11
COMPANY LAW
Syllabus:
Choice of business organisation & company registration
Separate corporate personality and limited liability
The constitution and shareholders’ powers
Directors’ duties (1)
Director’s duties (2)
Minority shareholder protection (1): the derivative action
Minority shareholder (2): unfair prejudice
Agency and company capacity
Takeovers and mergers & corporate finance
Lectures:
Partnership and Business Structures
Corporate Personality
Piercing the Veil
The Constitution and Shareholders’ powers
Directors Duties
Minority Protection: The Derivative Action
COMPANY LAW 2017/8
,Introduction:
Ownership and Control (Corporate Governance)– Who owns the company and benefits from the
wealth; who controls what the company does with its assets? A company has members (shareholders)
who own it + has directors who control what the company does.
Corporate Finance – two principles are capital contribute for shares and borrowing. Concept of share
capital
Members have limited liability which they discharge when they contribute capital for their shares.
Directors of a company normally have no liability for its debts.
Public companies (plc) are permitted to invite the general public to subscribe for their shares whereas
private companies are not. Shares of a public company may be officially listed for trading on a
recognised investment exchange such as the London Stock Exchange – shares of a private company
may not.
Registered companies are brought into existence by registration of document with a public official
under the provisions of the Companies Act 2006. Most important legal characteristics of a registered
company is that it is “incorporated” and has “legal personality” – which is provided for in CA 2006
s15(1) – on registration of a company, the registrar must give a “certificate that the company is
incorporated”.
Corporate Form VS Others
Forming a company is one step you will think about.
From the observation of companies around the world, scholars think that a company generally has five
major features:
1) Separate Legal Personality
2) Limited Liability
3) Specialised Management
4) Transferability of Shares
5) Allocation of rights and control to members
Business organisations require 3 things: capital (money) – does it facilitate investment in the business;
whether the form of business organisation mitigates or minimises the risk involved in venture;
wherever you have money, risk and people combined there is a potential for disagreement, so does the
form of business organisation provide a clear organisational structure
3 Types of “For Profit” Business Structure: (Sole Trader, Partnership, Company)
A. Sole Trader
• Simplest form of business structure available – no formal organisational structure required.
• Carrying on business on one’s own without anyone else – one-person operation. Examples: an
electrician or a plumber.
• Require only start-up capital (and skills if applicable) to commence business and are not dependent
upon the investment of capital by others. Capital is provided through personal savings or a bank
loan.
• Although no dedicated regulations on sole tradership, but general controls exist. Example: traders
must be fully qualified to do electrical work and comply with building regulations.
• Legally there is no distinction between the sole trader’s personal and business asset so if the business
goes badly the creditors can go after their home, car or other assets
(b) Partnership:
• The rules of equity and of common law applicable to partnership shall continue in force except so far
as they are inconsistent with the express provisions of the Act. (s 46)
• Partnership Act 1890, section 1(1): Partnership is the relation which subsists between “persons
carrying on business in common with a view to profit”. Broad definition which can come about by
oral agreement, can be inferred by conduct or it can be a formal written agreement specifiying the
terms and conditions of the partnership,
• “Persons” - includes companies - Newstead v Frost [1980] 1 All ER 363
• “Business” - s 45 of the 1890 Act: ‘The expression “business” includes every trade, occupation, or
profession.’ Excludes “not for profit” organisation which is unincorporated association - Wise v
COMPANY LAW 2017/8 – CHOICE OF BUSINESS STRUCTURE
, Perpetual Trustee Co. [1903] AC 139
• To really give it a definition, a partnership is the relation which subsists between persons carrying on
a business in common with a view of profit. (Partnership Act 1890 s1(1))
• No formal process of becoming a partner – if you behave as partners the law will deem you are even
if you don’t know what a partnership is (Khan v Miah).
• Min membership required is 2 years and the max (since 2002), unlimited (prior it was 20 unless you
were a professional firm).
• Each partner needs to engage in management, a equal share of profit, indeminity in respect of
liabilities assumed in the course of the partnership business and not to be expelled by other partners.
• As opposed to sole trader, formal regulation exists: Partnership Act 1890, Limited Partnership Act
1907 and Limited Liability Partnership Act 2000.
• Advantages over a registered company include:
– Fewer formalities. There is no need to be registered. No requirement for meetings. No need to
file accounts to the public.
– Lower costs to run, considering the above.
Two or more people carrying on business together and not registering a company to use for their business.
Ordinary Partnership
• “In Common” - participation in the business - Saywell v Pope (1979) 53 TC 40
– Mr. Saywell and Mr. Prentice were partners in a firm dealing in agricultural machinery. In 1973 the
firm obtained a marketing franchise from Fiat which expanded the work of the firm. Until that time
Mrs Saywell and Mrs Prentice had been employed by the firm to do a small amount of work but
they then began to take a more active part in the business.
– The Inland Revenue refused to accept that the wives had become partners before 1975, the point
when a formal agreement was drawn up.
– Slade J agreed with the IR in light of the fact that the wives had never been integrated into the firm.
• “With a View to Profit” - Newstead v Frost [1980] 1 All ER 363.
– David Frost, the television personality, formed a partnership with a Bahamian company to exploit
his highly profitable activities in the US.
– The major purpose behind this was tax avoidance, to isolate the income produced from the
individual.
– The Inland Revenue argued that this partnership was designed as a tax avoidance scheme and so
did not constitute ‘carrying on a business with a view of profit’.
– The House of Lords disagreed, profits were derived from the entertainer’s activities. The
avoidance of tax did not affect that basic idea.
• Participation in net profits is prima facie evidence of partnership, but need to consider more factors.
– Section 2(3) Partnership Act 1890: ‘The receipt by a person of a share of the profits of a business
is primâ facie evidence that he is a partner in the business, but the receipt of such a share, or of a
payment contingent on or varying with the profits of a business, does not of itself make him a
partner in the business.’
– In Saywell v Pope, a share of profits was indeed credited to the wives for 1973. But they had no
power to sign cheques, no injection of capital into the business and no drawing facilities. Indeed,
they did not do anything in the capacity of partners.
Three Types of Partnership:
(i) Partnership Act 1890
(ii) Limited Partnership Act 1907
(iii) Limited Liability Partnerships Act 2000
(i) Partnership Act 1890
– Unlimited Liability
Partnership Act 1890 s 9: ‘Every partner in a firm is liable jointly with the other partners for all debts
and obligations of the firm incurred while he is a partner; and after his death his estate is also severally
COMPANY LAW 2017/8 – CHOICE OF BUSINESS STRUCTURE
, liable.’
– Mutual Agency
Partnership Act 1890 s 5: “Every partner is an agent of the firm and his other partners for the purpose
of the business of the partnership.”
The acts of every partner bind the firm and his partners
Unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the
person with whom he is dealing either knows that he has no authority, or does not know or believe him
to be a partner.
• Number of partners: Unlimited, but maximum of 20 Partners in the past (except solicitors,
accountants, stock exchange members and other professionals) – under sections 716-717 Companies
Act 1985.
– Those sections were repealed by the Regulatory Reform (Removal of 20 Member Limit in
Partnerships etc.) Order 2002 SI 2002/3203 and no equivalent section now applies under the
Companies Act 2006
• Formal agreement: Not essential
– A partnership agreement, if exists, is no different from any other contract.
– The 1890 Act is a voluntary code. S 19: ‘The mutual rights and duties of partners, whether
ascertained by agreement or defined by this Act, may be varied by the consent of all the
partners, and such consent may be either express or inferred from a course of dealing.’
Duties of Partners
• Partnership is a relationship based on mutual trust and it has long been established that partners owe
each other a duty of good faith, ie to act honestly and for the benefit of the partnership as a whole.
• Examples of actual duties from the 1890 Act:
– Render Accounts to each other – s 28: ‘Partners are bound to render true accounts and full
information of all things affecting the partnership to any partner or his legal representatives.
‘
– Account for private profits – s 29: ‘Every partner must account to the firm for any benefit
derived by him without the consent of the other partners from any transaction concerning
the partnership’
– Duty not to compete with firm – s30: s 29 will apply for any profits made.
Duty of Utmost Good Faith between Partners – Right of Partners:
• Equal Share of Profits & Losses – s 24(1): ‘All the partners are entitled to share equally in the capital
and profits of the business, and must contribute equally towards the losses whether of capital or
otherwise sustained by the firm.’
• Every partner entitled to take part in management – s 24(5): ‘Every partner may take part in the
management of the partnership business.’
– Not necessarily all partners have the same workload. It is common to have a managing
partner to make a day-to-day business decisions.
• One partner one vote, simple majority in most cases (s 24(8))
– Fundamental decisions may require unanimity, such as changing the nature of business and
admission of new partner(s).
(ii) Limited Partnerships Act 1907
• LP was created by the Limited Partnerships Act 1907.
• The Partnership Act 1890, the rules of equity and of common law applicable to partnerships, except
so far as they are inconsistent with the express provisions of the last-mentioned Act, shall apply to
limited partnerships. (s 7)
• A limited partnership must consist of one or more persons called general partners, who shall be
liable for all debts and obligations of the firm (s 4(2)).
o Other partners are called limited partners, who contribute a sum of capital or property valued
at a stated amount, and who will not be liable for the debts or obligations of the firm beyond
the amount so contributed.
• LP must be registered with the Registrar of Companies – (ss 5 & 8)
o So unlike ordinary partnership, there is no such thing as informal limited partnerships.
COMPANY LAW 2017/8 – CHOICE OF BUSINESS STRUCTURE
