this, those not
paying their debts and taxes would get the death penalty. This tried to promote commercial
trade and start businesses. This Act did help reduce sentences or punishments for those
committing tax evasion and fraud.
Galileo Galilei 1610 – He galvanised the technical and commercial age. Creator of the
telescope, which led to a mass production of telescopes. Through commercial trade, new
rules started to emerge.
16-17th century – led to the introduction of chartered companies. The East India Company
1555 is the most significant as it represented ownership of India. This shows corporate
governance at a very large scale. Chartered companies were built to extend the realm,
otherwise known as royal power. Through commercial trade the British Empire expanded.
This is influential as the royal charter, e.g. the monarch has to give power to start a
company.
Benefits of chartered companies
- Crown privilege as they were protected in a foreign land.
- Monopoly over particular trades. One company dominating an entire sector.
Grant of charter was dependent upon satisfying a defined ‘public benefit’, e.g. the
promotion of overseas and colonial trade. How will your company promote interests and
support the British Empire? This has to be proven to the Crown.
Stock Exchange
1698 – An informal club formed for the exchange of stocks and commodities, including titles
in chartered companies, in and around Jonathan’s Coffee House in Change Alley, London.
This later became the site of the first London Stock Exchange. This was essential in pushing
forward commercial trade, e.g. buying shares. Investment of money lead to the financial
crisis, a major development of commercial law.
Period of irrational speculation in these markets led to a stock market crash known as the
South Sea Bubble, after the South Sea Company formed in 1711. Clumsy attempts by the
Government to intervene to check the speculative mood caused panic and led to the crash
on which many investors were ruined. This had an enormous effect on the granting of
charters over the following century because officials were vary wary of granting them and
when they did they often placed restrictive conditions in the grant.
Bubble Act 1970 – Enactment of the act led to the first financial crisis. This was created to
stop monopolies and to look at the risk of investment. Shares would only be given out if this
was approved by Parliament or the Crown. The act was enacted to reduce monopolies.
There are now many limitations on companies today.
Marriage between Contract and Corporate Law
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