Unit_02_Company Law.pdf

Company law: company formation

and management

Reading 1: Introduction to company law

This text provides an introduction to the key terms used when talking about companies as

legal entitities, how they are formed and how they are managed.

1 Read through the text quickly and decide which of these phrases (a–f) best

expresses the topic of each paragraph (1–6).

a directors’ duties

d company health

b management roles

e partnership definition

c company definition

f company formation

1A company 1 is a business association which has the character of a legal person, distinct from its

officers and shareholders. This is significant, as it allows the company to own property in its own

name, continue perpetually despite changes in ownership, and insulate the owners against

personal liability. However, in some instances, for example when the company is used to

perpetrate fraud or acts ultra vires, the court may ‘lift 2 the corporate veil’ and subject the

shareholders to personal liability.

2 By contrast, a partnership is a business association which, strictly speaking, is not considered to

be a legal entity but, rather, merely an association of owners. However, in order to avoid

impractical results, such as the partnership being precluded from owning property in its own

name, certain rules of partnership law treat a partnership as if it were a legal entity.

Nonetheless, partners are not insulated against personal liability, and the partnership may cease

to exist upon a change in ownership, for example, when one of the partners dies.

3A company is formed upon the issuance of a certificate of incorporation 3 by the appropriate

governmental authority. A certificate of incorporation is issued upon the filing of the constitutional

documents of the company, together with statutory forms and the payment of a filing fee. The

‘constitution’ of a company consists of two documents. One, the memorandum of association 4 ,

states the objects of the company and the details of its authorised capital, otherwise known as the

nominal capital. The second document, the articles of association 5 , contains provisions for the

internal management of the company, for example, shareholders annual general meetings 6 ,or

AGMs, and extraordinary general meetings 7 ,the board of directors, corporate contracts and loans.

4 The management of a company is carried out by its officers, who include a director, manager and/or

company secretary. A director is appointed to carry out and control the day-to-day affairs of the

company. The structure, procedures and work of the board of directors, which as a body govern the

company, are determined by the company’s articles of association. A manager is delegated

supervisory control of the affairs of the company. A manager’s duties to the company are generally

more burdensome than those of the employees, who basically owe a duty of confidentiality to the

company. Every company must have a company secretary, who cannot also be the sole director of

1 (US) corporation

2 (US) pierce

3 (US) generally no official certificate is issued; companies are

formed by filing the articles of incorporation and the bylaws

(see below)

4 (US) articles of incorporation or certificate of incorporation

5 (US) bylaws

6 (US) annual meetings of the shareholders

7 (US) special meetings of the shareholders

the company. This requirement is not applicable if there is more than one director. A company’s

auditors are appointed at general meetings. The auditors do not owe a duty to the company as a

legal entity, but, rather, to the shareholders, to whom the auditor’s report is addressed.

5 The duties owed by directors to a company can be classified into two groups. The first is a duty

of care and the second is a fiduciary duty. The duty of care requires that the directors must

exercise the care of an ordinarily prudent and diligent person under the relevant circumstances.

The fiduciary duty stems from the position of trust and responsibility entrusted to directors. This

duty has many aspects, but, broadly speaking, a director must act in the best interests of the

company and not for any collateral purpose. However, the courts are generally reluctant to

interfere, provided the relevant act or omission involves no fraud, illegality or conflict of interest.

6Finally, a company’s state of health is reflected in its accounts 8 , including its balance sheet and

profit-and-loss account 9 . Healthy profits might lead to a bonus 10 or capitalisation issue 11 to the

shareholders. On the other hand, continuous losses may result in insolvency and the company

going into liquidation.

8 (US) financial statements

9 (US) profit-and-loss statement or income statement

10 (US) stock dividend

11 (US) cash dividend

Key terms: Roles in company management

2 Some of the important roles in company management are discussed in

Reading 1 above. Which roles are mentioned?

3 Here is a more comprehensive list of roles in company management.

Match the roles (1–10) with their definitions (a–j).

1 auditor

a appointed by a shareholder to attend and vote at a meeting in his/her

place when the shareholder is unable to attend

b company director responsible for the day-to-day operation of the company

c elected by the shareholders to manage the company and decide its

general policy

d engages in developing or taking the initiative to form a company

(arranging capital, obtaining personnel, making arrangements for filing

corporate documentation)

e appointed by the company to examine the company’s accounts and to

report to the shareholders annually on the accounts

f a company’s chief administrative officer, whose responsibilities include

accounting and finance duties, personnel administration and

compliance with employment legislation, security of documentation,

insurance and intellectual property rights

g member of the company by virtue of an acquisition of shares in a

company

h officer of the court who commonly acts as a liquidator of a company

being wound up by the court

i appointed by creditors to oversee the repayment of debts

j appointed by a court, the company or its creditors to wind up the

company’s affairs

2 company secretary

3 director

4 liquidator

5 managing director

6 official receiver

7 promoter

8 proxy

9 receiver

10 shareholder

Unit 2 Company law: company formation and management

Listening 1: Company formation

Lawyers play important roles in the formation of a company, advising clients which entities

are most suited for their needs and ensuring that the proper documents are duly filed.

You are going to hear a conversation between an American lawyer, Ms Norris, and her

client, Mr O’Hara. The lawyer describes how a specific type of corporation is formed in the

state of Delaware.

4 X Listen to the conversation and tick the documents required for formation

that the lawyer mentions.

1 DBA filing

2 stock ledger

3 articles of incorporation

4 general partnership agreement

5 bylaws

6 IRS & State S Corporation election

7 organisational board resolutions

8 stock certificates

5 Company types (USA) Look at the following table, which provides information on

the documents required to form the different company types in the United States.

Based on what you have heard in Exercise 4, which type of business

association was the lawyer discussing with her client?

US entities

Documents required for formation

sole proprietorship DBA filing

general partnership General Partnership Agreement, local filings if partnership holds real estate

limited partnership Limited Partnership Certificate, Limited Partnership Agreement

C corporation

Articles of Incorporation, Bylaws, Organisational Board Resolutions, Stock Certificates,

Stock Ledger

S corporation

Articles of Incorporation, Bylaws, Organisational Board Resolutions, Stock Certificates,

Stock Ledger, IRS & State S corporation election

6 Company types (UK) The table on page 23 contains information about five

types of common UK business associations, covering the aspects of liability of

owners, capital contributions and management. In many jurisdictions in the

world, there are entities which share some or all of these characteristics. Add

these names to the table.

a private limited company (Ltd)

b general partnership

c public limited company (PLC)

d limited partnership

e sole proprietorship

Entity

Liability of owners

Capital contributions

Management

1) ................... Unlimited personal liability for Capital needed is contributed Business is managed by the

the obligations of the business by sole proprietor. sole proprietor.

2) .................... Generally no personal liability No minimum share capital Company is managed through

of the members for obligations requirement. However, capital its managing director or the

of the business can be raised through the board of directors acting as

issuance of shares to members a whole.

or through a guarantee.

3) .................... No personal liability; liability The minimum share capital of Company is managed by the

is generally limited to £50,000 is raised through board of directors;

shareholder contributions issuance of shares to the shareholders have no power to

(i.e. consideration for shares). public and/or existing members. participate in management.

4) .................... Unlimited personal liability of Partners contribute money or The partners have equal

the general partners for the services to the partnership; management rights, unless

obligations of the business they share profits and losses. they agree otherwise.

5) .................... Unlimited personal liability of General and limited partners The general partner manages

the general partners for the

contribute money or services the business, subject to any

obligations of the business;

to the limited partnership;

limitations of the Limited

limited partners generally

they share profits and losses. Partnership Agreement.

have no personal liability.

Reading 2: Memorandum of association

An important document in company formation is the memorandum of association (UK) or

articles/certificate of incorporation (USA). This document sets forth the objects of the

company and its capital structure; as such, it represents a legally binding declaration of

intent to which the members of the company must adhere.

7 Below is an extract from the articles of incorporation of a US company. Read

through the text quickly and tick the issues it addresses.

1 appointing members of the board of directors

2 changing corporation bylaws

3 procedures for holding a vote of the shareholders

4 stipulations for keeping corporation records

The power to alter, amend or repeal the bylaws or to adopt new bylaws shall be vested in

the Board of Directors; provided , however, that any bylaw or amendment thereto as adopted

by the Board of Directors may be altered, amended or repealed by a vote of the shareholders

entitled to vote for the election of directors, or a new bylaw in lieu thereof may be adopted by

vote of such shareholders. No bylaw which has been altered, amended or adopted by such a

vote of the shareholders may be altered, amended or repealed by vote of the directors until

two years shall have expired since such action by vote of such shareholders. [...]

The Corporation shall keep as permanent records minutes of all meetings of its

shareholders and directors, a record of all action taken by the shareholders or the

directors without a meeting and a record of all actions taken by a committee of the

directors in place of the Board of Directors on behalf of the Corporation. The Corporation

shall also maintain appropriate accounting records. The Corporation, or its agent, shall

maintain a record of its shareholders in a form that permits preparation of a list of the

names and addresses of all shareholders, in alphabetical order, by class of shares, showing

the number and class of shares held by each.

Unit 2 Company law: company formation and management

8 Read the text again and decide whether these statements are true or false.

1 The board of directors only has the power to change the bylaws if the

shareholders in turn have the power to amend any changes made by the

board of directors.

2 The board of directors is not permitted at any time to change any bylaw

which has been altered by a vote of the shareholders.

3 Records must only be kept of decisions reached by shareholders and

directors in the course of a meeting.

4 Records of the shareholders must list the number of shares they own.

9 For each of these words or phrases, find the italicised word(s) in the text on

that most closely matches its meaning.

1 passed

5 cancelled

2 who have the right to

6 revised

3 instead

7 given to

4 on condition

Language use: and

10 Read through the text on page 23 again, noting how shall and may are used.

1 Which of the following words most closely matches the meaning of shall in

each case?

a) will b) should c) must

2 Which of the following words most closely matches the meaning of may in

each case?

a) might

Shall

may

b) can

c) could

In legal documents, the verb shall is used to indicate obligation, to express a

promise or to make a declaration to which the parties involved are legally

bound. This use differs from that in everyday speech, where it is most often

used to make offers ( Shall I open the window? ) or to refer to the future

( I shall miss you ).

In legal texts, shall usually expresses the meaning of ‘must’ (obligation):

Every notice of the meeting of the shareholders shall state the place, date

and hour.

or ‘will’ (in the sense of a promise):

The board of directors shall have the power to enact bylaws.

Shall can also be used to refer to a future action or state, similar to the

future formed with will in everyday speech:

... until two years shall have expired since such action by vote of such

shareholders.

Another verb commonly found in legal documents is may , which generally

expresses permission, in the sense of ‘can’:

... any bylaw or amendment thereto as adopted by the Board of Directors may

be altered, amended or repealed by a vote of the shareholders.

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