United Kingdom company law
Encyclopedia
United Kingdom company law is the body of rules that concern corporations formed under the Companies Act 2006
. Also regulated by the Insolvency Act 1986
, the UK Corporate Governance Code, European Union
Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution
, public companies now employ more people and generate more of wealth in the United Kingdom
economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency
, and where management was delegated to a centralised board of directors
. An influential model within Europe
, the Commonwealth
and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.
Company law, or corporate law
, can be broken down into two main fields. Corporate governance
in the UK mediates the rights and duties among shareholders, employees, creditors and directors. Since the board of directors
habitually possesses the power to manage the business under a company constitution, a central theme is what mechanisms exist to ensure directors' accountability. UK law is "shareholder friendly" in that shareholders, to the exclusion of employees, typically exercise sole voting rights in the general meeting. The general meeting holds a series of minimum rights to change the company constitution, issue resolutions and remove members of the board. In turn, directors owe a set of duties
to their companies. Directors must carry out their responsibilities with competence, in good faith
and undivided loyalty to the enterprise. If the mechanisms of voting do not prove enough, particularly for minority shareholders, directors' duties and other member rights may be vindicated in court. Of central importance in public and listed companies is the securities market, typified by the London Stock Exchange
. Through the Takeover Code the UK strongly protects the right of shareholders to be treated equally and freely trade their shares.
Corporate finance
concerns the two money raising options of incorporators. Equity finance
involves the traditional method of issuing share
s to build up a company's capital
. Shares can contain any rights the company and purchaser wish to contract for, but generally grant the right to participate in dividend
s after a company earns profits and the right to vote in company affairs. A purchaser of shares is helped to make an informed decision directly by prospectus
requirements of full disclosure, and indirectly through restrictions on financial assistance by companies for purchase of their own shares. Debt finance means getting loans, usually for the price of a fixed annual interest
repayment. Sophisticated lenders, such as bank
s typically contract for a security interest
over the assets of a company, so that in the event of default on loan repayments they may seize the company's property directly to satisfy debts. Creditors are also, to some extent, protected by courts' power to set aside unfair transactions before a company goes under, or recoup money from negligent directors engaged in wrongful trading
. When a company is unable to pay its debts as they fall due, UK insolvency law
requires an administrator to attempt a rescue of the company. If rescue proves impossible, a company's life ends when its assets are liquidated, distributed to creditors and the company is struck off the register.
constructs, such as partnership
s. Whenever people acted together with a view to profit
, the law deemed that a partnership arose. Early guilds and livery companies were also often involved in the regulation of competition
between traders. As England sought to build a mercantile
Empire
, the government created corporations under a Royal Charter
or an Act of Parliament
with the grant of a monopoly
over a specified territory. The best known example, established in 1600, was the British East India Company
. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope
. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated
with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes on the high seas.
A similar chartered company
, the South Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were supposedly backed by the Treaty of Utrecht
, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assiento to trade, and to sell slaves
in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by company promoters' extravagant promises of profit, bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) that it assumed the public debt of the UK government. This accelerated the inflation of the share price further, as did the Royal Exchange and London Assurance Corporation Act 1719, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a Royal Charter. The share price rose so rapidly that people began buying shares merely in order to sell them at a higher price. By inflating demand this in turn led to higher share prices. The "South Sea bubble" was the first speculative bubble the country had seen, but by the end of 1720, the bubble had "burst", and the share price sank from £1000 to under £100. As bankruptcies and recriminations ricocheted through government and high society, the mood against corporations, and errant directors, was bitter. Even in 1776, Adam Smith
wrote in the Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others' money would not exercise as much care as they would with their own.
The Bubble Act 1720's prohibition on establishing companies remained in force until 1825. By this point the Industrial Revolution
had gathered pace, pressing for legal change to facilitate business activity. Restrictions were gradually lifted on ordinary people incorporating, though businesses such as those chronicled by Charles Dickens
in Martin Chuzzlewit
under primitive companies legislation were often scams. Without cohesive regulation, undercapitalised ventures like the proverbial "Anglo-Bengalee Disinterested Loan and Life Assurance Company" promised no hope of success, except for richly remunerated promoters. Then in 1843, William Gladstone took chairmanship of a Parliamentary Committee on Joint Stock Companies, which led to the Joint Stock Companies Act 1844
. For the first time it was possible for ordinary people through a simple registration procedure to incorporate. The advantage of establishing a company as a separate legal person was mainly administrative, as a unified entity under which the rights and duties of all investors and managers could be channeled. The most important development came through the Limited Liability Act 1855
, which allowed investors to limit their liability in the event of business failure to the amount they invested in the company. These two features - a simple registration procedure and limited liability - were subsequently codified in the world's first modern company law, the Joint Stock Companies Act 1856
. A series of Companies Acts up to the present Companies Act 2006
have essentially retained the same fundamental features.
Over the twentieth century, companies in the UK became the dominant organisational form of economic activity, which raised concerns about how accountable those who controlled companies were to those who invested in them. The first reforms following the Great Depression, in the Companies Act 1948
, ensured that directors could be removed by shareholders with a simple majority vote. In 1977, the government's Bullock Report proposed reform to allow employees to participate in selecting the board of directors
, as was happening across Europe, exemplified by the German Codetermination Act 1976. However the UK never implemented the reforms, and from 1979 the debate shifted. Although making directors more accountable to employees was delayed, the Cork Report led to stiffer sanctions in the Insolvency Act 1986
and the Company Directors Disqualification Act 1986
against directors who negligently ran companies at a loss. Through the 1990s the focus in corporate governance
turned toward internal control mechanisms, such as auditing, separation of the chief executive position from the chair, and remuneration committees as an attempt to place some check on excessive executive pay. These rules applicable to listed companies, now found in the UK Corporate Governance Code, have been complemented by principles based regulation of institutional investors' activity in company affairs. At the same time, the UK's integration in the European Union
meant a steadily growing body of EU Company Law Directives
and case law to harmonise company law within the internal market.
separate from those who invest their capital and labour to run the business. The general rules of contract, tort and unjust enrichment operate in the first place against the company as a distinct entity. This differs fundamentally from other forms of business association. A sole trader acquires rights and duties as normal under the general law of obligations. If people carry on business together with a view to profit, they are deemed to have formed a partnership under the Partnership Act 1890
section 1. Like a sole trader, partners will be liable on any contract or tort obligation jointly and severally
in shares equal to their monetary contribution, or according to their culpability. Law
, accountancy
and actuarial firms are commonly organised as partnerships. Since the Limited Liability Partnerships Act 2000
, partners can limit the amount they are liable for to their monetary investment in the business, if the partnership owes more money than the enterprise has. Outside these professions, however, the most common method for businesses to limit their liability is by forming a company.
under the Companies Act 2006
. The people interested in starting the enterprise - the prospective directors, employees and shareholders - may choose, firstly, an unlimited or a limited company. "Unlimited
" will mean the incorporators will be liable for all losses and debts under the general principles of civil law. The option of a limited company leads to a second choice. A company can be "limited by guarantee
", meaning that if the company owes more debts than it can pay, the guarantors' liability will be limited to the extent of the money they elect to guarantee. Or a company may choose to be "limited by shares", meaning capital investors' liability is limited to the amount they subscribe for in share capital. A third choice is whether a company limited by shares will be public or private. Both kinds of companies must display (partly as a warning) the endings "plc" or "Ltd" following the company name. Most new businesses will opt for a private company limited by shares
, while unlimited companies and companies limited by guarantee are typically chosen by either charities, risky ventures or mutual funds wanting to signal they will not leave debts unpaid. Charitable ventures also have the option to become a community interest company
. Public companies
are the predominant business vehicle in the UK economy. While far less numerous than private companies, they employ the overwhelming mass of British workers and turn over the greatest share of wealth. Public companies can offer shares to the public, must have a minimum capital
of £50,000, must allow free transferability of its shares, and typically (as most big public companies will be listed) will follow requirements of the London Stock Exchange
or a similar securities market. Businesses may also elect to incorporate under the European Company Statute
as a Societas Europaea. An "SE" will be treated in every European Union
member state as if it were a public company formed in accordance with the law of that state, and may opt in or out of employee involvement.
Once the decision has been made about the type of company, formation
occurs through a series of procedures with the registrar at Companies House
. Before registration, anybody promoting the company to attract investment falls under strict fiduciary duties to disclose all material facts about the venture and its finances. Moreover anybody purporting to contract in a company's name before its registration will generally be personally liable on those obligations. In the registration process, those who invest money in a company will sign a memorandum of association
stating what shares they will initially take, and pledge their compliance with the Companies Act 2006
. A standard company constitution, known as the Model Articles
, is deemed to apply, or the corporators may register their own individualised articles of association
. Directors must be appointed - one in a private company and at least two in a public company - and a public company must have a secretary, but there needs to be no more than a single member. The company will be refused registration if it is set up for an unlawful purpose, and a name must be chosen that is not inappropriate or already in use. This information is filled out in the "IN01" form available on the Companies House website, and a £18 fee is paid for online registration in 8 to 10 days, or a £100 fee for registration within 24 hours. The registrar then issues a certificate of incorporation and a new legal personality enters the stage.
English law recognised long ago that a corporation would have "legal personality". Legal personality simply means the entity is the subject of legal rights and duties. It can sue and be sued. Historically, municipal councils (such as the Corporation of London
) or charitable establishments would be the primary examples of corporations. In 1612, Sir Edward Coke remarked in the Case of Sutton's Hospital
,
Without a body to be kicked or a soul to be damned, a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf. If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs
and a liquidator
will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever
, even as the natural people who invest in it and carry out its business change or pass away.
Most companies adopt limited liability
for their members, seen in the suffix of "Ltd
" or "plc
". This means that if a company does go insolvent, unpaid creditor
s cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs. However, limited liability acts merely as a default position. It can be "contracted around", provided creditors have the opportunity and the bargaining power
to do so. A bank, for instance, may not lend to a small company unless the company's director gives her own house as security
for the loan (e.g., by mortgage
). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach
, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
cobbler incorporated his business under the Companies Act 1862
. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership. Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture
, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.
This principle is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act 1986
, section 214 stipulates that company directors must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency. A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
, the Trading with the Enemy Act 1914
said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).
There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud, or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plc
. A group of employees suffered asbestos
diseases after working for the American wholly owned subsidiary of Cape Industries plc
. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws
principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (i.e. ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman
, the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation. The potentially unjust result for tort
victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been changed so that a duty of care
may be owed by a parent to workers of a subsidiary regardless of separated legal personality. However even though tort victims are protected, the restrictive position remains subject to criticism where a company group is involved, since it is not clear that companies and actual people ought to get the protection of limited liability in identical ways. An influential decision, although subsequently doubted strongly by the House of Lords, was passed by Lord Denning MR in DHN Ltd v Tower Hamlets BC. Here Lord Denning MR held that a group of companies, two subsidiaries wholly owned by a parent, constituted a single economic unit. Because the companies' shareholders and controlling minds were identical, their rights were to be treated as the same. This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate "groups" or a "concern
" as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc
. It is very rare for English courts to lift the veil. The liability of the company is generally attributed to the company alone.
for their business, for instance "to make and sell, or lend on hire, railway-carriages". If companies acted outside their objects, for instance by giving a loan
to build railways in Belgium
, any such contracts were said to be ultra vires
and consequently void. This is what happened in the early case of Ashbury Railway Carriage and Iron Co Ltd v Riche
. The policy was thought to protect shareholders and creditors, whose investments or credit would not be used for an unanticipated purpose. However, it soon became clear that the ultra vires rule restricted the flexibility of businesses to expand to meet market opportunities. Void contracts might unexpectedly and arbitrarily hinder business. So companies began to draft ever longer objects clauses, often adding an extra provision stating all objects must be construed as fully separate, or the company's objects include anything directors feel is reasonably incidental to the business. Now the 2006 Act
states that companies are deemed to have unlimited objects, unless they opt for restrictions. The 2006 reforms have also clarified the legal position that if a company does have limited objects, an ultra vires act will cause the directors to have breached a duty to follow the constitution under section 171. So a shareholder who disagreed with an action outside the company's objects must sue directors for any loss. Contracts remain valid and third parties will be unaffected by this alone.
Contracts between companies and third parties, however, may turn out to be unenforceable on ordinary principals of agency law if the director or employee obviously exceeded their authority. As a general rule, third parties need not be concerned with constitutional details conferring power among directors or employees, which may only be found by laboriously searching the register at Companies House
. In general, if a third party acts in good faith
, then any contract, even one going beyond the constitutional authority of the director or employee with whom they strike a deal, is valid. However, if it would appear to a reasonable person that a company employee would not have the authority to enter an agreement, then the contract is voidable at the company's instance so long as there is no equitable bar to rescission
. The third party would have a claim against the (probably less solvent) employee instead. First, an agent may have express actual authority, in which case there is no problem. Her actions will be attributed to the company. Second, an agent may have implied actual authority (also sometimes called "usual" authority), which falls within the usual scope of the employee's office. Third, an agent may have "apparent authority
" (also called "ostensible" authority) as it would appear to a reasonable person, creating an estoppel
. If the actions of a company employee have authority deriving from a company constitution in none of these ways, a third party will only have recourse for breach of an obligation (a warrant of authority) against the individual agent, and not to the company as the principal. The Companies Act 2006
section 40 makes clear that directors are always deemed to be free of limitations on their authority under the constitution, unless a third party acting in callous bad faith takes advantage of a company whose director acts outside the scope of authority. For employees down the chain of delegation, it becomes less and less likely that a reasonable contracting party would think big transactions will have had authority. For instance, it would be unlikely that a bank cashier would have the authority to sell the bank's Canary Wharf
skyscraper.
Problems arise where serious torts, and particularly fatal injuries occur as a result of actions by company employees. All torts committed by employees in the course of employment
will attribute liability to their company even if acting wholly outside authority, so long as there is some temporal and close connection to work. It is also clear that acts by directors become acts of the company, as they are "the very ego and centre of the personality of the corporation." But despite strict liability
in tort, civil remedies are in some instances insufficient to provide a deterrent to a company pursuing business practices that could seriously injure the life, health and environment of other people. Even with additional regulation by government bodies, such as the Health and Safety Executive
or the Environment Agency
, companies may still have a collective incentive to ignore the rules in the knowledge that the costs and likelihood of enforcement is weaker than potential profits. Criminal sanctions remain problematic, for instance if a company director had no intention to harm anyone, no mens rea
, and managers in the corporate hierarchy had systems to prevent employees committing offences. One step toward reform is found in the Corporate Manslaughter and Corporate Homicide Act 2007
. This creates a criminal offence for manslaughter
, meaning a penal fine of up to 10 per cent of turnover against companies whose managers conduct business in a grossly negligent
fashion, resulting in deaths. Without lifting the veil there remains, however, no personal liability for directors or employees acting in the course of employment, for corporate manslaughter or otherwise. The quality of a company's accountability to a broader public and the conscientiousness of its behaviour must rely also, in great measure, on its governance.
and the general meeting. The term "governance" is often used in the more narrow sense of referring to principles in the UK Corporate Governance Code. This makes recommendations about the structure, accountability and remuneration of the board of directors in listed companies, and was developed after the Polly Peck
, BCCI
and Robert Maxwell
scandals led to the Cadbury Report
of 1992. However, put broadly corporate governance in UK law focuses on the relative rights and duties of directors, shareholders, employees, creditors and others who are seen as having a "stake" in the company's success. The Companies Act 2006
, in conjunction with other statutes and case law, lays down an irreducible minimum core of mandatory rights for shareholders, employees, creditors and others by which all companies must abide. UK rules usually focus on protecting shareholders or the investing public, but above the minimum, company constitutions are essentially free to allocate rights and duties to different groups in any form desired.
". Companies are presumed to adopt a set of "Model Articles
", unless the incorporators choose different rules. The Model Articles set out essential procedures for conducting a company's business, such as when to hold meetings, appointment of directors, or preparing accounts. These rules may always be changed, except where a provision is a compulsory term deriving from the Companies Act 2006
, or similar mandatory law
. In this sense a company constitution is functionally similar to any business contract, albeit one that is usually variable among the contracting parties with less than consensus. In Attorney General of Belize v Belize Telecom Ltd
, Lord Hoffmann held that courts construe the meaning of a company's articles in the same way as any other contract, or a piece of legislation, mindful of the context in which it was formulated. So in this case, the appropriate construction of a company's articles led to the implication that a director could be removed from office by shareholders (and did not have a job for life), even though a literal construction would have meant no person possessed the two classes of shares required to remove that director under the articles. Even if companies' articles are silent on an issue, the courts will construe the gaps to be filled with provisions consistent with the rest of the instrument in its context, as in the old case of Attorney General v Davy
where Lord Hardwicke LC held that a simple majority was enough for the election of a chaplain.
Typically, a company's articles will vest a general power of management in the board of directors, with full power of directors to delegate tasks to other employees, subject to an instruction right reserved for the general meeting acting with a three quarter majority. This basic pattern can theoretically be varied in any number of ways, and so long as it does not contravene the Act, courts will enforce that balance of power. In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame
, a shareholder sued the board for not following a resolution, carried with an ordinary majority of votes, to sell off the company's assets. The Court of Appeal refused the claim, since the articles stipulated that a three quarter majority was needed to issue specific instructions to the board. Shareholders always have the option of gaining the votes to change the constitution or threaten directors with removal, but they may not sidestep the separation of powers found in the company constitution. Though older cases raise an element of uncertainty, the majority opinion is that other provisions of a company's constitution generate personal rights that may be enforced by company members individually. Of the most important is a member's right to vote at meetings. Votes need not necessarily attach to shares, as preferential shares (e.g., those with extra dividend
rights) are frequently non-voting. However, ordinary shares invariably do have votes and in Pender v Lushington
Lord Jessel MR stated votes were so sacrosanct as to be enforceable like a "right of property". Otherwise, the articles may be enforced by any member privy to the contract. Companies are excluded from the Contracts (Rights of Third Parties) Act 1999
, so people who are conferred benefits under a constitution, but are not themselves members, are not necessarily able to sue for compliance. Partly for certainty and to achieve objectives the Act would prohibit, shareholders in small closely held companies frequently supplement the constitution by entering a shareholders' agreement
. By contract shareholders can regulate any of their rights outside the company, yet their rights within the company remain a separate matter.
this confers, shareholders typically gain a comprehensive set of governance rights under a constitution. While not technically required, shareholders invariably possess exclusive voting rights, in contrast to many other European jurisdictions which require that employees codetermine (i.e. have the right to elect some of) the members of the board. In this way, and also because of the additional mandatory rights shareholders enjoy under the Companies Act 2006
, the UK is a "shareholder friendly" jurisdiction relative to its European and American counterparts. Since the Report of the Committee on Company Law Amendment
, chaired in 1945 by Lord Cohen
, led to the Companies Act 1947
, as voters in the general meeting of public companies, shareholders have the mandatory right to remove directors by a simple majority, while in Germany, and in most American companies (predominantly incorporated in Delaware) directors can only be removed for a "good reason". Shareholders will habitually have the right to change the company's constitution with a three quarter majority vote, unless they have chosen to entrench the constitution with a higher threshold. Shareholders with support of 5 per cent of the total vote can call meetings, and can circulate suggestions for resolutions with support of 5 per cent of the total vote, or any one hundred other shareholders holding over £100 in shares each. Categories of important decisions, such as large asset sales, approval of mergers, takeovers, winding up of the company, any expenditure on political donations, share buybacks, or a (for the time being) non-binding say on pay
of directors, are reserved exclusively for the shareholder body.
Despite habitually occupying the most privileged position in UK corporate governance, shareholders in large public companies listed on the London Stock Exchange
infrequently exercise their governance rights. Institutional investors, including pension fund
s, mutual fund
s and insurance funds, own most shares. Thousands or perhaps millions of persons, particularly through pensions, are beneficiaries
from the returns on shares. Historically institutions have often not voted or participated in general meetings on their beneficiaries' behalf, and often display an uncritical pattern of supporting management. However, institutional investors also often work "behind the scenes" to secure better corporate governance for their members, through informal but direct communication with management. Individual shareholders form an increasingly small part of total investments, while foreign investment and institutional investor ownership have grown their share steadily over the last forty years. Institutional investors, who deal with other peoples' money, are bound by fiduciary obligations, deriving from the law of trusts
and obligations to exercise care deriving from the common law
. Now the Stewardship Code
2010, drafted by the Financial Reporting Council
(the corporate governance watchdog), reinforces the duty on institutions to actively engage in governance affairs by disclosing their voting policy, voting record and voting. The aim is to make directors more accountable, at least, to investors of capital.
Employees provide the investment of labour that is indispensable to make companies function. However UK company law, in heavy contrast to most European jurisdictions, promotes little formal participatory role for workers. Businesses are free in UK law to voluntarily grant employees participation rights as members in the general meeting, or the right to elect specific board members, though orthodox companies do not do this. The exceptions to lack of worker participation are entities like the John Lewis
partnership that are wholly managed and owned by the workforce. Some companies take advantage of tax breaks to implement employee share schemes, however this typically makes employees ordinary shareholders but at the cost of heavily under-diversifying risk
. New workplace participation practices have been emerging for larger companies. Under the Information and Consultation of Employees Regulations 2004, companies with more than fifty employees must inform their workforce about major economic issues in their enterprise, and should consult about major changes, particularly redundancies. And under the Transnational Information and Consultation of Employees Regulations 1999, companies with over 1000 employees in more than one EU member state establish works council
s to consult through the course of business. But beyond this model of encouraging "dialogue" the channels for employee participation in companies are limited to traditional systems of trade union
collective bargaining
and, as a final resort, industrial action
or strikes
.
In the 1977 Report of the committee of inquiry on industrial democracy
the Government proposed, in line with developments in Germany, and mirroring a Draft Fifth EU Company Law Directive, that the board of directors
should have an equal number of representatives elected by employees as there were for shareholders. However the only reform introduced after the 1979 election was that directors owed a duty to act in shareholders' and employees' interests alike. Though no UK company appears yet to have chosen this route, businesses reincorporating under the European Company Statute
may opt to follow the Directive for employee involvement. A Societas Europaea may adopt either a two or one-tier board structure. Where the board is two-tiered, as in German companies
, shareholders and employees (in proportion no less than what existed for most employees in their home countries previously) elect a supervisory board that in turn appoints a management board responsible for day to day running of the company. An SE may also choose a one tiered board, the same as every company in the UK chooses, and employees and shareholders may elect board members in the desired proportion.
form the central authority in UK companies. In carrying out their functions, directors (whether formally appointed, de facto
, or "shadow directors") owe a series of duties to the company. There are presently seven key duties codified under the Companies Act 2006
sections 171 to 177, which reflect the common law and equitable principles. These may not be limited, waived or contracted out of, but companies may buy insurance to cover directors for costs in the event of breach. The remedies for breaches of duty were not codified, but follow common law and equity, and include compensation
for losses, restitution
of illegitimate gains and specific performance
or injunction
s.
The first director's duty under section 171 is to follow the company's constitution, but also only exercise powers for implied "proper purposes". Prior proper purpose cases often involved directors plundering the company's assets for personal enrichment, or attempting to install mechanisms to frustrate attempted takeovers by outside bidders, such as a poison pill
. Such practices are improper, because they go beyond the reason for which directors were delegated their power. The all-important duty of care is found in section 174. Directors must display the care, skill and competence that is reasonable for somebody carrying out the functions of the office, and if a director has any special qualifications an even higher standard will be expected. However, under section 1157 courts may, if directors are negligent but found to be honest and ought to be excused, relieve directors from paying compensation. The "objective plus subjective" standard was first introduced in the wrongful trading
provision from the Insolvency Act 1986
, and applied in Re D'Jan of London Ltd
. The liquidator sought to recover compensation from Mr D'Jan, who failing to read an insurance policy form, did not disclose he was previously the director of an insolvent company. The policy was void when the company's warehouse burnt down. Hoffmann LJ held Mr D'Jan's failure was negligent, but exercised discretion to relieve liability on the ground that he owned almost all of his small business and had only put his own money at risk. The courts emphasise that they will not judge business decisions unfavourably with the benefit of hindsight, however simple procedural failures of judgment will be vulnerable. Cases under the Company Director Disqualification Act 1986, such as Re Barings plc (No 5) show that directors will also be liable for failing to adequately supervise employees or have effective risk management systems, as where the London directors ignored a warning report about a the currency exchange business in Singapore, where a rogue trader
caused losses so massive that it brought the whole bank into insolvency.
The central equitable principle applicable to directors is to avoid any possibility of a conflict of interest
, without disclosure to the board or seeking approval from shareholders. This core duty of loyalty is manifested firstly in section 175 which specifies that directors may not use business opportunities that the company could without approval. Shareholders may pass a resolution ratifying a breach of duty, but under section 239 they must be uninterested in the transaction. This absolute, strict duty has been consistently reaffirmed since the economic crisis following the South Sea Bubble in 1719. For example, in Cook v Deeks
, three directors took a railway line construction contract in their own names, rather than that of their company, to exclude a fourth director from the business. Even though the directors used their votes as shareholders to "ratify" their actions, the Privy Council
advised that the conflict of interest precluded their ability to forgive themselves. Similarly, in Bhullar v Bhullar
, a director on one side of a feuding family set up a company to buy a carpark next to one of the company's properties. The family company, amidst the feud, had in fact resolved to buy no further investment properties, but even so, because the director failed to fully disclose the opportunity that could reasonably be considered as falling within the company's line of business, the Court of Appeal held he was liable to make restitution for all profits made on the purchase. The duty of directors to avoid any possibility of a conflict of interest also exists after a director ceases employment with a company, so it is not permissible to resign and then take up a corporate opportunity, present or maturing, even though no longer officially a "director".
The purpose of the no conflict rule is to ensure directors carry out their tasks like it was their own interest at stake. Beyond corporate opportunities, the law requires directors accept no benefits from third parties under section 176, and also has specific regulation of transactions by a company with another party in which directors have an interest. Under section 177, when directors are on both sides of a proposed contract, for example where a person owns a business selling iron chairs to the company in which he is a director, it is a default requirement that they disclose the interest to the board, so that disinterested directors may approve the deal. The company's articles could heighten the requirement, say, to shareholder approval. If such a self dealing transaction has already taken place, directors still have a duty to disclose their interest and failure to do so is a criminal offence, subject to a £5000 fine. While such regulation through disclosure hovers with a relatively light touch, self dealing rules become more onerous as transactions become more significant. Shareholder approval is requisite for specific transactions with directors, or connected persons, when the sum of money either exceeds 10% of the company and is over £5000, or is over £100,000 in a company of any size. Further detailed provisions govern loaning money. On the question of director remuneration where the conflict of interest appears most serious, however, regulation is again relatively light. Directors pay themselves by default, but in large listed companies have pay set by a remuneration committee of directors. Under section 439, shareholders may cast a vote on remuneration but this "say on pay
", as yet, is not binding.
Finally, under section 172 directors must "promote the success of the company". This somewhat nebulous provision created significant debate during its passage through Parliament, since it goes on to prescribe that decisions should be taken in the interests of members, with regard to long term consequences, the need to act fairly between members, and a range of other "stakeholders", such as employees, suppliers, the environment, the general community, and creditors. Many groups objected to this "enlightened shareholder value
" model, which in form elevated the interests of members, who are invariably shareholders, above other stakeholders. However, the duty is particularly difficult to sue upon since it is only a duty for a director to do what she or "he considers, in good faith, would be most likely to promote the success of the company". Proof of subjective bad faith toward any group being difficult, directors have the discretion to balance all competing interests, even if to the short term detriment of shareholders in a particular instance. There is also a duty under section 173 to exercise independent judgment and the duty of care in section 174 applies to the decision making process of a director having regard to the factors listed in section 172, so it remains theoretically possible to challenge a decision if made without any rational basis. Only registered shareholders, not other stakeholders without being members of the general meeting, have standing to claim any breach of the provision. But section 172's criteria are useful as an aspirational standard because in the annual Director's Report
companies must explain how they have complied with their duties to stakeholders. Also, the idea of whether a company's success will be promoted is central when a court determines whether a derivative claim should proceed in the course of corporate litigation.
, "This Court is not required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom." If there were disagreements between the directors and shareholders about whether to pursue a claim, this was thought to be a question best left for the rules of internal management in a company's constitution, since litigation could legitimately be seen as costly or distracting from doing the company's real business. The board of directors
invariably holds the right to sue in the company's name as a general power of management. So if wrongs were alleged to have been done to the company, the principle from the case of Foss v Harbottle
, was that the company itself was the proper claimant, and it followed that as a general rule that only the board could bring claims in court. A majority of shareholders would also have the default right to start litigation, but the interest a minority shareholder had was seen as relative to the wishes of the majority. Aggrieved minorities could not, in general, sue. Only if the alleged wrongdoers were themselves in control, as directors or majority shareholder, would the courts allow an exception for a minority shareholder to derive the right from the company to launch a claim.
In practice very few derivative claims were successfully brought, given the complexity and narrowness in the exceptions to the rule in Foss v Harbottle
. This was witnessed by the fact that successful cases on directors' duties before the Companies Act 2006
seldom involved minority shareholders, rather than a new board, or a liquidator in the shoes of an insolvent company, suing former directors. The new requirements to bring a "derivative claim" are now codified in the Companies Act 2006
sections 261-264. Section 260 stipulates that such actions are concerned with suing directors for breach of a duty owed to the company. Under section 261 a shareholder must, first, show the court there is a good prima facie
case to be made. This preliminary legal question is followed by the substantive questions in section 263. The court must refuse permission for the claim if the alleged breach has already been validly authorised or ratified by disinterested shareholders, or if it appears that allowing litigation would undermine the company's success by the criteria laid out in section 172. If none of these "negative" criteria are fulfilled, the court then weighs up seven "positive" criteria. Again it asks whether, under the guidelines in section 172, allowing the action to continue would promote the company's success. It also asks whether the claimant is acting in good faith, whether the claimant could start an action in her own name, whether authorisation or ratification has happened or is likely to, and pays particular regard to the views of the independent and disinterested shareholders. This represented a shift from, and a replacement of, the complex pre-2006 position, by giving courts more discretion to allow meritorious claims. Still, the first cases showed the courts remaining conservative. In other respects the law remains the same. According to Wallersteiner v Moir (No 2)
, minority shareholders will be indemnified for the costs of a derivative claim by the company, even if it ultimately fails.
While derivative claims mean suing in the company's name, a minority shareholder can sue in her own name in four ways. The first is to claim a "personal right" under the constitution or the general law is breached. If a shareholder brings a personal action to vindicate a personal right (such as the right to not be misled by company circulars) the principle against double recovery dictates that one cannot sue for damages if the loss an individual shareholder suffers is merely the same as will be reflected in the reduction of the share value. For losses reflective
of the company's, only a derivative claim may be brought. The second is to show that a company's articles were amended in an objectively unjustifiably and directly discriminatory fashion. This residual protection for minorities was developed by the Court of Appeal in Allen v Gold Reefs of West Africa Ltd
, where Sir Nathaniel Lindley MR held that shareholders may amend a constitution by the required majority so long as it is "bona fide for the benefit of the company as a whole." This constraint is not heavy, as it can mean that a constitutional amendment, while applying in a formally equal way to all shareholders, has a negative and disparate impact on only one shareholder. This was so in Greenhalgh v Arderne Cinemas Ltd, where the articles were changed to remove all shareholders' pre-emption rights, but only one shareholder (the claimant, Mr Greenhalgh, who lost) was interested in preventing share sales to outside parties. This slim set of protections for minority shareholders was, until 1985, complemented only by a third, and drastic right of a shareholder, now under the Insolvency Act 1986
section 122(1)(g), to show it is "just and equitable" for a company to be liquidated. In Ebrahimi v Westbourne Galleries Ltd, Lord Wilberforce held that a court would use its discretion to wind up a company if three criteria were fulfilled: that the company was a small "quasi-partnership" founded on mutual confidence of the corporators, that shareholders participate in the business, and there are restrictions in the constitution on free transfer of shares. Given these features, it may be just and equitable to wind up a company if the court sees an agreement just short of a contract, or some other "equitable consideration", that one party has not fulfilled. So where Mr Ebrahmi, a minority shareholder, had been removed from the board, and the other two directors paid all company profits out as director salaries, rather than dividends to exclude him, the House of Lords regarded it as equitable to liquidate the company and distribute his share of the sale proceeds to Mr Ebrahimi.
The drastic remedy of liquidation was mitigated significantly as the unfair prejudice action was introduced by the Companies Act 1985
. Now under the Companies Act 2006
section 996, a court can grant any remedy, but will often simply require that a minority shareholder's interest is bought out by the majority at a fair value. The cause of action, stated in section 994, is very broad. A shareholder must simply allege they have been prejudiced (i.e. their interests as a member have been harmed) in a way that is unfair. "Unfairness" is now given a minimum meaning identical to that in Ebrahimi v Westbourne Galleries Ltd. A court must at least have an "equitable consideration" to grant a remedy. Generally this will refer to an agreement between two or more corporators in a small business that is just short of being an enforceable contract, for the lack of legal consideration
. A clear assurance, on which a corporator relies, which would be inequitable to go back on, would suffice, unlike the facts of the leading case, O'Neill v Phillips. Here Mr O'Neill had been a prodigy in Mr Phillips' asbestos stripping business, and took on a greater and greater role until economic difficulties struck. Mr O'Neill was then demoted, but claimed that he should be given 50 per cent of the company's shares because negotiations had started for this to happen and Mr Phillips had said one day it might. Lord Hoffmann held that the vague aspiration that it "might" was not enough here: there was no concrete assurance or promise given, and so no unfairness in Mr Phillips' recanting. Unfair prejudice in this sense is an action not well suited to public companies, when the alleged obligations binding the company were potentially undisclosed to public investors in the constitution, since this would undermine the principle of transparency. However it is plain that minority shareholders can also bring claims for more serious breaches of obligation, such as breach of directors' duties
. Unfair prejudice petitions remain most prevalent in small companies, and are the most numerous form of dispute to enter company courts. But if to hold directors accountable dispersed shareholders do not engage through voting, or through litigation, companies may be ripe for takeover.
, where parties compete to buy controlling stakes in companies, is seen seen by some as an important, although perhaps limited, mechanism for the board of directors
' accountability. Because individual shareholders may not be as likely to act collectively as a majority shareholder, the threat of a takeover when a company share price drops, heightens the prospect that a director is removed from office by an ordinary resolution under CA 2006 section 168. Since 1959 the UK has taken the approach that directors, particularly of public companies, should do nothing with the effect of frustrating a takeover bid, unless shareholders approve it by a majority at the time of the takeover. Rule 21 of the City Code on Takeovers and Mergers
consolidates this now. Typical takeover defence tactics, routinely found in US corporate law, led by Delaware
, include issuing extra shares to everyone but a takeover bidder to dilute their stake unless the bidder has the board's consent to buy shareholders' shares (a "poison pill
"), paying a takeover bidder to go away ("greenmail
"), merely selling a key company asset to a friendly third party, or engaging in large share buyback schemes. In the US, defensive tactics must merely be employed in good faith
, and be proportionate to the threat posed with regard to factors like the offer price, timing and effect on the company's stakeholders. Moreover, Delaware directors can often only be removed for a "good reason" (fought out in court) with a board classified into directors a third of whom will be removable in any given year. This makes hostile takeovers very difficult, unless a bidder promises the incumbent board large golden parachute
s in return for their consent. After much debate, the EU's newly implemented Takeover Directive
decided to leave member states the option under articles 9 and 12 of whether to mandate that boards remain "neutral".
Even with the UK's non-frustration principle directors always still have the option to persuade their shareholders through informed and reasoned argument that the share price offer is too low, or that the bidder may have ulterior motives that are bad for the company's employees, or for its ethical image. Under common law and the Takeover Code, directors must give out information to shareholders relevant to the bid, but not merely recommend the highest offer. The overriding common law rule, however, is to avoid any possibility of a conflict of interest
, which precludes using management powers for the purpose of frustrating takeovers. In Hogg v Cramphorn Ltd the director, purportedly concerned that a takeover bidder would make many workers redundant, issued a block of company shares to a trust, thus ensuring the bidder would remain outvoted. Buckley J held the power to issue shares creates fiduciary duty to only do so for the purpose of raising capital. Directors cannot plead they acted in good faith if a court determines their interests may possibly conflict. The result is that even though directors may wish to protect employees and stakeholders from ominous bidders, the law responds in other ways. UK workers have a minimal measure of job security, with very limited rights to be consulted, and no formal rights outside collective bargaining
to participate in elections for the board or codetermine dismissal issues in works councils. Employees do have rights before dismissal or redundancies to reasonable notice, dismissal only for a fair reason, and a redundancy payment, under the Employment Rights Act 1996
. Moreover, any changes to workers terms and conditions, or redundancies, following a restructuring through an asset (as opposed to share) sale triggers protection of the Transfer of Undertakings (Protection of Employment) Regulations 2006 meaning good economic, technical or organisational reasons must be given.
Beyond rules restricting takeover defences, a series of rules are in place to partly protect, and partly impose obligations on minority shareholders. Under CA 2006 section 979 when a takeover bidder has already acquired 90 per cent of a company's shares it can "squeeze out" or compulsorily purchase the minority's shares at the same price per share as paid for the rest of the takeover. Only if a court determines that price is "manifestly unfair" (and market prices are presumed fair) can the shareholder object, or if the whole arrangement is merely a trick for incumbent shareholders to expropriate a minority they find undesirable, or it can be shown that shareholders had been given insufficient information to properly evaluate the offer. Conversely section 983 allows minority shareholders to require that their stakes are bought out. Further standards apply to listed companies under the Takeover Code. The Code contains six principles for takeover bids. Shareholders in the same class should be equally treated, there must be time for them to adequate information including consequences for employees, the board must act in the company's whole interests not their own, false markets and share prices should not artificially fluctuate, bids should only be announced when bidders can follow through with money, and a bid should not distract the business longer than reasonable. Following on from these principles are 38 rules, designed to flesh out in legal terms the "common sense" standards embodied in the 6 principles. The Takeover Panel administers the Code, and enforces it. Originally established in 1968 as a private club that self-regulated
its members' practices, was held in R (Datafin plc) v Takeover Panel to be subject to judicial review
of its actions where decisions are found to be manifestly unfair. Despite a handful of challenges, this has not happened.
While corporate governance primarily concerns the general relative rights and duties of shareholders, employees and directors in terms of administration and accountability, corporate finance
concerns how the monetary or capital stake of shareholders and creditors are mediated, given the risk that the business may fail and become insolvent. Companies can fund their operations either through debt (i.e. loans) or equity (i.e. shares). In return for loans, typically from a bank, companies will often be required by contract
to give their creditor
s a security interest
over the company's assets, so that in the event of insolvency, the creditor may take the secured asset. The Insolvency Act 1986
limits powerful creditors ability to sweep up all company assets as security, particularly through a floating charge
, in favour of vulnerable creditors, such as employees or consumers. If money is raised by offering shares, the shareholders' relations are determined as a group by the provisions under the constitution. The law requires disclosure of all material facts in promotions, and prospectuses. Company constitutions typically require that existing shareholders have a pre-emption right
, to buy newly issued shares before outside shareholders and thus avoid their stake and control becoming diluted
. Actual rights, however, are determined by ordinary principles of construction of the company constitution. A host of rules exist to ensure that the company's capital (i.e. the amount that shareholders paid in when they bought their shares) is maintained for the benefit of creditors. Money is typically distributed to shareholders through dividend
s as the reward for investment. These should only come out of profits, or surpluses beyond the capital account. If companies pay out money to shareholders which in effect is a dividend "disguised" as something else, directors will be liable for repayment. Companies may, however, reduce their capital to a lower figure if directors of private companies warrant solvency, or courts approve a public company's reduction. Because a company buying back shares
from shareholders in itself, or taking back redeemable shares, has the same effect as a reduction of capital, similar transparency and procedural requirements need to be fulfilled. Public companies are also precluded from giving financial assistance for purchase of their shares, for example through a leveraged buyout
, unless the company is delisted and or taken private. Finally, in order to protect investors from being placed at an unfair disadvantage, people inside a company are under a strict duty to not trade on any information
that could affect a company's share price for their own benefit.
Issuing shares and pre-emptions
Determining rights
Consideration for shares
Minimum capital and alternatives
Reduction, redemption and buybacks
Insider dealing
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
. Also regulated by the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, the UK Corporate Governance Code, European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
, public companies now employ more people and generate more of wealth in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
, and where management was delegated to a centralised board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
. An influential model within Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, the Commonwealth
Commonwealth
Commonwealth is a traditional English term for a political community founded for the common good. Historically, it has sometimes been synonymous with "republic."More recently it has been used for fraternal associations of some sovereign nations...
and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.
Company law, or corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
, can be broken down into two main fields. Corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
in the UK mediates the rights and duties among shareholders, employees, creditors and directors. Since the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
habitually possesses the power to manage the business under a company constitution, a central theme is what mechanisms exist to ensure directors' accountability. UK law is "shareholder friendly" in that shareholders, to the exclusion of employees, typically exercise sole voting rights in the general meeting. The general meeting holds a series of minimum rights to change the company constitution, issue resolutions and remove members of the board. In turn, directors owe a set of duties
Directors' duties
Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance...
to their companies. Directors must carry out their responsibilities with competence, in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
and undivided loyalty to the enterprise. If the mechanisms of voting do not prove enough, particularly for minority shareholders, directors' duties and other member rights may be vindicated in court. Of central importance in public and listed companies is the securities market, typified by the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
. Through the Takeover Code the UK strongly protects the right of shareholders to be treated equally and freely trade their shares.
Corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
concerns the two money raising options of incorporators. Equity finance
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
involves the traditional method of issuing share
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s to build up a company's capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
. Shares can contain any rights the company and purchaser wish to contract for, but generally grant the right to participate in dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s after a company earns profits and the right to vote in company affairs. A purchaser of shares is helped to make an informed decision directly by prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
requirements of full disclosure, and indirectly through restrictions on financial assistance by companies for purchase of their own shares. Debt finance means getting loans, usually for the price of a fixed annual interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
repayment. Sophisticated lenders, such as bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s typically contract for a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
over the assets of a company, so that in the event of default on loan repayments they may seize the company's property directly to satisfy debts. Creditors are also, to some extent, protected by courts' power to set aside unfair transactions before a company goes under, or recoup money from negligent directors engaged in wrongful trading
Wrongful trading
Wrongful trading is a type of civil wrong found in UK insolvency law, under s 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company....
. When a company is unable to pay its debts as they fall due, UK insolvency law
UK insolvency law
United Kingdom insolvency law deals with the insolvency of firms and individuals in the United Kingdom. The important statutes are the Insolvency Act 1986, as amended by the Enterprise Act 2002, as well as the Company Director Disqualification Act 1986 and the Companies Act 2006.Insolvency is a...
requires an administrator to attempt a rescue of the company. If rescue proves impossible, a company's life ends when its assets are liquidated, distributed to creditors and the company is struck off the register.
History
Company law in its modern shape dates from the mid-nineteenth century, however an array of business associations developed long before. In medieval times traders would do business through common lawCommon law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
constructs, such as partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s. Whenever people acted together with a view to profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
, the law deemed that a partnership arose. Early guilds and livery companies were also often involved in the regulation of competition
Restraint of trade
Restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds Lord Smith LC said,...
between traders. As England sought to build a mercantile
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
Empire
British Empire
The British Empire comprised the dominions, colonies, protectorates, mandates and other territories ruled or administered by the United Kingdom. It originated with the overseas colonies and trading posts established by England in the late 16th and early 17th centuries. At its height, it was the...
, the government created corporations under a Royal Charter
Royal Charter
A royal charter is a formal document issued by a monarch as letters patent, granting a right or power to an individual or a body corporate. They were, and are still, used to establish significant organizations such as cities or universities. Charters should be distinguished from warrants and...
or an Act of Parliament
Act of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
with the grant of a monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
over a specified territory. The best known example, established in 1600, was the British East India Company
British East India Company
The East India Company was an early English joint-stock company that was formed initially for pursuing trade with the East Indies, but that ended up trading mainly with the Indian subcontinent and China...
. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope
Cape of Good Hope
The Cape of Good Hope is a rocky headland on the Atlantic coast of the Cape Peninsula, South Africa.There is a misconception that the Cape of Good Hope is the southern tip of Africa, because it was once believed to be the dividing point between the Atlantic and Indian Oceans. In fact, the...
. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated
Company rule in India
Company rule in India refers to the rule or dominion of the British East India Company on the Indian subcontinent...
with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes on the high seas.
A similar chartered company
Chartered company
A chartered company is an association formed by investors or shareholders for the purpose of trade, exploration and colonization.- History :...
, the South Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were supposedly backed by the Treaty of Utrecht
Treaty of Utrecht
The Treaty of Utrecht, which established the Peace of Utrecht, comprises a series of individual peace treaties, rather than a single document, signed by the belligerents in the War of Spanish Succession, in the Dutch city of Utrecht in March and April 1713...
, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assiento to trade, and to sell slaves
Slavery in Britain and Ireland
Slavery in Britain and Ireland dated from before Roman occupation. Chattel slavery virtually disappeared after the Norman Conquest. It was finally abolished by the Slavery Abolition Act 1833...
in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by company promoters' extravagant promises of profit, bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) that it assumed the public debt of the UK government. This accelerated the inflation of the share price further, as did the Royal Exchange and London Assurance Corporation Act 1719, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a Royal Charter. The share price rose so rapidly that people began buying shares merely in order to sell them at a higher price. By inflating demand this in turn led to higher share prices. The "South Sea bubble" was the first speculative bubble the country had seen, but by the end of 1720, the bubble had "burst", and the share price sank from £1000 to under £100. As bankruptcies and recriminations ricocheted through government and high society, the mood against corporations, and errant directors, was bitter. Even in 1776, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
wrote in the Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others' money would not exercise as much care as they would with their own.
The Bubble Act 1720's prohibition on establishing companies remained in force until 1825. By this point the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
had gathered pace, pressing for legal change to facilitate business activity. Restrictions were gradually lifted on ordinary people incorporating, though businesses such as those chronicled by Charles Dickens
Charles Dickens
Charles John Huffam Dickens was an English novelist, generally considered the greatest of the Victorian period. Dickens enjoyed a wider popularity and fame than had any previous author during his lifetime, and he remains popular, having been responsible for some of English literature's most iconic...
in Martin Chuzzlewit
Martin Chuzzlewit
The Life and Adventures of Martin Chuzzlewit is a novel by Charles Dickens, considered the last of his picaresque novels. It was originally serialized between 1843-1844. Dickens himself proclaimed Martin Chuzzlewit to be his best work, but it was one of his least popular novels...
under primitive companies legislation were often scams. Without cohesive regulation, undercapitalised ventures like the proverbial "Anglo-Bengalee Disinterested Loan and Life Assurance Company" promised no hope of success, except for richly remunerated promoters. Then in 1843, William Gladstone took chairmanship of a Parliamentary Committee on Joint Stock Companies, which led to the Joint Stock Companies Act 1844
Joint Stock Companies Act 1844
The Joint Stock Companies Act 1844 was an Act of the Parliament of the United Kingdom that expanded access to the incorporation of joint-stock companies....
. For the first time it was possible for ordinary people through a simple registration procedure to incorporate. The advantage of establishing a company as a separate legal person was mainly administrative, as a unified entity under which the rights and duties of all investors and managers could be channeled. The most important development came through the Limited Liability Act 1855
Limited Liability Act 1855
The Limited Liability Act 1855 was an Act of the Parliament of the United Kingdom that first allowed limited liability for corporations that could be established by the general public in the UK.-Overview:...
, which allowed investors to limit their liability in the event of business failure to the amount they invested in the company. These two features - a simple registration procedure and limited liability - were subsequently codified in the world's first modern company law, the Joint Stock Companies Act 1856
Joint Stock Companies Act 1856
The Joint Stock Companies Act 1856 was a consolidating statute, recognised as the founding piece of modern United Kingdom company law legislation.-Overview:...
. A series of Companies Acts up to the present Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
have essentially retained the same fundamental features.
Over the twentieth century, companies in the UK became the dominant organisational form of economic activity, which raised concerns about how accountable those who controlled companies were to those who invested in them. The first reforms following the Great Depression, in the Companies Act 1948
Companies Act 1948
The Companies Act 1948 was an Act of the Parliament of the United Kingdom, which regulated UK company law. Its descendent is the Companies Act 2006.-Cases decided under this Act:*Scottish Co-operative Wholesale Society Ltd v Meyer...
, ensured that directors could be removed by shareholders with a simple majority vote. In 1977, the government's Bullock Report proposed reform to allow employees to participate in selecting the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, as was happening across Europe, exemplified by the German Codetermination Act 1976. However the UK never implemented the reforms, and from 1979 the debate shifted. Although making directors more accountable to employees was delayed, the Cork Report led to stiffer sanctions in the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
and the Company Directors Disqualification Act 1986
Company Directors Disqualification Act 1986
Company Directors Disqualification Act 1986 is a piece of UK company law, which sets out the procedures for company directors to be disqualified in certain cases of misconduct.-History:...
against directors who negligently ran companies at a loss. Through the 1990s the focus in corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
turned toward internal control mechanisms, such as auditing, separation of the chief executive position from the chair, and remuneration committees as an attempt to place some check on excessive executive pay. These rules applicable to listed companies, now found in the UK Corporate Governance Code, have been complemented by principles based regulation of institutional investors' activity in company affairs. At the same time, the UK's integration in the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
meant a steadily growing body of EU Company Law Directives
European company law
European company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
and case law to harmonise company law within the internal market.
Companies and civil law
Companies occupy a special place in civil law, because they have a legal personalityLegal personality
Legal personality is the characteristic of a non-human entity regarded by law to have the status of a person....
separate from those who invest their capital and labour to run the business. The general rules of contract, tort and unjust enrichment operate in the first place against the company as a distinct entity. This differs fundamentally from other forms of business association. A sole trader acquires rights and duties as normal under the general law of obligations. If people carry on business together with a view to profit, they are deemed to have formed a partnership under the Partnership Act 1890
Partnership Act 1890
The Partnership Act 1890 is a Act of the Parliament of the United Kingdom, which governs the rights and duties of people who carry on business in common with a view to profit.-Main provisions:...
section 1. Like a sole trader, partners will be liable on any contract or tort obligation jointly and severally
Joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:* jointly liable, or* severally liable, or* jointly and severally liable.-Joint liability:...
in shares equal to their monetary contribution, or according to their culpability. Law
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...
, accountancy
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
and actuarial firms are commonly organised as partnerships. Since the Limited Liability Partnerships Act 2000
Limited Liability Partnerships Act 2000
The Limited Liability Partnerships Act 2000 is an Act of the Parliament of the United Kingdom which introduced the concept of the limited liability partnership into English and Scots law...
, partners can limit the amount they are liable for to their monetary investment in the business, if the partnership owes more money than the enterprise has. Outside these professions, however, the most common method for businesses to limit their liability is by forming a company.
Forming a company
A variety of companies may be incorporatedIncorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
under the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
. The people interested in starting the enterprise - the prospective directors, employees and shareholders - may choose, firstly, an unlimited or a limited company. "Unlimited
Unlimited Company
An unlimited company or private unlimited company is a hybrid company incorporated either with or without a share capital but where the liability of the members or shareholders is not limited - that is, its members or shareholders have a joint, several and unlimited obligation to meet any...
" will mean the incorporators will be liable for all losses and debts under the general principles of civil law. The option of a limited company leads to a second choice. A company can be "limited by guarantee
Company limited by guarantee
In British and Irish company law, a private company limited by guarantee is an alternative type of corporation used primarily for non-profit organisations that require legal personality. A guarantee company does not usually have a share capital or shareholders, but instead has members who act as...
", meaning that if the company owes more debts than it can pay, the guarantors' liability will be limited to the extent of the money they elect to guarantee. Or a company may choose to be "limited by shares", meaning capital investors' liability is limited to the amount they subscribe for in share capital. A third choice is whether a company limited by shares will be public or private. Both kinds of companies must display (partly as a warning) the endings "plc" or "Ltd" following the company name. Most new businesses will opt for a private company limited by shares
Private company limited by shares
A private company limited by shares, usually called a private limited company , is a type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland...
, while unlimited companies and companies limited by guarantee are typically chosen by either charities, risky ventures or mutual funds wanting to signal they will not leave debts unpaid. Charitable ventures also have the option to become a community interest company
Community interest company
A community interest company is a new type of company introduced by the United Kingdom government in 2005 under the Companies Act 2004, designed for social enterprises that want to use their profits and assets for the public good...
. Public companies
Public limited company
A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
are the predominant business vehicle in the UK economy. While far less numerous than private companies, they employ the overwhelming mass of British workers and turn over the greatest share of wealth. Public companies can offer shares to the public, must have a minimum capital
Minimum capital
Minimum capital is a concept used in corporate law and banking regulation to stipulate what assets the organisation must hold as a minimum requirement...
of £50,000, must allow free transferability of its shares, and typically (as most big public companies will be listed) will follow requirements of the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
or a similar securities market. Businesses may also elect to incorporate under the European Company Statute
European Company Statute
The Council Regulation on the Statute for a European Company is an EU Regulation containing the rules for a public EU company, called a Societas Europaea, or "SE". An SE can register in any member state of the European Union, and transfer to other member states. , at least 702 registrations have...
as a Societas Europaea. An "SE" will be treated in every European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
member state as if it were a public company formed in accordance with the law of that state, and may opt in or out of employee involvement.
Once the decision has been made about the type of company, formation
Company formation
Company formation is the term for the process of incorporation of a business in the UK. It is also sometimes referred to as company registration. Under UK company law and most international law a company or corporation is considered a separate entity to the people who own or operate the...
occurs through a series of procedures with the registrar at Companies House
Companies House
Companies House is the United Kingdom Registrar of Companies and is an Executive Agency of the United Kingdom Government Department for Business, Innovation and Skills . All forms of companies are incorporated and registered with Companies House and file specific details as required by the...
. Before registration, anybody promoting the company to attract investment falls under strict fiduciary duties to disclose all material facts about the venture and its finances. Moreover anybody purporting to contract in a company's name before its registration will generally be personally liable on those obligations. In the registration process, those who invest money in a company will sign a memorandum of association
Memorandum of Association
The memorandum of association of a company, often simply called the memorandum , is the document that governs the relationship between the company and the outside...
stating what shares they will initially take, and pledge their compliance with the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
. A standard company constitution, known as the Model Articles
Model Articles
The Companies Regulations 2008 are the basis for a company constitution under UK company law, unless modified by the Articles of a specific company. The new Model Articles came into force on 1 October 2009 and update the old Companies Act 1985 Table A Articles.-Private companies:Schedule 1...
, is deemed to apply, or the corporators may register their own individualised articles of association
Articles of Association
The Continental Association, often known simply as the "Association", was a system created by the First Continental Congress in 1774 for implementing a trade boycott with Great Britain...
. Directors must be appointed - one in a private company and at least two in a public company - and a public company must have a secretary, but there needs to be no more than a single member. The company will be refused registration if it is set up for an unlawful purpose, and a name must be chosen that is not inappropriate or already in use. This information is filled out in the "IN01" form available on the Companies House website, and a £18 fee is paid for online registration in 8 to 10 days, or a £100 fee for registration within 24 hours. The registrar then issues a certificate of incorporation and a new legal personality enters the stage.
Corporate personality
Corporation of London
The City of London Corporation is the municipal governing body of the City of London. It exercises control only over the City , and not over Greater London...
) or charitable establishments would be the primary examples of corporations. In 1612, Sir Edward Coke remarked in the Case of Sutton's Hospital
Case of Sutton's Hospital
Case of Sutton's Hospital 77 Eng Rep 960 is an old common law case decided by Sir Edward Coke. It concerned the London Charterhouse, which was held to be a properly constituted corporation.-Facts:...
,
Without a body to be kicked or a soul to be damned, a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf. If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
and a liquidator
Liquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever
Eternity
While in the popular mind, eternity often simply means existence for a limitless amount of time, many have used it to refer to a timeless existence altogether outside time. By contrast, infinite temporal existence is then called sempiternity. Something eternal exists outside time; by contrast,...
, even as the natural people who invest in it and carry out its business change or pass away.
Most companies adopt limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
for their members, seen in the suffix of "Ltd
Limited company
A limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. And the former of these, a limited company limited by shares, may be...
" or "plc
Public limited company
A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
". This means that if a company does go insolvent, unpaid creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs. However, limited liability acts merely as a default position. It can be "contracted around", provided creditors have the opportunity and the bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
to do so. A bank, for instance, may not lend to a small company unless the company's director gives her own house as security
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
for the loan (e.g., by mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
Lifting the veil
If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. This is usually said to derive from the "principle" in Salomon v A Salomon & Co Ltd. In this leading case, a WhitechapelWhitechapel
Whitechapel is a built-up inner city district in the London Borough of Tower Hamlets, London, England. It is located east of Charing Cross and roughly bounded by the Bishopsgate thoroughfare on the west, Fashion Street on the north, Brady Street and Cavell Street on the east and The Highway on the...
cobbler incorporated his business under the Companies Act 1862
Companies Act 1862
The Companies Act 1862 was an Act of the Parliament of the United Kingdom regulating UK company law, whose descendant is the Companies Act 2006.-Provisions:...
. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership. Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, section 214 stipulates that company directors must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency. A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307 is a UK company law case, concerning the concept of "control" and enemy character of a company...
, the Trading with the Enemy Act 1914
Trading with the Enemy Act 1914
The Trading with the Enemy Act 1914 was an Act of the Parliament of the United Kingdom that prescribed an offence of conducting business with any person of "enemy character". It was enacted soon after the United Kingdom became involved in World War I....
said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).
There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud, or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plc
Adams v Cape Industries plc
Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability of shareholders...
. A group of employees suffered asbestos
Asbestos
Asbestos is a set of six naturally occurring silicate minerals used commercially for their desirable physical properties. They all have in common their eponymous, asbestiform habit: long, thin fibrous crystals...
diseases after working for the American wholly owned subsidiary of Cape Industries plc
Cape plc
Cape plc is a United Kingdom energy services company based in Uxbridge, West London. It is a constituent of the FTSE 250 Index.- History :The company was founded in 1893 as the Cape Asbestos Company with the objective of mining asbestos in the Orange Free State and importing it into European...
. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (i.e. ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman
Jones v Lipman
Jones v Lipman [1962] 1 WLR 832 is a UK company law case concerning piercing the corporate veil. It exemplifies the principal case in which the veil will be lifted, that is, when a company is used as a "mere facade" concealing the "true facts", which essentially means it is formed to avoid a...
, the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation. The potentially unjust result for tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been changed so that a duty of care
Duty of care
In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant...
may be owed by a parent to workers of a subsidiary regardless of separated legal personality. However even though tort victims are protected, the restrictive position remains subject to criticism where a company group is involved, since it is not clear that companies and actual people ought to get the protection of limited liability in identical ways. An influential decision, although subsequently doubted strongly by the House of Lords, was passed by Lord Denning MR in DHN Ltd v Tower Hamlets BC. Here Lord Denning MR held that a group of companies, two subsidiaries wholly owned by a parent, constituted a single economic unit. Because the companies' shareholders and controlling minds were identical, their rights were to be treated as the same. This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate "groups" or a "concern
Concern (business)
A concern is a German type of business group. It results from the merger of several legally independent companies an economic entity under unified management. These associated companies called "Group" companies....
" as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc
Adams v Cape Industries plc
Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability of shareholders...
. It is very rare for English courts to lift the veil. The liability of the company is generally attributed to the company alone.
Rules of attribution
While a limited company is deemed to be a legal person separate from its shareholders and employees, as a matter of fact a company can only act through its employees, from the board of directors down. So there must be rules to attribute rights and duties to a company from its actors. This usually matters because an aggrieved third party will want to sue whoever has money to pay for breach of an obligation, and companies rather than their employees often have more money. Up until reforms in 2006 this area used to be complicated significantly by the requirement on companies to specify an objects clauseObjects clause
An objects clause is a provision in a company's constitution stating the purpose and range of activities for which the company is carried on. In UK company law up until reforms in the Companies Act 1989 and the Companies Act 2006, an objects clause circumscribed the capacity, or power, of a company...
for their business, for instance "to make and sell, or lend on hire, railway-carriages". If companies acted outside their objects, for instance by giving a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
to build railways in Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, any such contracts were said to be ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
and consequently void. This is what happened in the early case of Ashbury Railway Carriage and Iron Co Ltd v Riche
Ashbury Railway Carriage and Iron Co Ltd v Riche
Ashbury Railway Carriage and Iron Co Ltd v Riche LR 7 HL 653 is a UK company law case, which concerned the objects clause of a company....
. The policy was thought to protect shareholders and creditors, whose investments or credit would not be used for an unanticipated purpose. However, it soon became clear that the ultra vires rule restricted the flexibility of businesses to expand to meet market opportunities. Void contracts might unexpectedly and arbitrarily hinder business. So companies began to draft ever longer objects clauses, often adding an extra provision stating all objects must be construed as fully separate, or the company's objects include anything directors feel is reasonably incidental to the business. Now the 2006 Act
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
states that companies are deemed to have unlimited objects, unless they opt for restrictions. The 2006 reforms have also clarified the legal position that if a company does have limited objects, an ultra vires act will cause the directors to have breached a duty to follow the constitution under section 171. So a shareholder who disagreed with an action outside the company's objects must sue directors for any loss. Contracts remain valid and third parties will be unaffected by this alone.
Contracts between companies and third parties, however, may turn out to be unenforceable on ordinary principals of agency law if the director or employee obviously exceeded their authority. As a general rule, third parties need not be concerned with constitutional details conferring power among directors or employees, which may only be found by laboriously searching the register at Companies House
Companies House
Companies House is the United Kingdom Registrar of Companies and is an Executive Agency of the United Kingdom Government Department for Business, Innovation and Skills . All forms of companies are incorporated and registered with Companies House and file specific details as required by the...
. In general, if a third party acts in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
, then any contract, even one going beyond the constitutional authority of the director or employee with whom they strike a deal, is valid. However, if it would appear to a reasonable person that a company employee would not have the authority to enter an agreement, then the contract is voidable at the company's instance so long as there is no equitable bar to rescission
Misrepresentation in English law
Misrepresentation in English law is an area of English contract law, which allows a person to escape a contractual obligation or claim compensation for losses. If one person can show that she entered an agreement because of another person's false assurances, then the other person will be unable to...
. The third party would have a claim against the (probably less solvent) employee instead. First, an agent may have express actual authority, in which case there is no problem. Her actions will be attributed to the company. Second, an agent may have implied actual authority (also sometimes called "usual" authority), which falls within the usual scope of the employee's office. Third, an agent may have "apparent authority
Apparent authority
Apparent authority relates to the doctrines of the law of agency. It is relevant particularly in corporate law and constitutional law. Apparent authority refers to a situation where a reasonable person would understand that an agent had authority to act...
" (also called "ostensible" authority) as it would appear to a reasonable person, creating an estoppel
Estoppel
Estoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...
. If the actions of a company employee have authority deriving from a company constitution in none of these ways, a third party will only have recourse for breach of an obligation (a warrant of authority) against the individual agent, and not to the company as the principal. The Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
section 40 makes clear that directors are always deemed to be free of limitations on their authority under the constitution, unless a third party acting in callous bad faith takes advantage of a company whose director acts outside the scope of authority. For employees down the chain of delegation, it becomes less and less likely that a reasonable contracting party would think big transactions will have had authority. For instance, it would be unlikely that a bank cashier would have the authority to sell the bank's Canary Wharf
Canary Wharf
Canary Wharf is a major business district located in London, United Kingdom. It is one of London's two main financial centres, alongside the traditional City of London, and contains many of the UK's tallest buildings, including the second-tallest , One Canada Square...
skyscraper.
Problems arise where serious torts, and particularly fatal injuries occur as a result of actions by company employees. All torts committed by employees in the course of employment
Course of employment
Course of employment is a legal consideration of all circumstances which may occur in the performance of a person's job, especially during a period of time where specific objectives are given by the employer to the employee. Black's Law Dictionary pg...
will attribute liability to their company even if acting wholly outside authority, so long as there is some temporal and close connection to work. It is also clear that acts by directors become acts of the company, as they are "the very ego and centre of the personality of the corporation." But despite strict liability
Strict liability
In law, strict liability is a standard for liability which may exist in either a criminal or civil context. A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his or her acts and omissions regardless of culpability...
in tort, civil remedies are in some instances insufficient to provide a deterrent to a company pursuing business practices that could seriously injure the life, health and environment of other people. Even with additional regulation by government bodies, such as the Health and Safety Executive
Health and Safety Executive
The Health and Safety Executive is a non-departmental public body in the United Kingdom. It is the body responsible for the encouragement, regulation and enforcement of workplace health, safety and welfare, and for research into occupational risks in England and Wales and Scotland...
or the Environment Agency
Environment Agency
The Environment Agency is a British non-departmental public body of the Department for Environment, Food and Rural Affairs and an Assembly Government Sponsored Body of the Welsh Assembly Government that serves England and Wales.-Purpose:...
, companies may still have a collective incentive to ignore the rules in the knowledge that the costs and likelihood of enforcement is weaker than potential profits. Criminal sanctions remain problematic, for instance if a company director had no intention to harm anyone, no mens rea
Mens rea
Mens rea is Latin for "guilty mind". In criminal law, it is viewed as one of the necessary elements of a crime. The standard common law test of criminal liability is usually expressed in the Latin phrase, actus non facit reum nisi mens sit rea, which means "the act does not make a person guilty...
, and managers in the corporate hierarchy had systems to prevent employees committing offences. One step toward reform is found in the Corporate Manslaughter and Corporate Homicide Act 2007
Corporate Manslaughter and Corporate Homicide Act 2007
The Corporate Manslaughter and Corporate Homicide Act 2007 is an Act of the Parliament of the United Kingdom that seeks to broaden the law on corporate manslaughter in the United Kingdom...
. This creates a criminal offence for manslaughter
Manslaughter in English law
In the English law of homicide, manslaughter is a less serious offence than murder, the differential being between levels of fault based on the mens rea . In England and Wales, the usual practice is to prefer a charge of murder, with the judge or defence able to introduce manslaughter as an option...
, meaning a penal fine of up to 10 per cent of turnover against companies whose managers conduct business in a grossly negligent
Gross negligence
Gross negligence is a legal concept which means serious carelessness. Negligence is the opposite of diligence, or being careful. The standard of ordinary negligence is what conduct one expects from the proverbial "reasonable person"...
fashion, resulting in deaths. Without lifting the veil there remains, however, no personal liability for directors or employees acting in the course of employment, for corporate manslaughter or otherwise. The quality of a company's accountability to a broader public and the conscientiousness of its behaviour must rely also, in great measure, on its governance.
Corporate governance
Corporate governance is concerned primarily with the balance of power between the two basic organs of a UK company: the board of directorsBoard of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and the general meeting. The term "governance" is often used in the more narrow sense of referring to principles in the UK Corporate Governance Code. This makes recommendations about the structure, accountability and remuneration of the board of directors in listed companies, and was developed after the Polly Peck
Polly Peck
Polly Peck International was a small and barely profitable United Kingdom textile company which expanded rapidly in the 1980s and became a constituent of the FTSE 100 Index before it collapsed in 1990 with the then colossal debts of £1.3bn...
, BCCI
Bank of Credit and Commerce International
The Bank of Credit and Commerce International was a major international bank founded in 1972 by Agha Hasan Abedi, a Pakistani financier. The Bank was registered in Luxembourg with head offices in Karachi and London. Within a decade BCCI touched its peak...
and Robert Maxwell
Robert Maxwell
Ian Robert Maxwell MC was a Czechoslovakian-born British media proprietor and former Member of Parliament , who rose from poverty to build an extensive publishing empire...
scandals led to the Cadbury Report
Cadbury Report
The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures. The report was published in 1992...
of 1992. However, put broadly corporate governance in UK law focuses on the relative rights and duties of directors, shareholders, employees, creditors and others who are seen as having a "stake" in the company's success. The Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, in conjunction with other statutes and case law, lays down an irreducible minimum core of mandatory rights for shareholders, employees, creditors and others by which all companies must abide. UK rules usually focus on protecting shareholders or the investing public, but above the minimum, company constitutions are essentially free to allocate rights and duties to different groups in any form desired.
Constitutional separation of powers
The constitution of a company is usually referred to as the "articles of associationArticles of Association
The Continental Association, often known simply as the "Association", was a system created by the First Continental Congress in 1774 for implementing a trade boycott with Great Britain...
". Companies are presumed to adopt a set of "Model Articles
Model Articles
The Companies Regulations 2008 are the basis for a company constitution under UK company law, unless modified by the Articles of a specific company. The new Model Articles came into force on 1 October 2009 and update the old Companies Act 1985 Table A Articles.-Private companies:Schedule 1...
", unless the incorporators choose different rules. The Model Articles set out essential procedures for conducting a company's business, such as when to hold meetings, appointment of directors, or preparing accounts. These rules may always be changed, except where a provision is a compulsory term deriving from the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, or similar mandatory law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
. In this sense a company constitution is functionally similar to any business contract, albeit one that is usually variable among the contracting parties with less than consensus. In Attorney General of Belize v Belize Telecom Ltd
Attorney General of Belize v Belize Telecom Ltd
Attorney General of Belize v Belize Telecom Ltd [2009] is a case on which the Privy Council gave advice, relevant for contract law, company law and constitutional law...
, Lord Hoffmann held that courts construe the meaning of a company's articles in the same way as any other contract, or a piece of legislation, mindful of the context in which it was formulated. So in this case, the appropriate construction of a company's articles led to the implication that a director could be removed from office by shareholders (and did not have a job for life), even though a literal construction would have meant no person possessed the two classes of shares required to remove that director under the articles. Even if companies' articles are silent on an issue, the courts will construe the gaps to be filled with provisions consistent with the rest of the instrument in its context, as in the old case of Attorney General v Davy
Attorney General v Davy
Attorney General v Davy 26 ER 531 is a UK company law case, which establishes this small but essential point of law: the default rule is that a majority of a corporate body can determine what it does....
where Lord Hardwicke LC held that a simple majority was enough for the election of a chaplain.
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 is a UK company law case, which concerns the enforceability of provisions in a company's constitution....
, a shareholder sued the board for not following a resolution, carried with an ordinary majority of votes, to sell off the company's assets. The Court of Appeal refused the claim, since the articles stipulated that a three quarter majority was needed to issue specific instructions to the board. Shareholders always have the option of gaining the votes to change the constitution or threaten directors with removal, but they may not sidestep the separation of powers found in the company constitution. Though older cases raise an element of uncertainty, the majority opinion is that other provisions of a company's constitution generate personal rights that may be enforced by company members individually. Of the most important is a member's right to vote at meetings. Votes need not necessarily attach to shares, as preferential shares (e.g., those with extra dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
rights) are frequently non-voting. However, ordinary shares invariably do have votes and in Pender v Lushington
Pender v Lushington
Pender v Lushington 6 Ch D 70 is a leading case in UK company law, which confirms that a company member's right to vote may not be interfered with, because it is a right of property. Furthermore, any interference leads to a personal right of a member to sue in his own name to enforce his right...
Lord Jessel MR stated votes were so sacrosanct as to be enforceable like a "right of property". Otherwise, the articles may be enforced by any member privy to the contract. Companies are excluded from the Contracts (Rights of Third Parties) Act 1999
Contracts (Rights of Third Parties) Act 1999
The Contracts Act 1999 was an Act of the Parliament of the United Kingdom that significantly reformed the common law Doctrine of Privity and "thereby [removed] one of the most universally disliked and criticised blots on the legal landscape"...
, so people who are conferred benefits under a constitution, but are not themselves members, are not necessarily able to sue for compliance. Partly for certainty and to achieve objectives the Act would prohibit, shareholders in small closely held companies frequently supplement the constitution by entering a shareholders' agreement
Shareholders' agreement
A shareholders' agreement is an agreement amongst the shareholders of a company....
. By contract shareholders can regulate any of their rights outside the company, yet their rights within the company remain a separate matter.
Shareholders' rights
Shareholders provide an essential source of capital investment to corporations, and because of the bargaining positionInequality of bargaining power
Inequality of bargaining power is a concept used in social sciences and humanities, particularly law and economics to denote the situation where freedom of contract ceases to be real and markets fail....
this confers, shareholders typically gain a comprehensive set of governance rights under a constitution. While not technically required, shareholders invariably possess exclusive voting rights, in contrast to many other European jurisdictions which require that employees codetermine (i.e. have the right to elect some of) the members of the board. In this way, and also because of the additional mandatory rights shareholders enjoy under the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, the UK is a "shareholder friendly" jurisdiction relative to its European and American counterparts. Since the Report of the Committee on Company Law Amendment
Report of the Committee on Company Law Amendment
The Report of the Committee on Company Law Amendment , known best as the "Cohen Report" for short, was a company law reform committee appointed by the United Kingdom Coalition Government, during the Second World War...
, chaired in 1945 by Lord Cohen
Lionel Cohen, Baron Cohen
Lionel Leonard Cohen, Baron Cohen PC , was a British judge.Invested to the privy council in 1946, Cohen was Lord Justice of Appeal from 1946 to 1951. On 12 November 1951, he was appointed Lord of Appeal in Ordinary and made additionally a life peer with the title Baron Cohen, of Walmer in the...
, led to the Companies Act 1947
Companies Act 1947
The Companies Act 1947 was a United Kingdom Act of Parliament, that updated UK company law after the Companies Act 1929. It was soon recodified in the Companies Act 1948....
, as voters in the general meeting of public companies, shareholders have the mandatory right to remove directors by a simple majority, while in Germany, and in most American companies (predominantly incorporated in Delaware) directors can only be removed for a "good reason". Shareholders will habitually have the right to change the company's constitution with a three quarter majority vote, unless they have chosen to entrench the constitution with a higher threshold. Shareholders with support of 5 per cent of the total vote can call meetings, and can circulate suggestions for resolutions with support of 5 per cent of the total vote, or any one hundred other shareholders holding over £100 in shares each. Categories of important decisions, such as large asset sales, approval of mergers, takeovers, winding up of the company, any expenditure on political donations, share buybacks, or a (for the time being) non-binding say on pay
Say on pay
Say on pay is a term used for a rule in corporate law whereby a firm's shareholders have the right to vote on the remuneration of executives.Often described in corporate governance or management theory as an agency problem, a corporation's directors are likely to overpay themselves because,...
of directors, are reserved exclusively for the shareholder body.
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
infrequently exercise their governance rights. Institutional investors, including pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s, mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s and insurance funds, own most shares. Thousands or perhaps millions of persons, particularly through pensions, are beneficiaries
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
from the returns on shares. Historically institutions have often not voted or participated in general meetings on their beneficiaries' behalf, and often display an uncritical pattern of supporting management. However, institutional investors also often work "behind the scenes" to secure better corporate governance for their members, through informal but direct communication with management. Individual shareholders form an increasingly small part of total investments, while foreign investment and institutional investor ownership have grown their share steadily over the last forty years. Institutional investors, who deal with other peoples' money, are bound by fiduciary obligations, deriving from the law of trusts
English trusts law
English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...
and obligations to exercise care deriving from the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
. Now the Stewardship Code
Stewardship Code
The Stewardship Code is a set of principles or guidelines released in 2010 by the Financial Reporting Council directed at institutional investors who hold voting rights in United Kingdom companies...
2010, drafted by the Financial Reporting Council
Financial Reporting Council
The Financial Reporting Council is the UK's independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.-Structure:...
(the corporate governance watchdog), reinforces the duty on institutions to actively engage in governance affairs by disclosing their voting policy, voting record and voting. The aim is to make directors more accountable, at least, to investors of capital.
Employees' rights
John Lewis Partnership
The John Lewis Partnership is an employee-owned UK partnership which operates John Lewis department stores, Waitrose supermarkets and a number of other services...
partnership that are wholly managed and owned by the workforce. Some companies take advantage of tax breaks to implement employee share schemes, however this typically makes employees ordinary shareholders but at the cost of heavily under-diversifying risk
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
. New workplace participation practices have been emerging for larger companies. Under the Information and Consultation of Employees Regulations 2004, companies with more than fifty employees must inform their workforce about major economic issues in their enterprise, and should consult about major changes, particularly redundancies. And under the Transnational Information and Consultation of Employees Regulations 1999, companies with over 1000 employees in more than one EU member state establish works council
Works council
A works council is a "shop-floor" organization representing workers, which functions as local/firm-level complement to national labour negotiations...
s to consult through the course of business. But beyond this model of encouraging "dialogue" the channels for employee participation in companies are limited to traditional systems of trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
and, as a final resort, industrial action
Industrial action
Industrial action or job action refers collectively to any measure taken by trade unions or other organised labour meant to reduce productivity in a workplace. Quite often it is used and interpreted as a euphemism for strike, but the scope is much wider...
or strikes
Strike action
Strike action, also called labour strike, on strike, greve , or simply strike, is a work stoppage caused by the mass refusal of employees to work. A strike usually takes place in response to employee grievances. Strikes became important during the industrial revolution, when mass labour became...
.
In the 1977 Report of the committee of inquiry on industrial democracy
Report of the committee of inquiry on industrial democracy
The Report of the committee of inquiry on industrial democracy Cmnd 6706, also the Bullock Report for short, was a report proposing for a form of worker participation or workers' control, chaired by Alan Bullock...
the Government proposed, in line with developments in Germany, and mirroring a Draft Fifth EU Company Law Directive, that the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
should have an equal number of representatives elected by employees as there were for shareholders. However the only reform introduced after the 1979 election was that directors owed a duty to act in shareholders' and employees' interests alike. Though no UK company appears yet to have chosen this route, businesses reincorporating under the European Company Statute
European Company Statute
The Council Regulation on the Statute for a European Company is an EU Regulation containing the rules for a public EU company, called a Societas Europaea, or "SE". An SE can register in any member state of the European Union, and transfer to other member states. , at least 702 registrations have...
may opt to follow the Directive for employee involvement. A Societas Europaea may adopt either a two or one-tier board structure. Where the board is two-tiered, as in German companies
German company law
German company law is an influential legal regime for companies in Germany. The primary form of company is the public company or Aktiengesellschaft . The private company with limited liability is known as a Gesellschaft mit beschränkte Haftung...
, shareholders and employees (in proportion no less than what existed for most employees in their home countries previously) elect a supervisory board that in turn appoints a management board responsible for day to day running of the company. An SE may also choose a one tiered board, the same as every company in the UK chooses, and employees and shareholders may elect board members in the desired proportion.
Directors' duties
Directors appointed to the boardBoard of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
form the central authority in UK companies. In carrying out their functions, directors (whether formally appointed, de facto
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
, or "shadow directors") owe a series of duties to the company. There are presently seven key duties codified under the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
sections 171 to 177, which reflect the common law and equitable principles. These may not be limited, waived or contracted out of, but companies may buy insurance to cover directors for costs in the event of breach. The remedies for breaches of duty were not codified, but follow common law and equity, and include compensation
Damages
In law, damages is an award, typically of money, to be paid to a person as compensation for loss or injury; grammatically, it is a singular noun, not plural.- Compensatory damages :...
for losses, restitution
Restitution
The law of restitution is the law of gains-based recovery. It is to be contrasted with the law of compensation, which is the law of loss-based recovery. Obligations to make restitution and obligations to pay compensation are each a type of legal response to events in the real world. When a court...
of illegitimate gains and specific performance
Specific performance
Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to award/ for awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential...
or injunction
Injunction
An injunction is an equitable remedy in the form of a court order that requires a party to do or refrain from doing certain acts. A party that fails to comply with an injunction faces criminal or civil penalties and may have to pay damages or accept sanctions...
s.
The first director's duty under section 171 is to follow the company's constitution, but also only exercise powers for implied "proper purposes". Prior proper purpose cases often involved directors plundering the company's assets for personal enrichment, or attempting to install mechanisms to frustrate attempted takeovers by outside bidders, such as a poison pill
Poison pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
. Such practices are improper, because they go beyond the reason for which directors were delegated their power. The all-important duty of care is found in section 174. Directors must display the care, skill and competence that is reasonable for somebody carrying out the functions of the office, and if a director has any special qualifications an even higher standard will be expected. However, under section 1157 courts may, if directors are negligent but found to be honest and ought to be excused, relieve directors from paying compensation. The "objective plus subjective" standard was first introduced in the wrongful trading
Wrongful trading
Wrongful trading is a type of civil wrong found in UK insolvency law, under s 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company....
provision from the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, and applied in Re D'Jan of London Ltd
Re D'Jan of London Ltd
Re D’Jan of London Ltd [1994] 1 BCLC 561 is a leading English company law case, concerning a director's duty of care and skill, whose main precedent is now codified under s 174 of the Companies Act 2006...
. The liquidator sought to recover compensation from Mr D'Jan, who failing to read an insurance policy form, did not disclose he was previously the director of an insolvent company. The policy was void when the company's warehouse burnt down. Hoffmann LJ held Mr D'Jan's failure was negligent, but exercised discretion to relieve liability on the ground that he owned almost all of his small business and had only put his own money at risk. The courts emphasise that they will not judge business decisions unfavourably with the benefit of hindsight, however simple procedural failures of judgment will be vulnerable. Cases under the Company Director Disqualification Act 1986, such as Re Barings plc (No 5) show that directors will also be liable for failing to adequately supervise employees or have effective risk management systems, as where the London directors ignored a warning report about a the currency exchange business in Singapore, where a rogue trader
Rogue trader
A rogue trader is an authorised employee making unauthorised trades on behalf of their employer. It is most often applicable to financial trading, and as such is a term used to describe persons - professional traders - making unapproved financial transactions....
caused losses so massive that it brought the whole bank into insolvency.
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
, without disclosure to the board or seeking approval from shareholders. This core duty of loyalty is manifested firstly in section 175 which specifies that directors may not use business opportunities that the company could without approval. Shareholders may pass a resolution ratifying a breach of duty, but under section 239 they must be uninterested in the transaction. This absolute, strict duty has been consistently reaffirmed since the economic crisis following the South Sea Bubble in 1719. For example, in Cook v Deeks
Cook v Deeks
Cook v Deeks [1916] 1 AC 554 is a UK company law case, concerning the illegitimate diversion of a corporate opportunity.In UK company law the case would now be seen as falling within the Companies Act 2006 section 175, with a failure to have ratification of breach by independent shareholders under...
, three directors took a railway line construction contract in their own names, rather than that of their company, to exclude a fourth director from the business. Even though the directors used their votes as shareholders to "ratify" their actions, the Privy Council
Privy council
A privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
advised that the conflict of interest precluded their ability to forgive themselves. Similarly, in Bhullar v Bhullar
Bhullar v Bhullar
Bhullar v Bhullar [2003] is a leading UK company law case on the principle that directors must avoid any possibility of a conflict of interest, particular relating to corporate opportunities. It was not decided under, but is relevant for, s 175 Companies Act 2006.-Facts:Bhullar Bros Ltd was owned...
, a director on one side of a feuding family set up a company to buy a carpark next to one of the company's properties. The family company, amidst the feud, had in fact resolved to buy no further investment properties, but even so, because the director failed to fully disclose the opportunity that could reasonably be considered as falling within the company's line of business, the Court of Appeal held he was liable to make restitution for all profits made on the purchase. The duty of directors to avoid any possibility of a conflict of interest also exists after a director ceases employment with a company, so it is not permissible to resign and then take up a corporate opportunity, present or maturing, even though no longer officially a "director".
The purpose of the no conflict rule is to ensure directors carry out their tasks like it was their own interest at stake. Beyond corporate opportunities, the law requires directors accept no benefits from third parties under section 176, and also has specific regulation of transactions by a company with another party in which directors have an interest. Under section 177, when directors are on both sides of a proposed contract, for example where a person owns a business selling iron chairs to the company in which he is a director, it is a default requirement that they disclose the interest to the board, so that disinterested directors may approve the deal. The company's articles could heighten the requirement, say, to shareholder approval. If such a self dealing transaction has already taken place, directors still have a duty to disclose their interest and failure to do so is a criminal offence, subject to a £5000 fine. While such regulation through disclosure hovers with a relatively light touch, self dealing rules become more onerous as transactions become more significant. Shareholder approval is requisite for specific transactions with directors, or connected persons, when the sum of money either exceeds 10% of the company and is over £5000, or is over £100,000 in a company of any size. Further detailed provisions govern loaning money. On the question of director remuneration where the conflict of interest appears most serious, however, regulation is again relatively light. Directors pay themselves by default, but in large listed companies have pay set by a remuneration committee of directors. Under section 439, shareholders may cast a vote on remuneration but this "say on pay
Say on pay
Say on pay is a term used for a rule in corporate law whereby a firm's shareholders have the right to vote on the remuneration of executives.Often described in corporate governance or management theory as an agency problem, a corporation's directors are likely to overpay themselves because,...
", as yet, is not binding.
Finally, under section 172 directors must "promote the success of the company". This somewhat nebulous provision created significant debate during its passage through Parliament, since it goes on to prescribe that decisions should be taken in the interests of members, with regard to long term consequences, the need to act fairly between members, and a range of other "stakeholders", such as employees, suppliers, the environment, the general community, and creditors. Many groups objected to this "enlightened shareholder value
Shareholder value
Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders...
" model, which in form elevated the interests of members, who are invariably shareholders, above other stakeholders. However, the duty is particularly difficult to sue upon since it is only a duty for a director to do what she or "he considers, in good faith, would be most likely to promote the success of the company". Proof of subjective bad faith toward any group being difficult, directors have the discretion to balance all competing interests, even if to the short term detriment of shareholders in a particular instance. There is also a duty under section 173 to exercise independent judgment and the duty of care in section 174 applies to the decision making process of a director having regard to the factors listed in section 172, so it remains theoretically possible to challenge a decision if made without any rational basis. Only registered shareholders, not other stakeholders without being members of the general meeting, have standing to claim any breach of the provision. But section 172's criteria are useful as an aspirational standard because in the annual Director's Report
Director's Report
The Director's Report is a document produced by the board of directors under the requirements of UK company law, which details the state of the company and its compliance with a set of financial, accounting and corporate social responsibility standards....
companies must explain how they have complied with their duties to stakeholders. Also, the idea of whether a company's success will be promoted is central when a court determines whether a derivative claim should proceed in the course of corporate litigation.
Corporate litigation
Litigation among those within a company has historically been very restricted in UK law. The attitude of courts favoured non-interference. As Lord Eldon said in the old case of Carlen v DruryCarlen v Drury
Carlen v Drury 35 ER 61 is a UK partnership law case, which is often cited for a broader principle in UK company law that the court generally does not allow litigation by members where a procedure for redress is set out in the articles of association....
, "This Court is not required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom." If there were disagreements between the directors and shareholders about whether to pursue a claim, this was thought to be a question best left for the rules of internal management in a company's constitution, since litigation could legitimately be seen as costly or distracting from doing the company's real business. The board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
invariably holds the right to sue in the company's name as a general power of management. So if wrongs were alleged to have been done to the company, the principle from the case of Foss v Harbottle
Foss v Harbottle
Foss v Harbottle 67 ER 189 is a leading English precedent in corporate law. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle", and the several important exceptions that have been...
, was that the company itself was the proper claimant, and it followed that as a general rule that only the board could bring claims in court. A majority of shareholders would also have the default right to start litigation, but the interest a minority shareholder had was seen as relative to the wishes of the majority. Aggrieved minorities could not, in general, sue. Only if the alleged wrongdoers were themselves in control, as directors or majority shareholder, would the courts allow an exception for a minority shareholder to derive the right from the company to launch a claim.
In practice very few derivative claims were successfully brought, given the complexity and narrowness in the exceptions to the rule in Foss v Harbottle
Foss v Harbottle
Foss v Harbottle 67 ER 189 is a leading English precedent in corporate law. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle", and the several important exceptions that have been...
. This was witnessed by the fact that successful cases on directors' duties before the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
seldom involved minority shareholders, rather than a new board, or a liquidator in the shoes of an insolvent company, suing former directors. The new requirements to bring a "derivative claim" are now codified in the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
sections 261-264. Section 260 stipulates that such actions are concerned with suing directors for breach of a duty owed to the company. Under section 261 a shareholder must, first, show the court there is a good prima facie
Prima facie
Prima facie is a Latin expression meaning on its first encounter, first blush, or at first sight. The literal translation would be "at first face", from the feminine form of primus and facies , both in the ablative case. It is used in modern legal English to signify that on first examination, a...
case to be made. This preliminary legal question is followed by the substantive questions in section 263. The court must refuse permission for the claim if the alleged breach has already been validly authorised or ratified by disinterested shareholders, or if it appears that allowing litigation would undermine the company's success by the criteria laid out in section 172. If none of these "negative" criteria are fulfilled, the court then weighs up seven "positive" criteria. Again it asks whether, under the guidelines in section 172, allowing the action to continue would promote the company's success. It also asks whether the claimant is acting in good faith, whether the claimant could start an action in her own name, whether authorisation or ratification has happened or is likely to, and pays particular regard to the views of the independent and disinterested shareholders. This represented a shift from, and a replacement of, the complex pre-2006 position, by giving courts more discretion to allow meritorious claims. Still, the first cases showed the courts remaining conservative. In other respects the law remains the same. According to Wallersteiner v Moir (No 2)
Wallersteiner v Moir (No 2)
Wallersteiner v Moir [1975] QB 373 is a UK company law case, concerning the rules to bring a derivative claim. The updated law, which replaced the exceptions and the rule in Foss v Harbottle, is now contained in the Companies Act 2006 sections 260-264, but the case remains an example of the likely...
, minority shareholders will be indemnified for the costs of a derivative claim by the company, even if it ultimately fails.
While derivative claims mean suing in the company's name, a minority shareholder can sue in her own name in four ways. The first is to claim a "personal right" under the constitution or the general law is breached. If a shareholder brings a personal action to vindicate a personal right (such as the right to not be misled by company circulars) the principle against double recovery dictates that one cannot sue for damages if the loss an individual shareholder suffers is merely the same as will be reflected in the reduction of the share value. For losses reflective
Reflective loss
Reflective loss is a concept used in UK company law for losses of individual shareholders that are inseparable from general losses of the company...
of the company's, only a derivative claim may be brought. The second is to show that a company's articles were amended in an objectively unjustifiably and directly discriminatory fashion. This residual protection for minorities was developed by the Court of Appeal in Allen v Gold Reefs of West Africa Ltd
Allen v Gold Reefs of West Africa Ltd
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 is a UK company law case concerning alteration of a company's articles of association. It held that alterations could not be interfered with by the court unless a change was made that was not bona fide for the benefit of the company as a whole...
, where Sir Nathaniel Lindley MR held that shareholders may amend a constitution by the required majority so long as it is "bona fide for the benefit of the company as a whole." This constraint is not heavy, as it can mean that a constitutional amendment, while applying in a formally equal way to all shareholders, has a negative and disparate impact on only one shareholder. This was so in Greenhalgh v Arderne Cinemas Ltd, where the articles were changed to remove all shareholders' pre-emption rights, but only one shareholder (the claimant, Mr Greenhalgh, who lost) was interested in preventing share sales to outside parties. This slim set of protections for minority shareholders was, until 1985, complemented only by a third, and drastic right of a shareholder, now under the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
section 122(1)(g), to show it is "just and equitable" for a company to be liquidated. In Ebrahimi v Westbourne Galleries Ltd, Lord Wilberforce held that a court would use its discretion to wind up a company if three criteria were fulfilled: that the company was a small "quasi-partnership" founded on mutual confidence of the corporators, that shareholders participate in the business, and there are restrictions in the constitution on free transfer of shares. Given these features, it may be just and equitable to wind up a company if the court sees an agreement just short of a contract, or some other "equitable consideration", that one party has not fulfilled. So where Mr Ebrahmi, a minority shareholder, had been removed from the board, and the other two directors paid all company profits out as director salaries, rather than dividends to exclude him, the House of Lords regarded it as equitable to liquidate the company and distribute his share of the sale proceeds to Mr Ebrahimi.
Companies Act 1985
The Companies Act 1985 is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries.The Act was a consolidation of...
. Now under the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
section 996, a court can grant any remedy, but will often simply require that a minority shareholder's interest is bought out by the majority at a fair value. The cause of action, stated in section 994, is very broad. A shareholder must simply allege they have been prejudiced (i.e. their interests as a member have been harmed) in a way that is unfair. "Unfairness" is now given a minimum meaning identical to that in Ebrahimi v Westbourne Galleries Ltd. A court must at least have an "equitable consideration" to grant a remedy. Generally this will refer to an agreement between two or more corporators in a small business that is just short of being an enforceable contract, for the lack of legal consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
. A clear assurance, on which a corporator relies, which would be inequitable to go back on, would suffice, unlike the facts of the leading case, O'Neill v Phillips. Here Mr O'Neill had been a prodigy in Mr Phillips' asbestos stripping business, and took on a greater and greater role until economic difficulties struck. Mr O'Neill was then demoted, but claimed that he should be given 50 per cent of the company's shares because negotiations had started for this to happen and Mr Phillips had said one day it might. Lord Hoffmann held that the vague aspiration that it "might" was not enough here: there was no concrete assurance or promise given, and so no unfairness in Mr Phillips' recanting. Unfair prejudice in this sense is an action not well suited to public companies, when the alleged obligations binding the company were potentially undisclosed to public investors in the constitution, since this would undermine the principle of transparency. However it is plain that minority shareholders can also bring claims for more serious breaches of obligation, such as breach of directors' duties
Directors' duties
Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance...
. Unfair prejudice petitions remain most prevalent in small companies, and are the most numerous form of dispute to enter company courts. But if to hold directors accountable dispersed shareholders do not engage through voting, or through litigation, companies may be ripe for takeover.
Mergers and acquisitions
The market for corporate controlMarket for corporate control
The market for corporate control is a description of the role of equity markets in facilitating corporate takeovers first put forward in an article by HG Manne, ‘Mergers and the Market for Corporate Control’...
, where parties compete to buy controlling stakes in companies, is seen seen by some as an important, although perhaps limited, mechanism for the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
' accountability. Because individual shareholders may not be as likely to act collectively as a majority shareholder, the threat of a takeover when a company share price drops, heightens the prospect that a director is removed from office by an ordinary resolution under CA 2006 section 168. Since 1959 the UK has taken the approach that directors, particularly of public companies, should do nothing with the effect of frustrating a takeover bid, unless shareholders approve it by a majority at the time of the takeover. Rule 21 of the City Code on Takeovers and Mergers
City Code on Takeovers and Mergers
The City Code on Takeovers and Mergers is a binding set of rules that apply to listed companies in the United Kingdom, such as those trading on the London Stock Exchange...
consolidates this now. Typical takeover defence tactics, routinely found in US corporate law, led by Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
, include issuing extra shares to everyone but a takeover bidder to dilute their stake unless the bidder has the board's consent to buy shareholders' shares (a "poison pill
Poison pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
"), paying a takeover bidder to go away ("greenmail
Greenmail
Greenmail or greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover....
"), merely selling a key company asset to a friendly third party, or engaging in large share buyback schemes. In the US, defensive tactics must merely be employed in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
, and be proportionate to the threat posed with regard to factors like the offer price, timing and effect on the company's stakeholders. Moreover, Delaware directors can often only be removed for a "good reason" (fought out in court) with a board classified into directors a third of whom will be removable in any given year. This makes hostile takeovers very difficult, unless a bidder promises the incumbent board large golden parachute
Golden parachute
A golden parachute is an agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is...
s in return for their consent. After much debate, the EU's newly implemented Takeover Directive
Takeover Directive
The Takeover Directive is an EU Directive dealing with European company law's treatment of mergers and acquisitions. It concerns the standards takeover bidders must comply with in how long a bid stays open to, who they offer to, and the information companies must give to the public about the bid...
decided to leave member states the option under articles 9 and 12 of whether to mandate that boards remain "neutral".
Even with the UK's non-frustration principle directors always still have the option to persuade their shareholders through informed and reasoned argument that the share price offer is too low, or that the bidder may have ulterior motives that are bad for the company's employees, or for its ethical image. Under common law and the Takeover Code, directors must give out information to shareholders relevant to the bid, but not merely recommend the highest offer. The overriding common law rule, however, is to avoid any possibility of a conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
, which precludes using management powers for the purpose of frustrating takeovers. In Hogg v Cramphorn Ltd the director, purportedly concerned that a takeover bidder would make many workers redundant, issued a block of company shares to a trust, thus ensuring the bidder would remain outvoted. Buckley J held the power to issue shares creates fiduciary duty to only do so for the purpose of raising capital. Directors cannot plead they acted in good faith if a court determines their interests may possibly conflict. The result is that even though directors may wish to protect employees and stakeholders from ominous bidders, the law responds in other ways. UK workers have a minimal measure of job security, with very limited rights to be consulted, and no formal rights outside collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
to participate in elections for the board or codetermine dismissal issues in works councils. Employees do have rights before dismissal or redundancies to reasonable notice, dismissal only for a fair reason, and a redundancy payment, under the Employment Rights Act 1996
Employment Rights Act 1996
The Employment Rights Act 1996 is a United Kingdom Act of Parliament passed by the Conservative government to codify the existing law on individual rights in UK labour law. Previous statutes, dating from the Contracts of Employment Act 1963, included the Redundancy Payments Act 1965, the...
. Moreover, any changes to workers terms and conditions, or redundancies, following a restructuring through an asset (as opposed to share) sale triggers protection of the Transfer of Undertakings (Protection of Employment) Regulations 2006 meaning good economic, technical or organisational reasons must be given.
Self-regulation
The term self-regulation can signify:*Autoregulation*Homeostasis, in systems theory*Self-control, in sociology / psychology*Self-regulated learning, in educational psychology*Self-regulation theory , a system of conscious personal health management...
its members' practices, was held in R (Datafin plc) v Takeover Panel to be subject to judicial review
Judicial review
Judicial review is the doctrine under which legislative and executive actions are subject to review by the judiciary. Specific courts with judicial review power must annul the acts of the state when it finds them incompatible with a higher authority...
of its actions where decisions are found to be manifestly unfair. Despite a handful of challenges, this has not happened.
Corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
concerns how the monetary or capital stake of shareholders and creditors are mediated, given the risk that the business may fail and become insolvent. Companies can fund their operations either through debt (i.e. loans) or equity (i.e. shares). In return for loans, typically from a bank, companies will often be required by contract
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
to give their creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
over the company's assets, so that in the event of insolvency, the creditor may take the secured asset. The Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
limits powerful creditors ability to sweep up all company assets as security, particularly through a floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
, in favour of vulnerable creditors, such as employees or consumers. If money is raised by offering shares, the shareholders' relations are determined as a group by the provisions under the constitution. The law requires disclosure of all material facts in promotions, and prospectuses. Company constitutions typically require that existing shareholders have a pre-emption right
Pre-emption right
A pre-emption right is a right to acquire certain property in preference to any other person. It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. It usually refers to property newly coming into existence...
, to buy newly issued shares before outside shareholders and thus avoid their stake and control becoming diluted
Stock dilution
Stock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...
. Actual rights, however, are determined by ordinary principles of construction of the company constitution. A host of rules exist to ensure that the company's capital (i.e. the amount that shareholders paid in when they bought their shares) is maintained for the benefit of creditors. Money is typically distributed to shareholders through dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s as the reward for investment. These should only come out of profits, or surpluses beyond the capital account. If companies pay out money to shareholders which in effect is a dividend "disguised" as something else, directors will be liable for repayment. Companies may, however, reduce their capital to a lower figure if directors of private companies warrant solvency, or courts approve a public company's reduction. Because a company buying back shares
Share repurchase
Stock repurchase is the reacquisition by a company of its own stock. In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged...
from shareholders in itself, or taking back redeemable shares, has the same effect as a reduction of capital, similar transparency and procedural requirements need to be fulfilled. Public companies are also precluded from giving financial assistance for purchase of their shares, for example through a leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
, unless the company is delisted and or taken private. Finally, in order to protect investors from being placed at an unfair disadvantage, people inside a company are under a strict duty to not trade on any information
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
that could affect a company's share price for their own benefit.
Debt finance
- Corporate bonds to raise capital, determined by contract
- Priorities on insolvency through security, IA 1986 ss 40, 115, 175, 176A, 386, Sch 6 and SI 2003/2097
- Fixed charge and floating chargeFloating chargeA floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
, Re Spectrum Plus Ltd [2005] UKHL 41 - Registration of charges, CA 2006 ss 738, 860-877
Equity finance
Prospectuses- Listing Directive 2001/34/EC arts 42 – 51
- Financial Services and Markets Act 2000Financial Services and Markets Act 2000The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
, ss.74-8 - R v International Stock Exchange, ex parte Else [1993] QB 534
- Prospectus Directive 2003/71/EC, amending the Listing Directive
- Financial Services and Markets Act 2000Financial Services and Markets Act 2000The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
Part VI - Derry v Peek (1889) L R 14 App Cas 337
Issuing shares and pre-emptions
- EC Second Company Law Directive 77/91/EEC, in public companies, shareholders had to have a role in allotting shares, and also pre-emption.
- Companies Act 2006 ss 549-551, directors allot shares, unless for an employee share scheme or in a one share class company without article restrictions or if shares are paid for in something other than cash, unless shareholders have given authority. This is always revocable by ordinary resolution and authority lasts only five years
- Companies Act 2006 ss 561-571, shareholders have the right to pre-empt purchase of share issues proportionate to their existing stake, unless the company is private and has opted out, or shareholders agree in the articles or a special resolution to disapply the regime. Institutional investors’ Pre-emption Group, Disapplying Pre-emption Rights: A Statement of Principle (2008) suggests that the general practice is to disapply the pre-emption rights on a rolling basis for routine share issues (e.g. shares subject to a clawback) at no more than 5% of share capital each year
- Paul MynersPaul MynersPaul Myners, Baron Myners, CBE was the Financial Services Secretary in HM Treasury, the UK's finance ministry, during the Labour Government of Gordon Brown. He held the position from October 2008 until May 2010, and was made a life peer in consequence of his appointment, as he was not an elected...
, Pre-Emption Rights: Final Report (2005) DTI, .pdf
- CA 2006 s 10, incorporators make a statement of capital, number of shares and rights attached
- CA 2006 s 617
- Re Scandinavian Banking Group plc [1988] Ch 87
Determining rights
- Borland’s Trustee v Steel Brothers & Co LtdBorland’s Trustee v Steel Brothers & Co LtdBorland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 is a UK company law case, concerning the enforceability of a company's constitution and the nature of a company share.-Facts:...
[1901] 1 Ch 279 - CA 2006 s 33
- CA 2006 s 284, one share gets one vote, subject to the articles
- CA 2006 s 544, shares are transferable, subject to the articles
- CA 2006 ss 282 and 303-305, refer to voting members
- Birch v CropperBirch v CropperBirch v Cropper 14 App Cas 525 is a UK company law case concerning shares. It illustrates the principle of exhaustion, that the rights attached to a share in an article would be presumed exhaustive, although one should construe the nature of a share with a starting presumption of equality.The...
(1889) 14 App Cas 525 - Scottish Insurance Corporation v Wilsons & Clyde Coal Co LtdScottish Insurance Corporation v Wilsons & Clyde Coal Co LtdScottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462 is a UK company law case concerning shares. It illustrates that where the rights of shares are explained in the articles, that is likely to be an exhaustive statement.-Facts:...
[1949] AC 462 - Dimbula Valley (Ceylon) Tea Co v Laurie [1961] Ch 353
- Will v United Lankat Plantations Co Ltd [1914] AC 11
- Re Bradford Investments Ltd [1991] BCLC 224
Dividends and capital
- CMAR 2008 Sch 3 para 70, If directors recommend a dividend be paid, shareholders can bring an ordinary resolution to declare a dividend. Directors may also pass resolutions at their discretion to pay dividends in the interim.
- Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
ss 829-831, 853, dividends can be paid out of accumulated profits, and only if net net assets are not less than aggregate of called up capital. Profits and loss accounting should in turn be determined by Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...
- Shearer v Bercain Ltd [1980] 3 All ER 295
- Re Halt Garage [1982] 3 All ER 1016, reduction of capital
- Aveling Barford Ltd v Period LtdAveling Barford Ltd v Period LtdAveling Barford Ltd v Perion Ltd [1989] BCLC 626 is a UK company law case concerning reduction of capital. It held that a sale at an undervalue of an asset was a dress up reduction of capital....
[1989] BCLC 626 - Re Exchange Banking CoRe Exchange Banking CoIn re Exchange Banking Company or Flitcroft's case LR 21 Ch D 519 is a UK company law case concerning the payment of dividends...
(1882) 21 Ch D 519 - Bairstow v Queen's Moat Houses plcBairstow v Queen's Moat Houses plcBairstow v Queens Moat Houses Plc [2001] is a UK company law case concerning shares.-Facts:Counsel argued that directors should be liable for unlawful distributions even when the company was solvent.-Judgment:...
[2001] 2 BCLC 531, unlawful distributions - Re Marini [2004] BCC 172
- Progress Property Co Ltd v Moorgarth Group LtdProgress Property Co Ltd v Moorgarth Group LtdProgress Property Co Ltd v Moorgarth Group Ltd [2010] is a UK company law case concerning the circumstances by which a transaction at an undervalue would be considered an unauthorised return of capital.-Facts:...
[2010] UKSC 55, reduction of capital
Consideration for shares
- Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, ss 542, 580, shares have to be sold at more than nominal value, not at a discount. - Ooregum Gold Mining Co of India v RoperOoregum Gold Mining Co of India v RoperOoregum Gold Mining Co of India v Roper [1892] AC 125 is an old and controversial UK company law case concerning shares. It concerns the rule that shares should not be issued "at a discount" on the price at which they were issued....
[1892] AC 125 - Mosely v Kofffontein Mines Ltd [1904] 2 Ch 108
- Hilder v DexterHilder v Dexter-Facts:To raise working capital, United Gold Coast Mining Properties Ltd offered shares at par value to Mr Hilder and others with an option to take further shares at par for two years...
[1902] AC 474 - Kellar v Williams [2000] 2 BCLC 390
- Pilmer v Duke Group LtdPilmer v Duke Group LtdPilmer v Duke Group Ltd [2001] 2 BCLC 773 is an Australian company law case concerning the adequacy of consideration paid for shares.-Facts:...
[2001] 2 BCLC 773 - CA 2006 ss 588-9, subsequent holders of shares are jointly liable with a previous owner for any contravention of the act unless a bona fide purchaser and no actual knowledge, and the court, also for ss 585 and 587, can grant relief if just and equitable considering how much value is actually conferred
Minimum capital and alternatives
- Second EC Directive 77/91/EEC on minimum capital maintenance for public listed companies, as amended by other directives
- Re Wragg Ltd [1897] 1 Ch 796
- Insolvency Act 1986Insolvency Act 1986The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, ss.213-215 - Company Directors Disqualification Act 1986Company Directors Disqualification Act 1986Company Directors Disqualification Act 1986 is a piece of UK company law, which sets out the procedures for company directors to be disqualified in certain cases of misconduct.-History:...
, ss.6-7 - Colin Gwyer Associates Ltd v London Wharf (Limehouse) Ltd
- Adams v Cape Industries [1990] Ch 433
- Re Hydrodam (Corby) LtdRe Hydrodam (Corby) LtdRe Hydrodam Ltd [1994] 2 BCLC 180 is a UK company law case, concerning the meaning of a shadow director. Often incorrectly cited in numerous sources as "Re:Hydrodan"-Facts:...
[1994] 2 BCLC 180
Reduction, redemption and buybacks
- CA 2006 ss 658, 684-735, share buyback procedure and redeemable shares. Under s 701, listed company shareholders can give authority for buybacks for 18 months by ordinary resolution. Off market buybacks under s 696 require special resolution. Figures must be reported to Companies House on the number of shares bought back, cancelled and retained as treasury shares (Treasury shares are repurchased but not cancelled, and can be held for the purpose of resale for up to 12 months, to a limit of 10% for each class, and the company cannot exercise votes attaching to the shares). Redeemable shares (which is like debt if preferential) have to be cancelled.
- Listing Rule 9, 12.2 and 12.4
- Trevor v WhitworthTrevor v WhitworthTrevor v Whitworth 12 App Cas 409 is a UK company law case concerning share buybacks. It held they were unlawful. This rule was reformed in 1980, and replaced with a statutory procedure so that shares can either be classed as redeemable or be bought back, under the Companies Act 2006 sections...
(1887) 12 App Cas 409, old share buy back prohibition
- Culross Global SPC Ltd v Strategic Turnaround Master Partnership Ltd [2010] UKPC 33, a Cayman Islands mutual fund could suspend share redemptions under its articles, but not suspend payment of redemption proceeds after giving a valid redemption notice.
- Re Chatterly-Whitfield Collieries ltd [1948] 2 All ER 593, reduction of capital
- Re Saltdean Estate Co Ltd [1968] 3 All ER 829, court confirmed capital reduction where preference shareholders stake was cancelled
- Re Northern Engineering Industries plc [1994] 2 BCLC 704, articles provided that ‘the reduction of the capital paid up on those shares’ amounted to a variation of class rights.
Market regulation
Financial assistance- Barclays Bank Ltd v British & Commonwealth Holdings plc [1996] 1 All ER 381
- Chaston v SWP Group plc [2003] 1 BCLC 675
- Anglo Petroleum Ltd v TFB (Mortgages) LtdAnglo Petroleum Ltd v TFB (Mortgages) LtdAnglo Petroleum v TFB Ltd [2008] 1 BCLC 185 is a UK company law case concerning financial assistance.-Facts:A company in trouble, undergoing restructuring, undertook to pay back money after its acquisition. The seller of shares was only willing to sell if it received £15m...
[2007] BCC 407, financial assistance - Brady v BradyBrady v BradyBrady v Brady [1988] BCLC 579 is a UK company law case concerning the prohibition on financial assistance.-Facts:T. Brady & Sons Ltd and its subsidiaries went through restructuring after the two brothers that owned the majority of shares fell out and wished to divide the company’s assets...
[1988] 2 All E R 617
Insider dealing
- Criminal Justice Act 1993Criminal Justice Act 1993The Criminal Justice Act 1993 is a United Kingdom Act of Parliament that set out new rules regarding drug trafficking, proceeds and profit of crime, financing of terrorism and insider dealing.-External links:**...
ss 52-64 crime of insider trading - Financial Services and Markets Act 2000Financial Services and Markets Act 2000The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
s 397 (criminal provision on misleading information) s 118 (civil wrong ofmarket abuse), s 119 (FSA Code of Market Conduct), s 120 (legitimate circulation of price sensitive information, e.g. compliance with listing and takeover rules) - Directive 2003/6/EC on insider dealing and market manipulation (market abuse) and its implementing Directive 2003/124/EC on the definition and public disclosure of inside information and the definition of market abuse
- Re an Inquiry under the Company Securities (Insider Dealing) Act 1985 [1988] 1 AC 660
- Rigby and Bailey v R [2006] 1 WLR 306
Accounts and auditing
- EnronEnronEnron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
and Sarbanes–Oxley Act of 2002 - Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
ss 495-497, true and fair view of company in accounts. - UK Corporate Governance Code, audit committees
- Generally Accepted Accounting Practice (UK)
- Chartered Institute of Management AccountantsChartered Institute of Management AccountantsThe Chartered Institute of Management Accountants is a United Kingdom-based professional body offering training and qualification in management accountancy and related subjects, focused on accounting for business; together with ongoing support for members.CIMA is one of a number of professional...
- British qualified accountantsBritish qualified accountantsBritish qualified accountants are full voting members of United Kingdom professional bodies that evaluate individual experience and test competencies for accountants....
- Deloitte, Ernst & YoungErnst & YoungErnst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
, KPMGKPMGKPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
and PwCPwCPricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
- Directive 84/253/EEC, art 24
- International Accounting Standards BoardInternational Accounting Standards BoardThe International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...
- Auditing Practices BoardAuditing Practices BoardThe Auditing Practices Board Limited was originally established in 1991 as a committee of the Consultative Committee of Accountancy Bodies, to take responsibility within the United Kingdom and Republic of Ireland for setting standards of auditing with the objective of enhancing public confidence...
- Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
ss 532-536, auditor liability - Re Kingston Cotton Mill Co (No 2) [1896] 2 Ch 279
- Candler v Crane, Christmas & CoCandler v Crane, Christmas & CoCandler v Crane, Christmas & Co [1951] 2 KB 164 is an English tort law case. In it, Denning LJ delivered an important dissenting judgment, arguing for a duty of care for negligent statements...
[1951] 2 KB 164 - Formento (Stirling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 WLR 45, Denning LJ
- Caparo Industries plc v Dickman [1990] 2 AC 605
- Morgan Crucible Co v Hill Samuel Bank Ltd [1991] 1 Ch. 259
- Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360
- South Australia Asset Management Co v York Montague [1997] AC 191
Corporate insolvency
- K Cork, Insolvency Law and Practice, Report of the Review Committee (1982) Cmnd 8558
- Priority on insolvency
- Insolvency procedures
- Voidable transactions
- Directors' disqualifications and unlawful trading
Corporate law internationally
- Regulatory competitionRegulatory competitionRegulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction...
- European company lawEuropean company lawEuropean company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
- Centros Ltd v Erhvervs-og Selskabsstryrelsen [1999] 2 CMLR 551 (C-212/97)
- Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art LtdKamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art LtdKamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd is a leading corporate law case, concerning the EU law of freedom of establishment for companies.-Facts:...
[2003] ECR I-10155 (C-167/01)
- US corporate law
- Liggett v Lee
- Delaware General Corporation Law
- Berkey v Third Avenue Railway
- Dodge v. Ford Motor CompanyDodge v. Ford Motor CompanyDodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. , is a case in which the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders of the Ford Motor Company to operate his business to profit his shareholders, rather than the community as a whole or employees...
, on directors' duties to the corporation and the community - Aronson v Lewis
- Guth v. Loft Inc.Guth v. Loft Inc.Guth v. Loft, Inc., 5 A. 2d 503 is a Delaware corporation law case on corporate opportunities and the duty of loyalty. It deviated from the 200 year old rule laid down in Keech v. Sandford that a fiduciary should leave open no possibility of conflict of interest between his private dealings and...
5 A.2d 503 (Del. 1939) - In re Walt Disney Derivative Litigation
- Jay v North
- Chef v Mathes
- German company lawGerman company lawGerman company law is an influential legal regime for companies in Germany. The primary form of company is the public company or Aktiengesellschaft . The private company with limited liability is known as a Gesellschaft mit beschränkte Haftung...
- World Trade Organisation
- International tradeInternational tradeInternational trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
- International economic lawInternational economic lawInternational economic law is a field of international law that regulates the behavior of states, international organizations and firms operating in the international arena...
- International Labour Organisation
- Organisation for Economic Cooperation and Development and OECD Guidelines for Multinational EnterprisesOECD Guidelines for Multinational EnterprisesOECD Guidelines for Multinational Enterprises are annex to the OECD Declaration on International Investment and Multinational Enterprises. They are recommendations providing voluntary principles and standards for responsible business conduct for multinational corporations operating in or from...
- United Nations Principles for Responsible Investment (PRI)Principles for Responsible Investment (PRI)Principles of Responsible Investment is an initiative and a set of aspirational and voluntary guidelines for investment entities wishing to address environmental, social, and corporate governance issues...
- Conflicts of law
- Shipping law
- International Corporate Governance Network, www.icgn.org/
See also
- Corporate lawCorporate lawCorporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
- European company lawEuropean company lawEuropean company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
- German company lawGerman company lawGerman company law is an influential legal regime for companies in Germany. The primary form of company is the public company or Aktiengesellschaft . The private company with limited liability is known as a Gesellschaft mit beschränkte Haftung...
- US corporate law
- French company lawFrench company law-History:In the wake of the French Revolution in 1791, the right to free registration for all private companies was proclaimed. There was a boom in registrations, but this was followed by a bust in 1793. The law was reversed until 1796 when the principle of free incorporation was established...
- UK banking law
- UK commercial law
- Corporate social responsibilityCorporate social responsibilityCorporate social responsibility is a form of corporate self-regulation integrated into a business model...
- Socially responsible investingSocially responsible investingSocially responsible investing , also known as sustainable, socially conscious, or ethical investing, describes an investment strategy which seeks to consider both financial return and social good....
- Environmental Social and Corporate GovernanceEnvironmental Social and Corporate GovernanceEnvironmental, Social and Corporate Governance, also known as ESG, describes the three main areas of concern that have developed as the central factors in measuring the sustainability and ethical impact of an investment in a company or business...
- Companies HouseCompanies HouseCompanies House is the United Kingdom Registrar of Companies and is an Executive Agency of the United Kingdom Government Department for Business, Innovation and Skills . All forms of companies are incorporated and registered with Companies House and file specific details as required by the...
- Department for Business, Innovation and SkillsDepartment for Business, Innovation and SkillsThe Department for Business, Innovation and Skills is a ministerial department of the United Kingdom Government created on 5 June 2009 by the merger of the Department for Innovation, Universities and Skills and the Department for Business, Enterprise and Regulatory Reform .-Ministers:The BIS...
- Board of TradeBoard of TradeThe Board of Trade is a committee of the Privy Council of the United Kingdom, originating as a committee of inquiry in the 17th century and evolving gradually into a government department with a diverse range of functions...
(or DTI or DBERR) - Insolvency ServiceInsolvency ServiceThe Insolvency Service is an executive agency of the United Kingdom's Department for Business, Innovation and Skills which:* administers and investigates the affairs of bankrupts, of companies and partnerships wound up by the court, and establishes why they became insolvent;* acts as...
- Corporate taxCorporate taxMany countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the...
- UK corporation tax
- Corporation Tax Act 2010Corporation Tax Act 2010The Corporation Tax Act 2010 is an Act of the Parliament of the United Kingdom that received Royal Assent on 3 March 2010.It was first presented in the House of Commons on 19 November 2009 and received its third reading on 4 February 2010...
(c 4)
External links
- Companies Act 2006
- Companies Act 2006 PDF
- Companies House
- Department of Business corporate governance homepage
- Law student views on company law
- Corporate Law and Governance, a UK company law blog
- corpgov.net, a US corporate law blog