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Business Law and Practice Part 2 – Companies 101

Business Law and Practice Part 2 – Companies 101

A large portion of the BLP module revolves around company law. Some of you may have studied companies or business law in your undergraduate degree and that will help you here. However, there is a big practical element to the LPC revolving around time limits and various requirements. I always think of company law as a big checklist to tick of the procedural prerequisites to achieve a particular result.

Companies have requirements for their creation, how decisions are made both by owners and directors, how their ownership is dealt with and which reports must be returned to Companies House. It is a lot of regulation! In practice, in-house lawyers will be involved in assisting with the various procedures to effect a company’s decision and an external lawyer will be there to either advise what needs to be done or to certify everything has been done correctly after the decision has been taken. With this in mind, the company portion of this module will teach you the crucial requirements for company procedures.

There are a number of key company documents which you will need to have a handle on:

  • Under the 2006 Act, a company will have Articles. These set out the powers and procedures that must be followed by the company. Unless specified on incorporation or changed through a resolution, the model articles are assumed to apply.
  • Previously, a company was incorporated with a Memorandum and Articles. The Memorandum would detail the powers of the company and the Articles would specify how the company could operate.
  •  Annual Return. This document lists the company’s accounts at the end of the financial year but also list the directors and company secretary, and details relating to shareholders. This is very useful to check who was able to make historical decisions.

There has also been a raft of company law, the most recent of which came fully into force in 2010. As a result I learnt two lots of company law in my LPC, but I suspect you will only learn the Companies Act 2006. Although it might not be necessary for the exam, it is useful to know how to find previous law. This is because companies incorporated before the new legislation will have included parts of the old law into their documentation and will have followed previous procedures. Previous Table A provisions are available on the Companies House website and the old law can be found through your legal database (e.g. Lexis or Westlaw); just make sure any amendments were in force on the date you need it!

Incorporation

Incorporation is the start of the life of a company. To create a company various documents should be sent to Companies House. In reality, most companies are actually incorporated in advance and altered to reflect the needs of the client when they need it – a ‘shelf’ company. There are pros and cons of a shelf company; it is cheaper and faster than starting from scratch, however, there are procedures that are required to tailor the company to the client and for complicated structures it may be better to start from the beginning. If you are asked to advise the client which option would be better, keep in mind the needs of the client and the type of company they want; if it is a small business which has few requirements to document outside the legislative template, a shelf company is probably the best option. However, a large company which is likely to have numerous directors or committees with devolved powers, complicated decision-making powers or restricted function it may be better to start from scratch. If you fall on either side, make sure you can justify it.

Members’ decisions

There are various requirements for decisions made by members (shareholders) of a company, including majorities, notice requirements and meeting procedures. Some of the requirements are set by statute but they can be altered by the company’s constitutional documents. They are similar to a checklist in that if one isn’t followed correctly, the decision may not be legal or binding. They can be ratified afterwards, but if you are advising the client you don’t want to be the reason they got it wrong! For the exams, follow them through methodically

Directors’ decisions

Again, there are procedural requirements for decisions of the directors. These are covered by statute but are usually found in the Articles. Most resolutions must follow the requirements but occasionally one director or a sub-committee may have devolved powers to make the decision without the rest of the board. There are also procedures to follow if one director has a vested interest in the subject of the resolution, and it is possible that in that case the director may not be entitled to vote. Check these as well because if the resolution is passed by a majority but only by the vote of an unentitled director, the resolution may not be valid.

In both cases there are differing degrees of decisions requiring differing levels of majority to pass a resolution. This may also differ depending on the method of resolution, e.g. a board of directors may pass a resolution outside of a correctly convened meeting if it is unanimous. Check what level is required for the decision in question, both in statute and the constitutional documents.

Directors’ duties

Directors are under a number of duties in relation to the company. They must

  • act within their powers
  • promote the success of the company
  • exercise independent judgement
  • exercise reasonable care, skill and diligence (judged against both the skill and knowledge of that director and the skill and knowledge expected of someone in their role)
  • avoid conflicts of interest
  • not accept benefits from third parties
  • declare interest in proposed or existing transactions
  • not make secret profit (common law)
  • exercise powers bona fide in the interests of the company as a whole (common law)
  • make returns.

These are fiduciary duties and members have rights to redress any action taken in breach of that duty. If there is no appropriate redress then the court may issue a fine or injunction, reverse the decision, or order the directors and others to account for their profit. Actions of directors in breach of their duties can usually be ratified by a members resolution. Directors can also be personally liable for the actions of companies in a number of cases, e.g. corporate manslaughter, fraud, and competition offences. In addition, people who act like directors but aren’t officially named may still be held liable when the company is insolvent. It isn’t easy being a director!

Shares

The key attraction of a company structure is the limited liability for the owners; you are only at risk for the number of shares you own. Shares are a big part of a company; they indicate ownership of the company as they dictate voting rights and weight of votes in members’ decisions. In other words, if you own a sufficient percentage of the shares in a company, you decide what that company does or doesn’t do (this is what they are talking about on Dragon’s Den when they offer percentages of the equity). As a result, the transfer and sale of shares is regulated and again there is a procedure that should be followed. It is worth remembering that a stock transfer form should be completed and stamp duty paid by the purchaser. There are also procedural requirements for the company to be able to buy back shares and it is illegal for a public company to offer financial assistance for someone to buy shares.

The key thing for companies is to make sure every little requirement is checked off, both from statute and from the constitutional documents.

In terms of the exams, it is important to have a handle on the procedures and to understand what is and isn’t permitted in terms of shares. And always check the articles – there may be restrictions on transfer that are above those in statute.

The key thing for companies is to make sure every little requirement is checked off, both from statute and from the constitutional documents. I structured my notes as a checklist so I could work through the requirements methodically and included references to the relevant section of the statute so I could look it up quickly. Not only was I able to work through them quickly and easily, it also meant for problem-style questions that I had a list of things I needed to consider in my answer. Provided all the requirements are ticked off, you should get the marks you need!

Next week I will be looking at the pre-trial stage of litigation.

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