University of Trier English Law Helen Campbell, Lecturer Company Law Types of Business Associations --sole trader --partnership --company (aka corporation: management is separated from ownership) --limited liability partnership (hybrid form must be registered, and limits the liability of members to the money they have invested, but operates like a partnership) How is a sole tradership created? How is a partnership created? How is a company created? 1. registration through the Registrar of Companies a. three documents required: memorandum of association, articles of association, Memo and Arts b. Memoradum of Association details the founders (subscribers) intention to establish a company c. Articles of Association main document, functions like a constitution (addresses issuing/transfer of shares, general meetings, voting rights, how directors will run the business) d. Memo and Arts lists name of company, registered office, business objectives, whether company is limited by shares or guarantee e. Registrar then issues the new company a Certificate of Incorporation How is a business association capitalized? --sole trader --partnership --company 1. shares (ordinary and preferred intangible property, equity securities, aka authorized capital) 2. debentures ( debt securities) *Important: Company = legal person --can sue/be sued --can buy/sell/hold property --limited liability --perpetual existence 1
Classification of Companies 1. limited by shares ("Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company.) 2. limited by guarantee (Companies limited by guarantee are widely used for charities, community projects, clubs, societies and other similar bodies. Most guarantee companies are not-for-profit companies, that is, they do not distribute their profits to their members but either retain them within the company or use them for some other purpose. There are no shareholders. Most such companies need their articles to be drafted for that particular organisation, and this is the main specialised work to be undertaken). 3. Public (listed on stock exchanges; sells shares to public) or Private (no public offerings, but less gov t restriction) Partnership Cast of Characters 1. Generals 2. Limiteds 3. Employees Company Cast of Characters 1. Promoters (persons who intend and then undertake to create a company) 2. Directors (policy makers; hire managers; hold annual meeting; declare dividends) 3. Managers/Officers 4. Secretary (administrative officer; prepares meetings, drafts minutes, maintains records) 5. Shareholders (receive dividends; vote) 6. Employees Concepts and Vocabulary agent a person given the authority by a principal to enter into contracts oh his behalf alternative director this is a person appointed by a director to act in his place 2
application for registration document in the English system which much be registered in order to incorporate the company. it must state such matters as the company name, its registered office and address, whether it is limited by shares and whether it is a public or private company. articles of association constitutional document which regulates the way a company's affairs are managed. it consists of regulations governing the rights of the members and the structure of the company articles of incorporation document filed in the US to incorporate a company authorized share capital this is the amount of capital a company can raise by selling its shares bankruptcy where an individual is unable to pay his debts breach of directors' duties where a director has acted in a way inconsistent with the general duties of care and skill and fiduciary duties owed to the company certificate of incorporation this is issued on incorporation. In England, it states the name and registration number of the company, the date of incorporation, whether it is limited (by shares or guarantee) or unlimited, whether it is a private or public company and the location of the registered office chairman an appointed director who presides over meetings of the board of directors and general meetings charitable incorporated organization (CIO) new optional legal status for charities. it gives trustees the benefit of limited liability and separate legal identity outside the company law framework. it is a corporate body with a constitution, registered with and regulated by the charity commission company an association of persons formed for the purposes of an undertaking or business carried on in the name of the association. It is legally incorporated and is a legal person, separate from its individual members company secretary 3
every public company must have a company secretary who is responsible for the administration of the company's affairs. optional for private companies corporate veil the legal recognition of the company's independence from its owners and management corporation in English law, a legal body, such as a limited company or public authority, which has been incorporated. It is often used to indicate a large company debenture a document acknowledging debt for a capital sum that is to be repaid on a certain date, with interest payable at a fixed rate. In the London financial markets, the word debenture is used primarily to denote a secured loan. In the US, its a debt without security naked debenture debt without security debenture trust (indenture) a deed setting out the terms of the loan derivative action an action by a minority shareholder (or minority shareholders) is a derivative action if the shareholder is suing on behalf of the company director's duties 7 general duties: 1) to act within powers ; 2) to promote the success of the company; 3) to exercise independent judgment; 4) to exercise reasonable care, skill and diligence; 5) to avoid conflicts of interest; 6) not to accept benefits from third parties ; 7) to declare interests in proposed transactions or arrangements disclosure to disclose involves revealing details about an act or transaction. in return for limited liability, companies are required to make certain information about their constitution and financial status available to the public. directors are under a duty to disclose any personal interest that could lead to a conflict of interest situation disqualification order order by which a person is not allowed to act as a company director. grounds for disqualification include: a conviction for an indictable offense, breaches of 4
company law, fraud and unfitness to manage a company. an order on the grounds of unfitness can only be made if the company is insolvent dissolution bringing a business organization to an end executive director (inside director) full-time officer employed by the company to manage company business fiduciary duties a director is under obligation to exercise his power for the benefit of the company and not his own benefit. he owes a general duty of trust, honesty and integrity towards the company fraudulent trading where a person continued trading even though he knew the company could not pay its debts and the business is carried on with the intent to defraud creditors (or any fraudulent purpose) incorporation the issue of an incorporation certificate creates an independent legal personality insider dealing/trading using confidential information about a company in order to buy or sell its securities as profit insolvent a company is insolvent if it can no longer pay its debts issued capital that part of a company's authorized share capital that has actually been issued to the shareholders lien in general, a charge upon the property of another until the debts associated with that property have been paid off lifting (piercing) the veil process by which the courts may lift the veil of corporate secrecy and look at the underlying economic reality limited liability company a registered company where the shareholder's liability in the event of a winding up is limited to any amount that has not yet been paid for their shares. it is the most usual form of a trading company 5
limited liability partnership is a separate legal entity, giving its members the benefit of limited liability while retaining the internal structure of a partnership limited partnership one where a distinction is made between the general partners and the limited partners. limited partners have invested in the company but have no active function. these limited partners are not personally liable for the debts of the partnerships beyond the capital they have invested already liquidation process by which a company is brought to an end, often because of insolvency liquidator the one appointed to supervise the winding up of a company a receiver may become the provisional liquidator until the creditors have met to decide upon a permanent liquidator listed (quoted) company one that is listed on the stock exchange managing director (CEO) a director in charge of the management of the company membership contract special contract which binds the company to the members and regulates the relationship between members memorandum of association legal document which records the fact of incorporation, stating that the subscribers wish to form a company and agree to become members of the company minority action an action brought by a single shareholder or small number of shareholders nominal value the face value of a share rather than its market value negotiable where a document may legally be transferred to another objects clause a clause setting out the purpose for which the company was incorporated 6
officer one invested with authority for a particular position. in english law, a director is an officer of a company, as is the company secretary official receiver a government official appointed by the court to act as an interim receiver or a provisional liquidator ordinary resolution a simple majority vote by shareholders ordinary (equity) share holders of ordinary shares are entitled to be paid a dividend depending on how well a company is doing partnership property (capital) property that is jointly owned by the partners. assets that have not been transferred to the partnership remain the property of the individual partners pre-emption rights the right to purchase shares before others preferential creditor one paid out before certain other categories of creditors in a winding up pre-incorporation contract where a person centers into a contract on behalf of a company which has not yet been formed private company a company that may not offer its shares and debentures to the public promoter one who organizes the setting up of a company proxy a person appointed by a shareholder to vote in his place at a company meeting public company a public company must have a minimised subscribed share capital. It may seek finance by offering its shares and debentures to the public. If it is a public limited company, it is one incorporated with limited liability receiver 7
when the company has failed to repay a debt to a creditor, a receiver will take control of the property in question for the benefit of the creditor. he is not appointed to wind up the company relief a remedy or assistance provided by the court reserve capital a part of the uncalled share capital set aside as a fund for paying unsecured creditors should the company be wound up resolution a formal proposal, usually voted upon at a meeting self-dealing rule if a director has in interest in a contract between the company and a third party, he must disclose this to the company as a possible conflict of interest situation share capital the total amount which a company's shareholders have contributed or are liable to contribute as payment for their shares special resolution a company resolution, which is only valid if approved by 75% of the votes cast at a meeting subscriber shares the first shares issued when a new company is formed trading certificate a public limited company must wait for this before it can commence business ultra vires to act in a way which exceeds legal powers or authority unissued share capital the difference between the nominal value of a company;s authorized share capital and the nominal value of issued share capital, minus any amounts of issued capital that have not been called up by the company unsecured trade creditor a category of general creditors without security. this category does not have a high position on the order of priorities in winding up 8
voluntary arrangement rather than enter into winding up proceedings, a company can make voluntary arrangement with its creditors for repayment, if supervised by a qualified insolvency practitioner. a composition or a scheme of arrangement can be drawn up winding up process by which a registered company is dissolved voluntary winding up may be by a member or a creditors compulsory winding up court order upon the presentation of a winding up petition written resolution this dispenses the need for a meeting by a private company, a written resolution is passed when the required majority have signed their agreement wrongful trading where a person went on trading although he ought to have realized that the company could not pay its debts. 9