Company Law Revision Topics

Company law is about the formation of companies, their continuing regulation during their life and the procedures for dealing with their assets when they are terminated by a liquidator.  

The corporation is a product of a capitalist society and operates as a vehicle for raising finances and exploring business opportunities by businessmen.

History

1844         - Company law started

        - Joint stock companies’ act passed

        - Company formed without the royal charter

        - didn’t provide members with limited liability

1855        - Limited liabilities act

1856         - 1844 act repealed

• Introduced memorandum and articles of association

1862         - Memorandum & articles of association became fundamental in limited company

• Limited liability company by guarantee
• Provision of winding up

1900         - Audit of the company’s accounts

1908         - Private company concept

1948         - Act in force

• Public accountability

2004         - Revolutionized company law

• Only needed article of incorporation
• One man can start a company
• Reduction in powers

Issues in Salomon V Salomon case

• Trust
• Skill set to deal with economic challenges
• Availability to get capital or loan
• Management of the business
• Fraud

South Sea Bubble Act

It prohibited any company from acting as a body corporate and from raising transferable stocks and shares without the legal authority of a Royal Charter or Act of parliament.

Prohibition on the raising of transferable shares by companies made it difficult for businesses to raise money.  

        Repealed in 1825

6 Economic Themes (section B 2 of 2)

1. The growth of larger business units: accumulated of small businesses that merge/come together to form a larger company/conglomerate. (e.g.) FLOW buying out smaller cable companies.
2. The development of increasingly elaborate structures: the board of directors and general board meetings are a company’s main organs.

Vertical chain of command extending from the Board through middle management to the workforce as well as horizontal integration.

1. A shift from ownership to control of the company: moving from owner to controller means you are making decisions in the best interest of the company.
2. Increasing ownership by institutional investors: ownership of large companies in international markets by institutional investors, i.e. pension funds, insurance companies, unit trusts, investment trusts, and hedge funds who manage other people’s savings.
3. Ever increasing amount of government intervention in corporate affairs: Companies legislation typically requires disclosure of an increasing amount of information regarding the company.

Justified:

• leads to a better informed, and, consequently, more efficient stock market;
• minimizes the risk of fraud
• prevents excessive secrecy and the distrust which this engenders
•  Facilitates equality of opportunity.  

1. The growth of huge multinational enterprises: 

Private v public companies (section B 1 of 2)

1. Purpose

1. Public company; raise capital from the public to run the enterprise.
2. Private company is to make a profit

1. Transferability of shares

1. a public company are freely transferable on the Stock Exchange. (no hindrance)
2. A private company will, in contrast, wish to remain under the control of the ‘family’ or ‘business partners’ concerned. (hindrances)

1. Raising of capital

1. A private company is prohibited from inviting the public to subscribe for any shares or debentures of the company.
2. a public company can issue securities to the public subsequent to (i) issuing a prospectus

1. Limit on membership

1. A private company is limited to twenty members
2. public company may have unlimited membership.

1. Minimum share capital

1. A private company has no minimum share capital
2. a public company must have a minimum allotted share capital of five hundred thousand dollars ($500,000)

1. Obligation to file accounts

1. A private company has no obligation to file accounts
2. a public company is obliged to file accounts.

1. Statutory Meeting/Statutory Report

1. A private company has no obligation to hold a statutory meeting or to issue and file a statutory report soon after commencement of business or incorporation as is required for a public company

1. Number of Directors

1. A private company need only have one director and a company secretary
2. a public company must have at least three directors, at least two of whom must not be employees of the company or any of its affiliate

Lifting of the veil (compulsory section)

Land mark case - Adams v Cape Industries plc (1990)

Six reasons the veil can be lifted are:

• agency
• fraud
• group enterprises
• trust
• enemy
• tax

Agency

• Cases:  Smith, Stone & Knight Ltd. v Birmingham Corporation (1939)

• the corporate veil was pierced to allow a parent company to claim compensation on the basis of injury by Birmingham Corp.’s use of its powers of compulsory acquisition over the subsidiary’s land.  (If the corporate veil had not been pierced, Birmingham Corp. would have escaped paying compensation altogether.) Emphasis on the degree of effective and constant control and governance of the subsidiary by the parent company.

• Zaist v Olson (1967)

• it was held that agency required, inter alia, not mere majority or complete stock control, but complete domination not only of finances but of policy and business practice in respect to the transaction so that the corporate entity had at the time no separate mind, will, or existence of its own.

Fraud

• Gilford Motor Co. Ltd v Horne (1933)

• a managing director of a company entered into a covenant in a service agreement not to solicit customers from his employers.  Upon leaving the company’s employment he formed a company to solicit customers.  It was held that his company was a mere sham to cloak his wrongdoings and, therefore, he could be restrained from committing a breach of his covenant.

• Jones v Lipman (1962)

• a man entered into a contract to sell property, but then changed his mind.  In order to avoid an order for specific performance he transferred the property to a company.  The court held that specific performance could be ordered against the company—which was ‘the creature of the first defendant, a device and a sham, a mask which [he] held before his face to avoid recognition by the eye of equity’.

• Re Bugle Press Ltd. (1961)

• there were three shareholders of a company, two of whom wished to buy out the third—who refused.  The two wished to acquire compulsory the shares of the third, and sought to do so by forming a company to bid for all the company’s shares.  (This was an attempt to bring the matter within the provisions of the Companies Act).  It failed.  The Court of Appeal disregarded the newly formed company as a mere sham.  The minority shareholder had only to shout and the walls of Jericho fell flat (per Harman LJ).

Group enterprises