The Articles, as a rulebook will set out (among others):
INTRODUCTION TO BUSINESS LAW AND PRACTICE • the procedures of the company
• whether the company directors can make certain decisions
• the requisite majority required for making certain decisions
INTRODUCTION: • the issue and transfer of shares
• how the board and shareholder meetings are to be conducted
and the powers of directors.
The articles will be filed with Companies House to ensure compliance.
Three types of articles:
* Bespoke articles - articles written specifically for that company.
* Model articles (private or public version) - articles drafted in a
standard form that cater for the needs of most companies. Small
Businesses are set up to make a profit (except for non-profit private companies will likely adopt these articles.
organisations but you will not be looking at those on the BLP). A business * Model articles as amended - adopting the standard articles but
generates income by selling products and/or services. amended a few sections to suit that particular company.
Considerations to bear in mind when setting up a business: If not registered, model articles apply in default.
These considerations determine which business structure is the most
appropriate. When advising a client, a lawyer must check the articles first.
1. Cost considerations: The internal structure of a company:
• To be able to sell products/services, the business must
incur expenses. If the income exceeds the costs of the THE COMPANY
business, the business makes profit.
• It is likely that a proportion of that profit is given to the Shareholders Directors Secretary (if any)
business owners. The rest is retained by that business to Role: Investors Role: Managers
help it grow.
• A business is also likely to employ staff and may use
services.
Board of directors
• The company will need to raise finance to: General meeting Board meeting
* Pay for set-up costs (when setting up) – eg.
purchase/rent premises, employ staff, get
professional advice Employees (if any)
* Develop and expand (once established) – These
are the ongoing costs: marketing activities,
buying stock and renting premises.
• Businesses raise finance in four ways:
* Investment by the company’s owners
* Investment by outside investors in return for a The company will have shareholders and directors. It may also have
share in the company’s future profits secretaries and employees.
* Borrowing money – eg. by way of a loan
* Retaining a proportion of the profits instead of Shareholders:
distributing it to investors/owners by way of a Shareholders (members) = owners of the company. Shareholders invest
dividend a lump sum in the company and in return they receive a shareholding.
s.112(2) CA 2006 Membership begins when the member’s name is
2. Mitigating or minimising risk: entered in the company’s register of members.
Does the owner have personal liabilities for all debt?
Subscribers = the first shareholders of the company who become
3. Structural considerations: shareholders when the company forms.
Does the business vehicle provide a clear organisational
structure? Shareholders pay for their shares and are entitled to profits on their
shares. They usually also have the right to vote.
Commercial risk:
However, company properties and assets are owned by the company,
not the shareholders. Change in the shareholders does not affect the
Risk = the likelihood of things going wrong such as incurring liability. property. – Eg. Tesco owns a number of retail sites and buildings, but the
Liability = being legally obliged or responsible to another, of owing shareholders are not entitled to those.
another party money.
Directors:
Lawyers must devise legal solutions to help clients minimise commercial Directors = appointed managers who deal with the day-to-day
risks. operations of the company.
Examples of commercial risk: Directors together constitute the board of directors.
* Incurring expenditure that they cannot pay as their income is
lower than the expenditure Separate legal personality:
* Agreeing to onerous contracts with no way out if things go wrong Companies have a separate legal personality, meaning that they form
(no ways to terminate in case of acts of god) a legal person from the date of incorporation. Due to this separate
* Unrealistic deadlines personality, the shareholders are protected from liability and their
* Contractual obligations without limited liability liability will be limited to the amount they paid for the shares.
* Reputational risk
Suing and being sued:
A client will want to know: • A company as a legal person can take action to enforce its legal
1. The elements of risk rights.
2. Consequences/potential liabilities if things go wrong • Company can be sued for breach of its legal duties.
3. Strategies to reduce/minimise risks and potential liabilities
The acts/omissions of the director will ultimately be the acts/omissions
BASIC CONCEPTS OF COMPANY LAW: of the company and the company will be liable for such acts, not the
director. However, the director can also be liable in certain situations.
The focus of BLP is companies so it is essential to have a basic knowledge
of company law before you start the course.
Articles of Association:
The Articles of Association (Articles for short) is the 'Rulebook of the
Company', its Constitution.
BLP – Revision notes | Page 1 of 30
,SHARES AND THEIR FEATURES: * Costs: Companies House fees, no legal fees involved
Rules:
Nominal or par value: s.9 CA 2006 If not registered online, the following must be delivered to
Companies House:
Shares must have a fixed nominal value – eg. 1p, 5p or £1 1. A copy of the memorandum
2. An application for registration (Form IN01)
Nominal value = the minimum subscription price for that share. It 3. Articles
represents a unit of ownership rather than the actual value of the share. 4. The fee
Market value = often higher than the nominal value and it constantly
changes. Once approved, the company receives a certificate of incorporation
Eg. a share’s nominal value may be £1, but it maybe sold on the market containing:
for £2.50. 1. The name of the company
2. The date of incorporation
The excess over nominal value is the ‘premium’ – eg. Market price 3. The company’s registered number
(£2.50) – Nominal value (£1) = £1.50
s.15 CA 2006 The company becomes a legal entity from the date of
Issued, allotted, paid-up and called-up shares: incorporation.
Issued share capital = the total amount in value (nominal and premium) Shelf company:
of all shares in issue at any point in time. – This is the amount of share
capital that will be shown in the company’s accounts. More common than incorporating from scratch. In this case, a shelf
company has been set up in advance by a law firm ready to tailor it to
Issued share capital is made up of: the client’s requirements. This was used to speed up the process of
Subscriber shares = shares purchased by the first members of setting up a company, although now with online registration, this is
the company. becoming obsolete.
Further shares will be issued once the company has been
incorporated. Advantages:
Allotment = shares are ‘allotted’ when a person acquires the * The conversion of a shelf company retains the advantage of
unconditional right to be included in the company’s register in being available all the time on every day of the year.
respect of those shares – s.558 CA 2006 * Traditionally been regarded as the cheaper way to form a
Issue of shares = Shares are only issued, and only form part of a company (Companies House fees + legal fees) however, once
company’s issued share capital, once the shareholder has been legal fees are factored in, the costs of the two methods are not
registered. materially different.
* If the client requires complex tailor-made articles: usually shelf
Paid-up share capital = the amount paid on shares companies are incorporated with Model Articles which will
Called-up share capital = the outstanding payment on shares require a special resolution to change the articles - this may delay
that has been demanded by the company. the company’s start date for trading by 14 clear days unless the
procedure can be shortened.
Different classes of share:
Rules:
A company may create different classes of shares and these will be set When a client requests a new company, change the following via
out in the articles – Eg. different types of ordinary share, each carrying shareholders special resolution (or other means provided by articles s.77
different rights such as voting or no voting rights CA 2006):
* Articles – s.21(1) CA 2006
Preference shares = entitle the holder to a preferential right – Eg. the * Members, directors and company secretary
first claim to a dividend or return of capital on winding up * Shares held by subscribers (those working at the law firm) are
to be transferred to client
Shareholders: * Client’s representatives are appointed as directors
* The first directors resign
A shareholder can be a company or an individual. * Registered office – s.87(1) CA 2006
Wholly owned subsidiary = company A owns 100% of shares in company
B. In this case, A is B’s parent or holding company. B will be included in PRIVATE, PUBLIC AND LISTED COMPANIES:
A’s accounts as an asset.
For Private limited company rules – s.4(1) CA 2006
Subsidiary = company A owns shares in company B, however, it does not For Public limited company rules – s.4(2) CA 2006
own all the shares.
The main difference between public and private companies:
People with significant control: Only public companies can offer their shares to the public (hence the
name). This is done through listing on the London Stock Exchange.
Since 1 Apr 2016, UK companies are required to identify people with I
significant control (PSC’s). The purpose is to increase transparency and Listed companies:
combat terrorist financing/tax evasion It is not the company that is listed but the shares
PSC = Any individual who owns more than 25% of shares or voting Enables companies to raise large amounts in funds
rights, has the power to appoint or remove a majority of its board, or Client must convert the company into a plc first and then apply
otherwise exercises significant influence or control. for a listing on a stock exchange by making sure that they comply
with all the relevant listings regulations.
ss.790A-790ZG CA 2006 Companies must maintain a register of PSC’s
which is open to public inspection. Differences between a private and public company:
PSC register must be filed at Companies House alongside a Share capital:
confirmation statement. Private company – no requirement for a specified minimum amount of
share capital
Public company – must have a share capital with a nominal value of at
COMPANY FORMATION: least £50,000, of which at least one quarter must be paid up – s.586 and
s.763 CA 2006
Two incorporation methods:
1. Incorporating a new company from scratch or Number of directors:
2. Purchasing an existing shelf company Private company – need only have one
Public company – minimum of two – s.154 CA 2006
Incorporation from scratch:
Company secretary:
Advantages: Private company – May choose to have a company secretary but no
* Traditionally slower, now with the advent of online obligation to do so – s.270(1) CA 2006
incorporation services, difference in speed is now negligible, s.270(3)(b) CA 2006 If no company secretary then the directors may do
however incorporation can only take place during Companies anything that the secretary is required/authorised to do
House opening hours even if incorporated online.
* Easier to prepare tailor-made articles, but then it would be more Public company – Must have a company secretary – s.271 CA 2006
expensive due to legal costs and it would take longer This person must have the requisite knowledge and experience and hold
BLP – Revision notes | Page 2 of 30
, at least one of the qualifications specified in s.273(2) CA 2006 Contract between the members themselves:
Rayfield v Hands One member can enforce articles against another
Annual general meetings: member directly if that member accepted a personal obligation to
Private company – not required to hold one another member.
Public company – Must have one a year – s.336 CA 2006 Welton v Saffery Members can only enforce the articles through the
company itself – conflicting case law!
Level of regulation:
Public company – higher levels of regulation as they can potentially offer Advise client to enter into a shareholders’ agreement so they can
their shares to the public and thus need to be better regulated. enforce their rights against other members.
COMPANIES HOUSE PROCEDURES: DIRECTORS:
Companies House procedure rules that must be complied with: Officers of the company:
Company secretary/directors, must notify the Registrar of Company secretary:
Companies when tshe company changes its officers/makes
significant constitutional changes * Main duties: keep books up to date, produce minutes of board
and general meetings, make sure all necessary filings are made
At least once a year, company secretary/directors must file an at Companies House
annual confirmation statement for the company (Pre-2016 this * s.270(1) CA 2006 A private company is not required to have a
was called annual return) company secretary unless the articles require so.
A private company may elect to hold more detailed information * s.270(3)(b) CA 2006 If a private company does not have a
on a central register and in that case, they need not maintain company secretary, the directors may do anything the secretary
their own register in-house. was required or authorised to do
* s.271 CA 2006 A public company must have a company secretary
ARTICLES AND MEMORANDUM: Directors:
Articles of association: All directors must be natural persons to aid accountability. A company
s.18 CA 2006 All companies must have an articles of association. cannot be a director.
The main purpose of this document is to regulate the relationship Private companies must have at least one director.
between the shareholders, directors and the company.
Example provisions: s.157 CA 2006 Minimum age limit of 16 for directors.
* Method of appointment of directors MA 5 Directors may delegate specific powers.
* Special rights attaching to shares The roles of directors and shareholders differ, even though they may be
* Powers of directors the same person.
* Voting rights and how voting takes place
Memorandum of association: Types of directors:
s.8 CA 2006 The Memorandum must be in a prescribed form. 1. Executive directors – directors who have been appointed to
executive office. They are both an officer and employee of the
Prior to CA 2006: the memorandum was more complex and formed part company
of the company’s constitution – it included an objects clause setting out 2. Non-executive directors – An officer but not an employee of the
what the company was able to do (therefore also limiting the company company. They do not take part in the day-to-day running of the
to its objects). If the company acted outside of its objects, it acted ultra company but rather provide independent guidance and advice.
vires. 3. Shadow directors – s.251 CA 2006 Shadow directors = someone
with significant influence over the actions of a company without
Companies formed under CA 2006: having been appointed to a leadership position.
s.31 No more restrictions on objects so the ultra vires rule is not 4. Alternate directors – Not included in MA but may be provided
applicable unless the company has chosen to include an objects clause for in articles. They act in the director’s place if they are
in its articles. incapacitated, otherwise engaged, or out of the country.
Becoming obsolete as it is now possible to hold board meetings
s.28 The objects clauses of companies incorporated under CA 1985 over the phone and pass board resolutions in writing.
continue to be in force, until the articles are amended to remove it. Directors’ authority:
Relationship between CA 2006 and the articles:
A company may include procedures in the articles which is more onerous The common law principles of agency apply to directors. The company
than the procedure set out in CA 2006. – eg. A Ltd could provide in its is bound by acts which it has authorised the agent to do on its behalf. –
articles that it requires 5 directors, and so would need to comply with eg. the director is the agent and the company is the principal.
this requirement in its articles.
Power of directors:
Exception – CA 2006 provisions overriding anything in the articles:
s.321 CA 2006 The right to demand a poll vote at a general meeting Collective power to act on behalf of the company:
Alteration of the articles: MA 4 Third parties would expect the board to have the power to do all
1. s.21(1) CA 2006 By special resolution acts necessary for the management of the company’s business.
2. s.22(3) CA 2006 Entrenched articles can be amended by s.40 CA 2006 The board must not exceed their powers.
agreement of all members or by a court order Provided that the third party is acting in good faith, they are entitled to
3. Any alteration must be made bona fide in the best interests of rely on the authority of the directors acting as a board, even if the
the company as a whole directors are exceeding the powers granted to them in the articles.
Legal effect of articles: Power of an individual director to act on behalf of the company:
s.33(1) CA 2006 The contract established by the articles is binding on MA 5 The board is able to delegate. The board of directors do not always
both the company and its members. have to act collectively as a board.
Prior to CA 2006 – Confusing case law: Types of authority:
Hickman v Kent Romney Marsh Sheep-Breeders’ The articles are
evidence of a contract between: Actual express authority – Express authority to act regarding a
1. The company and its members particular transaction. Given formally by a board resolution – Eg.
AND evidence of express authority is a copy of the relevant board
2. The members themselves. minute granting the authority
Actual implied authority – Directors can bind the company in
Contract between the company and its members: acts which it is usual for a director to be acting.
A member may not enforce rights contained in the articles against the
company that are not relevant to their capacity as a member. Managing director:
Managing directors have the authority to act alone and bind the
Eley v Positive Life Assurance If a right is inserted into the articles for a company in relation to routine commercial contracts.
member to be employed as the company’s solicitor for life, this will not If a proposed contract is out of the ordinary/high value, the third party
be enforceable as the right will not be held in the capacity as a member should make sure the director has been granted express authority.
but in the capacity of being the company’s solicitor.
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