Essential Company Law (Essentials)

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In the event, the law does still make a distinction. Section 65 of the Charities Act deals with the position. Ultra vires and objects clauses remain favourite examination areas. The ground has shifted, however. You should make sure that you are familiar with the Prentice Report recommendations, with the Companies Act and the history behind the changes.

Company name Some knowledge of the rules governing the choice of name for a company is helpful. Although it is rare for there to be a specific question on the company name, it may feature as part of a problem question. The statutory provisions relating to company names are set out in ss 25—34 of the Companies Act Previously, this was the case under the Companies Act where companies could obtain a licence, if their work was for charity or public good, to omit the word limited. Section 30 of the Companies Act now permits companies to omit the word limited on satisfying certain conditions.

The constitution must also prohibit the payment of dividends to its members and require all of the assets which would otherwise be available to its members generally to be transferred on its winding up to another body with similar objects or to a body the objects of which are the promotion of charity and anything incidental or conducive thereto. Where such an exemption from using the word limited is desired, then a statutory declaration that a company complies with the above requirements must be delivered to the registrar of companies who may accept the declaration as evidence of the matters stated in it.

The registrar may refuse to register a company by a name which does not include the word limited, unless such a declaration has been delivered to him if the company is limited ; s 26 of the Companies Act prohibits the use of certain names. The same principle applies to the recognised abbreviations of these words or expressions. Names which would in the opinion of the Secretary of State constitute a criminal offence or which, in the opinion of the Secretary of State, would be offensive are also forbidden.

Certain words may only be used with the approval of the Secretary of State. For the purposes of deciding whether a name is the same as one already on the register, certain matters are ignored. There is a list of the words specified in regulations made under s 29 of the Companies Act. If the name of the company implies some regional, national or international pre-eminence, governmental link or sponsorship or some pre-eminent status, then consent may well be required.

In seeking registration of the company name, it would be appropriate to have copies of the letters sent to the relevant body and the response indicating that there is no objection when seeking registration with that name; the choice of company name is limited by other considerations. If the name constitutes a registered trade mark, the person who has the trade mark may institute summary proceedings to prevent the use of the name under the Trade Marks Act ; the use of the name which is already used by an existing business whether sole trader, partnership or company or a name which is similar to that of an existing business such as it appears to the trading public that there is a link between the two businesses may be subject to a passing off action in tort, which, if successful, will involve the granting of an injunction to prevent further use of the name and an account of profits in respect of the past use of the name.

Thus, in Ewing v Buttercup Margarine Ltd , Astbury J, affirmed by the Court of Appeal, held that the plaintiff who operated the Buttercup Dairy Co could obtain an injunction against the Buttercup Margarine Co, since this name was calculated to deceive by diverting customers, or potential customers, from the plaintiff to the defendant. It is not automatic that an injunction will be granted even where a business has an identical name. There must clearly be some similarity in the trading area and the business concern.

The Court of Appeal held that the single word could not qualify as an original literary work, so the defendant could not be restrained from using it on the grounds of breach of copyright. Change of name Section 28 of the Companies Act provides that a company may change its name by special resolution in general meeting. The same rules apply on a change of name as apply to the initial choice of name. Sometimes, the Secretary of State may require a change of name.

It has already been noted that if he finds that the name is too similar to an existing name, he may require a change within 12 months s 28 2 of the Companies Act This applies in just the same way after a name has been changed as on a choice of name on initial incorporation. If a company provides misleading information to the registrar on incorporation or on a change of a name, the registrar may order a change within five years s 28 3 of the Companies Act The Secretary of State may also require an alteration of name if he believes that it gives a misleading indication of the nature or activities of the company so as to be likely to cause harm to the public.

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This power may be exercised at any time s 32 1 of the Companies Act The direction must be complied with within six weeks. In practice, the two documents are attached together. If the company is a company limited by guarantee or an unlimited company the articles must be printed, divided into paragraphs and numbered. In the case of a company limited by shares, if individual articles are not registered or if articles are registered which are incomplete, then the relevant Table A will apply in full or part.

There have been various sets of Table A articles. For a company registering today, these would be the Table A articles that would apply. Companies that are already registered may have other Table A articles applying to them, for example, Table A of the First Schedule of the Companies Act It is possible for such companies to update their articles and apply later Table A articles.

It is usual for a company to adopt Table A articles with modifications to its own particular circumstances. In examination terms, the areas that are most likely to be examinable in relation to articles of association are either the alteration of the articles and restrictions upon alterability or the membership contract s 14 of the Companies Act which, in fact, governs the memorandum and articles of association, although the provisions in the articles are more likely to impinge upon members. Section 9 of the Companies Act provides that a company may, by special resolution, alter its articles.

For example, a provision in the articles which seeks to exempt an officer of the company from liability for negligence would be void by virtue of s of the Companies Act The memorandum of association provided that share capital would be divided into A shares and B shares. Chitty J, and the Court of Appeal upholding him, held that this provision was invalid, as it was at odds with the memorandum of association; if an alteration of the articles is proposed which conflicts with an order of the court, then this is, of course, void.

For example, an order of the court under s 5 of the Companies Act relating to a change of objects or under s of the Companies Act relating to the remedy for unfairly prejudicial conduct cannot be overridden by a change of articles; if the proposed alteration of articles involves an alteration or abrogation of class rights, then special procedures have to be followed in addition to the passing of a special resolution as required under s 9 of the Companies Act The company must follow the regime which is appropriate to the variation of class rights which is set out in ss —27 of the Companies Act Clearly, if the change of articles also involves a variation of class rights, the procedure must be followed.

If the company has more than one class of share, then questions of variation of class rights sometimes arise. Generally, it will be obvious if there is more than one class of share. However, it is not always so simple. On occasion, if particular rights attach to a certain shareholding, this might constitute those shares as a separate class of shares.

In that case, the plaintiff company, Cumbrian Newspapers Ltd was the holder of Furthermore, Art 12 in the articles of association provided that: …if and so long as Cumberland Newspapers Ltd should be registered as the holder of not less than one 10th in nominal value of the issued ordinary share capital of the company Cumberland Newspapers Ltd shall be entitled from time to time to nominate one person to be a director of the company. Scott J held that the shares held by Cumbrian Newspapers Group constituted a separate class of shares.

Once it has been determined that there is more than one class of share in the company, the next question for determination is whether there has been a variation of the rights attaching to those shares. Once again, this may not be as straightforward as it at first appears. By contrast with the question of whether there is more than one class of share, the approach of the courts here is somewhat restrictive.

The question had to be considered, for example, in Greenhalgh v Arderne Cinemas Ltd In this case, the company had two classes of shares; 50 pence shares and 10 pence shares. The 50 pence shares carried one vote each, as did the 10 pence shares. The resolution that was proposed was to subdivide the 50 pence shares into 10 pence shares, thus giving the shares, in effect, five times as many votes as previously.

It was argued on behalf of the 10 pence shareholders that this constituted a variation of class rights and that their rights were being varied. The Court of Appeal took the view that this did not constitute a variation. The rights attaching to the 10 pence shares remained constant. They carried one vote per share. Such an approach is restrictive. Furthermore, it seems from the judgment of Lord Greene MR that, had the approach been to limit the votes of the 10 pence shares to one vote for every five shares of that class, that this would have been a variation. But nothing of the kind has been done; the right to have one vote per share is left undisturbed.

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With all due respect to the learned judge, something of the kind had been done. The practical effect of the variation is precisely the same in quintupling the votes of the 50 pence shareholders as in dividing the votes of the 10 pence shareholders by five. The approach is excessively legalistic. Once it has been established that there has been a variation of class rights, then the rules that have to be followed to carry the variation into effect are dependent upon where the rights are set out and what the rights concern.

In this situation, whatever procedure is set out, the statutory procedure of s 2 must be followed. If the class rights are varied under a procedure set out in the memorandum or articles of the company or if the class rights are set out otherwise than in the memorandum and the articles are silent on variation, then dissentient minorities have special rights to object to the alteration. They must satisfy certain conditions.

They may then object to the variation within 21 days of consent being given to the resolution. On occasion, their objections may be upheld by the court s of the Companies Act Nothing could better illustrate the great mess that British company law sometimes gets itself into. This morass of rules is unnecessarily complicated. It is confusing to the specialist lawyer let alone to the average businessman. This surely must be an area that is ripe for reform and simplification. The alteration was challenged. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.

These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no grounds for judicially putting any other restrictions on the power conferred by the section and those contained in it. In the instant case, the Court of Appeal held that the power had been exercised bona fide. Much of the case law in this area centres upon a discussion as to how one determines whether the alteration is for the benefit of the company as a whole.

It means that the shareholder must proceed upon what, in his honest opinion is for the benefit of the company as a whole. In this case, the Court of Appeal held that the alteration was valid. Difficulties remain in deciding what is for the benefit of the individual hypothetical member. In Sidebottom v Kershaw Leese and Co Ltd , the Court of Appeal upheld an alteration which permitted the compulsory acquisition of the shares of a minority who was competing with the business of the company.

It was held that an alteration permitting such an acquisition was valid, even though it was carried out specifically against a particular member. This alteration was held invalid. In this case, the power could be used by the majority against the minority. The courts have also sometimes been willing to act to protect minority shareholders from the oppressive use of majority voting power.

It should be re-emphasised that an alteration of the articles cannot be injuncted merely because it results in a breach of contract. The remedy will be in damages see Southern Foundries Ltd v Shirlaw Look out for variation of class rights and remember, it is not always obvious that the company has more than one class of share. This is set out in s 14 of the Companies Act This is no ordinary contract however and examination questions tend to focus upon the unique features of this contract.

In that case, it was contended by the defendants that the plaintiff was obliged to offer the shares of her deceased husband to them as the other shareholders of the company. It was argued on their behalf that the articles of association should be rectified so as to provide that all ordinary shares of a deceased member should be offered by his executors or administrators to the principal shareholders of the company. It was held that rectification has no part to play in relation to the membership contract.

Luxmoore LJ said: It seems to us that there is no room in the case of a company incorporated under the appropriate statute or statutes for the application to either the memorandum or articles of association of the principles upon which a Court of Equity permits rectification of documents whether inter partes or not. The memorandum and articles of association of any company which it is proposed to incorporate must be signed by the requisite number of persons who desire its incorporation and must comply with the statutory requirements in respect of registration.

In this respect, the contract is quite different from a normal contract. However, if the understanding of the members differs materially from the constitutional arrangements of the company, this may be a basis for winding the company up on the just and equitable ground under s 1 g of the Insolvency Act In the New Zealand case of Re North End Motels Huntly Ltd , a retired farmer subscribed for half of the company on the basis that he would have a say in running the company.

He found that he was in a minority on the board of directors and effectively had no say in running the company. He successfully petitioned to wind the company up on the just and equitable ground. It was formerly the case that a member of a company could not sue for damages for breach of his membership contract while remaining a member of the company. This was a somewhat unusual feature of the membership contract of a company. A member was limited to the remedy of an injunction or a declaration. The s 14 contract is, of course, alterable by special resolution in most situations see above.

This therefore means that the terms of the s 14 contract are alterable. The s 14 contract is, of course, also subject to the provisions of the Companies Act and other legislation. Upon a literal reading of s 14, it appears simply to create contractual rights and obligations between the company and its members and between members inter se.

However, the section has been interpreted in some cases as only creating rights and duties in respect of membership or qua member. Article 49 is a general article applying to all the members as such, and, apart from technicalities, it would seem reasonable that the plaintiff will not be allowed in the absence of any evidence filed by him to proceed with an action to enforce his rights under the articles, seeing that the action is a breach of his obligation under Art 49 to submit his dispute with the association to arbitration… The High Court decision has been accepted in later cases.

If this interpretation of the section in Hickman and Beattie is correct, then the contract can only be invoked in respect of membership rights and obligations and not, for example, in disputes between officers and the company. He was a member of the company, but was unable to enforce the article in his capacity as company solicitor.

Professor Gower espouses the view that s 14 can only be utilised qua member: …the decisions have constantly affirmed that the section confers contractual effect on a provision in the memorandum and articles only in so far as it affords rights or imposes obligations on a member qua member. The cases are difficult to reconcile. Dr Dan Prentice by contrast argues that a member qua member can sue the company where the particular provision affects the power of the company to function 1 Co Law It is probably impossible to square the decided cases with any one view.

Roger Gregory probably comes close to the truth when he argues 44 MLR that the older case law is confused and inconsistent. It has been noted that the membership contract is also enforceable between members inter se.

This was the ratio of the decision in Rayfield v Hands This returns us to the debate between Professor Gower and Lord Wedderburn. This happened in Re New British Iron Co ex p Beckwith , where directors of the company were able to imply a contract on the same terms as the articles when suing for their fees. Thus, in Swabey v Port Darwin Gold Mining Co , the court took the view that the company could alter its articles and so effect the terms of the contract for the future. Where there is a contract on the same terms as the articles, there may be an implied term that the contract is fixed at a particular date, so that the contract is not freely alterable see Southern Foundries Ltd v Shirlaw It may, therefore, be seen how the s 14 contract differs from an orthodox type of contract.

The examiner often delights in such distinctions. This area lends itself to essay questions, but it may also feature as part of a problem question. It is worth noting that the Steering Committee of the Company Law Review in its paper published on 15 March , Modern Company Law for a Competitive Economy—Developing the framework, suggests replacing s 14 with a statutory provision explaining to what extent members can enforce the constitution against the company and abolishing the contractual nature of rights under s Promoters Promoters, pre-incorporation contracts, prospectuses and listing particulars are a favourite examination topic.

Very often, they are linked together so that in a problem two or more of these areas may combine. It is first proposed to look at the area of promoters. He notes that in the popular imagination, a company promoter would probably be a character of dubious repute and antecedents who infests the commercial demi-monde and who, after rising to affluence by preying on the susceptibilities of a gullible public, finally retires from the scene in the blaze of a sensational suicide or Old Bailey trial.

Such is far from the truth today. He is not a professional, he is merely incorporating his business. There is no satisfactory definition of a promoter. There is no definition in any of the relevant statutes. It is wise, however, to be familiar with some of the dicta in the cases, as questions often revolve around the question of whether a particular individual in a problem is a promoter or not. The question of whether a person is a promoter or not is a question of fact. Inevitably, if questions involve promoters, there will be an issue relating to the duties of the promoters. Promoters owe fiduciary duties to the company which they are promoting.

The duties are very similar to those owed by directors to their company and by trustees to their trust. A promoter must not, therefore, make a profit out of the promotion unless it is disclosed to the company and unless the company agrees to his retention of the profits. The promoter should disclose any profits that he is making from the promotion, either to an independent board of directors as discussed in Erlanger v New Sombrero Phosphate Co or, alternatively, disclosure may be made to all of the shareholders, actual and potential, as in Salomon v A Salomon The duty of disclosure is a duty to disclose all profits, whether direct or indirect.

Thus, in Gluckstein v Barnes , where the promoter failed to disclose a profit that he had made by buying up a mortgage at a discount, he was held liable to disgorge that profit back to the company. Another aspect of the fiduciary duties of promoters is that if a promoter acquires property during a promotion period, then he holds that property on trust for the company. There appears to be no British case which has this as the ratio decidendi. However, there are dicta in Ladywell Mining Co v Brookes to that effect.

Where full disclosure of any profits has not been made, then various remedies are open to the company in the normal run of events.

First, the company may seek to rescind the contract with the promoter. The remedy of rescission is, however, subject to the normal bars to that remedy. Thus, there can be no rescission if there has been affirmation of the contract, if third party rights have intervened or if restitution of the property is no longer possible. A second possible remedy is to recover the profit from the promoter rather than to rescind the contract.

Thus, in Gluckstein v Barnes , recovery of the indirect profit was granted to the company. The remedy of disgorgement is not available where the promoter has acquired the property in a pre-promotion period. The profit that is attributable to the pre-promotion period should surely belong to the promoter or the non-promoter as he then was! The courts will not intervene in a situation such as this to try to apportion the profits. On occasion, it may be that neither of these remedies is available. This would be the case, for example, if the property was acquired prepromotion, so that some of the profit is attributable to a pre-promotion period and if the remedy of rescission is blocked for one of the reasons set out above.

In one case, the remedy of damages was made available to the company. The company was awarded the difference between the market price and the contract price where the company paid over the odds for the property. The property in question was the purchase of two music halls Re Leeds and Hanley Theatre of Varieties Particular problems arise in relation to the remuneration of promoters.

There can be no obligation in contract between the promoter and the company. A promoter may be disqualified from acting as a director, liquidator, administrative receiver or administrator, or being otherwise involved in the business. All disqualifications are subject to this Act. The disqualification may, in extreme cases, last for up to 15 years.

Pre-incorporation contracts As has been mentioned, an area that is often coupled with promoters is that of pre-incorporation contracts. This is the situation where a person enters into a contract on behalf of an as yet unformed company. Before the European Communities Act , the position seemed to depend upon what particular formula was used by the person entering into the contract on behalf of the unformed company.

If the person entered into the contract signing for and on behalf of the company, then personal liability would result. Thus, in Kelner v Baxter , the plaintiff had delivered goods to the defendant. The question arose as to whether the company was liable. It was held that the company could not be liable, since it did not exist at the time, but the defendant acting on behalf of the unformed company was held liable on the contract.

Essential Company Law (Essentials)

By contrast, if the person entered into the contract signing his name and adding after his name the description of the office that he will hold when the company is incorporated, then no liability would arise as there was no contract. In this case, the company purported to sell a quantity of ham to the defendant. The defendant refused to take delivery of the ham. The company sued for breach of contract, but as the company had not been registered until after the contract was concluded and as the plaintiff had signed his name together with the description as director, it was held that there could be no liability.

It also follows that where there can be no agency on behalf of an unformed company, since there is no principal in existence, there can be no ratification in this case either. This was an appeal from the Supreme Court of Natal. The court took the view that ratification was not possible and, in such a situation, the company should enter into a completely new contract and the old contract should be discharged. It is worth noting in passing that many countries have provided by statute that a preincorporation contract can be ratified by a company when it comes into existence.

The Companies Bill in cl 6 would have made a similar provision, but the bill failed. The company was to manage a pop group called Cheap, Mean and Nasty. The defendant was the manager of the pop group. He agreed with the plaintiffs that the plaintiffs would supply finance. He signed an agreement undertaking to repay the monies that had been advanced on behalf of Fragile Management Ltd if the contract were not completed before a certain date.

Subsequently, the plaintiff sued the defendant for the money that had been advanced. The defendant argued that he was not personally liable on the agreement. Indeed, it was known by both parties that the company had not yet been formed. However, Lord Denning MR took the view, a view shared by other members of the Court of Appeal, that a contract can purport to be made on behalf of a company, even though the company is known by both parties to the agreement not to have been formed.

He took the view that the section could only be excluded by express contrary agreement. The other members of the Court of Appeal shared this view. Prospectuses and listing particulars It is most unusual for examiners to require students to know the detailed rules relating to the content of listing particulars and prospectuses.

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In relation to prospectuses which are those documents prepared by companies offering shares or debentures to the public which are not listed on the official list of the Stock Exchange , the rules are set out in the Public Offers of Securities Regulations After consultation, amendments were made to the Public Offers of Securities Regulations , by the Offer of Public Securities Amendment Regulations , which came into force on 10 May The amendments are intended to facilitate offering securities in the UK and to allow companies to raise capital through employee share schemes.

The regulations also make it easier for cross-border offers of securities into the UK from elsewhere in the European Union. Most questions involving a consideration of prospectuses or listing particulars require an assessment of the remedies that may be available to a misled investor. The statutory remedy for those who suffer loss as a result of misleading listing particulars is set out in s of the Financial Services Act.

Any investor who purchases securities and suffers loss as a result of misleading listing particulars is eligible for compensation, unless one of the defences applies. Where a misleading prospectus is issued, regs 13 and 15 of the Public Offers of Securities Regulations provide a similar remedy. There are, of course, other remedies available to those subscribing for or purchasing shares as a result of misleading listing particulars or prospectuses.

It makes no difference, however, whether the purchaser or subscriber has relied upon either a prospectus or listing particulars in this regard. Thus, the remedy of rescission may be available where a person subscribes for shares on the basis of misleading listing particulars or a misleading prospectus. The usual bars to rescission will apply.

Two Different Parties

Thus, if there has been affirmation, or the intervention of third party rights, or if restitution is not possible, rescission will not be available. Obviously, the remedy of rescission is only available to a subscriber against the company, the other contracting party. If the plaintiff has been induced to purchase shares or debentures on the basis of a misleading prospectus or misleading listing particulars, he may have a remedy for the misrepresentation under statute.

It has already been seen that he may seek rescission. In addition, damages may be available in lieu of rescission: see s 2 2 of the Misrepresentation Act Obviously, these damages can only be awarded if rescission is available. The section only applies if the misrepresentor is a party to the contract. It therefore means that the remedy is only available to a subscriber for shares.

A remedy may be available in tort. In relation to tortious remedies, it is conceivable that the remedy may be available both to a subscriber purchasing shares or debentures directly from the company and a purchaser on the open market who buys from another person after relying upon the content of the prospectus or listing particulars. The plaintiff may seek to obtain damages in the tort of deceit. He would need to show that there is a statement of fact which is fraudulent or which is made recklessly as to its truth. In Derry v Peek , a prospectus was issued by a tramway company.

The company was empowered to use horse-drawn trams in Plymouth. The prospectus stated that the company was empowered to use steam-driven vehicles. This was not the case.

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Permission was not granted in relation to a request that had been made. It was held that, since the directors honestly believed the statement to be true, they were not liable for fraud. An action in the tort of deceit may be brought against the company itself or against the directors. Since the remedy in contract is available against the company itself, it is not likely to be used by a subscriber for shares. It may, however, be used where a purchaser of shares on the open market wishes to bring an action in tort where he cannot bring one in contract.

He would need to demonstrate that the prospectus or listing particulars are designed to encourage purchases of shares on the open market: see Andrews v Mockford In this case, the Court of Appeal considered that the prospectus was designed to induce application for both the allotment of shares from the public and for the purchase of shares in the open market. An action will also lie in damages for the tort of negligent misstatement. In such an instance, it must be shown that the company owes a duty of care to the investor. It will, however, be easier to demonstrate negligence as opposed to deceit.

Once again, it will be necessary to demonstrate if the investor is a purchaser in the open market that the prospectus or listing particulars was designed to encourage the purchase of shares on the open market. These are the most important matters to consider in relation to prospectuses and listing particulars so far as the examination is concerned.

It will also be useful to be familiar with the provisions in relation to criminal liability. If a person involved in carrying on an investment business issues false listing particulars or a false prospectus, he will be guilty of an offence in certain situations under s 47 of the Financial Services Act If such a person makes a statement, promise or forecast which he knows to be misleading, false or deceptive, or dishonestly conceals any material facts or recklessly makes dishonestly or otherwise a statement, promise or forecast which is misleading, false or deceptive, if it is for the purpose of inducing another to enter into any investment agreement, he is guilty of an offence.

The section also makes it an offence to do any act or engage in conduct creating a false or misleading impression as to the market in or value of any investment if it is done to induce another to acquire, dispose of, subscribe for or underwrite those investments or to refrain from doing so or to exercise or refrain from exercising any rights conferred by those investments. It is a defence if the person concerned can prove that he reasonably believed that his act or conduct would not create an impression that was false or misleading.

Under s of the Financial Services Act , it is an offence to publish an advertisement of securities without the approval of the Stock Exchange. This applies also to prospectuses s A. A copy of listing particulars must be deposited with the registrar of companies. Failure to do so is an offence under s 3 of the Financial Services Act , punishable on indictment by a fine. This too applies to prospectuses s A. It is an offence for a private company to issue an advertisement offering its securities to the public s 81 of the Companies Act Section 19 of the Theft Act provides that an officer or person purporting to act as such with the intention of deceiving members or creditors of a company publishes a statement or account which he knows is, or may be, misleading is guilty of an offence.

It will introduce a single regulator—the Financial Services Authority. The Act provides for some amendments and repeals to the Financial Services Act , but these are few in number and not comprehensive. The Treasury has confirmed that the Act will not be totally replaced, but will be repealed in part and that the new Act will operate in conjunction with those provisions of the Act that remain in force. If necessary, the authorised capital may be increased, see s of the Companies Act ; do the directors have authority to allot the shares? See s 80 of the Companies Act Note that a private company may pass an elective resolution that s 80 is not to apply to that company, since, normally, authority under s 80 can only last up to five years see Chapter 5 ; do pre-emption rights apply?

Section 89 of the Companies Act makes statutory provision for pre-emption on second and subsequent issues of shares. This may be excluded by a private company in its constitution: see s 91 of the Companies Act It may be excluded by both public and private companies by special resolution, see s 95 2 of the Companies Act ; the rules for payment for shares are based upon the second EC Directive on company law. These rules are incorporated into the Companies Act Section of the Companies Act requires that shares cannot be issued at a discount. This applies to both public and private companies.

Shares may not be issued in exchange for services in a public company; d shares may be issued in exchange for property which is overvalued in a private company. In a public company, there is a need for an independent expert valuation of the property concerned see s of the Companies Act In a public company, shares must be paid up to at least one-quarter of their nominal value, plus the whole of any premium s of the Companies Act A public company cannot issue shares in exchange for a non-cash consideration which may be transferred more than five years from the date of allotment s 1 of the Companies Act Where shares are issued at a premium that is, above their nominal value in either a private or public company, the whole of the premium is placed in a share premium account.

This is treated as if it were ordinary share capital for most purposes. It cannot be used to pay off a dividend. However, it may be used to pay up a bonus issue of shares s of the Companies Act Rules relating to the maintenance of capital Companies are prohibited from purchasing their own shares, subject to certain exceptions see s of the Companies Act Section of the Companies Act allows companies to issue redeemable shares of any class subject to restrictions.

Public companies can only redeem or purchase their own shares out of profits or out of the proceeds of a fresh issue of shares. Private companies may purchase out of capital, subject to certain safeguards see s of the Companies Act Normally, where companies purchase their own shares, they had to cancel these shares. This will facilitate share buy back by companies. This will be subject to restrictions. Companies are generally prohibited from providing financial assistance towards the purchase of their own shares; see s of the Companies Act There are exceptions to this principle.

In particular, private companies may provide financial assistance out of distributable profits see s of the Companies Act and Brady v Brady Companies may reduce their capital by passing a special resolution to this effect and obtaining the consent of the court to the reduction see s of the Companies Act The payment of dividends Until the Companies Act , there was no statutory intervention in this area.

The rules were somewhat confused, in particular, the definition of a profit was uncertain. Following the second EC Directive on company law, statutory rules were introduced in the Companies Act , now consolidated into the Companies Act Section of the Companies Act provides that distributions can only be made out of accumulated realised profits less accumulated realised losses. Section of the Companies Act applies to public companies only.

It requires the public company to maintain the capital side of its account in addition to having available profits. If a dividend is wrongly paid, a member may be liable to repay it under s of the Companies Act If the directors have relied upon the auditors in recommending a dividend, then the auditors may well be liable see Dovey v Cory These are examined in depth. Removal of directors The key issue which is often examinable—sometimes in essay form and sometimes as part of a problem question—concerns the removal of directors.

This provision was first introduced in the Companies Act following recommendations of the Cohen Committee of This may seem to be a very powerful weapon in the hands of shareholders but for various reasons discussed below it is not as powerful as it first seems. In this case, a small private company concerned with the management of a block of flats in Southgate, North London, was at the centre of the dispute.

The shares were held by two sisters and a brother. The two sisters wished to remove the brother from the board of directors. Since the shares were held equally, on the face of it, this should present no problem. If this were valid, this would have the effect of entrenching the brother and preventing his removal. The House of Lords held by a majority of four to one that the provision was valid.

The brother was therefore protected from removal. Section of the Companies Act does, however, provide that a director cannot have a service agreement for a period of more than five years, unless the term is first approved by a resolution of the company in general meeting. This provision, therefore, to some extent counteracts the possibility of a director having a long service agreement at high remuneration and then suing for compensation if removed from the board of directors.

It may, nevertheless, prove expensive for a private company, and, indeed, sometimes a public company, to remove a director from the board see Shindler v Northern Raincoat Co Ltd and Southern Foundries Ltd v Shirlaw On occasion, a company may place in its constitution a liquidated damages provision which states that if a director is removed from the board, he is entitled to a set amount of compensation.

Provided that this sum is not a penalty, the director may simply enforce this provision see Taupo Totara Timber Co Ltd v Rowe This was a Privy Council decision on appeal from New Zealand. A director may enter into voting agreements with shareholders who may agree to vote as directed by him or to protect his position from removal. Such agreements, provided they are supported by consideration, would be enforceable by mandatory injunction see Stewart v Schwab South Africa. In Ebrahimi, he and Nazar had run a successful partnership business selling carpets and tapestries.

The company had been incorporated and had thrived. Discord followed and Nazar and George removed Ebrahimi from the board of directors. They had a majority of the shares and votes. Exclusion from the board therefore hit Ebrahimi in the pocket as well as hurting his pride. He sought and obtained a winding up order under the Act. The House of Lords held unanimously that his petition should be granted. Such situations are now unlikely. Section 2 of the Insolvency Act requires the court, if it is of the opinion that the petitioner is entitled to relief, to decide whether it is just and equitable that the company should be wound up, bearing in mind the possibility of other forms of relief.

The court, if it comes to the conclusion that it would be just and equitable that the company should be wound up in the absence of any other remedy, must make a winding up order, unless it is of the opinion that the petitioner is acting unreasonably in not pursuing that other remedy. In most situations, it will surely be unreasonable to pursue the winding up remedy where there is a possibility of a successful petition under ss —61 of the Companies Act However, in Virdi v Abbey Leisure Ltd , the court did consider that a refusal by the shareholder to accept an offer to buy his shares where he feared that the valuation would be wrong was not unreasonable.

There have been many successful petitions under ss —61 of the Companies Act on the grounds of removal from management. Most of the cases concern quasi-partnership companies. It seems that it is not inconceivable that a successful petition could be presented even for a public company see Re Blue Arrow plc , although it is unlikely in the case of a public company that a petition on the basis of exclusion from management would be successful.

Wherever a director is to be removed under s , special notice must be served. Special notice is defined in s of the Companies Act The resolution should then be forwarded forthwith to the director concerned. The director may make representations in writing which should then be circulated to every member of the company to whom notice of the meeting is to be sent. If it is not sent for some reason, the representations must be read out at the meeting. An exception to the requirement of circulation or oral presentation is if the representations contain defamatory matter, in which case, application should be made to the court, which will then decide if it is thought appropriate to circulate or for the director to read out the representations.

The director also has a right to speak at the meeting where his removal is proposed in his own defence, in addition to the circulation of the representations. Mere serving of the special notice does not, of course, entitle the person serving the special notice to have the meeting called. If it were otherwise, a single shareholder with one share serving special notice could require the company to call what may be a very expensive meeting see Pedley v The Inland Waterways Association Ltd In this case, Pedley who was a solicitor proposed the removal of the entire board of the company.

He served special notice on the company, but the board refused to call the meeting. Pedley argued that this was a contravention of the provisions of the Act. The court held that it was not. In order to have a meeting called, a person must fit within one of the provisions for the calling of meetings. Although the Companies Act has introduced a new written resolution procedure where members of a private company agree unanimously on a course of action, this does not apply to the removal of directors.

The reason for this is that the director concerned has a right to speak in his own defence, a right which can only be guaranteed by the meeting itself. There is much material here for answering a question on the removal of directors. Since there are many protections for directors, it lends itself to examination questions and students should therefore ensure that they know this area in detail.

The rules are largely common law and equitable, rather than statutorily based. However, there are some rules in the Companies Act and elsewhere that are relevant to this area. The Law Commission and the Scottish Law Commission on 22 September issued a report which inter alia argued for a statutory s t a t e m e n t o f d i re c t o r s d u t i e s.

It is suggested that this should be at a high level, so that there is no sacrifice of flexibility. The first question that should be considered is to whom do directors owe their duties. It used to be a simple matter. This meant the shareholders as a body, rather than individual shareholders. Thus, in Percival v Wright , certain shareholders approached directors and asked if the directors would purchase their shares.

Negotiations took place, but the directors failed to mention that a take-over bid had been made for the company. This materially affected the value of the shares. The court held that there had been no breach of duty by the directors. The directors owed their duties to the body of shareholders, rather than individual shareholders and premature disclosure of the take-over negotiations could well have amounted to a breach of duty.

The decision would have been different if the approach had been made by the directors to the shareholders see Breiss v Woolley and Allen v Hyatt The provision might seem to be radical in that it extends the category of persons that directors should take account of to include the providers of labour, but, in fact, the duty is enforceable in the same way as other duties and, therefore, ultimately, is only enforceable by the company, that is, the board of directors or, on occasion, the shareholders.

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It is perhaps worth noting in passing that s of the Companies Act permits a company to make payments to its employees on ceasing to trade or on transferring the business. This was something that was previously ultra vires where there was no business that was capable of being benefited see Parke v Daily News Ltd On occasion, judges may make reference to a duty being owed to creditors. There is, however, in general, no recognition at common law or in equity of duties being owed to creditors. Creditors are protected by provisions of the Insolvency Act and elsewhere. That was the point. And how far, if he failed in them, was he liable?

Traditionally, the duty of care and skill has been interpreted in a way that places a very modest burden upon the shoulders of directors. In this case, the company had experienced serious shortfalls of funds. The Managing Director, Mr Be van, was convicted of fraud. The liquidator sought to make other directors liable in negligence for failing to detect the frauds. Romer J, in what has become the classic exposition on the duty of care and skill, set out three propositions. They are as follows: A director need not exhibit in the performance of his duties a greater degree of skill than may be reasonably 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 a physician. It is perhaps only another way of stating the same proposition to say that the directors are not liable for mere errors of judgment.

These are the words of Romer J. In this case, a director had recommended the payment of a dividend out of capital. The director was held not liable in negligence. It was stated that he was a country gentleman not an accountant! Directors were exempted from this provision before it even came into force. This is surely an indication of the fact that the nature of this first proposition had not changed in Two of the directors were non-executive and one was an executive director.

The judge found that the duty that applied to the executive and non-executive directors was the same. There are some indications that the nature of the duty of care and skill is changing. Section of the Insolvency Act provides for an objective standard of care in relation to directors and shadow directors where the company is insolvent and they ought to have recognised that fact. In some cases, it seems that s has been used to try to establish an objective standard of care for directors across the board. Thus, in Norman v Theodore Goddard , Hoffmann J accepted that the standard in s applied generally in relation to directors.

The second proposition put forward by Romer J in Re City Equitable relates to the attention that has to be paid to the affairs of the company. He said: A director is not bound to give continuous attention to the affairs of a company. His duties are of an intermittent nature to be performed at periodic 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.

The Marquis of Bute was appointed president and director of the Cardiff Savings Bank when he was only six months old. During the next 38 years, he attended only one board meeting.

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During this time, frauds were perpetrated by another director. The court held that the Marquis was not liable for breach of duty in failing to attend board meetings, as he had never undertaken to do so. It does not seem out of place at the start of the 21st century in the way that the other two propositions which were first set out at the start of the 20th century do seem out of date. Some of this area is covered by statute. In addition, there is a considerable body of case law on this area.

Whilst little may be expected historically from company directors in relation to care and skill, much is expected in terms of honesty and integrity. Certain provisions of the Companies Act require a director to make disclosures. Section of the Companies Act requires the director to disclose any interest that he has in a contract between himself and the company. The provision extends to connected persons. A shadow director is also required to comply with s in the same way as a director. The section is not complied with by disclosing the matter to a sub-committee of the board.

Mere compliance with the section does not entitle a director to keep any profits. Some contracts require prior authorisation by the company in general meeting. Section of the Companies Act applies to what are termed substantial property transactions. If the director or shadow director is to sell or purchase from the company one or more non-cash assets that are substantial, then prior approval in general meeting is needed.

Section applies just as s does to connected persons. If the substantial property transaction does not receive prior authorisation or ratification within a reasonable period of its conclusion, then it is voidable at the instance of the company. The consideration can consist partly of money and partly of goods that have been assigned a value. Payment is not needed at the time of creating the sales contract. If any elements are not met, the sales contract is not valid.

For example, Party A agreed to sell her car to Party B. Party B forced Party A to sell her car through excessive persuasion. Therefore, the contract is invalid because there is no free consent by the transferor. A sale is an absolute contract, while an agreement to sell is an executory contract that suggests a conditional sale. A sales contract consists of an offer to sell or buy goods for a price and acceptance of that offer. The payment or delivery of goods is not necessary at the time of creating the sales contract unless it's agreed to.

If you need help with a contract of sale, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

Essential Elements in a Contract of Sale Two parties: A contract of sale is between two parties, where one party transfers goods to another party. Goods: The subject of the contract must be goods. This is usually the most important element in a contract of sale because if the goods are not described precisely, confusion could result.

Transfer of ownership: Ownership of the goods must be moved from the seller to the buyer, or there should be an agreement in which the transfer of ownership is made. Price: The buyer in the contract must pay a price for the goods. A sales contract is a special type of contract. In order for it to be valid, it must contain clauses about free consent and the competency of the signing parties. A sale and an agreement to sell are part of a sales contract. No formalities.

There is no particular form to define a valid contract of sale. A contract of sale can be made simply by offering and accepting. Two Different Parties The ownership of the goods is transferred from one of the two parties to the other. Goods Goods are defined as any type of movable property such as crops, stocks, and things attached to the land that can be separated from it. Transfer of Ownership In every contract of sale, the transfer of ownership has to be agreed upon.

Price Price is the money consideration for a sale of goods. Other Contract Essentials If any elements are not met, the sales contract is not valid. Contract Sale A sale is an absolute contract, while an agreement to sell is an executory contract that suggests a conditional sale.

A contract can be made in the following ways: Orally In writing Partly in writing and partly orally Through actions, and implied by those actions If you need help with a contract of sale, you can post your legal need on UpCounsel's marketplace. Was this document helpful?