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Summary Business Law & Practice - BPP LPC - High Distinction
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Revision style legacy notes summarising all chapter handouts and SGS materials (including solutions) for Business Law & Practice at BPP (LPC).
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Company’s ConstitutionAssessment of validity of Articles
When assessing the validity of a company’s Articles of Association, you must undertake two tests:
Two Tests (1) Legality Test; and
(2) Commerciality Test.
The legality test seeks to identify whether the articles of a company are consistent with the companies act. A company cannot fetter its
obligations, meaning that they cannot have more restrictive provisions in the articles than are provided for in the companies act.
When undertaking the legality test on a company’s articles:
Legality Test (1) Compare the relevant section of the companies act:
(a) Is the companies act silent on this point? If so, then the relevant provision in the articles will be permitted
(b) Is there a minimum or maximum threshold in the companies act? If so, these may not be altered by company’s articles.
(c) Is there an outright prohibition on this point in the companies act? If so, the relevant article will not be legally valid.
(2) If the articles are silent on a point, the companies act will be the default position
(3) If the articles are incompatible with companies act, the companies act will prevail and the articles will be legally invalid.
Commerciality The commerciality test seeks to identify whether the articles of a company are commercially suitable for a company taking into account the
Test size of the company’s business, the value of regular transactions and whether certain articles will be operationally burdensome.
Director’s Board Meeting to be called on 10 business days’ notice to the other directors and must be given in writing
Legality Test: This is legally valid as the companies act is silent on notice period for board meetings so there is no compatibility issue.
Commerciality Test: This may slow down decision making processes.
Chairperson of Board Meeting prevented from having casting vote if the votes are equal
Legality Test: Legally valid as companies act is silent on casting vote at board meeting so there is no compatibility issue.
Commerciality Test: Removing this can result in deadlock in the event that there are an equal amount of directors.
Board of Directors prevented from spending more than £100,000 without express shareholder approval
Legality Test: Legally valid as companies act is silent on the matter and therefore no compatibility issue.
Commerciality Test: Can provide shareholders with more control over the spend of the company on big transactions. However, may slow
down ability of the company to act resulting in them losing out on certain transactions.
Directors are able to change the name of the company
Example
Articles & Legality Test: Legally valid as s.77(1)(b) provides that company may change its name by other means provided for in articles.
Application of Directors are able to amend the articles of the company
Legality /
Legality Test: Not legally valid as s.21(1) provides that company can only amend articles by special resolution. Article is therefore
Commerciality
incompatible with companies act.
Tests
Unanimous vote is required by shareholders to remove director
Legality Test: Not legally valid as s.168(1) provides that director may only be removed by ordinary resolution. As the article provides for a
higher threshold, this is incompatible with the companies act.
Quorum for shareholders’ meetings fixed to number of shareholders that company has
Legality Test: Depends on how many shareholders the company has. S.318(1) relates to companies with one shareholder and does not
provide any qualification, so the article would be incompatible. S.318(2) relates to companies with two or more shareholders and does
provide qualification so article would be compatible.
An individual director is prevented from spending more than £10,000 without express unanimous board approval
Legality Test: Legally valid as the companies act is silent on the matter so the article is compatible.
Commerciality Test: Curtails the ability of certain directors to enter into expensive transactions without consulting the board first. This
may result in the board making more commercially sensible decisions.
The use of written resolutions by shareholders is prevented and all shareholders resolutions must be passed at meetings
Legality Test: Not legally valid as s.300 provides that any article preventing the use of written resolutions is void. Article is incompatible.
Change of Notice for General Meeting
Legality Test: Articles cannot stipulate a shorter notice period for general meeting than 14 clear days s.307(1).
However, articles are permitted to stipulate a longer notice period for general meeting than 14 clear days as provided for in s.307(3).
, Legal Effect of Company’s Articles
Contract s.33(1) – the provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on
Between the part of the company and of each member to observe those provisions.
Company & A member cannot enforce rights contained in the articles against a company, if they are not relevant to his capacity as a member of the
Members company (Eley v Positive Government Security)
Contract The articles are a contract between the members themselves. However, the shareholders can only enforce their rights against each other
between by requiring that the company enforces the provisions against the member (Welton v Saffery).
Members In order to enforce rights against other members themselves, the shareholders should enter into a shareholders agreement.
Shareholders Agreement
• Shareholders’ Agreement is a private document which does not have to be filed at companies house and is therefore confidential.
Why • The shareholders’ agreement sets out shareholders’ personal rights and obligations and will provide each shareholder with the ability
necessary to personally pursue a shareholder who has acted in breach of the agreement by claiming for damages as a result of breach of
contract. The shareholders do not have to bring this action through the company.
• The shareholders agreement may contain provisions which are incompatible with the companies act and the articles (Russell v
Northern Bank).
Can the Companies can be a party to the shareholders agreement. However, they cannot be a party to provisions which are incompatible with the
Company be companies act and therefore, such provisions must be severable from the rest of the shareholders agreement.
a Party
Where CA & The shareholders’ agreement may contain provisions which are incompatible with the provisions of the companies act.
Shareholders’ The existence of these provisions in the shareholders’ agreement will not prevent shareholders exercising their statutory rights as
Agreement provided for by the companies act. However, if the shareholders do exercise their statutory rights as provided for by the companies act in
conflict contravention of the shareholders agreement, then the other shareholders will be able to sue that shareholder personally for breach of
contract.
, Incorporating a Company
Pre-Incorporation
• A company cannot be bound by a contract if it has not yet been incorporated.
• S.51(1) – a contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect as
one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.
Persons can be other companies.
• Common law concept of Agency does not apply to a company which is not yet incorporated as the company cannot legally be deemed a
principal if it has no separate legal identity. Therefore, no one can be considered to be acting as agent for the company.
Agreements • If director of holding company is entering into contract on behalf of not yet incorporated subsidiary, whether or not the holding
company is liable will depend on whether the counterparty under the contract thought the director was acting on behalf of holding company.
• S.16(3) – the company is able to enter into contracts in their own right from the date of incorporation.
• A company will not automatically assume all rights and obligations of a contract which was entered into by someone purporting to act on
behalf of the company upon incorporation.
Contracts made Pre-Incorporation can be resolved by:
(1) Terminating the existing contract and the company entered into a new contract on the same terms but as its own legal entity.
(2) Assigning rights under a contract to the company. However, you cannot transfer the burden of a contract and only the benefit.
(3) Novation of the rights and obligations under a contract to the company.
There are a number of sections in the companies act which govern the naming of companies. Should also consider Trade Mark law.
S.53 – cannot have a name which is considered offensive, by the Secretary of State.
S.54(1) – approval of the Secretary of State is required for names which would give the impression that the company is connected with the
government or any public or local authority.
S.55(1) – approval of Secretary of State required when company name includes word or expression considered sensitive.
Choice of
Company S.57(1) – Secretary of State may make provision as to the use of special letters, characters, signs, symbols and punctuation to be included
Name in company names.
S.59(1) – the name of a limited company that is a private company must end with “limited” or “ltd”.
S.66(1) – company cannot have the same name as another company name which appears in the registrar’s index of company names.
S.67(1) – the Secretary of State may direct a company to change its name if it has been registered in a name that is the same as or too similar to
the name of an existing company which appears in the registrar’s index of company names.
S.82(1) – Secretary of State may make regulations that require a company to disclose its company name and display specified information in
specified locations.
Incorporation of a new Company from Scratch
It is possible to make an application to incorporate a new company from scratch online via Companies House.
S.7 – Method (1) A company is formed by one or more persons:
of forming (a) subscribing their names to a memorandum of association (s.8); and
Company (b) complying with the requirements of registration (set out in s.9).
S.8 – (1) A memorandum of association is a memorandum stating that the subscribers:
Memorandum (a) Wish to form a company; and
of (b) Agree to become members of the company and take at least one share.
Association (2) Memorandum must be in the prescribed form and must be authenticated by each subscriber.
The memorandum of association must be delivered to registrar for companies, together with application for registration of the company
(Form IN01) (s.9(1)) and along with the following:
S.9 – • Company’s proposed name, company’s proposed address, whether liability of members is to be limited by shares and whether company
Registration will be private or public company (s.9(2)).
Documents • Statement of capital & the initial shareholdings (s.9(4)(a)).
• Statement of the proposed officers (s.9(4)(b)).
• Statement of initial significant control (s.9(4)(c)).
• A copy of any proposed articles of association (to the extent that the Model Articles are not being adopted) (s.9(5)(b)).
• A statement of the type of company it is to be and its intended principal business activities (s.9(5)(c)).
S.14 – if the registrar is satisfied that the requirements as to registration are complied with, he shall register the documents delivered to him.
S.15(1) – on the registration of a company, the registrar of companies shall give a certificate of incorporation.
S.15(2) – certificate of incorporation will contain the date of incorporation and the name/registered number of the company.
Incorporation S.16(1) – the following shall take effect from the date of incorporation:
• The subscribers to the memorandum become the members of the company (s.16(2)).
• The company becomes a separate legal entity and is capable of exercising all the functions of an incorporated company (s.16(3)).
• The persons named in the statement of proposed officers are deemed to have been appointed as directors/company secretary (s.16(6)).
, Conversion of Shelf Company
Shelf companies are set up by registration agents and law firms and are utilised because they can enter into contracts immediately without the need to wait for
registration. However, there are many aspects about a shelf company which will need to be converted after it has been purchased.
Change Whose Authority Required Relevant CA/MA Type of Resolution Type of Meeting
Change of name The shareholder(s) Section 77(1)(a) Special Resolution General Meeting
Resignation of By letter from the outgoing secretary N/A Board Resolution to accept the resignation Board Meeting
secretary (effective from date set out in letter –
often immediate and handed over at
a board meeting)
Appointment of The directors - identity depends on MA 3 and MA 5 Board Resolution Board Meeting
secretary when the new directors are
appointed.
Section 270(1)
(NB Private company not required to
have a secretary)
Appointment of Outgoing directors or the MA 17(1)(b) Board Resolution Board Meeting or
new directors shareholder(s) MA 17(1)(a) or General Meeting (as
applicable).
Ordinary Resolution
Resignation of By letter from outgoing director MA 18(f) Usual to have a Board Resolution to accept the Board Meeting
existing directors (effective from date set out in letter – resignations
often immediate and handed over at
a board meeting)
Appointment of Outgoing director who was MA 12(1) Board Resolution Board Meeting
new chairperson chairperson would automatically
cease being chairperson on his
resignation
New directors vote for a chairperson
Transfer of Stock Transfer Form (STF) (change Section 112(2) Transferor shareholder executes STF (see s.770 - Board Meeting
subscriber is only effective once the new Section 544(1) transferee only needs to sign STF in limited
shares members have been entered into the circumstances)
MA 26
Register of Members) Usual to have a Board Resolution approving the
share transfer, the entry of the new member into the
Register of Members and instructing the secretary to
issue new share certificate.
The new shareholder will not be a valid shareholder
in the company until they have been entered into the
register of members (s.112(2))
MA 26(5) gives directors discretion to refuse to
register a transfer
Change of Directors giving notice to the Section 87(1) Board Resolution to instruct secretary to complete Board Meeting
registered office registrar the required form
Change of Directors giving notice to the Section 392(1) Board Resolution to instruct secretary to complete Board Meeting
accounting registrar the required form
reference date
Appoint auditors Appointed by directors at any time Section 485(3) Board Resolution Board Meeting
before the first period for appointing
auditors.
Note: members have the ability to
appoint auditors at times specified in
s.485(4)
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