United Kingdom company law

Source: Wikipedia, the free encyclopedia.

Beside the River Thames, the City of London is a global financial centre. Within the Square Mile, the London Stock Exchange lies at the heart of the United Kingdom's corporations.

The United Kingdom company law regulates

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,[1] 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.[2] 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

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 for limited companies.

UK insolvency law requires an administrator
to attempt a rescue of the company (if the company itself has the assets to pay for this). 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. If a company becomes insolvent with no assets it can be wound up by a creditor, for a fee (not that common), or more commonly by the tax creditor (HMRC).

History

See also:
History of company law and History of company law in the United Kingdom
British East India Company and Dutch East India Company ships, both with monopolies to trade. Other chartered corporations, still in existence include the Hudson's Bay Company (est 1670) and the Bank of England
(est 1694).

Company law in its modern shape dates from the mid-19th century, however an array of business associations developed long before. In medieval times traders would do business through

high seas
.

"The directors of such companies, however, being the managers rather of

other people's money
than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account, that joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers."

An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Book V, ch 1, §107

A similar

Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of "other people's money" would not exercise as much care as they would with their own.[3]

Robert Lowe, then Vice President of the Board of Trade has been dubbed the "father of modern company law" for his role in drafting the 1856 reforms.[4]

The

Companies Acts up to the present Companies Act 2006
have essentially retained the same fundamental features.

Over the 20th 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

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.[8]

Companies and the general law

See also:
English unjust enrichment

Companies occupy a special place in private law, because they have a

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.

Forming a company

Main articles: Company formation and Incorporation (business)
workers in the UK, and turn over
more than £2,500 billion.

A variety of companies may be

employee involvement.[17]

Once the decision has been made about the type of company,

Model Articles are adopted, or a £40 for postal registration using the "IN01" form.[25]
The registrar then issues a certificate of incorporation and a new legal personality enters the stage.

Corporate personality

See also:
Separate legal personality and Limited liability
Corporation of London, which governs the Square Mile from the Griffin at Temple Bar to the Tower of London
, is an early example of a separate legal person.

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

Sir Edward Coke remarked in the Case of Sutton's Hospital,[26]

the Corporation itself is onely in abstracto, and resteth onely in intendment and consideration of the

excommunicate, for they have no souls, neither can they appear in person, but by Attorney. A Corporation aggregate of many cannot do fealty, for an invisible body cannot be in person, nor can swear, it is not subject to imbecilities, or death of the natural, body
, and divers other cases.

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.

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,[28]
even as the natural people who invest in it and carry out its business change or pass away.

Most companies adopt

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".

Rules of attribution

See also: Attribution of liability to United Kingdom companies, Capacity in English law, Agency in English law, and Vicarious liability in English law

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.

Ashbury Railway Carriage and Iron Co Ltd v Riche.[33] 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.[34] Now the 2006 Act states that companies are deemed to have unlimited objects, unless they opt for restrictions.[35] 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. Therefore, 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.[36]

Contracts between companies and third parties, however, may turn out to be unenforceable on ordinary principles of

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.[38] Third, an agent may have "apparent authority" (also called "ostensible" authority) as it would appear to a reasonable person, creating an estoppel.[39] 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.

corporate manslaughter or otherwise.[43]
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.

Piercing the veil

See also:
UK insolvency law

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 limited. This is usually said to derive from the "principle" in

partnership.[45] 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.[46]

insolvent
.

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

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,

economic unit.[55] 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 broadly the rule still followed is that in Adams v Cape Industries plc. In 2013 in Prest v Petrodel Resources Ltd [2013] UKSC 34 the UK Supreme Court returned to the issue of veil lifting/piercing. In an unusual sitting of seven Justices, indicating the importance of the case, they declined to lift the veil in family law preferring instead to utilise trust law. In reaching that decision Lords Sumption and Neuberger set out principles of evasion and concealment to assist in determining when to lift/pierce the corporate veil. The other justices disagreed with this analysis and as Alan Dignam and Peter Oh have argued this has made it extremely difficult for subsequent judges to interpret lifting/piercing precedent.[56] However it is still very rare for English courts to lift the veil.[57]
The liability of the company is generally attributed to the company alone.

Capital regulations

See also:
Dividends, and Financial assistance (share purchase)

Because limited liability generally prevents shareholders, directors or employees from being sued, the Companies Acts have sought to regulate the company's use of its capital in at least four ways. "Capital" refers to the economic value of a company's assets, such as money, buildings, or equipment. First, and most controversially, the Companies Act 2006 section 761, following the EU's Second Company Law Directive,[58] requires that when a public company begins to trade, it has a minimum of £50,000 promised to be paid up by the shareholders. After that, the capital can be spent. This is a largely irrelevant sum for almost any public company, and although the first Companies Acts required it, since 1862 there has been no similar provision for a private company. Nevertheless, a number of EU member states kept minimum capital rules for their private companies, until recently. In 1999, in Centros Ltd v Erhvervs- og Selskabsstyrelsen[59] the European Court of Justice held that a Danish minimum capital rule for private companies was a disproportionate infringement of the right of establishment for businesses in the EU. A UK private limited company was refused registration by the Danish authorities, but it was held that the refusal was unlawful because the minimum capital rules did not proportionately achieve the aim of protecting creditors. Less restrictive means could achieve the same goal, such as allowing creditors to contract for guarantees. This led a large number of businesses in countries with minimum capital rules, like France and Germany, to begin incorporating as a UK "Ltd". France abolished its minimum capital requirement for the SARL in 2003, and Germany created a form of GmbH without minimum capital in 2008.[60] However, while the Second Company Law Directive is not amended, the rules remain in place for public companies.[61]

Barnum & Bailey, showing an issue price of £1 a share. The American business's founder P. T. Barnum was known for his phrase "There's a sucker born every minute
."

The second measures, which originally came from the common law but also went into the

In re Wragg Ltd said that any exchange that was "honestly and not colourably" agreed to, between the company and the purchaser of shares, would be presumed legitimate.[63] Later on it was also held that if the assets given were probably understood by both parties to have been insufficient, then this would count as a "colourable" taint, and the shares could be treated as being not properly paid for.[64] The shareholder would have to pay again. This laissez faire approach was changed for public companies. Shares cannot be issued in return for services that will only be provided at a later date.[65] Shares can be issued in return for assets, but a public company must pay for an independent valuation.[66] There are also absolute limits to what a share can be bought for in cash, based on a share's "nominal value" or "par value". This refers to a figure chosen by a company when it begins to sell shares, and it can be anything from 1 penny up to the market price. UK law always required that some nominal value be set, because it was thought that a lower limit of some kind should be in place for how much shares could be sold, even though this very figure was chosen by the company itself.[67] Every share, therefore, is still required to have a nominal value and shares cannot be sold at a price lower.[68] In practice this has meant companies always set nominal values so low below the issue price, that the actual market price at which a share ends up being traded is very unlikely to plummet so far. This has led to the criticism for at least 60 years that the rule is useless and best abolished.[69]

legal capital
": the initial total shareholders contributed when they bought their shares.

The third, and practically most important strategy for creditor protection, was to require that dividends and other returns to shareholders could only be made, generally speaking, if a company had profits. The concept of "

unjust enrichment.[76] This means that liability is probably strict, subject to a change of position defence, and the rules of tracing will apply if assets wrongfully paid out of the company have been passed on. For example, in It's A Wrap (UK) Ltd v Gula[77] the directors of a bankrupt company argued that they had been unaware that dividend payments they paid themselves were unlawful (as there had not in fact been profits) because their tax advisers had said it was okay. The Court of Appeal held that ignorance of the law was not a defence. A contravention existed so long as one ought to have known of the facts that show a dividend would contravene the law. Directors can similarly be liable for breach of duty, and so to restore the money wrongfully paid away, if they failed to take reasonable care.[78]

financial assistance for share purchase
were relaxed in 1981.

Legal capital must be maintained (not distributed to shareholders, or distributed "in disguise") unless a company formally reduces its legal capital. Then it can make distributions, which might be desirable if a company wishes to shrink. A private company must have a 75 per cent vote of the shareholders, and the directors must then warrant that the company will remain solvent and will be able to pay its debts.

treasury shares or cancelled must be reported to Companies House.[89] From the company's perspective the legal capital is being reduced, hence the same regulation applies. From the shareholder's perspective, the company buying back some of its shares is much the same as simply paying a dividend, except for one main difference. Taxation of dividends and share buy backs tends to be different, meaning that often buy backs are popular just because they "dodge" the Exchequer.[90]

The fourth main area of regulation, which is usually thought of as preserving a company's capital, is prohibition of companies providing other people with

take private" a public company (on its purchase, change the company from a plc to an Ltd). The result has been a growing number of leveraged buyouts, and an increase in the private equity industry of the UK.[95]

Corporate governance

See also: Corporate governance
CDDA 1986, disqualified the directors in Re Barings plc (No 5),[96] after a rogue trader brought down Barings Bank, unsupervised, from the Singapore
office.

Corporate governance is concerned primarily with the balance of power between the two basic organs of a UK company: the

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.

Constitutional separation of powers

Main article: Articles of association

The constitution of a company is usually referred to as the "

Lord Hardwicke LC held that a simple majority was enough for the election of a chaplain.[102]

general meeting
. These are the two essential organs of all UK companies.

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,[103] 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,[104] 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.[105] Though older cases raise an element of uncertainty,[106] 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".[107] Otherwise, the articles may be enforced by any member privy to the contract.[108] 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.[109] 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.[110] By contract shareholders can regulate any of their rights outside the company, yet their rights within the company remain a separate matter.

Shareholder rights

See also:
Shareholder rights in the United Kingdom, Institutional investor, and Shareholder

"...the relationship between management and ownership in limited liability companies has tended progressively to be more and more shadowy. Even before the war, apprehension was expressed on this point, and remedies were then suggested, and, with the great growth in the size of companies, the old relationship, which really grew out of the idea of partnership, where individual owners were closely concerned themselves with the management, has largely disappeared in modern company structure. The growth of groups or chains of companies, which make the true economic entity rather than the company itself, where we get a whole complex of companies operating together—that factor has still further divorced management from ownership. This now well-developed tendency is, in fact, practically ignored by the company law as it exists today, and that is another reason why amendment is required…"

Sir Stafford Cripps, President of the Board of Trade introducing the Companies Act 1947.[111]

In the

meetings,[118] 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.[119] Categories of important decisions, such as large asset sales,[120] approval of mergers, takeovers, winding up of the company, any expenditure on political donations,[121] share buybacks, or a (for the time being) non-binding say on pay of directors,[122]
are reserved exclusively for the shareholder body.

Investor rights

conflicts of interest.[123]

While shareholders have a privileged position in UK corporate governance, most are themselves, institutions - mainly

trusts and obligations to exercise care deriving from the common law. 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' rights

See also:
Bullock Report

While it has not been the norm, employee participation rights in corporate governance have existed in many specific sectors, particularly

UK company law, in principle, allows any measure of employee participation, alongside shareholders, but voluntary measures have been rare outside employee share schemes that usually carry very little voice and increase employees' financial risk. Crucially, the Companies Act 2006
section 168 defines "members" as those with the ability to vote out the board. Under section 112 a "member" is anybody who initially subscribes their name to the company memorandum, or is later entered on the members' register, and is not required to have contributed money as opposed to, for instance, work. A company could write its constitution to make "employees" members with voting rights under any terms it chose.

Universities in the UK are generally required to give staff members a right to vote for the board of managers at the head of corporate governance, such as in the Oxford University Act 1854, or the Cambridge University Act 1856.[134]

In addition to national rules, under the

employee share schemes, particularly for highly paid employees; however, such shares seldom compose more than a small percentage of capital in the company, and these investments entail heavy risks for workers, given the lack of diversification.[139]

Directors' duties

See also: Directors' duties in the United Kingdom, Directors' duties, Board of directors, and Fiduciary

Directors appointed to the

restitution of illegitimate gains and specific performance or injunctions.[citation needed
]

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,

Company Director Disqualification Act 1986, such as Re Barings plc (No 5)[96] 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 the currency exchange business in Singapore, where a rogue trader
caused losses so massive that it brought the whole bank into insolvency.

South Sea Bubble
of 1719.

The central equitable principle applicable to directors is to avoid any possibility of a

Privy Council advised that the conflict of interest precluded their ability to forgive themselves. Similarly, in Bhullar v Bhullar,[152] 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".[153]

I do not think it is necessary, but it appears to me very important, that we should concur in laying down again and again the general principle that in this Court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule, and must be applied inexorably by this Court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.

James LJ, Parker v McKenna (1874-75) LR 10 Ch App 96, 124-125

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,

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.[156] 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,[157] 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.[158] 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,[159] 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 "

Director's Report companies must explain how they have complied with their duties to stakeholders.[165]
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

See also:
Unfair prejudice

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 Drury,[166] "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.[167] So if wrongs were alleged to have been done to the company, the principle from the case of Foss v Harbottle,[168] 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,[169] 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.

Derivative claims are used by shareholders against directors alleged to have breached their duties of care or loyalty, exemplified in current litigation against BP executives for losses connected to the Deepwater Horizon oil spill
catastrophe.

In practice very few derivative claims were successfully brought, given the complexity and narrowness in the exceptions to the rule in

derivative claim" are now codified in the Companies Act 2006 sections 261–264.[170] 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,[171] 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,[172] whether authorisation or ratification has happened or is likely to, and pays particular regard to the views of the independent and disinterested shareholders.[173] This represented a shift from, and a replacement of,[174] the complex pre-2006 position, by giving courts more discretion to allow meritorious claims. Still, the first cases showed the courts remaining conservative.[175] In other respects the law remains the same. According to Wallersteiner v Moir (No 2),[176]
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.

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.

unfair prejudice
petitions in closely held businesses.

The drastic remedy of liquidation was mitigated significantly as the

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,[185] 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.[186] Unfair prejudice petitions remain most prevalent in small companies, and are the most numerous form of dispute to enter company courts.[187]
But if to hold directors accountable dispersed shareholders do not engage through voting, or through litigation, companies may be ripe for takeover.

Corporate finance and markets

See also: Corporate finance
London's new central business district, Canary Wharf was formerly a major centre of the world's shipping trade at West India Quay.

While corporate governance primarily concerns the general relative rights and duties of shareholders, employees and directors in terms of administration and accountability,

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 creditors 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.[188] 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.[189] 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 dividends 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.

Debt finance

See also: Security interest

Equity finance

See also:
Issued share capital

Companies limited by shares also acquire finance through 'equity' (a synonym for the share capital). Shares differ from debt in that shareholders rank last in

insolvency. The main justification for shareholders' residual claim is that, unlike many creditors (though not large banks) they are capable of diversifying their portfolio. Taxation of profits on shares can also be treated differently with a different tax rate (under the Income Tax Act 2007) to capital gains tax on debt (which falls under the Taxation of Chargeable Gains Act 1992). This makes the distinction between shares and debt important. In principle, all forms of debt and equity arise from contractual arrangements with a company, and the rights which attach are a question of construction.[190] For instance, in Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd the House of Lords held that when the Coal Industry Nationalisation Act 1946 was passed, preferential shareholders were entitled to no extra, special share of assets upon winding up: construction of the terms of the shares entitled them to extra dividends, but without special words to the contrary, shareholders were presumed equal otherwise.[191] For anyone to become a member of a company under the Companies Act 2006 section 33, the contract for shares must simply manifest the intention to do so.[192] However, beyond this, the dividing line between shares and debt is more a matter of standard practice than law.[193] It is legally possible to become a member of the company without being a shareholder, simply by being accepted and registered on the members' register.[194] It is also possible to be a shareholder without being a member immediately.[195] It is standard practice that shareholders have one vote per share,[196] but occasionally shareholders (particularly those with preferential dividend rights) do not have votes, and debt holders and others may have votes without having shares. It is even possible for creditors to contract to be subordinated behind shareholders in insolvency – it is just unlikely, and strongly discouraged by the regulatory framework. Shares are also presumed to be transferable to other people, although like other rights, the right to trade is subject to the company's constitution.[197]

money market funds
) will realise more predictable returns if there is prudent market regulation.

To give people shares initially there is formally a two step process. First, under

CA 2006 sections 768 and 769, a certificate that evidences the share issue should be given by the company within two months. In a typical company constitution, directors are entitled to issue shares as part of their general management rights,[199] although they have no power to do so outside the constitution. An authorisation must state the maximum number of allottable shares and the authority can only last for five years.[200]

The main reason to control directors' power over share allotments and issues is to prevent shareholders' rights being watered down if new shares are created. Under

CA 2006 sections 570–571, shareholders may disapply pre-emption rights. In practice, large companies frequently give directors ad hoc authority to disapply pre-emption rights, but within the scope of a 'Statement of Principles' issued by asset managers. At present, the most influential guide is the document by the Institutional investors' Pre-emption Group, Disapplying Pre-emption Rights: A Statement of Principle (2008). This 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.[202]

Market regulation

Main articles: Prospectus (finance), Market abuse, and Insider trading
Prospectuses
Insider dealing

Accounts and auditing

Mergers and acquisitions

Main article: Mergers and acquisitions in United Kingdom law

The

hostile takeovers very difficult, unless a bidder promises the incumbent board large golden parachutes 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".[207]

UK directors, like those at Cadbury facing the takeover from Kraft,[208] are unable to use corporate powers to block takeover bids and enrich themselves, but this potentially leaves employees vulnerable to job cuts, or reductions in environmental or ethical standards.

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

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.[213] 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[214]
meaning good economic, technical or organisational reasons must be given.

Takeover Panel's Code, an example of principles based self-regulation
, requires equal treatment and good information for shareholders, including consideration of the effects on employees.

Beyond rules restricting takeover defences, a series of rules are in place to partly protect, and partly impose obligations on minority shareholders. Under

R (Datafin plc) v Takeover Panel[218] 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.[219]

Corporate insolvency

Main article:
UK insolvency law

Corporation tax

Main articles:
UK corporation tax and Taxation in the United Kingdom

Corporate law internationally

Main article: Corporate law
One of a number of posters created by the Economic Cooperation Administration to promote the Marshall Plan in Europe

See also

  • FTSE 100

Notes and citations

  1. ^ See Joint Stock Companies Act 1856. The French Code de Commerce of 1807, as part of the Napoleonic Code allowed for public company formation with limited liability after an express governmental concession, and the New York Act Relative to Incorporations for Manufacturing Purposes of 1811 allowed for free incorporation with limited liability, but only for manufacturing businesses. So, while necessarily drawing on ideas formulated in France and the US, the UK had the first modern company law.
  2. RC Clark
    , Corporate Law (Aspen 1986) 2, defines the modern public company by these three features (separate legal personality, limited liability, delegated management) and in addition, freely transferable shares.
  3. An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Book V, ch 1, para 107
  4. ^ See J Micklethwait and A Wooldridge, The company: A short history of a revolutionary idea (Modern Library 2003) ch 3
  5. Bubble Companies, etc. Act 1825
    , 6 Geo 4, c 91
  6. C Dickens, Martin Chuzzlewit (1843) ch 27, "'The secretary's salary, David,' said Mr Montague, 'the office being now established, is eight hundred pounds per annum, with his house–rent, coals, and candles free. His five–and–twenty shares he holds, of course. Is that enough?' David smiled and nodded, and coughed behind a little locked portfolio which he carried; with an air that proclaimed him to be the secretary in question. 'If that's enough,' said Montague, 'I will propose it at the Board to–day, in my capacity as chairman.' The secretary smiled again; laughed, indeed, this time; and said, rubbing his nose slily with one end of the portfolio: 'It was a capital thought, wasn't it?' 'What was a capital thought, David?' Mr Montague inquired. 'The Anglo–Bengalee,' tittered the secretary. 'The Anglo–Bengalee Disinterested Loan and Life Assurance Company is rather a capital concern, I hope, David,' said Montague. 'Capital indeed!' cried the secretary, with another laugh —' in one sense.' 'In the only important one,' observed the chairman; 'which is number one, David.' 'What,' asked the secretary, bursting into another laugh, 'what will be the paid up capital
    , according to the next prospectus?' 'A figure of two, and as many oughts after it as the printer can get into the same line,' replied his friend. 'Ha, ha!' At this they both laughed; the secretary so vehemently, that in kicking up his feet, he kicked the apron open, and nearly started Cauliflower's brother into an oyster shop; not to mention Mr Bailey's receiving such a sudden swing, that he held on for a moment quite a young Fame, by one strap and no legs."
  7. ^ Report of the Parliamentary Committee on Joint Stock Companies (1844) British Parliamentary Papers vol VII
  8. Centros Ltd v Erhvervs-og Selskabsstryrelsen [1999] 2 CMLR 551 and Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd
    [2003] ECR I-10155
  9. ^ CA 2006 s 3(4); under CA 2006 s 448, unlimited companies are exempt from publishing accounts and reports
  10. ^ Insolvency Act 1986 s 74(2)(d) 'In the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or future member.'
  11. ^ CA 2006 s 4
  12. ^ CA 2006 s 58
  13. ^ CA 2006 s 3(4)
  14. ^ CA 2006 s 35(2) and the Companies (Audit, Investigations and Community Enterprise) Act 2004
  15. ^ See CA 2006 ss 755 (offering shares to the public), ss 761-763 (minimum capital); for market regulation rules, see the Financial Services and Markets Act 2000
  16. ^ See The European Public Limited-Liability Company Regulations 2004 SI 2326/2004 and EU Regulation 2157/2001/EC
  17. ^ EU Directive 2001/86/EC
  18. ^ CA 2006 s 7
  19. invitations to treat, Spencer v Harding
    (1870) LR 5 CP 561.
  20. ^ See Kelner v Baxter (1866) LR 2 CP 174; CA 2006 s 51, implementing the Second Company Law Directive 68/151/EEC, replaced by the Single Person Company Directive 2009/101/EC and Phonogram Ltd v Lane [1982] 2 QB 938
  21. ^ CA 2006 s 13
  22. ^ CA 2006 s 20 and the Companies (Model Articles) Regulations 2008 (SI 2008/3229)
  23. ^ See CA 2006 s 154 (directors), s 12 (secretary) s 7 (member) and Single Person Company Directive 2009/102/EC
  24. ^ See CA 2006 ss 54-69, Business Names Act 1985 and Bowman v Secular Society Ltd [1917] AC 406; see also, F Goldsmith (Sicklesmere) Ltd v Baxter [1970] 1 Ch 85, holding that if a company misstates its name in a contract, the contract is not void if a reasonable person would understand the entity referred to.
  25. ^ See http://www.companieshouse.gov.uk/forms/formsContinuation.shtml#IN01 (last accessed 6 October 2018)
  26. ^ Case of Sutton's Hospital (1612) 10 Rep 32; 77 Eng Rep 960, 973
  27. ^ For a very old example, see Edmunds v Brown and Tillard (1668) 83 ER 385-387
  28. ^ It is highly improbable in practice that companies lifespans are longer than an average person's. Of the 100 largest global companies in 1912, 48 had gone by 1995, see L Hannah, 'Marshall's Trees and the Global Forest: Were Giant Redwoods Different?' in N Lamoreaux et al. (eds), Learning by Doing in Markets, Firms and Countries (1998) 253, 259
  29. ^ See Insolvency Act 1986 s 74(2)(d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member'.
  30. PL Davies
    , An Introduction to Company Law (Clarendon 2002) ch 4
  31. ^ See Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500
  32. Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, where a thin majority of the House of Lords held that an illegal act by a shareholder would be attributed to the company even though a liquidator was now standing in the company's shoes and would therefore be barred by ex turpi causa non-oritur actio
    .
  33. ^ (1875) LR 7 HL 653
  34. ^ Cotman v Brougham [1918] AC 514 and Bell Houses v City Wall Properties [1966] 2 QB 656
  35. ^ CA 2006 s 31
  36. agency law, however directors may have exceeded their authority. CA 2006 s 40 states third parties will lose protection if they have acted in bad faith
    with the knowledge that a company exceeded its capacity.
  37. ^ e.g. Royal British Bank v Turquand (1856) 119 ER 327, Mahony v East Holyford Mining Co (1875) LR 7 HL 869
  38. ^ See Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
  39. Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd
    [1964] 2 QB 480
  40. ^ e.g. Lister v Hesley Hall Ltd [2001] UKHL 22; see also R Stevens, 'Vicarious Liability or Vicarious Action' (2007) 123 Law Quarterly Review 30; Middleton v Folwer (1699) 1 Salk 282 and Ackworth v Kempe (1778) 1 Dougl 40
  41. ^ Lord Haldane Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705; see also, Bolton v Graham & Sons Limited, per Lord Denning, "A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre... (the) directors and managers represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such."
  42. Tesco Supermarkets v Nattrass
    [1972] AC 153
  43. ^ See Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830
  44. ^ Salomon v A Salomon & Co Ltd [1897] AC 22
  45. ^ See R Grantham, 'The Doctrinal Basis of Company Law' (1998) 57 Cambridge Law Journal 554, 560
  46. ^ See also, Lee v Lee's Air Farming Ltd
  47. Re Hydrodam (Corby) Ltd
    [1994] BCC 161.
  48. Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
    [1916] 2 AC 307
  49. Re Darby, ex parte Brougham
    [1911] 1 KB 95
  50. VTB Capital plc v Nutritek Int Corp
    [2013] UKSC 5, [127] 'they include obiter observations and are anyway not binding in this court'.
  51. ^ Jones v Lipman [1962] 1 WLR 832, where to avoid an order for specific performance, Mr Lipman sold his house to a company. Russell J held that this attempt to avoid a pre-existing obligation meant the court could ignore the separate legal identity of the company and award specific performance as a remedy anyway.
  52. Lubbe v Cape Plc
    [2000] 1 WLR 1545.
  53. ^ See Woolfson v Strathclyde Regional Council (1978) SLT 159; see also, The Albazero [1977] AC 774, 807; Re A Company [1985] 1 BCC 99421; Bank of Tokyo Ltd v Karoon [1987] AC 45n, 64; cf Canada Safeway Ltd v Local 373, Canadian Food and Allied Workers (1974) 46 DLR (3d) 113, and contrast Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 All ER 751
  54. Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1 WLR 1214; Wallersteiner v Moir
    [1974] 1 WLR 991
  55. ^ This terminology follows from AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343, and is a concept used in German company law. See C Alting, 'Piercing the corporate veil in German and American law - Liability of individuals and entities: a comparative view' (1994–1995) 2 Tulsa Journal Comparative & International Law 187.
  56. S2CID 218916703
    .
  57. C Mitchell
    , 'Lifting the Corporate Veil in the. English Courts: An Empirical Study' (1999) 3 Company, Financial and Insolvency Law Review 15.
  58. ^ Second Company Law Directive 2012/30/EU art 6 requires a €25,000 minimum
  59. ^ (1999) C-212/97, [36]-[38]
  60. GmbHG
    §5a
  61. ^ For support for minimum capital, on the basis that it prevents frivolous incorporations, see H Eidenmueller, B Grunewald and U Noack, 'Minimum Capital in the System of Legal Capital' in M Lutter (ed), Legal Capital in Europe (2006) European and Company Financial Law Review, Special Volume 25
  62. CA 2006 s 584
  63. laissez faire viewpoint: "We must not allow ourselves to be misled by talking of value
    . The value paid to the company is measured by the price at which the company agrees to buy what it thinks it worth its while to acquire. Whilst the transaction is unimpeached, this is the only value to be considered."
  64. Pilmer v Duke Group Ltd
    [2001] 2 BCLC 773
  65. CA 2006 s 585, and Directive 2012/30/EU
    art 7
  66. CA 2006 ss 593-597 and Directive 2012/30/EU
    art 10
  67. Mosely v Kofffontein Mines Ltd [1904] 2 Ch 108 held this also applied to bonds convertible into shares. Hilder v Dexter
    [1902] AC 474 held that options attached to shares issued at nominal value to buy later, if the share price rose, did not infringe the rule.
  68. CA 2006 ss 588-9, subsequent holders of shares are jointly liable with a previous owner for any contravention of the Act unless they are a bona fide purchaser. Under CA 2006 ss 584-7
    , the court can grant relief if just and equitable considering how much value is actually conferred.
  69. ^ See Gedge Committee, Report of the Committee on Shares of No Par Value (1954) Cmd 9112 and Company Law Review Steering Group, The Strategic Framework (1999) 'the requirement that shares should have a nominal value has become an anachronism.'
  70. ^ CA 2006 ss 830-831 and Directive 2012/30/EU art 15
  71. ^ Companies (Model Articles) Regulations 2008 Sch 3, para 70. Sch 3 para 4, also allows shareholders the instruction right to get the dividends paid out with a 75% vote.
  72. Re Halt Garage
    [1982] 3 All ER 1016, Oliver J
  73. Aveling Barford Ltd v Period Ltd
    [1989] BCLC 626, Hoffmann J
  74. ^ [2010] UKSC 55
  75. CA 2006
    ss 847
  76. ^ See J Payne, 'Unjust Enrichment, Trusts and Recipient Liability For Unlawful Dividends' (2003) 119 LQR 583
  77. ^ [2006] EWCA Civ 544
  78. Bairstow v Queen's Moat Houses plc
    [2001] EWCA Civ 712
  79. ^ See, for example, M Moritz, 'Manchester United opens window on murky world of leveraged buy-outs' (27 June 2010) Daily Telegraph
  80. CA 2006 ss 641-644
  81. ^ CA 2006 ss 645-653
  82. ^ CA 2006 s 646(4)
  83. ^ Second Company Law Directive 2012/30/EU art 46
  84. ^ See Re Chatterley-Whitfield Collieries Ltd [1948] 2 All ER 593, per Lord Greene MR. Further Re Saltdean Estate Co Ltd [1968] 3 All ER 829, cf Re Northern Engineering Industries plc [1994] 2 BCLC 704
  85. ^ Trevor v Whitworth (1887) 12 App Cas 409
  86. CA 2006 ss 684-690 and 735. See 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.
  87. CA 2006 ss 714-717
  88. ^ Listing Rule 12.4.2-3
  89. CA 2006
    s 707
  90. ^ e.g. R Dobbs and W Rehm, 'Debating Point: Are share buybacks a good thing?' (28 June 2006) Financial Times
  91. ^ See Greene Committee, Company Law Amendment Committee Report (1925-1926) Cmnd 2657 §30 and Jenkins Committee, Report of the Company Law Committee (1962) Cmnd 6707 §173
  92. PL Davies
    and S Worthington, Principles of Modern Company Law (2012) 360, 13-44
  93. ^ Companies Act 1929 s 45
  94. CA 2006 ss 677-678
  95. ^ J Armour, 'Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law' (2000) 63(3) Modern Law Review 355, 374, also noting that "LBOs do have the capacity to harm creditors" and some are motivated by "asset stripping" even though empirical studies suggest gains to other groups are high.
  96. ^ a b [1999] 1 BCLC 433
  97. ^ See CA 2006 s 17. Prior to CA 2006, the constitution was also composed of a "memorandum of association", which contained basic company information and was unalterable. Now the "memorandum" merely refers to a document signed by initial shareholders at a company formation under CA 2006 s 8.
  98. ^ See the Companies (Model Articles) Regulations 2008 (SI 2008/3229) with differing provisions for private and public companies, previously known as "Table A".
  99. ^ CA 2006 s 20
  100. ^ [2009] UKPC 10, [16]; cf Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701
  101. ^ See also, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
  102. ^ (1741) 26 ER 531
  103. ^ [1906] 2 Ch 34
  104. ^ The shareholder, Mr McDiarmid, brought the claim as a derivative action in the name of the company, given the rule in Foss v Harbottle (1843) 67 ER 189 presupposed a majority of shareholders could litigate
  105. ^ See John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, Greer LJ, 'The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if the opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove.'
  106. ^ Macdougall v Gardiner (1875) 1 Ch D 13, holding that a director's refusal to take a poll of shareholders, validly requested under the company's articles, was not actionable because it was a "mere internal irregularity". This decision was not clearly based on any authority, and appears contradicted by the modern theory of construction. See also P Davies, Gower and Davies' Principles of Modern Company Law (8th edn Sweet and Maxwell 2008) 72; RJ Smith (1978) 41 MLR 147
  107. ^ (1877) 6 Ch D 70; cf Ashby v White (1703) 92 ER 126
  108. ^ See Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88; but cf Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881
  109. ^ The Contracts (Rights of Third Parties) Act 1999 s 6, excludes the Companies Acts from its scope; however the rule of privity is unsteady on orthodox principles, see Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500
  110. ^ See Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588
  111. ^ Hansard HC 585 (6 June 1947) vol 438 cols 585-588, Companies Bill, 2nd Reading, Sir Stafford Cripps.
  112. CA 2006
    s 172, which requires directors "promote the success of the company" for the benefit of members with regard to stakeholders (but at no point refers to shareholders). This said, members usually are shareholders, and because shareholders tend to monopolise voting rights, directors invariably follow shareholder interests. There is, however, no legal duty.
  113. CA 2006 s 168 is qualified by the majority House of Lords decision in Bushell v Faith
    [1970] AC 1099, holding that a company's articles could allow a shareholder's votes to triple if facing removal as a director. This followed the Cohen Report's recommendations.
  114. Cohen Committee, Report of the Committee on Company Law Amendment (1945) Cmd 6659. See EM Dodd, 'The Cohen Report' (1945) 58 Harvard Law Review
    1258
  115. Aufsichtsrat
    or supervisory council, which appoints it and is in turn elected by shareholders and employees.
  116. AA Berle and GC Means, The Modern Corporation and Private Property
    (1932)
  117. ^ CA 2006 s 283 (special resolution definition), ss 21-22 (amending the constitution)
  118. CA 2006 ss 303-305
    , as amended by Companies (Shareholders' Rights) Regulations 2009/1632 Pt 2, reg 4
  119. CA 2006 s 314
  120. UKLA Listing Rule
    10.
  121. ^ CA 2006 ss 366-368 and 378 require a resolution, itemising the money to be donated, be passed by shareholders for any political contributions over £5000 in 12 months, lasting a maximum of four years.
  122. ^ CA 2006 s 439; other transactions where directors have a conflict of interest that require binding approval of shareholders are ratification of corporate opportunities, large self dealing transactions and service contracts lasting over two years.
  123. ^ See PL Davies and S Worthington, Gower and Davies' Principles of Modern Company Law (2016) 15-27 'Conflicts of interest and inactivity'. E McGaughey, 'Does Corporate Governance Exclude the Ultimate Investor?' (2016) 16(1) Journal of Corporate Law Studies 221.
  124. Other People's Money And How the Bankers Use It
    (1914)
  125. ^ E McGaughey, 'Does Corporate Governance Exclude the Ultimate Investor?' (2016) 16(1) Journal of Corporate Law Studies 221 and RC Nolan, 'Indirect Investors: A Greater Say in the Company?' (2003) 3(1) Journal of Corporate Law Studies 73
  126. ^ Hampel Committee, Committee on Corporate Governance: Final Report (1998) para 5.7, 'The right to vote is an important part of the asset represented by a share, and in our view an institution has a responsibility to the client to make considered use of it.' Also Cadbury Report, Financial Aspects of Corporate Governance (1992) para 6.12
  127. Barlow Clowes International Ltd v Vaughan
    [1991] EWCA Civ 11, Dillon LJ, 'it is accepted that... the assets and moneys in question are trust moneys held on trust for all or some of the would-be investors ("the investors") who paid moneys to BCI or associated bodies for investment, and are not general assets of BCI.'
  128. ^ Discussed by E McGaughey, 'Does Corporate Governance Exclude the Ultimate Investor?' (2016) 16(1) Journal of Corporate Law Studies 221 and see further RC Nolan, 'Indirect Investors: A Greater Say in the Company?' (2003) 3(1) Journal of Corporate Law Studies 73
  129. ^ See BS Black and JC Coffee, 'Hail Britannia?: Institutional Investor Behavior Under Limited Regulation' (1994) 92 Michigan Law Review 1997-2087
  130. Dodd Frank Act of 2010
    §957 (banning broker dealers from voting without instructions on any important issue, including director elections) and the Swiss, Verordnung gegen übermässige Vergütungen bei börsenkotierten Aktiengesellschaften 2013 (banning banks from voting on behalf of any company investor, and placing a duty instead on pension funds to be active in their voting).
  131. ^ Discussed in E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the 'Single Channel' (2018) 47(1) Industrial Law Journal 76 and E McGaughey, A Casebook on Labour Law (Hart 2019) ch 11. In university corporations, see the Oxford University Act 1854 ss 16 and 21, Cambridge University Act 1856 ss 5 and 12. Also the Further and Higher Education Act 1992, ss 20(2) and 85, and Sch 4, para 4.
  132. South Metropolitan Gas Act 1896 s 19, Port of London Act 1908 s 1(7), Iron and Steel Act 1967, Sch 4, Part V, Aircraft and Shipbuilding Industries Act 1977 s 2(8), Post Office Act 1977
    s 1
  133. Betriebsverfassungsgesetz
    1972 §87. Member states with no participation rights are Belgium, Cyprus, Estonia, Italy, Latvia, Lithuania, Romania and the United Kingdom.
  134. ^ Oxford University Act 1854 ss 16 and 21, Cambridge University Act 1856 ss 5 and 12; cf King's College London Act 1997 s 15, though since amended. Discussed in E McGaughey, 'Votes at Work in Britain: Shareholder Monopolisation and the 'Single Channel' (2016) ssrn.com
  135. Employee Involvement Directive 2001/86/EC
  136. PL Davies, 'Workers on the Board of the European Company?' (2003) 32(2) Industrial Law Journal 75
  137. Report of the Royal Commission on Trade Unions and Employers' Associations
    (1965–1968) Cmnd 3623, §§997-1006, where the minority favoured worker directors in principle.
  138. CA 2006
    s 172
  139. ^ Growth and Infrastructure Act 2013 s 31, and PJ Purcell, 'The Enron Bankruptcy and Employer Stock in Retirement Plans' (11 March 2002) CRS Report for Congress
  140. Re Hydrodam (Corby) Ltd
    [1994] BCC 161; CA 2006 s 251; a shadow director is typically a bank or a dominant shareholder, according to whose directions a director is accustomed to act.
  141. Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd
    [2003] 2 BCLC 153.
  142. ^ CA 2006 ss 232-235; while a director may not have to pay for breach of duties, they will not be able to avoid negative publicity and possibly appearing in court should the insurance company choose to contest the claim.
  143. ^ e.g. Bishopsgate Investment Management Ltd v Maxwell (No 2) [1993] BCLC 814
  144. Howard Smith Ltd v Ampol Ltd
    [1974] AC 832
  145. Takeover Code Rule 21 voids any measure, without shareholder approval, with the effect of frustrating a takeover bid. This is reflected in the Takeover Directive 2004/25/EC
    , art 9(2).
  146. ^ For the old and abandoned approach of the pure subjective standard, see Re Cardiff Savings Bank [1892] 2 Ch 100; In re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425; Re City Equitable Fire Insurance Co [1925] Ch 407
  147. ^ [1994] 1 BCLC 561
  148. Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd
    [1974] AC 821
  149. ^ See Boardman v Phipps [1966] UKHL 2
  150. Ex parte James [1803-13] All ER Rep 7, Parker v McKenna (1874) LR 10 Ch App 96 and Bray v Ford
    [1896] AC 44
  151. ^ [1916] 1 AC 554, [1916] UKPC 10 (PC)
  152. ^ [2003] EWCA Civ 424
  153. Industrial Development Consultants v Cooley [1972] 1 WLR 443, CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704, In Plus Group Ltd v Pyke [2002] EWCA Civ 370, and Foster Bryant Surveying Ltd v Bryant
    [2007] EWCA Civ 200
  154. Aberdeen Railway Co v Blaikie Brothers
    (1854) 1 Macq HL 461
  155. Boulting v ACTAT
    [1963] 2 QB 606, 636
  156. ^ CA 2006 ss 182-183
  157. ^ Under CA 2006 ss 252-254, a "connected person" includes family members, and companies, partnerships and trusts where the director has a large stake.
  158. ^ See CA 2006 ss 197-214
  159. Model Articles, art 22, and cf Guinness plc v Saunders
    [1990] 2 AC 663
  160. Hutton v West Cork Railway Co (1883) 23 Ch D 654 and Parke v Daily News Ltd
    [1962] Ch 927 suggested directors of insolvent companies could not protect employees, though this had been reversed by statute, IA 1986 s 187 and CA 2006 s 247 (Power to make provision for employees on cessation or transfer of business)
  161. ^ CA 2006 s 172(1)(a)-(f)
  162. ^ CA 2006 s 172(3)
  163. ^ CA 2006 s 172(1)
  164. ^ cf Regentcrest plc v Cohen [2001] 2 BCLC 80
  165. ^ CA 2006 s 419
  166. ^ (1812) 1 Ves & B 154, 158
  167. Model Articles
    , art 3
  168. ^ (1843) 67 ER 189
  169. ^ cf Alexander Ward v Samyang [1975] 2 All ER 424 and Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100
  170. Aktiengesetz § 148
    , whereby 1% of shareholders, or those holding at least €100,000 in shares, can bring a claim.
  171. ^ See CA 2006 s 239, stipulating that a breach of duty can only be ratified by disinterested shareholders. It also appears that disinterested shareholders would not, however, be competent to ratify fraudulent behaviour, contrary to public policy.
  172. ^ CA 2006 s 263(3)
  173. ^ CA 2006 s 263(4), and see Smith v Croft (No 2) [1988] Ch 114
  174. ^ The pre-2006 case law may still be indicative of the present law, however since according to CA 2006 s 260(2) a claim can only be brought "under this Chapter", the sole rules for derivative actions are contained in ss 260-264.
  175. ^ e.g. Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch) and Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch)
  176. ^ [1975] QB 373
  177. ^ e.g. Pender v Lushington (1877) 6 Ch D 70, cf Macdougall v Gardiner (1875) 1 Ch D 13
  178. negligent misstatement
    .
  179. ^ See further, Johnson v Gore Wood & Co [2002] 2 AC 1, Giles v Rhind [2002] EWCA Civ 1428, Gardner v Parker [2004] 2 BCLC 554
  180. ^ [1900] 1 Ch 656
  181. ^ [1951] Ch 286
  182. Shuttleworth v Cox Bros and Co (Maidenhead) [1927] 1 Ch 154, Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701 and Citco Banking Corporation NV v Pusser's Ltd
    [2007] UKPC 13
  183. ^ [1973] AC 360
  184. ^ [1999] 1 WLR 1092
  185. ^ See Re Blue Arrow plc [1987] BCLC 585
  186. ^ e.g. Bhullar v Bhullar [2003] EWCA Civ 424
  187. ^ e.g. O'Donnell v Shanahan [2009] EWCA Civ 751
  188. ^ See Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279
  189. ^ See Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10
  190. ^ Birch v Cropper (1889) 14 App Cas 525, preferential shareholders presumed to be entitled to distribution on winding up like other shareholders, as constitution did not say otherwise. Alliance Perpetual Building Society v Clifton [1962] 1 WLR 1270, whether shares are ordinary or preference shares.
  191. ^ [1949] UKHL 3
  192. ^ Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279, per Farwell J, 'A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share.'
  193. CMAR 2008
    Sch 1 para 22 and Sch 3 para 43
  194. CA 2006 ss 112-113
  195. CA 2006
    s 779, by having a warrant, entitling a holder to shares on delivery, or a letter of allotment, but not yet being on the register.
  196. CA 2006
    s 284, one share gets one vote, subject to the articles
  197. CA 2006
    s 544
  198. CA 2006
    ss 112-114
  199. ^ CMAR 2008 Schs 1 and 3 para 3
  200. CA 2006
    ss 549-551
  201. CA 2006
    s 562(5)
  202. Paul Myners, Pre-Emption Rights: Final Report (2005) DTI, .pdf
  203. ^ Treanor, Jill (23 March 2010). "Six arrested over City insider dealing". The Guardian – via www.theguardian.com.
  204. Takeover Panel
    's background and the non-frustration principle, see J Armour and DA Skeel Jr., 'Who Writes the Rules for Hostile Takeovers, and Why? – The Peculiar Divergence of US and UK Takeover Regulation' (2007) 95 Georgetown Law Journal 1727
  205. Paramount Communications, Inc. v. Time Incorporated, Fed. Sec. L. Rep. (CCH
    ) ¶ 94,514; aff'd 571 A.2d 1140 (Del. 1989)
  206. DGCL
    §141(k)
  207. ^ Takeover Directive 2004/25/EC arts 9(2) and 12
  208. ^ See L Lucas and A Rappeport, 'Mergers and acquisitions: A bitter taste' (23 May 2011) Financial Times. When Kraft broke public promises to keep 500 jobs in the Somerdale plant it was criticsed by the Takeover Panel.
  209. ^ See Gething v Kilner [1972] 1 All ER 1166
  210. ^ Re a Company No. 008699 of 1985 [1986] BCLC 383
  211. ^ [1967] Ch 254
  212. Lord Wilberforce
  213. ERA 1996
    ss 86, 94 and 135
  214. TUPER 2006 SI 2006/246
  215. ^ Re Grierson Oldham and Adams Ltd [1968] Ch 17
  216. ^ Re Bugle Press Ltd [1961] Ch 270
  217. ^ Fiske Nominees Ltd v Dwyka Diamond Ltd [2002] EWHC 770; 2 BCLC 123
  218. ^ [1987] QB 815
  219. ^ ex parte Guinness plc [1990] 1 QB 146, the Panel was found to be 'insensitive and unwise' no action. Also, ex parte Fayed [1992] BCLC 938

References

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