Company Law

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Tutorial 4

• Company Law

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Part A

• Capital Maintenance

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Capital Maintenance

• CAPITAL - the life blood of companies!!
• Overview
• 1. Definition
• 2. Terminology
• 3. Rationale
• 4. Raising capital
• 5. Changing capital
• 6. Maintaining capital

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• 1. Some definitions
• Oxford Dictionary of Law BILLY LTD
• Gower
• 2. Terminology
• Capital
• Authorised Capital
• Called up share capital
• Paid up capital
• Uncalled capital
• Issued share capital
• Nominal Value Legal Capital
  Assets
• Call

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1. Rational for Legal Capital

• Protection of creditors
• Ensure that a company operates only with an
  appropriate level of assets, so as to increase
  the chances that it will be able to meet the
  claims of its creditors.

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Meaning of Legal Capital

• Capital connotes the value of the assets
  contributed to the company by those who subscribe
  for its shares.
• By and large, the value of what the company
  receives from investors in exchange for its
  shares constitutes its capital.
• Note one talks about the value of what is
  received, rather than the assets themselves,
  because those assets will change over time.

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• Profits do not count as capital
• Loans do not count as capital.
• Reason in an insolvency the creditors are paid
  before the shareholders
• The value of assets the company receives in
  exchange for its shares may present less than the
  total value of the companys assets because of
  the loans.

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Terminology

• Authorised capital
• The amount of share capital with which a company
  proposes to be registered and the division of
  that share capital into shares of a fixed amount.

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• Issued capital
• The number of shares issued to members and
  represents some guarantee of progress for the
  companys creditors
• authorised capital Vs. issued capital
• A companys authorised capital may be 10 million
  shares of ?1 each, but if only two of those share
  have been issued at par, then its legal capital
  will be ?2.
• What if the shares are issued at premium?

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• Called-up capital
• The amount of capital raised by a call on shares.
  A shareholder, on being allotted shares, may not
  have to pay for them at once but may be called on
  to do so at a later date.

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• Paid-up capital
• This should be the same as the called-up capital
  unless a shareholder has failed to pay what is
  due.

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• Uncalled capital
• The difference between the called-up capital and
  the nominal value of the shares.

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• Reserve capital
• Created by the company passing a special
  resolution which removes issued capital from the
  directors control in order to provide a fund out
  of which creditors may be paid in the event of a
  winding up.

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2. Increase of Legal Capital

• Increase authorised share capital
• Find persons who are willing to take up the new
  shares.
• Table A, regulation 32
• Special Resoultion
• Bonus Issue

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3. Reduction of Legal Capital Yes and No

• Companies are not free to make downward
  adjustment to its legal capital after it has
  raised it in that the amount of the companies
  legal capital plays the important function of
  limiting the companys freedom to return assets
  to its members and thus in retaining assets
  within the company for the benefit of creditors.
• However, there may be good reasons to allow the
  adjustment in certain cases. e.g. new investors

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Reduction of Legal Capital

• Procedures
• Alteration of memorandum
• Company petition with special resolution
• Notify all creditors and give them opportunity to
  object
• What if some creditors are overlooked?
• (Court Approval)
• Confirming order is duly registered and
  advertised
• What if the adjusted legal capital fall below the
  minimum requirement for a public company?

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Reduction of Legal Capital

• Reasons
• No longer need the assets
• Buy out a retiring/deceased member of the company
• Issued capital is sufficient
• Company suffer property losses
• Re Jupiter House Investments (Cambridge) Ltd
  1985 1 WLR 975 serious property loss.

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Reduction of Legal Capital

• Prerequisite
• The company has to satisfy the court that a
  sufficient sum has been deposited, or been
  guaranteed by a bank or insurance company to meet
  the claims of all creditors.

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Ways to Reduce Legal Capital

• Legal capital can be reduced by
• Reduce the amount of any uncalled liability on
  its shares
• Cancel any paid up share capital which is lost
  ore unrepresented by available assets
• Pay off any paid-up share capital which is in
  excess of the companys wants

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• s.135 (2) (b) - cancel paid up share
  capital/lost/unavailable
• A MASSIVE LOSS HAS OCCURRED, E.G.
• 100,000 issued share capital - 100,000 assets
• made up of 100,000 1 shares
• the assets owned by the company are now worth
  only 25,000
• company wants to reduce its capital to reflect
  the assets
• reduce the nominal value of each share to 25p
  (0.25)
• why? if there has been a wastage of capital the
  companys profit and loss account will stand in
  debit
• no dividend can therefore be paid
• Reduce the capital extinguish the debt pay a
  dividend.

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• s.135 (2) (c) - pay off any paid up share capital
  in excess of wants
• Why? E.g.
• Company has sold a large asset and has a large
  amount of cash
• More than it could ever need
• A reduction of capital could be achieved by
  cancelling some shares and returning their value
  to shareholders
• Or by reducing the nominal value of each share
  say from 100p to 75p thus giving each
  shareholder 25p

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4. Acquisition of Own Shares

• The company may acquire its own shares in the
  following circumstances
• No valuable consideration is paid for the shares
• The purchase is to effect a formal reduction of
  capital which has been approved by the court
• The court orders the purchase of shares to
  protect the interests of a minority of
  shareholders.
• s.5(4) CA 1985   The court may on
  such an application make an order confirming the
  alteration either wholly or in part and on such
  terms and conditions as it thinks fit, and may?
  (a)   if it thinks fit, adjourn the proceedings
  in order that an arrangement may be made to its
  satisfaction for the purchase of the interests of
  dissentient members

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• Where shares are forfeited or surrendered as
  required by the articles, by the shareholder who
  has failed to pay.
• Companys employees share scheme or pension
  scheme.
• redeemable shares
• s.159(1)  CA 1985  Subject to the provisions
  of this Chapter, a company limited by shares or
  limited by guarantee and having a share capital
  may, if authorised to do so by its articles,
  issue shares which are to be redeemed or are
  liable to be redeemed at the option of the
  company or the shareholder.
• compulsory purchase order made by the court under
  the unfair prejudice provisions - s.459 CA 85

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5. Raising Capital

• Share Capital/equity financing
• buyers become company members
• Loan Capital/debt financing
• lenders become companys creditors.

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Part B

• Equity Finance

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1. The decisions of finance

• asset need/ purpose
• investment decisions What are the options open to
  the directors- how are we going to finance this
  venture?
• claims against the company - equity or debt -
  issuing securities/borrowing.
• see Eurotunnel plc - online? Butterworths?

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2. An overview of finance stages

• (1) Initial - entrepreneur /banks
• (2) Medium - venture capitalists
• (3) Large - public offering

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2. An overview of finance stages

• (1) INITIAL
• MORTGAGE (Re-)
• SAVINGS
• REDUNDANCY
• RELATIVES
• BANK LONS

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2. An overview of finance stages

• (2) MEDIUM
• BUSINESS ANGELS
• VENTURE CAPITAL FIRMS - e.g. 3I
• Loss of control?
• Time period
• Some figures -
• Amounts?
• Why - capital gain
• Industry terminology (seed corn, start up, early
  stage, expansion MBO, MBI)
• Rescue

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2. An overview of finance stages

• (3) LARGE - PUBLIC OFFERING
• Why?
• Where? (LSE, Tokyo, Shanghai, New York)
• Good/Bad!!??

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2. An overview of finance stages

• (3) Contd - The Paradigm!!
• Ordinary shares
• Only public companies - s.81 CA 85
• The LSE
• the two markets (Official List AIM)
• preliminary corporate restructuring
• 1st Stage - IPO/Floatation - types of offer -
• (1) offer - sale or subscription
• offer contents/level/where/risk

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2. An overview of finance stages

• IPO Contd
• Offer continued - Agent OR Principal investment
  bank
• what might the offer include
• offer level (fixed price OR tender)
• risk of the offer (Agent or Principal)
• underwriting the offer - the Fee.
• (2) Placing - 2nd kind of offer
• 2nd Stage - Flotation - come to market.
• People involved in the IPO process.

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3. Types of Corporate Finance

• Two main types of finance available to companies
  -
• (1) Equity Finance
• (2) Debt Finance
• (3) Other Forms of Finance

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4. Definition of Share

• Borlands Trustee v. Steel 1901 1 Ch. 279 at
  288
• 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
  shareholders inter se in accordance with s.14.
  The contract contained in the articles of
  association is one of the original incidents of
  the share. A share is not a sum of moneybut is
  an interest measured by a sum of money and made
  up of various rights contained in the contract,
  including the right to a sum of money of a more
  or less amount.

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• Some relevant statutory provisions
• s.22 Companies Act 1985
• s.352 - 362 Companies Act 1985
• s.185-186 Companies Act 1985
• Re Bahia Son Francisco Rly Co (1868) LR 3 QB 584

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5. The rights of shareholders

• To be paid any dividend declared by the company
• To vote at company meetings/or appoint a proxy
• To recover the capital value of their shares if
  the company goes into liquidation
• To transfer their shares

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6. Class of Shares
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7. Other Types of Share

• Deferred/Founders Shares
• Non-voting shares
• Multiple voting shares
• Golden Share

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(No Transcript)
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8. Transfer and Transaction in shares

• sale
• Stock Exchange Transfer
• Death of Shareholder
• Mortgages of shares
• restrictions on shares

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Part C

• Debt Finance

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Overview

• (1) Terminology
• (2) The main types of Debt Finance
• (3) The companys POWER to borrow
• (4) Forms of Debt Finance
• (5) Other Types of Finance

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1 Terminology

• Loan
• Contract
• Debt
• Charge
• Security

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2 The main types of debt finance

• Banks
• short term overdraft
• medium term loans
• recurring credit facilities
• Capital Markets
• bonds
• marketable loans

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4 Forms of Debt Finance

• The Debenture
• definitions
• s.744 CA 85
• Types
• Qualities and Ingredients
• .

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Definition

• Debenture refers to the document which
  acknowledges the fact that a company has borrowed
  money, and also refers to the actual debt.

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Debentures

• The single debenture
• A loan from any person or organization
• Series debentures
• A series of debentures to participants who have
  equal rights to repayment.
• Debenture stock
• Offered to the public through the SE in the same
  way as shares.

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• Charges Contd
• what can be charged?
• legal charge
• equitable charge
• fixed charge
• floating charge
• crystallisation
• registration and priority of charges
• rights and remedies of debenture holders

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Charges the Security behind the Loan

• Chargeable assets
• Premises, plant, machinery, goods, tangible
  property, intellectual property

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Types of charges
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Time to crystallize

• The company ceases trading
• Winding up is commenced
• The company fails to repay the debenture holder
  at the due date
• The occurrence of any other event specified in
  the charge deed as triggering crystallization

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Priority of charges

• Charges of the same type take priority according
  to their date of creation. As regards charges of
  different types, a fixed charge takes priority
  over a floating charge, even though it was
  created after it.

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Differences between Shares and Debentures
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B. Corporate Finance - Debt Finance

• (5) Other Types of Finance
• Loan Notes??????
• Subordinated Debt???
• Guarantees????
• Hire-Purchase??
• Leasing??
• Factoring????????

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Part D

• Company Accounting A Company Law Perspective

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C. Company Accounting

• Overview
• (1) Theories of disclosure
• (2) Accounting records
• (3) Annual accounts
• (4) The independent audit
• (5) The process of publicity

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C. Company Accounting

• (1) Theories of Disclosure
• rationale
• disclosure places
• protecting who

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Rationale

• Public disclosure
• Mandatory publicity is an important regulatory
  tool. 
• Forewarned is forearmed-disclosure
• disclosure still remains the principal safeguard
  on which the Companies acts pin their faith
  Gower at page 533.
• keeping accounts, the audit, filling with
  registrar are the price which the members and
  directors of a limited liability company pay for
  limited liability

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Disclosure Places

• London Gazette
• Companies House
• Companys own registers
• compulsory disclosure of the financial
  position in the companys annual published
  accounts and by attempting to ensure their
  accuracy through a professional audit (Gower,
  p.533)
• Newspaper Articles (e.g. My Travel 50 million
  capitalisation 911million debts!)

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Protecting Who

• Business partners/possible creditors
• investors

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C. Company Accounting

• (2) Accounting Records
• s221 CA 85
• accounting records are at all times to be open
  for inspection by officers of the company
• These records are kept for
• 6 years (public company)
• 3 years (private company)
• Failure to keep will result in a fine or
  imprisonment

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C. Company Accounting

• (3) Annual Accounts
• The purpose (Caparo Industries plc v. Dickman
  1990 2 AC 605, per Lord Jauncey at p.662.)
• to question the past management of the company,
• to exercise their voting rights,
• if so advised, and to influence the future policy
  and management

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The Company Financial Yea

• Starts
• ARP Accounting Reference Period
• This begins on the day after the date to which
  the last accounts were prepared, e.g.
• Accounts prepared up to 31st December 2002
• So 1st January 2003 is the date the ARP begins.
• Ends -
• ARD Accounting Reference Date
• The Financial Year ends on the last day of the
  companys financial year, called the ARD. 
• Changing the ARD
• Sections 224-225 CA 85 allow the company to
  specify a new accounting reference date
• They may want to extend the period of accounts

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Form and content of the annual accounts

• s.226 CA 85 a duty on the directors to prepare
  each financial year a balance sheet and a profit
  and loss account individual accounts 
• Balance Sheet
• Shows the companys financial position at the end
  of the year Assets/liabilities 
• Profit and Loss Account
• The Companys financial performance during the
  year.
• Group Accounts
• s.227 CA 85 parent company - a duty on the
  directors to prepare each financial year a
  balance sheet and profit and loss account group
  accounts

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Duty to Lay Accounts

• s.241 CA 85 accounts must be laid before a
  general meeting pursuant to s.242 it is an
  offence if the directors do not and they could be
  convicted.
•  
• It is a defence to have taken reasonable steps
  to comply

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Scale of fines

• s.242A CA 85 -
• Length of period Public company Private
  company
• Not more than 3 months. 500 100
• More than 3 months but
• not more than 6 months. 1,000 250
• More than 6 months but
• not more than 12 months. 2,000 500
• More than 12 months. 5,000 1,000

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Formalities

• The accounts must be
• Accounts approved by the directors
• Balance Sheet signed by the directors

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C. Company Accounting

• (4) The Independent Audit
• purpose
• benefits
• provisions
• appointment
• remuneration
• qualifications and experience
• removal and resignation

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Purpose

• to add financial credibility to the financial
  statements forming part of the annual accounts
  and to ensure that they comply with regulations
  and give a true and fair view
•  
• process concerned to establish and confirm
  confidence in the accounting information viewed
  by the companys records and systems

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Benefits

• a check for the shareholders as to the
  effectiveness of the directors stewardship
• also creditors
• investors

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Auditor Provisions

• Sections 384-394A CA 85
•  s.235 CA 85 an independent auditor must
  audit the accounts and the auditors report must
  be published with the accounts

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Appointment

• Auditors must be appointed unless the company is
  dormant or audit-exempt.
• At each AGM auditors must be appointed they
  hold office until the next AGM

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Remuneration

• Fixed by the company in AGM or in any other way
  the company may determine
• Usually delegated to the directors

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Qualifications and Experience

• ICAEW
• ACCA
• Accountants
• 9th EC Company Law Directive now have a
  registered auditor
• Who cannot be an auditor?
• Company officer or servant
• Partner of an officer or servant
• Subsidiary company officers or servants

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Removal

• Members may remove an auditor before the expiry
  of their term of office registrar must be
  informed within 14 days.

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Resignation

• Can be done at any time by the auditor giving
  notice at the companys registered offices.

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Rights of the auditor

• Auditors have wide statutory powers to enable
  them to obtain whatever information they require
  for the purposes of their audit, e.g
• Right of access to all books, accounts and
  vouchers of the company
• They are entitled to such information and an
  explanation form the officers of the company as
  they think necessary for the performance of the
  auditing duties
• Criminal offence if an officer misleads the
  auditor
• AGM notice and allowed to attend

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Auditors Duties

• Two main duties
• (1) to audit the accounts of the company
• (2) to report to the members of the company on
  the accounts this report must be open to
  inspection by any member

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SOME case law examples

• It is not the auditors job to make sure the
  company is being run efficiently or profitably or
  to advise on the conduct of the business
•  
• The auditors job is to ascertain the true
  financial position of the company

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Re London and General Bank 1895 2 Ch 166

• The Facts
• The London and General Bank was being wound up
• For a period of time the capital of the bank had
  been advanced to four Balfour companies
• The securities granted by the companies were
  insufficient and difficult to realise
• The auditors (Theobald) drew attention to the
  situation in a report to the directors of one
  Balfour company stressing the gravity

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• They said, we cannot conclude without expressing
  our opinion unhesitantly that no dividend should
  be paid this year
• The chairman of the Bank, Mr Balfour persuaded
  the auditors to strike this sentence from their
  report before the report was laid before the
  board of directors
• The certificate signed by the auditors and laid
  before the shareholders at AGM stated that the
  value of the assets as shown on the balance sheet
  is dependant on realisation

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• As originally drawn it also said and on this
  point we have reported specifically to the board
• But again Mr Balfour persuaded them to withdraw
  this statement by promising to mention this in
  his speech to the shareholders
• He did this without drawing special attention to
  it
• The directors declared a dividend of 7 per cent

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• HELD
• The auditors had been guilty of misfeasance
  (s.212 IA 86) and were liable to make good the
  amount of the dividend.
• It is the duty of an auditor to consider and
  report to the shareholders
• 1.  Whether the balance sheet exhibits a
  correct view of the state of the companys
  affairs and the true financial position at the
  time of audit
• 2.  He must take reasonable care to see that his
  certification is true
• And he must place the necessary information
  before the shareholders and not merely indicate
  the means of acquiring it.

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• Historical position
•  
• The auditor is not under a duty to take stock and
  can accept as honest any statements made by the
  companys officers and servants so long as he
  acts reasonably in so doing and the circumstances
  are not suspicious.

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•  Re Kingston Cotton Mill Co 1896 2 Ch 279
• The Facts
• The directors of the company were enabled to pay
  dividends out of capital because the stock in
  trade of the company was overstated for several
  years
• The auditors had not required the production of
  the stock records
• They had accepted the certificate of the
  companys manager regarding th value of the stock.

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• HELD
• The auditors were not liable
• And the auditor, Lopes, LJ is a watchdog, not
  a bloodhound
• He can assume that the companys servants are
  honest.
• He can therefore rely on the statements that they
  make.