The Legal Framework of the Modern Company

Leonard Jason-Lloyd, Larry Mead

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780714642888
• eBook ISBN:
  9781136312700
• Topic: Law
• Subtopic: Financial Law
• Index: Law

There has been a substantial growth in the application of company law, partly due to the prevailing economic and general business environment. This book examines issues such as company securities, capital and insider dealing.

1

The History and Purpose of the Company

Trade associations referred to as companies can be traced back to the sixteenth century where they existed as merchants’ guilds formed for the purpose of gaining monopolies over certain commodities. A century later joint stock companies emerged which shared some of the characteristics of the modern company except they did not include limited liability for their members. This meant that their private assets could be taken by the company’s creditors in order to pay its debts. As a result of the historic collapse of the South Sea Company six months after it was formed in 1711, legislation in the form of the Bubble Act 1720 was passed which made it difficult to form companies and other business associations. It was not until 1825 that this Act was repealed and a gradual improvement was effected in enabling businesses to form companies. Since then many Companies Acts have been passed but the most important today (although not the most recent) is the Companies Act 1985 which had three other statutes passed in conjunction with it, namely, the Company Securities (Insider Dealing) Act 1985 (since repealed – see the Criminal Justice Act 1993, Part V), the Business Names Act 1985 and the Companies Consolidation (Consequential Provisions) Act 1985. A year later three further statutes were passed which are of major importance in company law. They are the Insolvency Act 1986 (which repealed the 1985 Act), the Company Directors Disqualification Act 1986 and the Financial Services Act 1986. As a result of two European Union Directives and our own government’s desire to effect other changes in the law, the Companies Act 1989 was passed and, finally, Part V of the Criminal Justice Act 1993 was enacted which completely restates the law on insider dealing (see Chapter 10). The diagram shown in Figure 1 illustrates the standing of current legislation within company law.

Although company law is based largely on statute, there has also been a significant development of case law since the middle of the nineteenth century which still plays an important part in formulating modern company-law decisions in the courts and these will be examined later. Those who wish to create business associations today usually form either partnerships or companies. The former is based on contract and is suitable only for relatively small concerns, therefore the law governing this aspect of business association falls outside the scope of this book. The most important type of modern company is the registered company which can be either public or private and limited by shares. Other registered companies include those which are unlimited or limited by guarantee. There are also chartered and statutory companies which are not registered but formed by Royal Charter and Act of Parliament respectively. There are three main segments that comprise a company: the entrepreneurs who provide the management and leadership skills; the employees who carry out the daily tasks; and the shareholders who provide the capital and constitute both the ownership and membership of the enterprise. It is the shareholders who are protected by limited liability which is the greatest single advantage in forming a company.

Company law therefore endeavours to regulate the many facets of human activity while engaged in the numerous functions associated with this particular type of business association.

 

FIGURE 1
THE DEVELOPMENT OF COMPANY LAW LEGISLATION

2

Documentation, People and Finance

A registered company has no physical existence. It is, however, recognised at law and described as a legal person. The company so recognised can sue and be sued, contract, employ persons, have its own bank account and, to a certain extent, have criminal liability.

The need for, and significance of, documentation in the context of this legal person and its activities is great. Certain standard documents must be submitted to the Registrar of Companies in order to form the company and obtain a Certificate of Incorporation. These include a Memorandum of Association, the content of which is discussed in the next Chapter. Articles of Association which constitute the company’s rules must also be identifiable. The registered company must maintain numerous registers including a register of members, a register of directors and the company secretary, and a register of charges. Such registers are available for inspection. Events at formally held meetings must be recorded in minutes, and financial information can be discovered in the accounts of a company.

The rights, duties, obligations and roles of physical persons who act within the corporate entity and who, to a notable extent, are responsible for the company’s documentation production and content, are important in gaining an initial overview of the company and its functioning. The company can only contract with outsiders through the actions of the company’s directors who are its agents. The role of the shareholders or members as controllers of the company is of great significance. The relationship and relative positions of the directors and members is also of importance. When considering the internal workings of the company – the procedural and administrative aspects – the role of the company secretary should be borne in mind.

Finally, the financial aspects in relation to the corporate entity are worth noting before looking more specifically at the legal framework of the company. Money can be raised on the allotment of shares. Borrowing is another means of raising funds, and the creation of debentures and charges are relevant factors where company indebtedness arises.

While documentation, people, and financial issues can be singled out in providing a brief initial foundation of company law, obvious overlaps exist, and it is not suggested that these categories are exhaustive.

3

Incorporation

PROMOTION

Usually the first step in the formation of a company is the process known as ‘promotion’ where a person engages in persuading others to contribute capital to the proposed company which is intended to fulfil a specific end. The promoter of a company is also one who runs it initially and often such persons are on its first board of directors. If someone assists a promoter in a paid, professional capacity, such as an accountant or solicitor, they are not classed as a promoter. The duties of promoters are not contained in statute but have been developed through case law where, among other factors, it has been established that they owe a fiduciary duty to the company being formed. This means that they are entrusted with its guardianship and must not, for instance, make a secret profit from their duties. Furthermore, they commit a criminal offence if they deliberately make misleading statements while endeavouring to raise capital for the new venture. An interesting feature regarding promoters is the question of their payment for services rendered. Since the company does not legally exist before incorporation, it cannot enter into any contract which includes any agreement regarding the remuneration of the promoter. However, since promoters are generally the first directors of the new company, this problem is usually obviated. Alternatively, the promoter may sell property to the company above its true value and the subsequent profit will constitute his remuneration. This question of pre-incorporation contracts can present problems to the promoters that may not be so easily resolved, however, particularly with regard to entirely new ventures or where the promoter is not selling his business to a company and is also not a director and majority sh...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Contents
• 1 The History and Purpose of the Company
• 2 Documentation, People and Finance
• 3 Incorporation
• 4 Capital
• 5 Company Securities
• 6 The Raising of Capital by Public Companies
• 7 The Directors and the Company Secretary
• 8 Company Accountability
• 9 Company Democracy
• 10 Insider Dealing
• 11 Takeovers, Mergers and Reconstructions
• 12 Liquidations
• 13 Administration Orders and Receiverships
• Glossary
• Index