The Corporate Structure

Transcription

1 The Corporate Structure 3/07/14 8:38 AM SH s had all the power Originally when people talked about the company, the most powerful organ was the SH s at a general meeting They could do everything the Co could, and made all the decisions The BOD would just act as the agents in the general meeting. Beginning of 20 th Century Recognized that SH s could defer their control to the BOD to manage the Co o If they did, they could not interfere with anything. This is backed up by Shaw and Sons If powers of management are vested in the directors they and they alone can exercise these powers They only way Sh s can control ex of power vested in the BOD by the articles is to alter those articles, or refuse to re-elect the directors who they disapprove of Companies Act 1993 s128 Backed this up: BOD has ultimate responsibility for the company s management The BOD is the dominant organ of the company. (1) The business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company (2) The BOD has all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company (3) Makes the point that both 1 and 2 are subject to any limitation s and modifications elsewhere in the act or by the constitution Board: Defined in Cl 2 of the 3 rd schedule to the act Must have at least one director 128 Managed By Dairy Containers

2 It is the fundamental role of directors to manage the company: their power and responsibility Can delegate powers and functions But can t delegate the management function itself 130 Delegation of powers (1) Subject to any restrictions in the constitution of the Co The board of a Co may delegate to a committee of directors, a director or employee of the Co, or any other person Any one or more of its powers Other than its powers under any of the sections in schedule 2 Only the board can decide To pay dividends To issue new shares Any change in the Co s name or address o So you can always find the company The constitution can further restrict the power of delegation as much as it pleases. 109 Shareholders (1) The chair of a SH meeting must allow a reasonable opportunity for SH s at the meeting to question, discuss or comment on the company management. (2) SH s can pass resolutions under this section relating to company management (3) Unless the constitution says so, this resolution won t be binding So SH s must have a reasonable opportunity to discuss/comment on management, and can pass resolutions, but they won t be binding unless it says they are in the constitution.

3 129 Major Transactions: exception where the SH s can override the board Can t be overridden by constitution Applies to major transactions o Any that involve over! the value of the Co s assets o Need 75% SH s to agree Internal Rules The constitution SH agreements o These are quite common: legally binding private contracts o Often say that they will do something should something happen o They are popular because they are private documents, whereas the constitution is a public document: it allows SH s to keep stuff hidden from competitors Listing Rules o Must comply with the Stock Exchange s rules if you want to list on it. o May require establishment of special committees etc o They will regulate a company to a degree o May require establishment of special committees etc o They will regulate a company to a degree

4 Introduction 3/07/14 8:38 AM Common forms of business organization Sole trader All the benefits but all the risk Personal assets become vulnerable as you become personally liable. Unlimited person liability: failure means you can potentially lose everything. Have to sell everything if you decide you want to quit the business: hassle. Partnership Positive: have more money Downside: have to share control with all partners. Less control All partners are personally liable: big negative if you just want to be an investor. Partnership terminates when one of the partners seeks to leave or when someone dies: a bit of a risk when there are say 20 partners. Everything must be transferred to a new partnership. Hassle. Statute allows a limited liability partnership. Means most of the partners are just investors so have no control of business. General partner in control, personally liable. Joint Ventures: Variation on partnership Share a purpose The Incorporated Company People wanted a business model that was legally distinct from them Precedent for this was that common law had recognized that a non-human entity could be a legal entity: church Also used to exist the possibility of getting a royal charter, made an entity distinct from a person Could also go to Parliament and get statute to say this entity is a separate legal person. o 1700 s, these got very popular.

5 ! South Seas Company: formed 1719 to acquire all of England s national debt. Failed, brought down lots of investors s: Industrial revolution, require large amounts of money to build stuff. Partnership concept couldn t cope with it, needed more. o Individual Acts too cumbersome So company idea comes about. Designed for former large partnerships, had restrictions on minimum number of partners etc. These are the modern Company. Modern Company Shareholders have limited liability limited to the money that they ve contributed. All incorporated companies are required to have limited in the name o Warning to 3 rd parties that you are dealing with a distinct entity and that the owners are not personally liable Can have just the 1 shareholder (used to be a minimum) Why a company? Corporate personality Separate legal identity Company owns its own assets: o If you want to sell the business you just sell the shares, not all the individual assets Company can be sued in its own right o Shareholders don t have to worry about it Also has its own tax liability Perpetual succession o Still exists despite death etc. o Only dies when the shareholders decide to kill it. Ability to raise funds (?) Shareholders limited liability

6 Generally shareholder s personal liability is limited to any unpaid amount owing on shares ss 97,21 o But constitution of a company may provide otherwise: personal guarantees: liability for breach of statutory obligations. Separation of ownership and control o Majority rule o Specialized management Transferability of shares o Easy to get rid of your share and walk away o If your Co is listed, can just put them up for sale o If smaller, may have to go find buyers yourself Legislation Companies Act 1955, replaced by 1993 Act P was concerned that Co s couldn t change their nature: originally was restricted to the nature of the business they started off with when incorporated. So they removed this, saying if they are distinct legal persons, can do as they please. Could have a 1 person company This Act focused on the small company (as opposed to large ones) The Act suppled the default rules so you didn t need a constitution anymore (but you could have one if you wanted) o Some rules you can t change, some you can Also relevant Financial Reporting Act 1993, Securities Act 1978, Takeover Act 1993

7 The Consequences of Incorporation 3/07/14 8:38 AM 15 A company is a legal entity in its own right, separate from SH s and continues in existence until it is removed from the NZ register Salomon v Salomon What it did Prior to this case, incorporation was seen as only appropriate for large companies: required 7 shareholders People would get around this by having nominal SH s who held 1 share This case provided judicial support for the small business Left it to P to change actual law, which it did in 1993: 93 Act said you only need one SH Facts S runs Salomon and Co: wanted to incorporate a company which could buy his business off him to create Salomon and Co Ltd Were going to be 7 SH s: Mr and Mrs S, 1 daughter, 4 sons. Sold by Mr S for 40000P- he got o He puts in 20k to business and gets shares o 9000 used to pay debts o balance, in form of a debenture: meant he had equitable charge over S and Co Ltd s assets Co loses business, borrows 5000 off Broadcorp (?), B gets Mr S s debenture as security. Co starts failing to pay interest, so B uses his remedy as secured creditor Co ends up in liquidation B has first charge on liquidated assets due to security o S entitled to the balance: but all that he gets after sale of assets and B getting his 5000 is 1050 dollars (so company was 8950 short of being able to pay both B and S) o Unsecured creditors owed 7333: get nothing. S loses his investment, but isn t liable for the debt as Ltd liability

8 Why did he want incorporation? Limited liability : personal wealth not at risk He maintained much more control than if it had been a partnership with his sons, due to the number of shares he had. Strange things 1. Why should unsecured creditor lose out? Preference is given to debenture holders before unsecured creditors. 2. Why shouldn t he be allowed to lend to the Co and get a security? 3. Why should S be allowed to be a secured creditor? 3 Main Arguments of the receivers 1. There wasn t really a company at all: S controlled the whole thing Didn t get off the ground: the SH s ratified the deal of sale at a general meeting 2. The Co paid Mr S too much for his business: it wasn t worth 40k HL: Berlinger Imposed a fiduciary relationship between the seller of assets and the members of the Co which required full disclosure of the facts between the vendor and Co. HL said this may be too much: sale by a fond owner who thought too much of it- not a rare situation. Regardless of the value though, the SH s knew what they were doing 3. The Co is a fraud on creditors: Mr S used to be liable for everything, why can he hide behind the company? Trial Court: Said legit company, but was acting as an agent for Mr S so the liquidator could recover all its debts from him personally CA: Said legit company, but was a sham: the business holding the assets on trust for Mr S

9 HL: Acknowledged that S was the only real dominant SH, the others had no power. BUT as long as you comply with stat requirements, that is all that is necessary: 7 ticked the box, doesn t matter how many shares they have. Motive is irrelevant in incorporation: ok that he wanted to protect his wealth. Arguments That the nominal SH s held their shares on trust for Mr S o Lord Herschall said this is irrelevant, doesn t matter if beneficiaries or not: they are registered SH s and that s all that matters Fraud o Once the Co is legit, he can also be a secured creditor. o Anyone who holds a majority of shares, necessarily has the intention of taking most of the profits without any risk beyond that of losing what he has invested himself. Creditors suffer o They could have protected themselves: once a Co is Inc, all docs are available to public o Could have found out that Mr S was secured creditor, the amount of debenture, number of shares o Their own fault they chose to deal with a Co with this set up and it failed. Case Confirms The Co s debts are not Mr S s debts on any grounds SH s are not the Co An individual can interact with a company in many levels: Mr S was a SH, a vendor, and a creditor. Any money you pay for shares can be lost: o Should look at Co records before investing. o If S was smart: should have gotten a 30k debenture. 301

10 If someone who has o Taken part in the formation/promotion of the company or o Is a past or present director/manager/liquidator/receiver Has misapplied/retained/become liable/accountable for money and property of the Co Or been guilty of negligence/breach of duty or trust/default in relation to the Co The court may, on application of liquidator/creditor/sh o Inquire and o Order that person! To repay or restore the money/property or any part of it with an interest rate the Court thinks just OR! Contribute such sum to assets of the Co OR! (If application by creditor) order that person to repay or restore the money/property or part of it with interest as court sees just. So formation of a company doesn t completely exclude personal liability if you are a director or a manager. Lee s Air Farming Ltd Act required 2 SH s: Lee had 999, his solicitor had 1. BOD was Mr Lee, and the Constitution gave him power of whole board Act required a BOD, and a company sentry (don t now, just 1 director) Lee was also chief pilot- employee Had an air accident, died. Wife seeking compensation from Workers Compensation Act (pre ACC) which provided that o All employers had to have insurance for their workers o Worker defined as any person who has entered into or works under a contract OF service (Employee)! Diff from Contract FOR service (Independent K er) We know from Solomon that a person can have multiple roles whilst being a SH

11 Articles of Assoc (Const) appointed L as governing director for life and therefore he was agent of board, and ultimate controller of Co. Issue: Could he be both governing director and an employee? CA: Said no, incompatible to give orders to himself PC: Said yes o Drew from Solomon where HL said can have diff roles o So when L was flying plane, was performing the role of chief piot doing so as an employee of the Co, not as governing director Building on Solomon, no reason to doubt that a valid K al r ship could be created between the Co and the deceased, even though he made the K in his role as Co agent. Result: Deemed employee, compensation available You must always ask, at what capacity is someone acting at the relevant time? Macaura Mr M wants to mill his land: decides to do this through medium of Irish Canadian Sawmills Ltd. He is dominant SH, all others are nominees. He is also on BOD. Co purpose: to mill trees and sell timber. Sold the milling rights to Co for 27000P, then uses proceeds of this to buy shares in the Co Spends own money to buy 15k more shares Lends Co 19000P Insures the timber with Northern Assurance Co. Fire burns timber, he wants his payout. Issue: Did he have an insurable interest? Before you can get insurance you have to have an insurable interest in the property: eg can t insure mates house NA argue