LAWS10083 Company law Revision-Document-Guide-Company-Law, Study Guides, Projects, Research of Law

Download LAWS10083 Company law Revision-Document-Guide-Company-Law and more Study Guides, Projects, Research Law in PDF only on Docsity! Revision Document Guide – Company Law Topics that have come up in exams Auditors II Articles of Association II Indoor Management Rule II Class Rights II Directors Duties III Directors Disqualification III Minority Protection III Shadow Directors I Fiduciary Duties of Promoters II Shares III Financial Assistance I Wrongful Trading II Insider Dealing I Enlightened Shareholder Value Model I Seminar 2 Corporate Personality, Limited Liability and Lifting the Corporate Veil Notes from the Seminar What we will talk about:  Separate Corporate personality  Limited Liability  Lifting the Corporate Veil  What some of the tools are to balance the advantages and the disadvantages limited liability gives to the creditors  Constitutional Documents  Shares  Corporate capacity – and the rules of attribution. Corporations are artificial persons, they need people to act on their behalf, a lot of problems arising in relation the representatives have in relation to third parties. Registered companies are separate legal persons in the eye of the law, they enjoy separate corporate personality. They are treated as legal person with full contractual capacity and accountable for their conduct and obligations.  The contracts or legal acts that the company enters into, it is the company that enters into these. But there are differences, corporations cannot have hurt feelings (defamtion) the metaphor of separate legal eprsonality is pushed quite far - they have can have human rights and have criminal liability, but obviously the most important consequence is the rights and obligations that belong to the company and not to the shareholders.  The effect between the company and shareholder? In the vast majority of cases - it is not the shareholders agent. The shareholders own the company in an economic sense. They hold the control in that sense, and derive the largest benefit, from the business in the form of dividends or capital gains. The company acquires its own rights and obligations. The assets are separated as are the liabilities, which is why we have limited liability of shareholders. This separation is called asset partitioning. Important in groups of companies, it is an important reason not to mess up and pierce the corporate veil. Keeping the assets separated, it is a crucial principal for structuring a business. Asset partitioning and limited liability of shareholders The liability of shareholders is limited. You are liable to the aggregate nominal value of the shares. The share capital on creation must have a nominal value - the liability is to pay the nominal value and pay the premium - for newly issued shares. There is an option to pay only a fraction of the nominal value and you can call up the rest at a given time.  Why is limited liability so important? You are more likely to invest into a company. It encourages equity investment. The more shares you hold the potential liability would multiply, all your assets you would be unlimited liability.  He now had capped limited liability and was now a secured creditor - he had shielded his liability. The company started to do badly, and they tried to get more debentures, and they weren’t able to pay for the interest, they had enough money to pay him back but not the unsecured creditors. The liquidator was trying to find ways of reaching into saloman’s personal assets. How did the court go about doing that?  Trial court; the company was an agent, so the principal was liable to reimburse the creditors because they had become indebted. As principal he had an obligation to pay. There was nothing they could do in terms of incorporation. All the formalities were complied with, there was an irrefutable proof/presumption that the company had incorporated according to the law. They had to work with it and find ways of using it to reach into Mr saloman’s personal assets. The company was an agent. This was not a good argument because the business belonged to the company, you cannot say that the agent worked for the princaipls business.   Court of appeal; they said that the company as a scheme. They were very disgruntled with the fact that this structure was created. They said it was a sham, but they weren’t saying they should nullify. The company was created improperly because of the spirit of its creation. They said that Mr.Salomans had the business as a beneficial owner rather than a legal owner, in the common law trust there is a legal ownership and equitable ownership.  They were saying nothing has changed in terms of how the business looks before, mr saloman is still the beneficial owner therefore there is a trust relation. As a beneficiary Saloman has to reimburse the trustee for the expenses incurred in carrying out the business to pay the creditors.  This didn’t hold because there was no intention to create a trust. Why was it such a problem that Mr saloman had 2001 shares and the other members only had one share. Why was this necessarily a problem? Used the nominees as mere dummies; So he used this form to try to avoid unlimited liability. They didn’t like the idea of being a privilege of giving limited liability to a one man company. If you have more shareholders that hold more shares that would be more capital in the company. When the companies act recognised limited liability, it was for large investments, to finance big projects. These companies would then float and raise equity capital on the market. The limited liability should not be for small or medium sized business but for large to encourage people to invest. There was no clear requirement that every shareholder should be a real investor, it was just a spirit behind it, and there was nothing clear in the law. This is why the trial court had such a problem with letting the court get away with perverting the spirit of the law. House of Lords; There is nothing in the law requiring to have 7 independent members, or 7 genuine investors; just 7 shareholders. They said there is nothing wrong with using 6 nominees. They adopted a much more literal approach to the spirit of the law. It was a reasonable thing to do/ recognise. The reality actually matches the law.  This case is referred to every other case that discusses separate legal personality etc. It just brought home the idea that once the company is registered it doesn’t matter that the economic reality is different from a legal reality the legal reality will prevail. We cannot infer an agency relation simply by the fact that one shareholder is the controller of the company, we cannot say that automatically. There has to be actual agency relationship and having particular scope for particular purposes, otherwise every parent company would be the principal for the subsidiary. It is against the idea of separate corporate legal personality - there is nothing stopping this but it is not a presumption.  Therefore the liabilities belong to the company and not to the shareholder. Lee v Lee's AIr FArming Ltd Mr Lee was almost the sole shareholder and the governing director, but held another capacity. The fiction of separate legal personality is pushed to its logical limit. He was also on an employment contract. His wife tried to get compensation through the workers compensation act. He qualifies by compensation by being an employee.  The court in first instance; They said that he couldn’t be regarded as a worker within the meaning of the act, because there would be no power of control because he would be the boss of himself. There would be no relationship of employer employee, because he was the main shareholder and the only director as well. Trial court said this is illogical, this cannot be.  Privy Council; Put forward the idea of separate legal personality. It was the company giving orders not himself, the company was himself as the capacity of director. MR Lee had a split capacity in his capacity as director, he is the company, as the individual he is the employee. He was able to give orders and obey orders cuz there was two different entities. Really forming the separate legal personality idea. if we think as we usually do, Directors are usually office holders, they have a set of rights powers and duties that are not attached to a person but to a position. It doesn’t matter who occupies the office, the rights belong to that position. Office holder is just exercising them.  Macaura v Northern Assurance There was a lot timber on his land, he took out insurance in his own name, not the company, so he had no beneficial interest, despite it being on his land and being the major shareholder. The company has it. The business was his. The court said no insurable interest.    An example where the separate legal personality works against the shareholder.  Implication; the company owns its property. Consequences of Limited Liabilities on Creditors In what sense could it be detrimental  The shareholders would always want the directors to take risks in cases where there is little money left over. Creditors in the vicinity of insolvency, they want the directors to go low risk because they just want to be paid off. Shareholders have no cap at to what they can gain, but creditors are capped at to how much they can acquire.  Shareholders are however at the lowest to get out of a liquidation, creditors are paid first. Shareholders are risk bearers, but in a much better place to bear the risk, via diversification, because the portfolio as a whole is a safe investment.  Creditors however have the ability to secure themselves. They can charge higher interest, personal securities, etc. If they are debt holders, they are protected by contractual negotiations between the trustee and the issuing companies.  Most creditors are in a good position to protect their interest. Unsecured creditors only have themselves to blame.  There are involuntary creditors who have no means to secure anything; tort victims - tort creditors have no way to protect their interest - they have no idea they will be tort victims. Christopher Hare, “Family Division, 0; Chancery Division, 1: Piercing the Corporate Veil in the Supreme Court (Again)” (2013) 72:3 Cambridge Law Journal 511-515 ‘Significantly, their Lordships all accepted (although Lord Neuberger hesitated) the existence of a general common law veil-piercing jurisdiction albeit one limited to rare and exceptional circumstances. Such a resounding endorsement is welcome, given that VTB left this issue open.’ Good Discussion of the Ratio of the case here; ‘In identifying the scope of that jurisdiction, Lord Sumption distinguished between two (potentially overlapping) principles, namely the “concealment” and “evasion” principles (Lord Neuberger applied the alternative labels of “lifting” and “piercing” the corporate veil to those two principles: The Coral Rose (No. 1 ) [1991] 4 All E.R. 769, 779). Whilst their remaining Lordships approved this distinction, Lady Hale and Lords Wilson, Mance and Clarke expressed doubts as to its comprehensiveness. For Lord Sumption, the “concealment principle” only involves “looking behind [the corporate form] to discover the facts which [it] is concealing”. An example would be where a third party must identify the company with its controlling shareholder in order to establish some element of its cause of action against that shareholder: Gencor ACP Ltd. v Dalby [2000] 2 B.C.L.C. 734; Trustor AB v Smallbone (No. 2 ) [2001] 1 W.L.R. 1177. In contrast, the “evasion principle” (the only true exception to Salomon v A. Salomon & Co. Ltd. [1897] A.C. 22) involves disregarding the company's separate personality so as to deprive its controller(s) of any benefit deriving therefrom. It applies “when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control”, but not when a controller simply causes his company (or a particular member of a corporate group) to incur a liability in the first place. This echoes the distinction in Adams v Cape Industries plc [1990] Ch. 433 between evading pre-existing and future obligations. As Mr Prest's actions involved wealth protection and tax avoidance measures, but not the evasion of any pre-existing legal obligation to his ex-wife, the “evasion principle” did not apply. In contrast, Lord Sumption identified Gilford Motor Co. Ltd. v Horne [1933] Ch. 935 and Jones v Lipman [1962] 1 W.L.R. 832 as classic examples of that principle's operation. It is difficult, however, to square his Lordship's treatment of those cases with his recognition that Gilford might well be explicable on other more conventional grounds and his acceptance that the “evasion principle” will only apply when strictly necessary. Lord Neuberger spotted this tension and (reiterating his views in VTB ) refused to treat either Gilford or Jones as examples of the “evasion principle”. *C.L.J. 514  Lord Walker agreed. Accordingly, those decisions' precise standing remains obscure.’ Elisabeth Roxburgh, “Prest v Petrodel Resources Ltd: cold comfort for Mrs Prest in Scotland” (2013) 32 Scots Law Times 223-225 ‘ Four of the Justices questioned whether all future cases would fall neatly into cases of concealment or evasion. Lady Hale, with whom Lord Wilson agreed, suggested a wider principle that a person should not be allowed to take “unconscionable advantage” of a person with whom they did business. However, the tone of the opinions from the other justices suggest that the test described by Lord Sumption is unlikely to be given any wider application.’ ‘The confirmation that there are circumstances in which the corporate veil can be pierced is to be welcomed. However, it should be noted that the circumstances in which the doctrine will assist a litigant are likely to be limited.’ Seminar 3 Constitution of the Company DISCUSSION QUESTIONS AND ACTIVITIES Discussion Questions 1) What is the role and relevance of the model articles of association? 2) What i s the main consequence of regarding the certificate of incorporation as conclusive evidence that the requirements of the CA 2006 as to registration have been met? 3) Compare and contrast the role of the memorandum of association before and after CA 2006. 4) What are the consequences of labelling the constitution a “statutory contract”? 5) To what extent, if at all, does s 33 of CA 2006 give a shareholder enforceable contractual rights against a company? 6) What are the limits to shareholders’ powers to amend the arti cles of association? 7)What is the purpose of shareholders’ agreements? What will be discussed: - Nature of the foundational documents of the company. - The way they are interpreted. - The relationship between a company’s constituencies. Avenues for creation - Incorporation by registration most important. Types of company Public company limited by shares; they have to be limited by shares. There is no requirement for a number of shareholders - you need to have the capital requirement - a nominal value for each share. It is doesn’t prevent unlimited liability - but it would defeat the purpose of having a public company. It incorporates in order to raise capital - it is impossible to raise capital by unlimited liability. Private companies can be unlimited.  What is a public company? What makes it public as opposed to private?  They are limited by shares that are available to public. In order to be a public, does it have to be traded by the stock market? No. It can offered to an unspecified recipients. They don’t have to be carried by a stock exchange. Could be a public offer outside a stock exchange. As long as there is no defined recipient. It has to be registered and stated as such that it is a public company. Issues shares to the public. One goes public so you can raise money by selling to the public. The private capital, with a private investor is usually for investors in venture capital. They sell the company and exit. At what point does it become public? When it is sold to an unspecific general group of people. Private companies can be limited by shares, guarantee or unlimited. If they undertake the guarantee, in case of insolvency they will provide a specific amount. They do not contribute equity - they just say we will give this given amount. Some organisations do not rely on share equity because of things like being not for profit. Community interest companies are a special type of company limited by guarantee - you need to have a certain purpose - which is of utility to the community and in order to obtain finance, they need to be of this type. Unlimited companies, - Here if the business losses its money, the debts extend to the members. It is more acceptable in certain professions, as you are not trying to use limited liability to avoid any debts. It refers to the idea of reputation and credit worthiness. If you are an accountant, you may want to show that you have good reputation and you incorporate. The idea refers to reputation and in certain circles that could give you an advantage. Unlimited liability still have share capital, but it is a question of that there will be unlimited liability - so the share capital has a significantly different role than in a limited liability company. They are liable to how much they own in The Company. Joint and severally liable. However it is no longer possible. Cannot say it is not subject to change. You can entrench the provision but you can't say that it cannot be changed.  The memorandum now is a vestigial document. Nothing the parties can add to that. Each subscriber agrees to become a member and agrees to take at least one share. It is one sentence. Once the procedure has been complied with it gives a certificate of incorporation.  It says the jurisdiction and provides the name, and the form of company. This is conclusive evidence that the requirements of the act as to registration have been met. There is nothing you can do to challenge the company once it is created with some exceptions (1) the attorney general can quash the incorporation when contrary to public policy and crime etc.  Trading certificate for public companies Certain companies need an extra document before starting. A certificate that a public company needs to have before they start operating. Why do they need this? They do not need the minimum of share capital, they have paid up 12.5K capital - this is what the trading certificate thing allows - it shows that they have this capital requirements. What happens when a private company reincorporates to a public company? The capital needs to be in place in order to incorporate as public. There is no gap between registration certificate and trading certificate. What if there is a business trading before they have found 50K in equity? The directors themselves could be liable, the transactions are not void. If the business has started, the transactions are valid, the directors will be personally liable. The creditors will have to demonstrate some sort of loss.  The constitution From reading; The articles may regulate or deal with any of the matters which is not mentioned through any of the aforementioned sources. It will determine the division of powers, the composition/structure and operation of the board of directors.” What does it include if not the memorandum? s.17 of the CA refers to the articles and other resolutions that affect the constitution to be included in the definition of the Company’s Constitution. Shareholders resolutions that amend the company’s articles. It could be unanimous agreements, it could be written or could be resolutions adopted by the members of a class that have constitutional value as well. It has to be a unanimous resolution which happens when it is writing a proposal by convening their shareholders. The shareholders agreements, is different. New members are not part of the shareholders agreement. The shareholder agreement is not necessarily applicable to new members. However, one exception is to do with the powers of the board to bind the company, in that sense shareholders agreements then are treated as the constitution - the powers of the board to bind the company. Shareholder agreements are not part of the constitution. Special resolutions of shareholders, they are adopted to amend the articles or are of an important constitutional relevance to the company. They automatically become the constitution. The law doesn't provide an exhaustive list - constitution includes the articles, the resolutions amending the articles. One ought to think in theory of constitutional value. The certificate of incorporation could be - but no question as to the rights or the ideas stemming from them. We are interested in defining the constitution because of the way the courts interpret and imply terms in the constitution.  The articles are the most important. We have model articles to reduce costs. Nature of Constitutional Documents AoA and the resolutions amending - They have a contractual nature. They are not a regular contract, but a statutory contract. Because it is its stat. contract, this has quite a few implications in the way it is enforced and the way courts can amend it. The parties to this stat. contract, are not only the members but the company. There are consequences regarding interpretation enforcement, alteration and publicity. Notes from reading: (i) The contract as a public document They are contractual, but they are clearly more than a private bargain among the company and its members. They become a public document at the moment of formation, either because the relevant model articles will apply (which are public documents) or because the company supplies to the registrar the document. It is a requirement. Standard contract law should apply with certain qualifications. The courts are reluctant to apply to the statutory contract those doctrines of contract law which might result in the articles subsequently being held to have a content substantially different from that which someone reading the registered documents would have understood them to have. The court has refused to give effect to what incorporators intended, but failed to embody in the registered document. Also they would refuse to imply terms into the statutory contract from extrinsic evidence of surrounding circumstances where that evidence would probably not be known to third parties. Also it cannot be defeasible on the grounds of misrepresentation, common law mistake, mistake in equity, undue influence or duress. The policy underlying this – protection of third parties by enabling the third party to rely on what he or she finds upon a search of the public registery. But a lot of the time informal unanimous decisions taken by the shareholders will not be registered in practice. Though it is a criminal offence to not inform the registrar, the validity of the alteration appears not to be effected by non compliance. Interpretation of the articles Main differences between articles and a regular contract       - The intention is important - but in the constitution it is all about what is written in the constitution. It is about what is there - what the parties meant to say, it is irrelevant, unless there is a way to imply from the actual text of the constitution what we ought to do.  Bratton Seymour Service Co v Oxborough      - was it possible to imply an obligation for the members to contribute maintain the premises of the building. This was not a provision of the articles of association. The company was created simply to hold residential premise. The court refused to imply such a term in the constitution. - Extract from the judgement; “The Articles of Association of a company differ very considerably from a normal contract.” - “The court has no jurisdiction to rectify the AoA of a company, even if those articles do not accord with what is proved to have been the concurrent intention of the signatories of the memorandum at the moment of signature.” - “It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into AoA from extrinsic circumstances.” - Individuals cannot “Seek to defeat the statutory contract by reason of special circumstances such as misrepresentation, mistake, undue influence and duress is furthermore not permitted to seek a rectification, neither the company nor any member can seek to add to or to subtract from the terms of the articles by way of implying a term derived from extrinsic surrounding circumstances.” Further limits to the provisions which can be enforced: Individual rights not collective rights to correct procedural irregularities Suing another member may be defeated on the grounds that the provision does not confer a personal right on the member, but creates only an obligation on the company, breach of which constitutes “ a mere internal irregularity” on the company’s part. The decision to sue to enforce the provision therefore is a matter for the shareholders collectively. It is difficult to discern the principled basis to which the classification is carried out on. The company may be regarded as breaching its contract with the member if it seeks to act upon a resolution improperly passed and should be restrainable by the member, but for the loss caused to the company by the chair of the meeting in not conducting it in accordance with the company’s regulations, the company is the proper plaintiff. CLR; All duties imposed in favour of members under the constitution should be enforceable by individual shareholders. Suing would be possible then. But not every breach of the articles by a corporate officer would entitle each shareholder to sue the company for damages. Damages would be an available remedy only if the shareholder personally suffered loss. There may also be more appropriate remedies like injunction. This is subject to the qualification that it would be possible for the shareholders to opt for some or all of the articles not to be enforceable. Therefore, the relevant articles would not be enforceable as a contract. The general contractual enforcement of the articles would be the default rule and in any case it should be clear which articles were enforceable and which not. Enforcement by the company against the member Hickman v Kent - Article 49 of its articles of association provided that disputes between the association and any of its members should be referred to arbitration. This article was held to be enforceable as between the association and a member. -Extract from the judgement; - He claims to enforce his rights under the association’s articles -“ An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member cannot sue on those articles treating them as contracts between himself and the company to enforce those rights. They do not apply to all shareholders and only exist by virtue of some contract between such person and the company. Several controversies followed this decision; 1. It is not easy to reconcile with the qua member rule. 2. There is an inherent conflict from the two proposition which may be deduced from the cases; (i) Any member has a right to have the provisions of the corporate constitution duly observed and (ii) s.33 cannot be relied on to enforce the rights of a non- member or the outsider rights of one who is a member. It is not possible to say that every right which the memorandum or articles purport to confer on a member is enforceable. It is a relational contract, establishing a framework for an ongoing set of relationships. It aims to give a relationship of give and take between the constituents. Also, constitutional irregularities are curable by a majority resolution of the members, or even capable of being condoned by acquiescence or inertia. Any claim that s.33 gives a member a right to have the terms of the constitution observed is wrong unless it acknowledges that the right is qualified in these sense. What kind of rights could members enforce against the company? - Something to do with a personal right that is attached to the shares. The board of directors acting as the company is part of the AoA so is bound by this contract, there is a right for shareholders to hold the board a.k.a the company as being liable to follow the provisions of the articles. However the courts made this slightly questionable by saying if a breach of the articles is a mere internal irregularity, adopting a decision that doesn’t fit the normal requirement or not all the steps follows, these are internal irregularities. The shareholder cannot sue personally against such an internal irregularity. This is not a direct loss; this should be a reflective loss - so they should go through other avenues such as a derivative claim, or unfair prejudice. We do not have a contractual claim based on the articles as we do when a shareholder would enforce a personal right that is attached to a share. Sometimes the same set of facts can be a mere internal irregularity or damage one of the shareholders rights they have.  Amendment of the articles of association   Notes from the reading: “ (i) Altering the contract It is crucial that the articles as part of the constitution can be capable of amendment. – s.21 of the act. Should be able to alter the articles by following a prescribed procedure and thus alter for the future, the contractual rights and obligations of individual shareholders. Some process of collective decision making is needed to adapt to changing circumstances in the business environment. There is also the potential of the majority binding the minority – in opportunistic behaviour on thepart of the majority towards the minority. 2 restirctions on the majorities power to alter the articles; (1) The consent of each individual member is required if he or she is to be bound by an alteration which requires members to subscribe for further shares in the company in the company or which increases liability to contribute to the company share capital or pay money to the company. (1) – s.22 allows for the shareholders to ‘entrench’ provisions of the company’s constitution – make them capable of amendment or repeal only if certain conditions or procedural requirements are met. While this does not make them completely unalterable, it makes it harder. If it is not made in the formation of the company, it requires unanimity.” The articles are changed via the rules of majority. If someone disagrees with the amendment, they are bound, but if they are oppressed or prejudiced they can seek relief. If not all they could potentially do is sell their shares or try and wind up the company, but that would be exceptional circumstance.  General rules: -Amendment by special resolution - 75% of the members that allowed to vote. There are classes of shares who have no voting rights - 75% of those who can vote AND present at the meeting. In the CA all you need is 2 shareholders present or represented. That’s what happens when there is voting by poll. If the AoA allows certain decisions to make decisions by show of hands, it would be 75% of who showed up at the meeting.  Another exception: if the special resolution is passed not by having an actual meeting, but by circulating the agenda or remote decision - it is the 75% of people who are entitled to vote. It is 75% of the voting right.  (see presentation) If proportions are required is higher, it is to do with entrenching these provisions. Entrenchment is when you make something much harder to amend. Putting things in the memorandum used to make them unamendable - unless the CA said that you could amend them.  - The companies house must be notified of any amendment. The changing of constitution will only be enforceable by third parties if companies house is aware of it. The effects of the third parties are commissionable on filing the amendments. Failure to file after 15 days is a criminal offence. The obligation to notify is taken quite seriously that directors could be liable for. There is no absolute entrenchment.  - The right to amend cannot be waived - Punt v Symons .- “The company cannot contract itself out of the right to alter its articles, though it cannot, by altering its articles, commit a breach of contract. “ There is a restriction that they must exercise the voting rights for the benefit for the company as a whole - Allen v Gold reefs.  Shareholders' agreements rules on matters such as the allocation of powers between the members of a company and its directors will be set out in the articles s.18 –articles of association. – This is required for a company. It must be registered unless the model articles apply. s.20 – default application of model articles – if the articles are not registered, or if they are registered and they do not exclude the relevant model articles, the relevant model articles form part of the company’s articles in tehs ame manner and to the same xtent as if articles in the form of those articles had been duly registered. The model articles operates as a safety net, which enables the memebrs and directors of such companies to take decisions in circumstances where a company has failed to provide the appropriate authority in its registered articles. s.31 – Statement of company’s objects – unless the articles restrict a company’s objects, its objects are unrestricted. This is a change from the new law. If there is a change in the articles to add/remove/alter the objects it must give notice to the registrar. Special rules for charity. And Scottish charities. s.33- The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company of each member to observe those provisions. s.755 – the prohibition of public offers by private companies. Private companies are also prohibited from allotting their shares or debenture with the intention tha thtey are offered to the public by someone else. If a private company does breach this provision, it will be required to re-register as a pub companies unless it appears to the court that the company does not meet the requirements for registration and that it is impractical or undesirable to require it to take stepts to do. (3) provides an exemption, if you attempt to re-register as a public in good faith it is fine. And if the offer states that it will re-register as a public company within a specified period. s.756 – Meaning of offer to the public – means an offer to any section of the public. It also sets out when it is not an offer to the public. It will not be public if it does not result in shares or debentures of the company becoming available to anyone other than those receiving the offer. (4) gives two further exemptions – persons already connected with the company and those for an employees share scheme. (5) defines those who are already connected with the company. Journal Articles Robert Drury, “The Relative Nature of a Shareholder's Right to Enforce the Company Contract” (1986) 45:2 Cambridge Law Journal 219 Gary Scanlan, “The Statutory Contract under s 33 of the Companies Act 2006: The Legal Consequences for Banks Pt I” (2008) 6 Journal of International Banking and Financial Law 304 Eilis Ferran, “The Decision of the House of Lords in Russell v. Northern Bank Development Corporation Limited” (1994) 53:2 Cambridge Law Journal 343 Len Sealy “Shareholders' Agreements - An Endorsement and A Warning from the House of Lords” (1992) 51:3 Cambridge Law Journal 437 Seminar 4 Corporate Capacity Notes from Seminar Promoters and Their duties There is a slight period of time between when the company is created and when the whole process of creating the company starts and to the actual incorporation. There could be some people in this time intending to bind the future company, or to do things for the company for the benefit of the company. What is the liability of this individual to the shareholders of the future company and are those pre-incorporation contracts binding? People involved in the incorporating the company are promoters and they are fiduciaries who have quite extensive duties. What are they? No legal definition, but they help form the company. Someone who is involved in making the company but not a promoter: Solicitor/Accountant - they are in a ministerial role. They are simply carrying out a specific but not considered promoters because they do not decide on the future aspects of the company. People who have discretional power of the business are promoters and fiduciaries. Examples from cases; People buying an asset - people undertaking to buy something and sell something - people looking for directors to be shareholders for this company.  They are undertaking to form a company with reference to a given project, and to set it going and to accomplish that purpose - Tycross v Grant Not a purely ministerial role, but don’t necessarily have to hold shares. The duties of a company promoter What are the consequences of being a fiduciary? 1. Disclosure of any profits they make; the no profits rule. Very important for promoters. They cannot make a profit out of this office. If they do make a profit they have the possibility to disclose it to the future company. Who must the disclosure be towards for it to become valid? Disclosure of the profit or accounting for the unauthorised secret profit.  Erlanger v New Sombrero Phosphate co - A contract between the promoter and the company is voidable at the company’s option unless the promoter has disclosed all material facts relating to the contract to an independent board, and the company has freely agreed to the terms.      - There was a large secret profit, the contract was rescinded. The profit remained secret. The board was not independent. The board members were not independent from the promoters. So there was no disclosure to an independent board of directors (independent from the promoter) so therefore the profit was unauthorised. There was a duty to account for it to the company.  ` - Extract from the judgement; o “The promoter stand undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company” o “The Privilege given to them for promoting such a company for such an object, involved obligations of the utmost good faith, the completest truthfulness and a careful regard to the protection of the future shareholders” o “The promoters in this case failed to remember the exigencies of their fiduciary position, when they appointed directors who were in no way independent of themselves, and who did not sustain the interests of the company with ordinary care and intelligence. “ o “If the directors had been nominated merely to ratify any terms the promoters might dictate, they discharged their function; if it was their duty to protectant shareholders (it was) they never seem to have thought of doing it. The transaction must not stand.” What happens though if no independent board could be stablished? Gluckstein v Barnes   - Promoters, as fiduciaries, may not make a seret profit while acting in that capacity. Any profits so received must be accounted for to the company. - Extracts from the judgement; o “IT is too absurd to suggest that a disclosure to the parties to this transaction is a disclosure to the company of which these directors were proper guardians and What was the purpose of the objects?       - Publicity? You knew what the company ought to do. Mostly for investors, certainty for how their funds would be used. The company’s act 2006 no longer had this mandatory requirement; they could have been changed after, but could be quite long afterwards,       -Third parties wouldn't have to enquire as to what the objects of a company are, would save time. Similarly, people would just work around this rule. There is still a requirement for charity companies.       -Companies no longer need to have objects, its objects are unrestricted.  This clause lays down what the company is capable of doing, whether through its board or via the shareholders collectively or through an agent. Currently there is no provision making it mandatory to provide an objects clause. Even if it does have an objects clause, that will not necessarily affect the validity of the acts of the company; s.39(1). The ultravires doctrine so far as it is based on the company’s objects clause no longer threatens the security of third parties’ transactions. The central point is that, whilst the ultra vires doctrine is dead as a restriction on the capacity of the company, objects clauses ocntinue to limit the authority of the board or the shareholders collectively to bind the company, in the same way as any other provision in the articles may have this effect. When referring to the company’s articles, objects clause is included if it has one.       31- Statement of company's objects (1)Unless a company's articles specifically restrict the objects of the company, its objects are unrestricted. (2)Where a company amends its articles so as to add, remove or alter a statement of the company's objects— (a)it must give notice to the registrar, (b)on receipt of the notice, the registrar shall register it, and (c)the amendment is not effective until entry of that notice on the register. (3)Any such amendment does not affect any rights or obligations of the company or render defective any legal proceedings by or against it. Companies have unrestricted objects unless they are specificially restricted by the articles. The directors of a company are uner a duty to observe the company’s constitution (s.171) although restrictions in objects will, as now, have little effect outside of the internal workings of the company because of the effect of ss.39/40. Corporate capacity  s.39 - A company's capacity (1)The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution. (2)This section has effect subject to section 42 (companies that are charities).      - The validity of the act done by a company, shall not be called into question on the grounds of lack of capacity by reason of anything in the company's constitution.  No question could arise about the company’s capacity and for the internal relations, the shareholders could bring actions depending on what they wanted because he would have breached the s.171 - it would be a breach of duty.  Shareholders could bring an injunction or interdict from shareholders (s.40(4)) to prevent acting against the constitution  Corporate actions at common law: constructive notice The powers of company's organs to act as the company and represent the company.  The CA has made the life of third parties much easier, under the constructive notice and the indoor management rule.  Constructive notice -Third parties were expected to have knowledge of all the provisions in the constitution. Therefore, because they know what everyone is meant to do, if something is out of order, then it is not the company's fault, The Company is not bound, and the act is voidable at the instance of the company. They were supposed to know whoever was breaching was breaching. Constructive notice - even if the party didn’t know, they were presumed to know because it was published. There is something to having these documents public, but it is also about giving the option for the third parties to look at the constitution if they want to.  This gave too much uncertainty for the people dealing with the company.  Turquands case softened it a bit. Made life of third parties slightly better. Constructive notice was softened almost immediately.  In cases where there was no explicit prohibitions, it applies here. If it is simply entrenched, but this was not followed, the third party could assume that the internal arrangements had been followed. It is only for good faith third parties though.  Royal British Bank v Turquand - A person dealing with a company is entitled to assume in the absence of circumstances putting him on inquiry that there has been due compliance with all matters of internal management and procedure required by the article. - Extract from judgement; o “The party here on reading the deed of settlement would find, not a prohibition from borrowing but permission to do so. He would have the right to infer the fact of a resolution authorising that which on the face of the document appeared to be legitimately done.” Notes from reading: “The Indoor Management Rule This rule from British Bank v Turquand allows a person dealing with a company to assume, in the absence of circumstances putting him or her on inquiry, that all matters of internal management and procedure have been duly complied with. So even though under the doctrine of constructive notice, such a person was taken to be aware of the provisions of the company’s memorandum and articles, and thus of any procedural restrctions contained in those documetns, he was not bound to inquire further. He could take it for granted that its officers had been duly appointed, that meetings had been properly summoned and conducted and that resolutions had been passed by requisite majorities. What is the standing of the rule and scope fors its application now that the doctrine of constructive notice has been abolished. Although the rule did operate to mitigate the effects of the doctrine of constructive notice, that was never its only function. A person dealing with a company is always subjected to uncertainty as to whether its officers have been properly appointed, its resolutions duly passed, etc. He simply has to take it for granted that the internal affairs have been regularly conducted. Although the indoor management rule is commonly regarded as operating only in favour of a person dealing with a company in good faith, the presumption of regularity in fact applies in a much wider range of situations. The situations on which the indoor management rule will be pleaded are likely to be rare because: (1) S.40 largely eliminates the need to raise the rule by way of a rejoinder to a contention that the person was affected by the constructive notice doctrine. (2) Since the decision in Freeman & Lockyer v Buckhurst Park Properties It is common to use arguments based on ostensible authority rather thatn to rely on the internal management rule to resolve questions in this area. Should the rules making a company liable, remove liability from the shoulders of the person who acted for the company? The answer to this depends on contract law and agency law, due to this idea of separate legal personality and contractual capacity. Therefore, if there is a breach of contract it is likely that there will only be redress against the company. However those acting on behalf of a company are not necessarily shielded from liability if they undertook wrongdoing on their part. There is a sharp contrast between those who are within their powers, acting on behalf of the company and those that don’t. If they don’t they could be personally liable to the claimant or the company. CONTRACTUAL RIGHTS AND LIMITATIONS The rules governing the way the decision making bodies make decisions in regards to the company is referred to as the ‘primary rules of attribution’, while the rules governing the persons of the company acting as agents is referred to as ‘general rules of attribution’ since they are also applicable to agents/principals more generally. Contracting through the board or the shareholders collectively It is possible that a third party will contract with the company via the board in an area where the board cannot act or where the board’s powers are restricted. Is the contract binding on the company if the board (or shareholders) act outside the powers conferred upon them by the AoA? Constructive Notice and the rule in Turquand’s case Originally, whether the company was bound or not depended on whether the third party knew that the board were acting outside their authority. If they knew then the transaction was not binding on the company unless the company chose to ratify it. Knowing of the board’s lack of authority meant that there was no legitimate claim to hold the company to the contract. This was indefensible by the doctrine of constructive notice, which deprived the third party of the security of the transaction, even though he had no actualy knowledge of the board’s want of authority and by no practical means of finding it out other than a detailed study of the company’s constitution. Anyone dealing with the company registered was deemd to have notice of the public documents. This had the effect of making everyone aware of the limits to the boards powers and therefore making it possible for the company to say they were not bound by it. This position however, was modified by the ‘rule in turquand’s case’ or the indoor management rule. The third party could assume that the directors had authority to act, even if a fair reading of the articles might lead a third party to make further enquiries. See above for the facts of Turquand. THe artices did not state a prohibition on borrowing but a permission to do so under certain conditions. So he would have the right to infer that this permission was given. s.161 of CA 2006 – provides a somewhat expanded protection, by applying not only in the case of the subsequently discovered defect int eh appointment but also where the director is disqualified from holding office, has ceased to hold office, etc. The indoor management rule does have its limitations; (1) It does not protect the third party if the constitution states that the board cannot enter into a specific type of contract. (2) It does not apply if the third party has been put on notice or on enquiry as to the lack of authority. This cannot arise out of constructive or even actual notice of the constitution – something else must be required. B. Liggett LTd v Barclays Bank – The letter informing the bank that the appointment was only signedby one existing director while the constitution indicated that two was needed. The prior dealing with M and the bank as to the singing of company cheques was something else which put the bank on the enquirty to establish wihether M had in fact consented, the bank was not entitled to assume such consent. Statutory Protection for third parties dealing with the board This state of the law meant that no third party could safely refrain from reading and alaysing the company’s articles before contracting with it. Policy has seen that commerce will be promoted by relieving third parties from the need to check the company’s constitution. The constitution is no longer seen as an obviously appropriate way to communicate the board’s limitations to third parties. The legislature moved to enact stat. provisions which extended the protections given to third parties – s.40 . Each element of s.40(1) deserves attention. (a) “In good faith” So protection will not be given to those in bad faith, but that is quite difficult to prove under s.40(2). The provision completely undermines the rationale for constructive notice, and also appears to set aside the put on enquiry qualification to the indoor management rule. If you do not enquire about the company’s articles and the boards powers you are not putting yourself in bad faith. THe third party is presumed to have acted in good faith, unless the contrary is proved, so the burden of proof falls on the company rather than the third party. You are not regarded as being in bad faith, just because you know that an act is beyond the powers of the director’s under the company’s constitution. It can be an ingredient of bad faith, but by simply having knowledge is not enough for bad faith. (b) “ Dealing with the company” This is where a person deals with the company so long as he is a party to the transaction or act which the company is also a party to, but the ourts are reluctant to bring gratuitous transactions into this. (c) Persons Are corporate insiders persons? Are they third parties? At common law with the indoor management rule – Morris v Kanssen – the claimant seeking to rely on the rule had assumed the functinos of adirector of a company at the time fo the disputed transaction. HoL held that it would be inconsistent to allow him to take the benefit of the rule. H/E in Hely-Hutchinson v Brayhead Ltd - the director was was an insider only if the transaction with the company was connected with his position as a director as to make it impossible for him not to be treated as knowing of the limitaitons on the powers of the officers of whom he dealt with. In relation to s.40, it is answered in s.41. This section does not affect the operation of s.40 in relation to any part to the transaction toher than a director or a person who the director is connected. A transaction within s.40 but caught within s.41, is binding unless set aside by the company, whereas if the transaction is outside s.40 and governed by the common law, it will not be binding on the company unless ratified by it. Therefore s.41 is more favourable than the common law. Corporate insiders dealing with the company in good faith are within s.40, but that the protection they obtain is that laid down in s.41. (d) The directors The section removes limitations in the company’s constitution on the powers of directors to bind the company or to authorise others to do so. Those who deal with the sharehodlers are still subject to the perils of the common law. It is not that common to deal with shareholders. It can hardly be the case that third parties, dealing with persons with no connection with the company, can claim the benefit of s.40 on the grounds that the failure of those persons to be elected directors by the company is a limitation under the company’s constitution which third parties are entitled to ignore, provided they are good faith third parties. The irreducible minimum for s.40 to operate must be a genuine decision taken by a person or persons who can on substantial grounds claim to be the board of directors acting as such… - ‘ Smith v Henniker –Major & Co’ (e) Any limitation under the company’s constitution The company’s constitution who is overridden by this provision includes AoA, Resolutions of the company, resolutions of classes of shareholders and agreements among the members of the company or any class of them. (f) The internal effects of lack of authority He aim of the provision is not to alter the internal effect of directors’ actions taken without authority except in so far as such amendment is needed to protect third parties. s.40(4) – preserves individual shareholders’’ powers to bring an action to restrain the company from doing an act to which the directors have committed the company in excess of their powers. But this relief cannot be granted if it would impede the fulfilment of the company’s legal obligations to the third party. So this provision operates in the narrow position before the directors are proposing to exceed their powers, but have not yet done so, or have exceeded their powers but it is not yet legally binding. It seems that the provisions does not alleviate the liability of the directors (s.41(1) included) which would allow therefore some redress for the company potentially udner s.171. Similarly it doesn’t state anywhere that the third party will not be liable if they should have known that the director was in breach of his duties. This may allow for constructive trusts to occur o possible to return the property. Contracting through agents How do the rules above apply in cases where there has been delegation of authority for certain transactions? It is suggested that those rules apply with two major modifications; (1) The primary rules of attribution assume that the board or the shareholders collectively have the power to bind the company, because they are its statutorily created decision making bodies. Once we move away from the AoA and all that, we must ask what powers does that person have to bind the company? In order to answer that, we need to resort to the genral rules of attribution applicable to companies. Outside of the board and shareholders collectively, the constitute the first set of rules one needs to apply before questioning whther a provision in the articles limits the powers the agent would other wise have. (2) Is the putative power of the agent limited by the articles? We must discuss the doctrines above again, however the balance among the doctrines is diferent as between agents and the corporate decision-making bodies. It depends on whether shareholders want shares or dividends. If they want capital gains as opposed to dividends they can exercise the option to get fully paid shares - SCRIP dividends. Dividends that take the form of shares - so they have the power to decide as to when they want to capitalise the gains - as opposed to receiving dividends when they get taxed on it straight away.  We are saying that the premium is part of the legal capital, and has almost the same regime as share capital - cannot be returned except the one exception. It can also be used to pay for the expenses of issuing a new set of shares. This can pay off the fees of issuing the shares.  Otherwise the share premium account is non-distributive.  Another part of the legal capital - Share Capital The aggregate nominal value of all issued shares. Share capital is all the other capital - there is equity securities under this heading. Equity securities is part of the share capital that comprises ordinary shares plus any other shares that have an unlimited right to participate in the distribution of capital. These are preferred ordinary shares. Preference shares that have a fixed right to dividends and no rights to participate in the distribution of capital in liquidation or a fixed right to participate in the liquation. It is not however, Equity Share Capital. Ordinary shares and participating preference shares are the ones that count as share capital.  This distinction is important for pre-emption rights - the stat. pre-emption rights apply to equity shares, but the stat pre-emption rights do not apply to preference shares that are not participating. Equity share capital (as defined under s.548 – is share capital excluding those that have a fixed distribution) v share capital. Also in a merger it is important to differentiate between equity capital and share capital.  Shareholders are referenced as residual claimants. The idea of equity capital is that it has a residual value - it is subject to the level of profitability. The other part of the share capital - have a fixed claim - they have a percentage right to participate in distribution of dividends and capital.  There are a few other concepts; Share capital - paid up capital - the amount that the company has actually received. This refers to the nominal value of the shares. The fraction that is actually paid.  There are two other concepts; Called and uncalled up share capital. Called up share capital - there are payment dates and some money is due at that point. Or when shares were allotted they were to pay in instalments.  Uncalled share capital - whatever the company has not called up yet.  Public company, - share premium has to be paid at the beginnidng - plus at least 1/4 of the nominal value of the shares.  Authorised share capital (authorised minimum - share capital) v statement of capital. Authorised share capital - the maximum amount of money/shares that could be issued to shareholders - it was to protect to shareholders from the directors. The threshold that limited the directors powers - but it was set very high - and if the board reached the limit - the shareholders had to authorise an increase so the shareholders had the ultimate power, but there is no requirement at the moment of registering the company. There is a requirement to have an authorised minimum - is 50K for public company, but for private companies there isn't a limit. Why is there a requirement of this for public companies ? The minimal capital requirement for public companies is due to a directive. The philosophy behind this is that this is something the legislator does not want - it is not at all significant in protecting creditors. We have this 50K because the directive has to be followed - and it is there because we must protect creditors in capitalisation.  But a public company can be created without having this capital. It cannot start trading without some capital - the certificate of trading.  Nominal (par) value and Share premium Nominal value is not the price that it will trade, but the price that the subscriber pays for it. It will not be issued at less than its nominal price – ‘no discount’ rule. The company whilst being obliged to attach a nominal value to the share, maintains full control over its size. This freedom, gives the company an incentive to keep the nominal value of the share low in relation to its issue price. The lower the nominal value, the less likely the company is to find itself in the situation, either now or in the future, where investors will be prepared to buy shares only at less than their nominal value. How useful is it? Share capital is to protect creditors. It can be very restrictive when issuing more shares. The contribution of shareholders makes a difference in the premium - but as it is treated as the share capital - there is no point in having a nominal value, the real question is how much the company is asking for - so it serves no purpose.  Because public companies need to have an authorised share capital - it would be difficult to implement this requirement of no nominal value. Requiring companies to convert shares into no nominal value shares would be costly - nominal value doesn’t save any creditor protection purpose but it is too costly to get rid of it.  What happens if they have no nominal value - they are void,  If below the nominal value - the third party has to pay the difference plus interest - and directors could be liable for not observing this provision. Another reason why they wanted to get rid of the nominal value - it doesn’t say anything about the real value of the firm. The share nominal value and share price is never the same. The share price is not always exactly the market value, when new shares are issued it is very common to issue below the market value. This is why the nominal value will have no implication to the value of the company.  Capital maintenance rules The nominal value doesn’t say a whole a lot about the company in the one hand, but on the other hand a company may have actually started trading and using up some of the share capital. The rule for maintaining share capital, but not distributing it to the shareholders, doesn’t mean that it can't be used in maintaining a business. It can fall below the aggregate nominal value of the share capital. If the net assets of the company is lower - then further rules are triggered. But by maintaining the capital, that doesn’t mean don’t use it.  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 [s.33 of the CA 2006]. It is not a sum of money, but an interest measured by a sum of money and made up of various rights contained in the contract. Comment: Basically you get rights by virtue of being a shareholder. It can arise from the contract contained in the constitution or it can arise outside of the constitution like statute. It is not absolute ownership of the company - it is a personal right against the company. With respect to rights to dividends, the dividends are payable to the nominal value of the shares you hold. But in the model article for public companies - shareholders are entitled by default to a dividend proportional to the amount they have paid up, rather than the total nominal value of their shares. This is subject to bargaining.  It is a measure of the shareholder's participation in the company regarded as an association of members. Shareholders have voting rights, information rights etc The process of share issue When the company wants to raise money via equity there are lots of questions as to the process of issuing shares. Who has the power to decide on issuing new shares? Directors are in charge of the issuing of new shares. If the company is a private company with more than one class of shares or a public company, the decision to issue new shares is split between the board and the shareholders. (SEE LEGISLATION BIT TO SEE WHICH IT IS?) When more than one class of shares the law sets a different regime. Authorisation is made by ordinary resolution. It is a maximum 5 years authorisation and there is a specific amount of issue you distribute in this period. The shareholders must specify the number of shares the board can issue.  This delegation of power for a specific number of years and for a specific number of shares, sounds like authorised share capital that was present. But the philosophy is the same, they retain the power to keep an eye on the boards power to issue shares. This has to do with not changing the control of shareholders.  It is a clear breach of duty to issue shares to dilute the shareholders stake.  So the decision to issue shares is split between direcotrs and shareholders. Pre-emption Rights When shares are issued, this allows existing shareholders with equity securities (residual claimants) to have the right of first refusal in order to prevent them from being diluted. Once the time frame has expired then the board can offer the shares to whoever wants to buy them or cancel the issuing of shares if they don’t want outsiders.  Liability of breach of this provision is found under s.563 It can be excluded for private companies. (s.567) Can be disapplied by spec resolution (s.570), Are pre-emption rights useful to shareholders? it is question if they have the money to buy it - if they do not have the money they can sell their pre-emption rights. If the allotment is made on a renounceable basis - if the board decides to do a rights issue or a renounceable allotment then within the preference period, they have the right to sell their right to participate in the share issue - it cannot offer shares to the public at a lower price - the pre-emption right is valuable to whoever ever wants this beneficial deal. The right of first refusal implies that they cannot be offered at more favourable terms to others. When can they give renounceable letters of allotment? This is for the articles of association to decide - they may want all the share capital to be made on this renounceable basis. s.563 for breach of these Pre-emption rights See notes. Allotting the shares - two stage process. What is allotment? Individuals get the right to be registered, but they aren’t necessarily shareholders now. Allotment happens when they have the unconditional right to become members. Shares can be conditional (when the shares are issued to employees) when they have an option attached to them. When new shares are being created and given to employees they can exercise them when they want. They get an allotment of shares. They are the beneficiary of an allotment - they hold this right - but their shares are not allotted because it is not unconditional. The condition could also be that a certain amount of shares must be paid before they have the unconditional right - it is a purely contractual arrangement. Here the board is looking for whoever wants shares.  Once all the conditions are met - they are not members, they have the right to be registered. In private companies there is no real gap - it usually happens at the same time - all the conditions are met and there is no meaningful gap. What happens if the board cannot find buyer for all the shares? If they want to avoid the transaction they have the power. It is not fair to bind individuals however who wanted to subscribe to a company that ends up being far less capitalised then they thought initially. This rarely happens because of an underwriter who will buy the company’s shares in the case that not all the shares are brought up - who obviously charges a fee for doing that. Public companies are almost always bought.  Registration The next step. Registering the buyer of the share, and the shareholder becomes a member. The registration for large companies is done electronically. Once they are registered they acquire full rights, sometimes after the registration the members get certificates attesting the number of shares and their name. They can be issued in uncertificated form, however they cannot be issued anonymously - no bearer shares. The legislator wanted to increase the transparency - now bearer shares have to be surrendered to the company.  Classes of Share within the terms of the article cited. The company’s view, which was upheld by the Court of Appeal, was that the rights themselves were not ‘affected’ by the proposal so that no class meeting was required. JUDGMENT; The position with the increase of capital will be exactly the same; the holder of preference stock will have on a poll one vote for every £1 for preference stock held by him. It may have less force behind it, because it will be watereed down; but no particular weight is attached to the vote by the constitution of the company, as distinct from the right to exercise the vote, and certainly no right is conferred on the preference stock holders to preserve anything in the nature of an equilibrium between their class and the ordinary stockholders or any other class. The procedure for varying class rights Where a proposed alteration of the articles involves “the variation of the rights attached to a class of shares” the act supplements the general supermajority provisions with additional protective mechanisms for members of the affected class. Deployed in ss.630/631 – is to require the separate consent of the class, usually by way of a 75% majority to any poroposals to alter the articles in such a way as would vary the class rights. If the class has no voting rights – alteration of their rights would otherwise be a matter entirely for the voting shareholders, but the act allows them to vote on their own issue. s.630 lays down a single default rules with equivalent provision being made in s.631 for companies without shares. Variation of the rights attached to a class of shares requires the consent of three quarters of the vast cast at a separate meeting of that class or a written resolution having the support of holders of three quarters of the nominal value of the class. This can be displaced by explicit provisions in the company’s articles which may set a higher or a lower standard. If it was easy to amend it would undermine the protection intended to be afforded by the articles to the class. Any amendment to the variation procedure contained in the articles itself attracts the provisions protecting class rights – otherwise people could just vary the variation procedure by following s.21. The company may even use other means to restrict the variation of rights 0 s.630(3) – specifically meaning the entrenchment mechanisms under s.22. s.633 also makes use of a third technique – (the other two being a separate meeting of the class, and the super majority protectiong of a three quarters majority to obtain an effective decision of the class meeting). Court review of a majority’s decision. The majority of the class may act opportunistically. S.633 allows a dissenting minority of not less than 15% of the issued shares of a class who rights have been varied in a manner permitted by s.630, a right to apply to the court to have the variation cancelled. If the court feels that it would unfairly prejudice the sharehodlers of the class it may disallow the variation but otherwise msut confirm it. Not really used but bings the boards attention. Reading Notes Andrews v Gas Meter Co [1897] 1 Ch 361 (Court of Appeal) A company may alter its articles so as to take power to issue shares ranking preference to its existing shares. There is no implied condition in a company’s articles that all shares in a company shall be equal. Cumbrian Newspaper Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing CO Ltd [1987] Ch 1 Rights enjoyed by a member may be class rights although they are not refereable to particular shares. White v Bristol Aeroplane Co [1953] Ch 65 (Court of Appeal) The Rights of a class of shareholders are not altered, or even ‘affected’, by a change in the company’s structure if this change affects merely the enjoyment of such rights. Legislation IF still not making sense see reading notes Part 17 of CA. 549 Exercise by directors of power to allot shares etc a) Fa (4) 6) (6) 550 551 a) 2) @) (a) 6) (6) The directors of a company must not exercise any pawer of the company— (a) to allot shares in the company, or (b) to grant rights to subscribe for, orto convert any security into, shares in the company, except in accordance with section 550 (private company with single class of shares) or section 61 (authorisation by company). ‘Subsection (1) does not apply— (a) to the allotment of shares in pursuance of an employees’ share scheme, or (b) to the grant of a right to subscribe for, or to convert any security into, shares so allotted. Subsection (1) does not apply to the allotment of shares pursuant to a right to subscribe for, or to convert any security into, shares in the company] A director who knowingly contravenes, or permits or authorises a contravention of, this section commits an offence. Aperson guilty of an offence under this section is liable— {@) on conviction on indictment, to a‘fine; (b) on summary conviction, to a fine not exceeding the statutory maximum. Nothing in this section affects the validity of an allotment or ather transaction. Power of directors to allot shares etc: private company with only one class of shares Where a private company has only one class of shares, the directors may exercise any power of the company— (a) toallot shares ofthat class, ar (b) to grant rights to subscribe for or to convert any security into such shares, except to the extent that they are prohibited from doing so by the company's articles. Pawer of directors to allot shares ete: authorisation by company The directors of a company may exercise a power of the company— (a) toallot shares in the company, or (b) to grant rights to subseribe for or to convert any security into shares in the company, ifthey are authorised to do so by the company's articles or by resolution ofthe company Authorisation may be given for a particular exercise of the power or for its exercise generally, and may be unconditional or Subject to conditions. Authorisation must— (a) state the maximum amount of shares that may be allotted underit, and (b) specify the date on which itwill expire, which must be not more than five years from— (inthe case of authorisation contained in the company's articles at the time of its original incorporation, the date of that incorporation; (ii) in any other case, the date on which the resolution is passed by virtue of which the authorisation is given. Authorisation may— (a) be renewed or further renewed by resolution of the company for a further period not exceeding five years, and {b) be revoked or varied at any time by resolution of the company. Aresolution renewing authorisation must— (a) state (or restate) the maximum amount of shares that may be allotted under the authorisation or, as the case may be, the amount remaining to be allotted under it, and (b) specify the date on which the renewed authorisation will expire. In relation to rights to subscribe for or to convert any security into shares in the company, references in this section to the maximum amount of shares that may be allotted under the authorisation are to the maximum amount of shares that may be allotted pursuantto the rights. The directors may allot shares, or grant rights to subscribe for or to convert any security into shares, after authorisation has, expired it— When the company wishes give the investors opportunities to exit the company. The company could also have less need for equity finance. It is beneficial for a company to rearrange for changing circumstances given in s.641(4)(a) . The first example of such a benefit - when the capital is in excess of its needs. One might say that the return of assets to the shareholders is the driving force behind the transaction and the reduction of capital is just the consequent adjustment to the balance sheet which is necessary to reflect what has been done. Reduction of capital appears as a functional substitute for a redemption or repurchase of shares as discussed in the previous section of this chapter. (b) when the company would like to reduce the members liability to reduce uncalled capital . (c) - the company would like to reflect the diminution of the value in the company assets. This has two benefits - it is in the creditor’s interests - so now the capital will show the real value – and it can also insure fairness between new and old investors. Net asset values are less than the legal capital. They find an investor who is willing to invest - but before issuing new shares, they will reduce the existing capital to reflect the existing shareholders capital in the company - the new investors will receive a fair amount from their input - they want to show the real value for the existing shareholders in the company before he invests - the new investor can achieve their shares of profits named in the future. The new investor does not want his investment to fund the past losses of the company, nor that existing shareholders should participate in the future profits except to the extent that their investments have survived the company’s previous trading misfortunes. First Exception – Redeemable Shares Redemption of shares; s.684 - a company may issue shares that are to be redeemed - shares issued on the basis that they WILL be redeemed or they CAN be redeemed. The rules apply differently for public and private company. Public it must be authorised - private it can issue such shares unless it has been prohibited.  According to s.688 They must cancel the shares - see the capital redemption reserve - and the company must reduce issued share capital by the nominal value of the shares cancelled - and transfer this amount to a new capital account called the CRR to the extent that it is not made up of proceeds of fresh issues of shares.  A key issue of redemption is where do the shares come from? - For both public and private company - the redeemable shares must be bought from distributable profits - or proceeds from a fresh issue of shares. Fresh issue which has the purpose of redemption. This is both public and private company. For private they can also make a payment out of capital.  If it is bought by the new issue of shares, there is no need for a CRR. They use the redeemable shares to restructure their finance. and it also better to let go of shares cheaply and then acquire some shares for a higher price. Redeemable shares are of a hybrid nature as they can also be considered as a debt because you have a right to have a repayment at a preset condition. If they cannot pay at the date - they can agree for a later date.  The principle out of way to pay out of capital (private) is that it must go through distributable profits or fresh issue - first.  Requirements for Reduction out of Capital There are two requirements for reduction out of capital - members approval and transparency requirements. 1st requirement; members’ approval. - Special resolution(requires 75% of majority votes) ignoring the votes that are to be redeemed.  2nd requirement; solvency statement (s.642) - this will determine if the company can still pay its debts after the redemption of shares out of capital. The directors have to consider all the liabilities of the company; contingent (may arise) and prospective (will certainly become due).  It also states how it ought to be shown to the members at a general meeting. Failure to do so amounts to an offence under s.644. How it is carried out is found under s.644. It seems to be done solely through the court under s.645. In addition to solvency statement they also need an auditors report. (s.714) - the PCP is permissible capital payment - the limit to which the capital can be used. They need to make it limited to the PCP and also that they are not aware of any matters which makes the directors statement unreasonable.  Three other requirements; 1. They need to register after 15 days - solvency statement and auditors’ report to the registrar. (s.644) 2. Within one week after the adoption of special resolution - they need to advertise the adoption; two ways - they must advertise in the gazette or they must insert a similar advertisement in a national newspaper or notify all the creditors by letter. (s.718?) 3. After 5 weeks - they need to make an auditor report available for inspection by any creditor or any member. Any creditor or member who did not vote in the members resolution can apply to the court for the cancellation of the special resolution (s.720 The court can confirm or cancel the special resolution or amend the articles of the resolution. (s.721) Reduction of capital - solvency statement vs directors statement (the directors has to look the firm being a going concern) - They are essentially the same thing. Timeline of the redemption  1. Special resolution. One week before that the directors need to make a Solvency statement for the reduction of capital. One week after the spec resolution - it is the time to advertise the special resolution. 15 days after the SR it is the time to make a registration. 5 weeks after it the documents must be available for inspection. The payment out of capital cannot be earlier than 5 weeks or later than 7 weeks. Reduction of capital by special resolution - 641(1) - reduce its shares by special resolution - provided that it is supported by solvency statement or confirmed by the court(s.645). So Private Company can do so through solvency statement or confirmed by the court. Public company - confirmed by the court.  One condition is that after this mechanism at least one member must hold non-redeemable shares.  Purchase of Own Shares CA 2006 - s.690 - provides that a company may purchase its shares - but this can be restricted or prohibited by its articles. No distinction between public and private. One condition for purchasing your own shares - there must be at least one member who owns shares that are not redeemable shares, after the repurchase.  Repurchasing shares is considered more useful then redemption because there is no commitment in advance. For RS the terms of the purchase can be set out in advance or not; it is much more flexible. Although it is more useful - they have some similarities with redemption; (1) Only fully paid shares can be repurchased (s.691). (2) when a share is purchased, it must be cancelled – capital must be reduced by the nominal value. In repurchase of shares - the company has an option not to cancel them - but hold them as treasury shares.  3- the cause of the reduciton has been explained to the members properly - so they can make an informal choice. - Among those interests - the creditors interests are mthe most important.  new addition - is that a creditors lists only includes the creditors that can show - that the proposed reduction will mean that the company cannot pay its debts - the list of creditors who can show that there is a real likelihood that the proposed reduction will mean teh company cannot pay its debts. In addition to creditors interest they take into account public interests.  - Including future creditors interests - future investors.  Also the courts need to consider shareholder interest. they need to make sure than the mechanism is equitable among the different shareholders - the company needs to aware that the sharehodlers are in equal standing - those how have traded differently have consented to that different method - they have been treated equally or consented to different treatment. The court needs to protect the minority shareholders interest. The super majority votes - does not achieve that end. The courts need to make sure that the reduction affects shareholders equitably -  REREAD AGAIN WITH THE READING NOTES TO TIDY UP 3 Methods (1) Reduction of Capital via Court (for public and Private) or through solvency Statement (simply private) (2) Redemption of Shares/Redeemable Shares (3) Purchase of Own Shares Usually only done through Distributable profits OR through a new issue of shares. However, I believe that it can also be done with capital, only for private companies, which is when the chapter 5 t 18 stuff comes into effect. See reading notes, clearer than the seminar notes. PART II OF SEMINARS – NEED TO DO CAPITAL MAIN II Capital Maintenance II Seminar Notes The aims and objectives of this seminar are to consider: (i) the prohibition on “financial assistance”, under the Companies Act 2006; (ii) the rationale for it; (iii) the effect of it both civilly and criminally; and (iv) the exceptions to it. We know the exceptions to capital return. Share buybacks for instance. There are various things that can be done to reduce capital, but requires court approval. There is statement of solvency for reduction of share capital, but usually you go to the court. If you get court approval, directors will not be liable in any way (which may not be the case for the statement of solvency). The general rule; company cannot buy its own shares. Out of all of this comes financial assistance, it is not what it used to be. Changes by the 2006 Act. What the changes were to do with the rules in relation to Private companies. Seminar 11 Directors I Notes from Seminar   Slight changes made to the law by the Small Business Enterprise Act of 2015 which amended the 2006 Act – you can no longer have corporate directors.  Who or what is a company director?   Lord Hoffman; Directors don’t have to be shareholders, but they probably will be. Even in PLCs, director’s remuneration will be linked to shares. You don’t have to have shares, but you probably will.  Directors act collectively via board of directors. There needs to be a quorum. Board meetings conduct via articles. Majority rule is applicable.  They meet periodically - not involved necessarily on daily business. Two groups of directors – One is involved with the day to day running of the company. They are pursuant to a service contract. The non-executive - they have an overseeing role. They will hold directors to account. Their role is to make sure that problems are investigated. Asking questions like; why are figures down - why is there a black hole in the company account.  Non exec directors have business experience. You can be a NED for more than one company, which is a slightly contentious issue. Under the corp. governance code, you are required to comply with this code if you want to be listed. The corp. governance code, says you need to devote sufficient time to the company. How many is enough? Depends on the nature of the company and the duties you are required to preform. So there are exec directors (service contracts) and non-executive directors (who oversee).  Directors - defined under s.250 - quite circular. Courts are looking at the substance at what you do. There are 2 types of director; (1) official director appointed via shareholder or when company is first formed, or (2) Those appointed at GM. They can retire by rotation and may stand for re-election. The official or legitimate directors are listed in companies’ house.  There are 2 types who are not official directors; (1) a shadow director (someone who the board acts in accordance with) and (2) a defacto director. When looking at someone who is a de-facto director you look at what responsibilities they have assumed and their conduct. - 2014 1 WLR 189 - para 34- 45. For more detail. Shadow Director - Not an official director and pretends he’s not a director, but has influence over the majority of the board. They can influence majority decisions at board level. It doesn't touch upon one off situations. If you constantly influence decisions - and expect people to do what you say, you will be liable as if you are an official director of the company. See s.170(5).  Examples; Someone who owns majority of shares, they are disqualified as a director and employed as a consultant. And they are consulted a lot.  Another one; patriarchal/matriarchal former executive.  They say they are not a director but they are, and it requires regularity of conduct. This ties in today as they can be liable under the general duties, and s.214 for wrongful trading.  Other things to remind you of; - need two directors for a public company -private you need one.  -Shareholders don’t really get involved with the running of the company.  s.156A - no more corporate directors s - all directors must be natural persons.  s.156B - exceptions.  Caused a lot of comment. It is a political compromise. Two competing groups - shareholder rights groups, where focus should be to maximise returns to shareholders. Pluralist group - company had much wider responsibilities in societies. It was pretty clear that the proposals for the pluralist group were unworkable. Compromise resulted in s.172. It goes for the shareholder view rather than the other parties.  See s.172. The other constituents they must have regard to. Normally what will happen is that with board meetings you minute what was done. Two Parts; First section and then a reference to various constituents.  It is a subjective test, in a way in which he or she considers would be most likely to promote the success of the company, for the benefit of its members as a whole. Because it is subjective, it will be hard to prove that their opinion is wrong, i.e that they took into account things they shouldn’t take into account. You may be able to, but you need strong evidence, and strong witness statements etc. It may be possible to show the director isn’t acting in good faith but hard.  'promote the success of the company'  - Government statements; 'medium term' - The stock market and UK business sphere do not think ahead. They want wanted companies to think slightly longer.  So it is subjective, and promoting the success of the company in the medium term, for the benefit of the members as a whole. What that means is that the shareholders have the duties owed to them? Not sure if that is right. They must simply take them into account. It must be beneficial to the members as a whole. Not just one part. If you don’t keep the shareholders happy, they will vote you out. It makes it more explicit. It doesn't mean that it is owed to the shareholder necessarily.  Various constituents; Interests of the employees etc. It doesn’t give them any right to sue. If these are breached, they cannot sue. They have no standing. They are taken into account. One situation where this would arise when company is in liquidation. S.212 of some misfeasance act - if directors breached their duty, the liquidator can bring an action against them. It will become a question of proof.  Second situation; where a company is taken over. When they get a new manager in, when they are unhappy with the price they have paid. They want to sue the previous board to get some money.  It comes into questions of derivative proceedings.  Apart from (f), where shareholders have other methods to enforce their prejudice like s.994. How does this relate to s.170(1) – the duties are owed by the director to the company? The duty under s.172 is still owed to the company, but it is simply to have regard to other constituents. The company is still at the very heart of the purpose/objective of this provision. The route that has been taken in CA 2006 under s.172(1) is to require diretors to consider other constituencies in the context of promoting the benefit of the members. This is described as promoting enlighted shareholder value. s.172(3) The duty under this section is subject to law. Common law. A lot of dicta said that where a company is in the vicinity of insolvency, then the director must take into account the interests of creditors. This view has been confirmed in:  Bita – it is not a direct duty, but it is all part of acting for the success of the company as a whole. Extract from judgement; ‘Is well established that the fid duties of a director of a company which is insolvent or bordering on insolvency differ from the duties of a company which is able to meet its liabilities, because in the case of the former the director’s duty towards the company requires him to have proper regard for the interest of its creditors and prospective creditors’ ‘The protection which the law gives to the creditors of an insolvent company while it remains under the director’s management is through the medium of the directors’ fid duty to the company, whose interests are not to be treated as synonymous with those of the shareholders but rather as embracing those of the creditors’ One can therefore see the potential interplay therefore between s.172(1) and (3). But (3), says that the duty of (1) is subject to any rule of law requiring directors to consider or act in the interests of creditors. It seems therefore, that in these given situations, the creditors considerations are paramount. s.214 of the IA coming to play, in relation to directors.  If we go back to s.172(1), these so called constituents. See People and Planet v RBS Case - was not environmentally friendly lending practices. The bank was in public ownership; UKFI. Under various manuals, RBS had not complied with its environmental requirements. So they sought judicial review of the whole position. The court said that even if they have breached the guidelines, the paramount interests for the directors are not the constituencies but the requirement to promote the company for the benefit of the members as a whole. These are matters for the director to decide, to promote the company's success. They were held not liable in that particular case. What it shows is that the prime aspect of all this is that the duty to promote the success is the overriding requirement. A lot of them are just good business sense. It is important to keep your suppliers and customers onside. It makes sense in a lot of ways. But if you're an airline company, you have to fly. You can't stop a business from carrying on its business. There are factors they have to have regard to in relation to what the company does. Compliance with all these constituents will be difficult. s.172 was successor to the old common law rule that directors have to work in the best interests of the company. Judges do not like intervening in the running of companies s.173 - Exercising Independent Judgement. You don’t want to be under the influence of anything. You want impartial advice. That links up with the conflicts provision.  The two conflicts provisions. s.175/s.177. S.175 - It is where you are competing against the company and using company assets.  s.177 - where you are dealing with the company. Both sides of the transactions. You have interest in the other side. If we look at s.175(1). A Director of the company must avoid a situation where there is an indirect or direct interest which may conflict with that interests of the company.  See s.175(2) - makes it quite clear, exploiting company assets is not allowed. Confirms the old common law rule. Doesn’t matter if you make loss or not. Fiduciaries have higher standards of conduct. You are expecting a higher standard gives rise to the benefit. Usually. But the benefit could also lead to a conflict of interest. Reading Notes: Aberdeen Railway Company v Blaikie Brothers – Fiduciary Duty “It was a rule of universal application that trustees could not enter into contracts which their own interest might be in conflict with those of their constituents” “Blaiki was at the time of the contract, bound to make the best bargain possible for the Company of which he was chairman of the court of directors. His personal interest, as a member of the firm contracting with the Company, would lead him in an entirely opposite direction. The directors of a company had duties which were of a fiduciary nature to discharge, and any contract in which a director was intered entered into with the Company must be void.” Regal (Hastings) Ltd v Gulliver – Fiduciary Duty (Account of Profits) “The general rule of equity is that no one who has duties of a fid nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to Cestui que trust. Sharma v Sharma – Case on s.175 CA 2006 “I must apply the following the principles in resolving the issues in the present appeal. In this summary “Stat Duty” means the stat duty imposed by s.175 of the 2006 Act. (i) A Company director is in breach of his Fid or stat duty if he exploits for his personal gain (a) opportunities which come to his attention through his role as a director or (b) any other opportunities which he could and should exploit for the benefit of the company. (ii) If the shareholder with full knowledge of the relevant facts consent to the director exploiting these opportunities for his own personal gain, then the conduct is not a breach of the fiduciary or statutory duty. (iii) If the shareholders with full knowledge of the relevant facts acquiesce in the director’s proposed conduct, then that may constitute consent. However, consent cannot be inferred from silence unless: a. Shareholders know that their consent is required, or b. The circumstances are such that it would be unconscionable for the shareholders to remain silent at the time and object after the event. (iv) For propositions (ii) and (iii), the shareholders need not appreciate that the proposed action would be characterised as a breach of fid or stat duty.” Richmond Pharmacology Ltd v Chester Overseas Ltd – Subjective Test under s.172 and Objective Test under s.175 “Under s.172, a director is under a duty to act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to certain specified matters. Under the duty set out in S.172: ‘The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of director at the relevant time, might have acted differently. Rather the question is whether the director honestly believed that his act or omission was in the best interests of the company. The issue is as to the director’s state of mind.’ ‘ I was not referred to any authority on the interpretation of section 175. However, the ‘no conflict rule’ that a person who owes fid duties must not put himself in a position where his duty does or may conflict with his interests, is a very familiar one. It is clear from [a decision] and many later ones that the rule is a strict one that doesn’t depend on bad faith or any question as to the state of mind of the fiduciary. [Reliance placed on Regal (Hastings)] Re HLC Environmental Projects Ltd – ‘Subjective Test for s.172’ ‘It is common ground that duties [Under s.172] are subjective’ ‘However this general principle of subjectivity is subject to three qualifications of potential relevance in this case: (a) Where the creditors are to be taken into account [under s.172(3)] their interests must be considered as paramount. [Reliance placed on Brady v Brady] (b) The subjective test only applies where there is evidence of actual consideration of the best interests of the company. Where there is no such evidence, the proper test is objective. Could the intelligent and honest man in the position of a director of the company concerned, in the circumstances, have reasonably believed that the transaction was for the benefit of the company. (c) Building on (b), where a very material interest (like a large creditor) is unreasonably overlooked and not taken into account, the objective test must equally be applied. Here they have failed to take into account a material factor. It is the court making an objective judgement taking into account all the relevant facts know ro which ought to have been known at the time, the irectors not having made such a judgement in the first place.’ Bita (UK) Ltd v Nazir – on s.172 ‘it is well established that the fiduciary duties of a director of a company which is insolvent or bordering on insolvency differ from the duties of a company which is able to meet its liabilities, because in the case former the director’s duty towards the company requires him to have proper regard for the interest of its creditors and prospective creditors.’ ‘The proptection which the law gives to the creditors of an insolvent company while it remains under the directors management is through the medium of the director’s fiduciary duty to the company. ‘Public policy puts the case that there should be no obstacles in the way of the enforcement of this duty.’ ‘The court would defeat the very object of the rule of law which we have identified, and would be acting contrary to the purpose and terms of section 172(3) and 180(5) of the Companies Act 2006, if they permitted the directors of an insovlent company to escape responsibility for breach of their fiduciary duty in relation to the interests of the creditors, by raising a defence illegality to an action brought by the liquidators to recover, for the benefit of those creidtors, the loss caused to the company by their breach of fiduciary duty.’ I think (4) would allow for the company to excuse any breach (including s.176 therefore) . s.182. This requires a declaration of interest in a transaction or arrangement which has been entered into by the company, to the extent that the interest has not already been declared under s.177. The s.182 is subject to the same exceptions as in s.177 for interests of which the director is unaware, or which are unlikely t give rise to a conflict of interest or which are already known to the other directors or are terms of a service contract. s.183 makes it an offence. (7) Did not know that the relevant circumstances constituted a contravention. There can be subsequent ratification of the transaction within a reasonable period of the company. They can ratify the transaction. These provisions are important, when you are dealing with substantial transactions. Often with land. The price you are paying for the asset, doesn’t mean the market price, it refers to the value to yourself. MicroLeisure- It wasnt necessarily the market price, because you may have a situation where a director plays hardball with the company. Say company had land in a particualr area. Director may own land right next to that. The company wants that land. Director will say sure its worth 90K but ill sell you at 150K, so you need shareholder approval for it. It is not jsut the market value, it is the value to the director concerned. Directors duties relating to skill care and diligence A duty that is not fid as stated in s.178(2). - It is the one relating to skill care and diligence. A director must exercise reasonable care skill and diligence.  Sees.174. The general knowledge - an objective standard (s.174(2)(a)) and the subjective standard that the particular director has (s.174(2)(b)). It is a driving test. If you want to drive on the road you need to have a particular standard. You have to have a general standard you need to pass. There is a threshold standard. If you don’t pass the first test, you will be liable. If you pass the first test, you got to the second, give the actual persons knowledge - have they acted with skill and experience? The code shows its fragilities - it’s not dealing with things as fully as it could?. Re Equitable Fire Assurance -  see page 428 in notes. Extract from the judgement; - ‘: (1.) A djirector need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley M.R.: "If directors act within their powers, *429 if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company": see Lagunas Nitrate Co. v. Lagunas Syndicate. 79 It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3.) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.’ Three things; 1. Proposes the standard of conduct. 2. You do not need to give all your time to the company ( no longer good law?) 3. Delegation is permitted as long as they can do it well too or at least you can. Two of those things are not dealt with under s174 - how much time you ought to spend and the question of delegation. The test of J Romer - was thought of being subjective. The director’s knowledge and experience. But the reference to 'reasonably' indicate an objective standard is concerned as well. It is a bit like 174 as well. You look at the particular characteristics of the director concerned as well. The test of s.214(4) of the IA - which is in relation to wrongful trading which is in very similar terms to s.174 - The test there under s.214, is the same as s.174. Those cases that discuss s.214 can be used in relation to s.174. You are looking at the general standard; the general threshold that directors have to pass, and then a specific standard. Now the other point that arises from all of this is the distinction between executive and non-executive directors. The courts have said in theory one treats them the same, but in practice they are not treated the same. They will presumably have less knowledge than executive directors of the company. The non executive will have a lot of business experience, but perhaps not the same way. There is a distinction in practice but in Dorchester Finance - that is the exception. Directors and their failings; Re D'Jan of London. Mr D'Jan got someone else to fill out insurance on his company's insurance. third party filled it out, D'Jan had some minor criminal convictions that had nothing to do with the insurance. But they were omitted from the form. The insurance company did not pay on the basis of material non-disclosure. The company brought proceedings against d'jan on liquidation. They said he was in breach of duty of skill care and diligence. It is different from fid obligations. There we are dealing with loyalty. This duty is to do with competence and negligence. There can be overlap between the two. The other thing is that the remedies will be different. Because the fiduciary will be expected to act at a higher standard, the remedies here are not as stringent. It will be damages. Restitutionary damages.   You wont avoid a transaction unless there was some negligent misrep which went to the formation of the agreement. You wont usually be setting aside the contract, it will be damages. The director will be interacting with other parties. They have done their job negligently. The other situation arose in Dorchester Finance - Where directors signed blank cheques. 3 directors sued for breach of skill and care. P and H were non-executive directors. P and H did not give the company a great deal of time, there were no directors meetings. Sums were used to make unsecured loans to various persons. These loans couldn’t be recovered. The source of the company's loss - the directors. It was held that they all breached their duty. No distinction was made between executives and non-executives, here there was no need to. Negligent by signing cheques in blank. Parons and Hamilton did not show the requisite level. Stebbings did not show and skill or care. The judge said that they hadn’t done their jobs properly. Stebbings hadnt even tried to do anything. They were held liable in that particular situation. In relation to the second part of the test, paying attention to the company's affairs, that is becoming more controversial. - If you didn’t attend the meetings you'd probably be chucked out. This particular rule is on its way out - maybe not the law at all. With the greater scrutiny of directors, shareholders or other constituents, as well a more complex business environment, if they didn’t attend meetings they probably would be asked to leave and not stand for re-election. In relation to the other part about delegation, the courts have made clear that you can delegate, but that doesn’t excuse you from liability. Cannot do the ostrich routine. If you delegate, you must be sure that they have to perform to a requisite standard but you have to oversee and check that they do it to the requisite standard. Delegation does not absolve from responsibility This is set out in two important cases - Re Westmid Packaging and Sec of State for Trade and Industry v Baker The Re West Mid Packaging case  Lord Wolf - 'Collegiate responsibility of Directors' - You've got to become aware of the company's affairs. There is a difference - the director cannot participate in ratifying his acts or any member connected with the member. This does not mean that they cannot take part in the meeting. You can come to the meeting and plead your case - no denial of natural justice. But not allowed to be involved in the actual decision. It has to be disinterested shareholders.  That might seem fair but it might be problematic if there is only one shareholder and director, or where everyone is connected; family business for example.  Which may then lead us to s.1157 where you throw yourself to the mercy of the court. Directors can - take out insurance to cover them for breaches of duty. Sensible thing to have.  But the court has a discretion to relieve liability wholly or partially see s.1157.  There are three cumulative elements to this defence; 1. The Director must have acted honestly. 2. Reasonably. 3. Ought fairly to be excused.  Yes okay you've made a mistake, but it was an honest and reasonable mistake.  Re D'Jan was excused - because he owned 99% of the shares. The insurance was invalid, had to pay it all then. The company was insolvent and went into liquidation. The 'economic realities of the case'. See para in notes. His breach of duties was not gross. He had been honest and reasonable, and some of the liabilities should be excused.  Extract from judgement; - In my judgment, although Mr D'Jan's 99 per cent holding of shares is not sufficient to sustain a Multinational defence, it is relevant to the exercise of the discretion under sec. 727 . It may be reasonable to take a risk in relation to your own money which would be unreasonable in relation to someone else's. And although for the purposes of the law of negligence the company is a separate entity to which Mr D'Jan owes a duty of care which cannot vary according to the number of shares he owns, I think that the economic realities of the case can be taken into account in exercising the discretion under sec. 727 . His breach of duty in failing to read the form before signing was not gross. It was the kind of thing which could happen to any busy man, although, as I have said, this is not enough to excuse it. But I think it is also relevant that in 1986, with the company solvent and indeed prosperous, the only persons whose interests he was foreseeably putting at risk by not reading the form were himself and his wife. Mr D'Jan certainly acted honestly. For the purposes of sec. 727 I think he acted reasonably and I think he ought fairly to be excused for some, though not all, of the liability which he would otherwise have incurred. in Dorcehster Finance Stebbings was not excused because he did not meet any of the criteria. Last thing to talk about; In some countries, US(Delaware), the laws are very favourable to companies and directors, and Australia has a similar business judgment rule - you will not be liable if it is an error related to business judgment you will not be liable.  If you are going to be doing company work - you will be dealing with the US. The business judgement rule is definitively something you'll come across We do not have an express rule, but it is something similar. s.172 - got to be in good faith, for the benefit of shareholders. An implicit business judgement rule. The parameters of s.172 will be worked out further. If you are going to Delaware, a lot of the companies will be incorporated in delaware.  Reading Notes: The provision which states who is connected to the director, thereby limiting their ability to vote in s.239, is s.252. Brumder v Motornet Service and Repairs Ltd [2013] EWCA Civ 195 “The definition in section 174(2) of the 2006 Act builds on the formulation in section 214(4) of the Insolvency Act 1986 which Hoffmann LJ stated in In re D'Jan of London Ltd accurately stated the common law duty. It is in two parts. The first part, in section 174(2)(a) , is that a director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with “the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company”. This objective test sets the floor. The second part of the definition, in section 174(2)(b) , will displace it where the particular director under consideration has greater knowledge, skill and experience than may reasonably be expected. I observe only that the statutory formulation in section 174 of the 2006 Act recognises that there will be variations between different types of directors and between different types and sizes of company. Directors are permitted to engage in substantial delegation of management functions to non-board employees, just as they were at common law: see In re City Equitable Fire Insurance Co Ltd [1925] Ch 407 , 429. Directors are not, however, permitted to escape from being in a position to guide and monitor management and from “the duty to supervise the discharge of the delegated functions”: In re Barings plc (No 5) [1999] 1 BCLC 433, 489, approved by the Court of Appeal [2000] 1 BCLC 523 , 536, and Equitable Life Assurance Society v Bowley [2004] 1 BCLC 180 , para 41. In the latter case Langley J stated that the law as to the extent to which non-executive directors may be able to rely on the executive directors and other professionals to perform their duties is in a state of development and is “fact sensitive”. One factor may (see Gower & Davies, Principles of Modern Company Law , 9th ed, para 16-34) be “the quality of the internal controls”. In this case, where there was no attempt by the claimant to enable the company to fulfil its health and safety obligations, even by expressly delegating them (subject to appropriate supervision) to Mr Lewis, such considerations are not applicable.” Seminar 13 Corporate Governance Doesnae come up. Seminar 14 Wrongful Trading/Shadow Directors Will just focus on Shadow Directors part of the Seminar. The concept of a shadow director is under the companies act/Insolvency act - s.251 for both. See s.251 They are not an official director of a company. If you go to companies house you see the official directors. You will not see shadow directors. Shadow director tries to call the shots from the shadows. They are exerting influence over the board, behind the scenes. This is in contrast to a de facto director - who is also not an official director, but is acting as if they are a director. De facto - is not an official director - but says i am a director. How to determine if they are a shadow director? There is no specific test - no box ticking test - you're looking at the role the individual plays in the company. What responsibilities they've assumed, the status and their function. Then they will be liable in their role, through their status and their function etc. They will have a more overt role. Shadow directors – Two Examples 1. Where you have a family company, mother/father - children on the board and the parent decides they will retire from the company, but not be involved with the management of the company. But of course like some parents, they cannot keep away from the company, and continue to tell the children what to do. They dish out advice that is followed. If they are simply doing what they are told, that is a shadow director. Not exercising independent judgement as stated under s.173. 2. Where someone is a majority or sole shareholder of a company, or they are disqualified as director - they are not allowed to be a director for a certain time. They are magically employed by the company as a consultant, and they are heavily consulted. They can be an employee of a company, we can consult them and make the decisions - but everyone knows the reality that they simply do as they are told. The disqualified director, who cannot be a director, would be telling people what to do - breaching their disqual order and are being a shadow director. When can an individual be targeted for disqualification? - s.6 - an individual when a company has gone into insolvent. - Complaints by general public to the insolvency services - they will decide whether they think the directors should be targeted for disqualification. s.8 Here the sec of state has the power to investigate the conduct of directors where companies are being used as vehicles not in the interests of the public. - new one; where a director has been disqaulfied and the third party he was following - s.8zA. -failure to comply with company legislation - s.5 et seq s.4 – s.10 - wrongful trading/fraudulent trading - s.214/s.213  - can also disqualify the director at the same time. One of the reasons why they're less common in this process however, is that the insolvency practitioner is not interested in disqualifying the director - he wants money for creditors. The two most likely cases will be s.6/8 - Here where a disqualification order is granted, is it absolute. The act prohibits directors for specific period of times, max 15 years and solely for UK companies. Following this however, a director can apply for leave to act. What is the purpose of the CDD Act? What is the intention? It is to protect the public - all the cases come back to this. It will do this by raising standards. Through being a deterrence factor - if the court is setting up minimum standards, that should raise standards; Re Grayan Building Services Ltd - 1993 Extracts from the judgement; - ‘It must decide whether that conduct, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.’ - ‘It follows that I agree with the approach of Vinelott J in Re Pamstock Ltd, when he said that it was his duty to disqualify a director whose conduct fell short of the standard of conduct which is today expected of a director of a company which enjoys the privilege of limited liability even though he did so with regret’ - The court of appeal had regard to purpose of the legislation - 315. They found that limited liability must not be misused, and that it must be carried out with proper sense of responsibility. This act amounted to an important sanction, and acted basically as a safeguard laid down by parliament to benefit others who would be dealing with their companies. -So it raises standards, and deals with the abuse of limited liability. How does the act try and carry out the balancing act of protecting the public and not too detrimental to entrepreneurship? - The result of each case depends on the facts of each case. It focuses on the individual conduct of management. It doesn’t ignore collective responsibility. If other directors fail to stop fraud - they will try and uncover and determine whether the conduct was carried out - each director is focused on separately. The court is looking at each particular director and their conduct and whether it merits disqualification. - Another way it avoids being too detrimental to entrepreneurship is that the ban is a fixed period of time, not forever. -In addition, even when they have been disqualified, there is the ability to apply to the court to act as a director, The purpose of the act is key in determining how well the other provisions operate or interpreted. You always do that through the lens of the act. When will proceedings be brought under s.6? - practical point; s.6 is the usual section that proceedings will be brought: where a company has entered into liquidation.      -There will be a report on each director regardless – they(I think the liquidator) will tell the insolvency service all the relevant conduct and leave it up to them to target the conduct/director further or not. -One of the reasons for concern around that is that the insolvency service felt that some reports for disqualification were very mundane. Also the liquidator can be appointed by the court or the directors themselves in some cases. The professional bodies wanted to avoid any criticisms on that ground. -  There will always be a conduct report.      - They will put forward the report and someone may go into investigation. The law firms will form a view if they should proceed to a disqualification hearing.      -(DON’T KNOW IF THIS IS RELEVANT)      -Once the investigator report is made there is an authorisations team, which is a different part of the IS - they look at all the cases. They see a lot of cases, so can work out exactly where it fits. They review the report, and normally they’ll just make a final decision. If they take the view that it should be disqualified - it goes to another team in the IS. The idea of passing the report to the defence liaison team, will be a key point as they issue a letter to the director - s.16 - sets out the terms of the allegations being made. What conduct has been set to amount to misconduct - the period of time that has been suggested as well.      - Things can go one of three ways 1. The defence liaison team can be convinced that proceedings should not be put forward.           - 2.It could result in a voluntary director undertaking for a fixed period of time. It has the force of court order, and details. There will be a schedule attached to that undertakings to which he admits to, which will be relevant for leave to act. The benefit of undertaking is that it is cheaper           - 3. Raise proceedings - the case will be handed to a panel of solicitors. There is a case; Kiyani v Sec of State - you can JR the sec of state's decision. Provided they have gone through the correct processes - it will be very rare that they will raise the proceedings. They will probably just go through the disqualification process.      - This is not going to be examinable - probably just something to be aware. Unfitness under s.6 of the 1986 - mandatory to determine. How do we determine unfitness? s.12C -> Schedule 1 (revised by SME 2015). It used to be the case that the schedule had very specific items of misconduct - all very specific - the case law made it clear that there was no one single case. Parliament was concerned that individuals wouldn’t understand, so Schedule 1 was revised to take into account all cases - or to specific cases for directors. See schedule 1  - "Matters ot be taken into account" Para 4 – It is not just the loss or harm that has actually been caused - but the potential harm or loss that could have been caused. It could also be relevant for health and safety breaches. If a building was empty - the court would look at what else could have happened. One case Re Bath Limited 4 BCC 130 Re Gibson Davies Ltd - There is no single specified occurrence - the court must have regard to the directors’ conduct in general - you have to consider whether he has met the standards of commercial probity. -Unfitness is a question of fact. - the act doesn’t provide any manner in which they ought to exercise it. They provide discretion in schedule 1, but nothing else when determining to grant leave – They must consider the end of the disqualification order; the deterrent function and the desire to raise standards. Because there is a deterrent function leave cannot be so easily granted. First factor; Leave to act for a particular company rather than leave in general. That wouldn’t be in keeping with the legislation in general. You can't analyse when the public will be protected if you dont know what enterprise the director will act in . Re Gibson Davies ltd -Westlaw summary; - On an application under s. 17 the court had to be satisfied that there was a need to make the order and that if the order was made the public would remain adequately protected. - The desire of the appellant to be a director of the company which he had devised and which was it seemed successful, was not a need for purposes of the application. On the other hand, the evidence showed that the company was in need of the services of the appellant - Since the court was of the view that there was a need for the making of an order, the question was whether if an order was made there would be adequate protection for the public. T -Another way of reading it, there has to be an overriding need for a director to be appointed. Here, the director wanting to be a director wasn’t need. Did the company require him to be a director? Would the company fail without him? It would be difficult to replace him, however there has been a move away from that approach Re Dawes & Henderson - 1999  2 BCLC  317? page 325 -Extract from Judgement; - ‘The discretion given to the court under the 1986 Act to grant leave to an individual against whom a disqualification order has been made, enabling him during the currency of the disqualification order to act as a director of a particular company, is a discretion unfettered by any statutory condition or criterion. It would in my view be wrong for the court to create any such fetters or conditions. The reason why it would be wrong is that no-one, when sitting in a particular case to give judgment, can foresee the infinite variety of circumstances that might apply in future cases not before the court. Where Parliament has given the courts an unfettered discretion I do not think it is for the courts to reduce the ambit of that discretion. But in exercising the statutory discretion courts must, of course, not take into account any irrelevant factors. The emphasis given in a judgment in a particular case on particular circumstances in that case is not necessarily a guide to the weight to be attributed to similar circumstances in a different case.’ - ‘The factors of importance to my mind in the present case are, first and foremost, the reasons why the disqualification order was made. The reasons were those of inadequate management. All the matters of which complaint was made, the s. 151 breach, the preference given to the Royal Bank of Scotland, the imprudent loans, were attributable to inadequate management. They were not attributable to dishonesty or to any want of probity or to any propensity, as is present in a number of disqualification cases, to live on creditors' money by not paying debts or by taking excessive remuneration out of the company.’ - ‘Further, the policy behind the 1986 Act is that individuals against whom disqualification orders are made should nonetheless be able to earn their living in whatever business they may choose to turn their hand to. It is in the public interest that that should be so. Mr Shuttleworth has, since the order was made against him, identified a business that he wants to carry on; he has set it up using his own money; he is carrying it on in his own name. It is entirely consistent with the policy of the Act that that should be so whatever risk there might be that inadequate management on his part in doing so might lead to the failure of the business. He, after all, is personally liable for its debts.’ - The next factor of importance, in my experience peculiar to this case-I have never heard of another-is that the company in question, of which the applicant wants to be allowed to be a director, is not a limited company. It has a share capital but the liability of its members is not limited to the amount outstanding on the shares they have taken up. As a sole trader Mr Shuttleworth is liable in respect of all the debts of the business. As the sole shareholder in an unlimited company carrying on that business he would retain the same liability, albeit that the procedure to enforce that liability would require *212 a petition to have the company wound up. The liability of a member of a company without limited liability cannot be enforced short of a winding up. -Needs no longer seen as a condition of precedent - where you cant show a need. There is a balancing act – the need of director to earn a living and the company against the protection of the public. When you read the Scottish cases, they do still talk about need - but there hasn't been anything before the court where there was no strong need. You always want to show the strong need - you want the application to be as strong as possible. Sec of State v Palferman - 1995 SLT 156 - that case does talk about broad discretion. They don’t see need as a condition precedent, while a lot of Scottish cases do see need as a hurdle. Is the public protected? Here it is an issue for deterrence, which is why in Scottish cases you have a high test of need. The difficulties the company would have without him. A lot of people would have the view of why grant the order? The idea is to do with balancing - entrepreneurship vs abuse of limited liability. Now there may be too much interest in protecting the entrepreneurship. The first thing they consider is the seriousness of the type of conduct. So serious is the conduct that you shouldn’t allowed to act again. It is punitive - the more difficult the conduct, the more you want to protect the public. What is put in place when granting leave, therefore, are financial controls of the company or trading controls. The court says he is very good business man, but we want specific safeguards - we want an accountant on board etc. We want someone who makes sure that it is kept on top of. Cost implication, if he wants to get leave that is what the court will look at. If a director has been taking out of company accounts, the court may say 1 condition to protect the public is that he won’t have access to the company's bank account. Or you could say that he is entitled to sign, but there must be two signatories. What becomes more difficult is when they are liable for a complex fraud. What sort of control do you put to protect the public for that? Protections that would stop the last fraud would probably would not stop the next one. So the controls to protect the company. The final thing about leave and granting, do you say it is a undertaking or do you say its conditional - what the insolvency service pushes for is conditional leave. If you make leave conditional then the leave flies off, when he breaches the conditions, and he is acting without leave and then the penalties will apply. How well does legislation meet its policy aims? ARTICLE HICKS - read Hicks considers the protection to be limited since there are no prior qualifications to be required as a director. The way in which they are enforced in present, is that it is particularly voluntary. How will we know the directors are disqualified? The obligation is on the court to provide the disqualification orders Hicks also considers the deterrence is limited, as awareness is limited. ‘Deterrence is limited Deterrence for rogues’. They will then put their family members instead. Hicks considered a solution; more education for directors - training courses - and more disqualifications for longer periods R3 - institution for recover of professionals - fines for disqualification and compulsory finance courses. Government consultation led to the SBE 2015 act allows for compensation award of disqualification proceedings. This is where individuals take disqualification It relates to where the privilege of limited liability was exploited. Where you transfer the assets to a new company and would use the same name and same premises. If you dont realise that you are trading with a new entity who has failed to provide money for invoices - you wouldn’t have done so. How did the IA look to deal with - s.216/217 - far wider than the initial mischief. When do these sections apply? When they enter insolvent liquidation - 12 months prior to insolvency – they will be subject to the prohibition. SEE THE ACT - - There is no need for any member of the public to be confused - all that happens is the name that is used is similar. Not just the companies name, not just trading names but any name which is used in the insolvent company in carrying on it business. There is no requirement for confusion - the test is similarity, in that the previous company and the new one would get attributed. Rickets v Ad valorem factors ltd (CoA - LJ Mowry) When deciding that they are so similar - the courts have to take a contextual approach. Consideration had to be given to geographical locations of the areas. If they are operating in the same area, that suggests similarity. The types of customer dealt with, if they are the same, suggests similarity. The final factor; the management of the two enterprises - are the figure heads so similar? What are the consequence of breach? Fine, imprisonment and personal liability of the prohibited name company. There was an important caveat in the Sulley case, in that case a director who acted in breach was being sued by a creditor – It was held that it would have to be debts that were due when he was in breach of that provision - LJ Arden – That is when the company was known by the prohibited company name.  Glasgow City Council v Craig (Decision of Lord Glennie) Exemptions to the section;   1. Successor gets all the debts from the old company - see provision.  2. Genuine businesses have been run in a group basis - traded with similar names for more than a year. Known by the prohibited name for more than a year before insolvency - that will not breach s.216. If it is nothing new then no requirement to protect the public.  When looking at directors disqualifications and you're trying to see whether it meets the aim - read hicks is articles - people read the act in a vacuum. It will only be part of one small piece in the wider jigsaw, is not entirely fair to criticise. The fact that there are no courses on becoming a director is an issue with who is allowed to be director. The insolvency remedies don’t work particularly well. In some areas you might improve the situation by bulking up the areas of other locations. Reading Notes for Director Disqualification Department of Business Innovation and Skills, “Transparency & Trust: Enhancing the transparency of UK Companies and increasing trust in UK business – Government Response” This paper is meant to show why the reform was brought in from the SMBE act of 2015. a. Material Breaches of sectoral regualtions b. The wider social impacts of the failed company. c. The nature of creditors and the degree of loss they have suffered. d. The director’sprevious failures. 7. Increasing the reach of the director disqualification regime In section 5 of this document we set out our intention to amend the statutory framing of the matters determining unfitness which the court must consider in disqualifying a director. There was support for explicitly including material breaches of sectoral regulation in this process. This support was indicative of the general view that more should be done to integrate sectoral regulatory regimes and the director disqualification regime. Government Response