COMPANY PROMOTION LESSON
Definitions of a promoter
Promotion is conducted persons who come up with the idea to form a company. They are legally referred to as promoters.
It has been observed that a promoter is a person who carries up with the idea of enterprise and participates in transforming the idea into a company.
He is said to be the person who prepares the documentations, registers the co. and meets its preliminary expenses.
A promoter is any person who has taken some part in bringing a company into existence or in procuring persons to join it as soon as it is technically formed.
The question as to who a promoter is one of fact and varies from case to case. In the words of Bowen L.J. In Whaley bridge Calico printing Co Ltd V Green:
“The term promoter is a term not of law but of business it usefully sums up in a single word a number of business operations familiar to the commercial world which a company is generally brought into existence. Although company law recognizes the role played a promoter the term still remains ill-defined and so is the promoter’s relationships with the company in formation. He is therefore described as an illegitimate child of the law; actively known but formally ignored.” The legal position of a promoter
A promoter is not an agent of the company in formation as it does not legally exist. This is because at common law, a person cannot be an agent for a non-existing principal as it was held in Kelner V Baxter.
A promoter is also not a trustee of the company in formation as the beneficiary does not exist. This was so held in Omnium Electric Palaces Ltd V Baines.
Promoters thus stand in a fiduciary position with regard to the company in formation. In the words of Lord Cairns in Erlanger V Sombrero propahte Co Ltd (The Sombrero case):
“They stand in my opinion, undoubtedly in a fiduciary position [as] they have on their hands the creation and molding of the company. This is an equitable relationship based on trust confidence and good faith; it imposes upon the promoters certain equitable or fiduciary obligations” Duties and obligations of promoters
Promoter’s duties fall into 2 broad categories; fiduciary and common law
- Duty to act bonafide: Promoters are bound to act in good faith in what they consider to be the best interest of the company and all actions must be guided the principles of utmost good faith and fairness.
- Proper accounting: Promoters are bound to explain the application of monies or assets which come to their hands from the date they become promoters. The account must be complete and honest.
- Disclosure: As fiduciaries, promoters are bound to disclose personal interest in transactions to avoid conflict of interest. Any secret profit made must be disclosed failing which the promoter is liable to account for the same and the contract may be rescinded the company. Such disclosure may be made to an independent board of directors or to all members in the prospectus.
In the Sombrero Case, persons who were in the process of forming a company bought a lease in the West Indies for £55,000 so as to mine phosphate deposits. They sold the lease to the company for £110,000 a fact that they did not disclose. The facts came to light 8 months later and all the directors were removed from office. The company sought to rescind the contract for the non-disclosure and it was held that it was entitled to do so. It was so held in Gluckstein V Baines (1900) where the plaintiff and 4 others bought certain premises for £140,000 and sold it to a company they were forming for £180,000. The company had no independent board of directors. Although the prospectus disclosed the £40,000 profit, it did not disclose a further £20,000 the promoters had made on the premises. In liquidation, the liquidator sought to recover £6,341 from Gluckstein as his share of the secret profit. It was held that he was liable to account for the non-disclosure.
Common law or General Duties
- Determine and settle the company name.
- To request or cause the registration of a company.
- To prepare or cause the preparation of the constitutive documents.
- To meet the preliminary expenses.
- To secure the services of directors.
- To prepare the prospectus if necessary.
- To ensure that the company has an independent BOD
- To acquire assets for use the company.
- To enter into business contracts on behalf of the company.
Remuneration of promoters
A promoter is neither entitled to remuneration for incorporating the company nor is he entitled to recover the expenses incurred.
This is because there is no contractual relationship between the promoter and the company.
Such a contract cannot exist at the company has no legal existence or capacity to contract.
Promoters may be rewarded/ remuneration in other ways as follows:
The following are the usual ways of promoters receiving remuneration:
- A promoter can sell overvalued assets to the company in formation in return for a profit upon disclosing the fact to the company.
- By taking fully or partly paid shares or debentures.
- By taking a commission for selling shares
- Promoters may be afforded the opportunity to take up extra shares at par value after the market value has risen.
- Traditionally, promoters have been rewarded being offered either deferred, founders or management shares.
- Promoters may also be appointed as the initial directors of the company
PRE-INCORPORATION CONTRACTS/PRELIMINARY CONTRACTS
The promoter is obligated to bring the company in the legal existence and to ensure its successful running, and in order to accomplish his obligation he may enter into some contract on behalf of prospective company.
These types of contract are called ‘Pre-incorporation Contract’. In this type of contract, the promoter furnishes the contract with interested person; and it would be bilateral contract between them. But the remarkable part of this contract is that, this contract helps the perspective company, who is not a party to the contract.
Rules governing pre-incorporation contracts
- Before incorporation, a company has no capacity to contract as held in Kelner V Baxter this is because a company has no legal existence
- At common law, a person who purports to contract as an agent where he has no principal existing at that particular time is personally liable on the contract.
This was so held in Kelner V Baxter where 3 persons who were forming a company ordered a large quantity of wine from plaintiff and signed the contract as follows: “On behalf of
Gravesend Royal Alexander Hotel Ltd”
The wine was supplied and consumed the hotel business which subsequently collapsed. The plaintiff sued the promoters in question and the issue was who the contracting parties were. It was held that even though the defendants had contracted as agents, they had no principal and were thus personally liable on the contract. The Court was of the considered view that it was necessary to hold the defendants liable to give effect of the contract stating:
“Where a contract is signed one who professes to be signing as an agent, but who has no principal existing at the time and the contract would be altogether inoperative unless binding upon the one who signed it, he is bound thereand a stranger cannot, a subsequent notification, relieve him from such responsibility”
- At common law a contract purportedly entered into a nonexistent person is void. This is because for a contract to come into existence there must be at least two parties.
In Newborne V Sensoid (GB) Ltd, the plaintiff who was in the process of forming a company contracted to supply the defendant company with a large quantity of ham. He signed the contract as follows: “Leopold Newborne London Ltd
Leopold Newborne, Director”.
Due to a drop in demand for ham, the company did not wish the same supplied and Newborne sued. It was held that the purported contract was void as one of the parties did not exist. In the words of Lord Goddard: “This purports to be contract the company; it doesn’t purport to be a contract Mr. Newborn. He does not purport to be selling his goods. The only person who had any contract here was the company and Mr. Newborne signature merely confirmed the company’s signature.”
- At common law, a pre-incorporation contract cannot be ratified the company after incorporation as the company did not exist when the contract was entered into. It was so held in Price V Kelsal (1959).
In Natal Land Co. Ltd V Pauline Colliery Syndicate where the respondent company applied for specific performance of a contract entered into before its incorporation, it was held that the contract was unenforceable as it was incapable of being ratified the company.
- At common law, the mere adoption or confirmation directors of a contract entered into before incorporation creates no relationship whatsoever between the company and the party. It was so held in North Sydney Investments and Another V Higgins and Another.
- At common law, a pre-incorporation contract is enforceable or against the company if after incorporation the company has entered into a new contract similar to the previous agreement. It was so held in Howard V Patent Ivory Manufacturing Co Ltd.
The new contract the company may be express or implied the conduct of the company after incorporation.
Liability of promoters for pre-incorporation contracts
A company’s promoter is liable on all contracts to which they are deemed to be a party. This means they may also be entitled to enforce such contracts against the other party and so they could transfer the right to enforce the contract to the company .from the acts of the company when incorporated.”
Ways of avoiding liability as a promoter for pre-incorporation contracts
There are various other ways for promoters to avoid liability for a pre-incorporation contract. (a) The contract remains as a draft (so not binding) until the company is formed. The promoters are the directors, and the company has the power to enter the contract. Once the company is formed, the directors take office and the company enters into the contract.
- If the contract has to be finalized before incorporation, it should contain a clause that the personal liability of promoters is to cease if the company, when formed, enters a new contract on identical terms. This is known as novation.
- A common way to avoid the problem concerning pre-incorporation contracts is to buy a company ‘off the shelf’. Even if a person contracts on behalf of the new company before it is bought, the company should be able to ratify the contract since it existed ‘on the shelf’ at the time the contract was made.
Remedies against promoters for breach of duty
The company or a third party may pursue any of the following remedies against the promoters where appropriate for breach
The company or third party who has dealt with a promoter in breach of his fiduciary obligations may rescind the contract in question.
The essence of the remedy is to restore the parties to the position they were before the contract.
Its grant or refusal is dictated the principles of equity. The remedy is unavailable where.
- The party entitled to it has slept on its rights for too long.
- The party entitled to it has expressly or impliedly affirmed or accepted the contract.
- Third party rights have arisen on the contract.
- Restitutio in integrum is not possible.
In the Samborero case, it was held that the company was entitled to rescind the contract for nondisclosure the promoters. Recovery of profit.
The company is entitled to recover any secret profit made a promoter in his promotional activities without disclosure.
The same is recoverable under an action for money had and received as held in Gluckstein V Barnes (1900) where Gluckstein was ordred to account for £6,341 which was a secret profit he had made as a promoter. ii. Damages.
The company has an action in damages against a promoter for breach of duty which is sustainable notwithstanding the absence of fraud. This action is an alternative to an account.
In Re Leeds and Hanley Theater of Varieties Ltd, where a promoter had made a secret profit of £12,000 and the company sued, the Court of appeal awarded the same as damages.
A third party who has suffered loss or damage reason of subscribing for shares or debentures of a company on the faith of a prospectus containing any untrue statement is entitled to compensation for loss or damage among others, every person who was a promoter of the company. iii. Public examination.
Under the Companies Act, if after the winding up order is made, the official receiver makes a report to the Court to the effect that fraud has been committed in the promotion or management of the company, the Court may, after examination of the reports, appoint a date in which the promoters or any other persons involved will be examined in Court on the matters relating to the promotion or management of the company. The examination is under oath. The Court has jurisdiction to assess the damages payable any person found to have acted fraudulently.
CERTIFICATE OF INCORPORATION
If the constitutive documents are correctly prepared in accordance with the provisions of the Companies Act, the Registrar shall register the company and allocate to it a unique identifying number and is registered, the registrar grants a certificate of incorporation and the company is formed from the date of incorporation written in the certificate. The original copy of the certificate will be given to the promoters and a copy remains in the company’s file.
Content of a certificate of incorporation
- Name of the company
- Identifying number
- Date of incorporation
- The registrar signature
- Registrar’s seal
Circumstances When Certificate of Incorporation Can Be Withdrawn
Even though the certificate is conclusive for the purpose of incorporation, it does not make an illegal object a legal one. For this reason, there are a number of cases where the certificate of incorporation though duly issued had been withdrawn. It can happen in the following situations:
- Where it is discovered after the certificate of incorporation has been issued the registrar, that the company was formed with blasphemous objectives. ii) In cases where it is discovered later that the objects of the company are immoral, the certificate can be withdrawn. The registrar of companies cancelled a company’s name which was Hooker ltd.
iii) Where the entity that was registered as a company is not a company in nature iv) Where the company to which the certificate has been issued turns out to be an enemy of the state i.e. a company which belongs to or whose members belong to a country that is at war with Kenya.
Effects of Registration
When a company is eventually registered and the certificate of incorporation is issued it becomes a legal person
S.19 of the Companies Act provides that “from the date of incorporation mentioned in the certificate of incorporation the subscribers to the memorandum of association… shall be a body corporate the name contained in the memorandum”.
The date mentioned (i.e. written) in the certificate of incorporation is the date from which the company’s legal existence commences.
The company’s registration constitutes it “a body corporate”. It becomes “a legal person”, whose name is the name chosen for it its promoters and written in its memorandum of association. The certificate of incorporation may therefore be regarded as the company’s birth certificate and the date written therein as the company’s birthday.
As legal person, the company becomes separate and distinct from its members. It exists as a person and does all its things as any other legal person.
The idea that upon incorporation a company becomes a legal person was first laid down in the case of Salomon vs. Salomon & Co. Ltd (1897)
Consequences of Incorporation /Characteristics of Company
Separate legal entity (independent corporate existence,): The Companies Act provides for a separate legal existence of a company from its shareholders. From the date of incorporation as mentioned in the certificate a body corporate the name contained in the MOA is formed. Such a body corporate is capable of having perpetual succession, power to hold land, has a common seal with liabilities of its members ltd as per the provision of the Act.
A company is in law a distinct legal person existing independently of its members. By incorporation therefore a company is vested with a corporate person which is distinct and separate from the members who compose it. In Salomon vs. Salomon & Co. Ltd (1897)
The company is at law a different person altogether from the subscriber of the memo and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers.
- Limited liability: The fact that a registered company is a different person altogether from the subscribers to its memorandum and its other members means that the company’s debts are not the debts of its members. If the company has borrowed money, it and it alone is under an obligation to repay the loan. The members are under no such obligation and cannot be asked to repay the loan. In case a company is unable to pay its debts the creditors, or a creditor, may petition the High Court for an order to wind it up. During the winding up the members will be called upon to pay the amount which is unpaid on the shares they hold, if any, in the case of a company limited shares, or the amount prescribed the memorandum, in the case of a company limited guarantee.
- Perpetual succession: The term “Perpetual” means, among other things “applicable, valid forever or for indefinite time”.
A company’s existence may be terminated only the legal process of dissolution. The death or bankruptcy or retirement of a member does not affect the co’s corporate existence. Its life is independent of the life of its members. The company continues its operations so long as it fulfills the requirements of the law under which it has been formed.
- Owning of Property: The property of the company is not owned the members; directors or shareholders collectively. Being a legal person, a company is capable of owning, enjoying and disposing of property in its own name. Members have no direct propriety rights to the company’s property. They don’t even have an insurable interest to the company’s property.
This was explained in Macaura V. Northern Assurance Co. Ltd
Macaura got insurance policies – but in his own name, not the company’s – with Northern Assurance covering for fire. Two weeks later, there was a fire. Northern Assurance refused to pay up because the timber was owned the company, and that because the company was a separate legal entity, it was not required to pay Mr Macaura any money.
- Capacity to sue and being sued: A company as a legal person can be sued under its own name and not the shareholders’. Therefore, in suits the company, the company is the proper plaintiff and where the company is sued, it is the proper defendant.
A member or members cannot institute legal proceedings to redress a wrong to the company. The company as the injured party is, generally speaking, the proper plaintiff. This is illustrated the facts of, and the decision in, Foss v Harbottle.
A member cannot be sued to redress a wrong the company. This is illustrated Salomon v Salomon& Co Ltd in which it was held that Salomon was not liable for the company’s debts and should not therefore have been sued to recover them.
- Contractual Capacity: A company has full contractual capacity, and only the company can enforce its contracts. The company’s ability to contract is however subject to its MOA. Any transaction that is beyond its objectives or purpose is ultra vires and therefore void.
- Common seal: A company being an artificial person cannot sign documents. The law therefore has provided for the use of a common seal, with the name of company engraved on it, as a substitute for its signatures. However, a company is not obliged to have one)and provides for its use for the authentication of documents.
- Transferability of shares: Members of public limited company are free to transfer the shares held them to anybody. Shares can be sold and purchased through the stock exchange. However, in a private company such transfer is restricted
Lifting the Veil of Incorporation
A company is a legal person and is distinct from its members. This principle is regarded as a curtain, a veil or shield between the company and its members. This principle of separate legal entity was established in Salomon vs. Salomon & Co. Ltd. This precedent has been followed in a number of cases and it has come to be regarded as a fundamental principle in company law. This shows that once a company is registered under the Act, there is a veil between the company and its members. This veil is a partition or curtain between the company and its members. Following this principle the courts in most cases have refused to go behind the curtain and see who are the real persons composing the company.
But sometimes the necessity of the situation may compel the authorities to disregard the corporate legal entity and look to individual members who are in fact the real beneficiaries of all corporate
property, and this is what is referred to as “lifting or piercing the corporate veil”
Thus the doctrine of lifting or piercing the corporate veil may be understood as the identification of a company with its members and when the corporate veil is lifted the individual members may be held liable for its acts or entitled to its property.
The general rule is that a company entity and the corporate veil will be disregarded only in exceptional cases. There cases are exceptions in Salomon .V. Salomon co ltd. The courts will lift the corporate veil
where it is essential to secure justice, ii) where it is in the public interest to do so or iii) where it is for the benefit of revenue
Such instances may arise under statutory provisions or case law.
Lifting By Statute
- Membership fallen below statutory minimum: When a company carries on business for more than 6 months during which the company’s membership had fallen below the statutory minimum, seven in the case of a public company ,every person knowing of the fact that the membership had so fallen is severally liable for the debts of the company contracted during that period. This section is regarded as an instance of “lifting the veil” because it modifies the principle established in Salomon v Salomon & Co Ltd that a member is not liable for the company’s debts, and permits the company’s creditors to sue him directly in order to recover the debts. Liability under the section may arise on the death of a member if the death reduces the membership below the statutory minimum for the particular company and:
No transferee is registered as a new member, and
N.B this section limits a member’s liability to debts contracted after the six months. It does not make the member liable for any debts incurred during the six months which follow the reduction of membership.
- Non-publication of a Company’s Name: The Companies Act requires a company’s officers and other agents to write its name on its seal, letters, business documents and negotiable instruments. This is to be done primarily for the benefit of third parties who might contract with a limited company without realising that it is a limited company.
Any officer or agent of the company who does not comply with the aforesaid statutory requirements shall be liable to a fine and shall further be personally liable to the holder of any bill of exchange, promissory note, cheque or order for goods which did not bear the company’s correct name, unless the amount due thereon is duly paid the company. The imposition of personal liability on the company’s agent is what is regarded, in a somewhat loose sense, as “lifting the veil of incorporation”.
- Group Accounts (holding and subsidiary companies): In practice it is common for a company to create an organisation of inter-related companies each of which is theoretically a separate entity but in reality part of one concern represented the group as a whole. Such is particularly the case when one company is the parent or holding company and the rest are its subsidiaries.
A company is deemed to be a subsidiary of another if;
- That other company either; is a member of it and controls the composition of its board of directors or
- Holds more than half in nominal value of its equity share capital or
- The first mentioned company is a subsidiary of any company which is that other’s subsidiary.
Where at the end of the financial year a company has subsidiaries, the accounts dealing with the profit and loss of the company and subsidiaries should be laid before the company in general meeting when the company’s own balance sheet and profit and loss account are also laid. This means that group accounts must be laid before the general meeting.
The group accounts should consist of a consolidated balance sheet for the company and subsidiary and also of a consolidated profit and loss account dealing with the profit and loss account of a company.
The treatment of these accounts in a consolidated form qualify an old rule that each company constitutes a separate legal entity. The statute here recognises enterprise entity rather than corporate entity i.e. the veil of incorporation will be lifted so that they will not be regarded as separate legal entities but will be treated as a group.
- Investigation of Company’s Affairs: The act gives an inspector appointed the court powers to investigate the affairs of that company’s subsidiary, or holding company, if the inspector thinks it necessary to do so for the purpose of his investigation. An investigation instituted pursuant to this power would be regarded, in a loose sense, as an instance of “lifting the veil” because the order to investigate a company sufficed to investigate the company’s member, or vice versa, as if they were one entity. generally speaking, a company and its member (in this case, the holding company) are altogether separate entities and a court order to investigate the affairs of a subsidiary company would not authorise an investigation of its holding company, and vice versa.
- Investigation of Company’s Membership: The Act empowers the registrar to appoint one or more competent inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are or have been financially interested in the success or failure of the company or able to control or materially to influence the policy of the company.
For the purpose of that investigation, subsection the Act confers on the inspector, or inspectors, power to investigate the membership of the company’s subsidiary or holding company for the same purpose. A company and its subsidiary, or subsidiaries, are thereregarded as one entity for the purpose of the investigation, and the veil of incorporation therelifted.
- Take-over bids: where a scheme or contract involving the transfer of shares or any class of shares in a company to another company has been approved the holders of not less than nine-tenths in value of the shares whose transfer is involved the transferee company may, at any time within two months after the expiration of four months after the making of the offer the transferee company, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares. The dissenting shareholder must then apply to the court within one month from the date on which the notice was given for an order restraining the transferee company from compulsorily acquiring his shares. The court order may, in an appropriate situation, lift the veil of incorporation. This is illustrated Re:
Bugle Press Ltd
Bugle Press Ltd had an issued capital of 10,000 pounds 1 shares, of which Jackson held 4,500, Shaw held 4,500 and Treheld 1,000. Jackson and Shaw then incorporated new company, called Jackson and Shaw (Holdings) ltd, with an issued capital of 100 shares, of which each of them held 50 shares. This company then made an offer to the shareholders of Bugle Press Ltd, which was accepted Jackson and Shaw but rejected Treby. The company then served a notice to Trestating that it wished to buy his shares. Trethen applied to court for an order restraining the intended purchase on the ground that it amounted to an expropriation of his interests in that the shareholders of Jackson and Shaw (Holdings) ltd were the same persons who held 90% of the shares in Bugle Press Ltd. And who had purported to accept the offer. The application succeeded.
The court regarded the offer made Jackson and Shaw (Holdings) ltd as having been made Jackson and Shaw as individuals and therelifting the veil of incorporation treating the company and its members as one entity for purposes of accepting of the offer.
- Fraudulent Trading: If, in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court, on the application of the official receiver or the liquidator or any creditor or contributory of the company may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, for all or any of the debts or other liabilities of the company as the court may direct.
Lifting the veil under Case Law
- Fraud & Improper Conduct: Where there is fraud or improper conduct, the courts will immediately disregard the corporate entity of the company. Examples are found in those situations in which a company is formed for a fraudulent purpose or to facilitate the evasion of legal obligations. In Re Bugle Press Limited the court ruled the actions of the majority shareholders actions was a bare faced attempt to evade the fundamental principle of company law which forbids the majority unless the articles provide to expropriate the minority shareholders.
Gilford Motor Co. v. Horne (1933): Here the Defendant was a former employee of the plaintiff company and had covenanted not to solicit the plaintiff’s customers. He formed a company to run a competing business. The company did the solicitation. The defendant argued that he had not breached his agreement with the plaintiffs because the solicitation was undertaken a company which was a separate legal entity from him.
The court held: that the defendant’s company was a mere cloak or sham and that it was the defendant himself through this device who was soliciting the plaintiff’s customers. An injunction was granted against the both the defendant and the company not to solicit the plaintiff’s customers.
- Agency, trustee or nominee: In Salomon’s case, the court stated that “the company is not in law the agent of the subscribers”. However “Under the ordinary rules of law, a parent company and a subsidiary company, even a 100% subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies, one cannot be said to be the agent of the other”.
From this statement, it can be inferred that, if a court held that a company acted in a particular instance as an agent of its holding company, the veil of incorporation would have been lifted.
- Determination of the enemy character: A company may assume an enemy character when persons in de facto control of its affairs are residents in an enemy country. In such a case, the Court may examine the character of persons in real control of the company, and declare the company to be an enemy company. In Daimler Co. Ltd V. Continental Tyre and Rubber Co. Ltd, A company was incorporated in England for the purpose of selling in England, tyres made in Germany a German company which held the bulk of shares in the English company. The holders of the remaining shares, except one, and all the directors were Germans, residing in Germany. During the First World War, the English company commenced action for recovery of a trade debt. Held, the company was an alien company and the payment of debt to it would amount to trading with the enemy, and therefore, the company was not allowed to proceed with the action.
- Protection of revenue: The court may also lift the corporate veil in the interests of revenue. The court will not hesitate to look behind the corporate veil where it is found that the company has been formed for evasion of taxes. In such cases, the individual shareholders may be held liable to pay income tax.
Advantages of Incorporation
- Limited Liability: since a corporation is a separate person from the members, its members are not liable for its debts. In the absence of any provisions to the contrary the members
are completely free from any personal liability. In a company limited shares the member’s liability is limited to the amount unpaid on the shares whereas in a company limited guarantee the member’s liability is limited to the amount they guaranteed to pay.
- Holding Property: Corporate personality enables the property of the association to be distinguishable from that of the members. In an incorporated association, the property of the association is the joint property of all the members although their rights therein may differ from their rights to separate property because the joint property must be dealt with according to the rules of the society and no individual member can claim any particular asset to that property.
- Suing and Being Sued: As a legal person, a company can take action in its own name to enforce its legal rights. Conversely it may be sued for breach of its legal duties. The only restriction on a company’s right to sue is that it must always be represented a lawyer in all its actions.
- Transferability Of Shares The Shares in a company are moveable property transferable in the manner provided the Articles of Association of the Company. Shares can therefore be transferred from one person to another without the consent of the members. B.this transferability only relates to public companies and not private companies.
- Borrowing Facilities: in practice companies can raise their capital borrowing much more easily than the sole trader or partnership. This is enabled the device of the ‘floating charge’ a floating charge.
- Separate Legal Entity: a company is a separate entity from its members and its members and its existence is not affected the death, insanity or bankruptcy of a meme. I.e. a company has perpetual succession. Members will always come and go but the company will continue to exist.
- Control: the control of a company can be secured the acquisition of the majority of the company’s shares which carry the voting power.
- Expert Management: since a company carries a business on a large scale and has huge financial resources, it can afford the services of the experts. This will lead towards professionalism of management which is necessary for the efficient management of any business
- Public Confidence: the formation and running of a company is regulated the provisions of the Companies Act and various other Acts. The provisions regarding appointment and remuneration of directors, compulsory audit and publication of accounts, protection of minority shareholders and so on has created greater public confidence.
- Social advantages: a company is also beneficial from the society point of view. It mobilises the scattered savings of the public and invests them in sound industrial and commercial ventures. It provides employment to a large number of people.
Disadvantages of incorporation
- Formalities: Too many formalities required in the formation of the company. A registered company is characterised formalities from incorporation to dissolution.
- Publicity: There is maximum publicity of the company’s affairs. There is no secrecy regarding the affairs of a company. Once the Memorandum and Articles of Association and the Prospectus have been filed with the registrar of companies, they become public documents open to the inspection of the public. This wide publicity may open the company to economic sabotage its rivals.
- Costly: the registered company is the most expensive business association to form and maintain. The expenses include search fees, legal fees, registration fees and stamp duty. A company must pay directors allowances and remunerate its auditors.
- Administration: the administration of a company must comply with the Companies Act. Requirements pertain to the holding of general and statutory meetings and returns of annual accounts. The accounts report and audit report also require expenses.
- Inflexibility: a company can only carry on the business specified i its object clause of the Memorandum of Association. The operation of the doctrine of ultra vires hinders the company from investing in other forms of business which might be more profitable.
- Taxation: a company must pay corporate tax which is higher than other business forms therereducing the amount of profit available to the shareholders as dividends.
A company’s constitution comprises the Articles of Association and any resolutions and agreements the company makes which affect the constitution.
Memorandum of Association under the Companies Act 2015
The memorandum is a simple document which states that the subscribers wish to form a company and become members of it.
Before the Companies Act 2015, the memorandum of association was an extremely important document containing information concerning the relationship between the company and the outside world – for example its aims and purpose (its objects).
The position changed with the 2015 Act and much of the information contained in the old memorandum is now to be found in the Articles of Association.
The essence of the memorandum has been retained, although it is now a very simple historical document which states that the subscribers (the initial shareholders):
- Wish to form a company under the Act, and
- Agree to become members of the company and to take at least one share each if the company is to have share capital.
The memorandum must be in the prescribed form and must be signed each subscriber.
According to the Companies Act 2015, the constitution of a company consists of: ▪ The Articles of Association
▪ Resolutions and agreements that it makes that affect the constitution
The constitution sets out what the company does; if there are no restrictions specified then the company may do anything provided it is legal. Clearly this includes the capacity to contract, an important aspect of legal personality. Also significant is the concept of ultra vires, a term used to describe transactions that are outside the scope of the company’s capacity.
Resolutions and agreements
In addition to the main constitutional document (the Articles of Association), resolutions and agreements also form part of a company’s constitution.
Resolutions are decisions passed members which directly affect the company’s constitution as they are used to introduce, amend or remove provisions in the articles. Agreements made, for example between the company and members, are also deemed as amending the constitution.
Copies of resolutions, or agreements that amend the constitution, must be sent to the Registrar within 14 days of being passed or agreed. If a company fails to do this then every officer who is in default commits an offence punishable fine.
Articles of association
The articles contain detailed rules and regulations setting out how the company is to be managed and administered. The Act states that the registered articles should be contained in a single document which is divided into consecutively numbered paragraphs.
The Companies’ Act, provides that articles shall be –
- In the English language; and
- Printed; and
- Divided into paragraphs numbered consecutively and
- Dated; and
- Signed each subscriber to the memorandum of association.
CONTENTS OF THE ARTICLES OF ASSOCIATION
CONTENTS OF ARTICLES
- Appointment and dismissal of directors
- Communication with members
- Powers, responsibilities and liabilities of directors
- Class meetings
- Directors’ meetings
- Issue of shares
- General meetings: calling, conduct and voting
- Transfer of shares
- Members’ rights Documents and records
- Company secretary
These are standard articles that companies can adopt instead of drafting one.
Rather than each company having to draft their own articles, and to allow companies to be set up quickly and easily, the Act allows standard articles that companies can adopt. Different models are available for different types of company; most companies would adopt model private or public company articles.
Companies are free to use any of the model articles that they wish to registering them on incorporation.
If no articles are registered then the company will be automatically incorporated with the default model articles which are relevant to the type of company being formed. Model articles can be amended the members and therefore tailored to the specific needs of the company.
Alteration of the articles
The articles may be altered a special resolution. The basic test is whether the alteration is for the benefit of the company as a whole.
Any company has a statutory power to alter its articles special resolution. A private company may pass a written resolution with a 75% majority. The alteration will be valid and binding on all members of the company. Copies of the amended articles must be sent to the Registrar within 14 days of the amendment taking effect.
Making the company’s constitution unalterable
There are devices which some provisions of the company’s constitution can be made unalterable unless the member who wishes to prevent any alteration consents.
- The articles may give a member additional votes so that they can block a resolution to alter articles on particular points (including the removal of their weighted voting rights from the articles).However, to be effective, the articles must also limit the powers of members to alter the articles that give extra votes.
- The articles may provide that when a meeting is held to vote on a proposed alteration of the articles the quorum present must include the member concerned. They can then deny the meeting a quorum absenting themselves.
- The Act permits companies to ‘entrench’ provisions in their articles. This means specific provisions may only be amended or removed if certain conditions are met which are more restrictive than a special resolution such as agreement of all the members. FAS
Restrictions on alteration/Rules
Even when it is possible to hold a meeting and pass a special resolution, alteration of the articles is restricted the following principles.
- Alteration of the Articles must not contradict the Companies Act. The alteration is void if it conflicts with the Companies Act or with general law.
- An existing member may not be compelled alteration of the articles to subscribe for additional shares or to accept increased liability for the shares which they hold unless they have given their consent.
- An alteration of the articles which varies the rights attached to a class of shares may only be made if the correct rights variation procedure has been followed to obtain the consent of the class. A 15 percent minority may apply to the court to cancel the variation.
- An alteration cannot take away rights already acquired performing a contract.
- An alteration must be in the best interest of the company as a whole
- The alteration must be legal
- The alteration must not be fraudulent
Expulsion of minorities
Expulsion cases are concerned with:
- Alteration of the articles for the purpose of removing a director from office
- Alteration of the articles to permit a majority of members to enforce a transfer to themselves of the shareholding of a minority
The action of the majority in altering the articles to achieve ‘expulsion’ will generally be treated as valid even though it is discriminatory, if the majority were concerned to benefit the company or to remove some detriment to its interests.
If, on the other hand, the majority was blatantly seeking to secure an advantage to themselves their discrimination, the alteration made to the articles their voting control of the company will be invalid.
Sidebottom v Kershaw, Leese & Co Ltd 1920
The facts: The articles were altered to enable the directors to purchase at a fair price the shareholding of any member who competed with the company in its business. The minority against whom the new article was aimed did carry on a competing business. They challenged the validity of the alteration on the ground that it was an abuse of majority power to ‘expel’ a member. Decision: There was no objection to a power of ‘expulsion’ this means. It was a justifiable alteration if made bona fide (good faith) in the interests of the company as a whole. On the facts this was justifiable.
Therefore if the majority intends that the power to acquire the shares of a minority is to be restricted to specific circumstances for the benefit of the company, they should ensure that this restriction is included in the new article.