Learning Outcomes: To explain the distinction between establishing a company by registra-tion and purchasing ‘off the shelf ’.
6.3.1 Promoters
Those who set out to form a company are called its ‘promoters’. They include those who arrange for the documents to be drafted and filed, those who buy for or transfer property to the new company, nominate the first directors, choose the company’s accountants and solicitors, open its bank accounts, and arrange finance and shareholding.
They do not include the independent providers of professional services, such as the pro-posed company’s accountants, solicitors or bankers themselves.
Promoters owe stringent fiduciary duties to the company: good faith, care, and such skill as they have. Although they are allowed to charge for, or make a profit from, their activities, promoters must disclose this to the company and its shareholders; otherwise they may be made to account for it to the company. When a small private company is formed, the pro-moters themselves may be the only shareholders and directors, and in this situation little dif-ficulty should occur. The position may be more complex if there are also new shareholders.
Most of the activities undertaken by promoters will lead at some point to a contract made (purportedly) between an outsider and the company. Promoters should be careful not to enter into such contracts until the company is actually in existence. Pre-incorporation contracts are not enforceable against a company but they may be enforced personally against the promoter himself. Promoters are allowed to charge for their pre-incorporation services but they cannot compel the company to pay them. The company may, however, choose voluntarily to reimburse their expenses.
6.3.2 Registration
The main legal task of the promoters is to file the necessary documents with the Registrar of Companies in Cardiff. These documents are:
● the Memorandum of Association;
● the Articles of Association (not strictly necessary – see later).
● details of the registered office, the first directors and the company secretary (Form G.10);
● a statutory declaration that the requirements of the Companies Acts have been complied with;
● a small registration fee.
The Memorandum of Association and its clauses
This, in effect, describes the company’s characteristics, and affects its relationship with the outside world. Its form is governed by regulations under the Companies Act. There are five compulsory clauses:
1. name;
2. registered office;
3. objects;
4. liability of members;
5. nominal/authorised capital.
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Name The promoters will choose this, but there are some constraints, and the Registrar must refuse to accept some names.
● The name must end with ‘limited’ (or its abbreviation ‘ltd’) if the company is a private one limited by shares, or ‘public limited company’ (‘plc’) if it is public. These words or abbreviations must not appear other than at the end. If the company is specifically regis-tered as Welsh, then the Welsh language equivalents (‘cyfyngedig’, ‘cyf ’, etc.) may be used.
Exceptionally, a non-profit making guarantee company can apply for exemption from ending with ‘limited’, etc.
● The name must not be the same (or virtually the same) as that of an existing registered company. In practice it is possible to log on to the companies house website and check the index of names to see whether or not the proposed name is already in use.
● The name must not in the opinion of the Secretary of State be a criminal offence, or offensive.
● The Registrar must refuse a name which suggests connection with government or a local authority unless the Secretary of State approves it.
The Company and Business Names Regulations specify a number of words or expres-sions for which the approval of the Secretary of State (for Trade and Industry) is required.
Members can later change the name by a special resolution, but subject to all of the above constraints (for a small fee). Moreover, the Secretary of State can subsequently direct a company to change its name in some circumstances.
In choosing a name, the promoters should also be aware of the law of trade marks, under which another business could prevent the use of a name too like that of itself or its products, irrespective of what the Registrar has approved.
Companies trade under corporate names but they may also trade under other, non-corporate, names. For example, ABC Limited may trade under the name ‘Simply Blue’ – a business name. When selecting a business name, care must be taken not to choose one which is already in use, that is, by another undertaking, either as a corporate or a business name – otherwise it may give rise to an action in tort for passing-off: [Ewing v. Buttercup Margarine Co Ltd (1917)]. Under the Business Names Act 1985, the name of the company must appear on all business documents and be clearly shown at all premises to which the public is likely to have access or where business is transacted.
Registered office Every company must have one. This is the company’s legal home, and determines the company’s domicile. Writs and other documents can be served on it there, and various registers must be kept there, often available for inspection by shareholders, creditors and/or the public. It need not be at or near any place where the company does business.
The Memorandum need only state the (British) country of registration: Scotland;
England and Wales generally; or specifically Wales for Welsh companies. The actual address need only be given on Form G.10 (together with particulars of directors, etc.) which must be delivered with the Memorandum, but it is often also included in the Memorandum.
The address of the registered office may later be changed by the members by an ordinary resolution of which the Registrar is informed. However, an English and/or Welsh company cannot move its registered office to Scotland or vice versa. A new company must be formed in the new country.
Objects clause This defines (often at great length) the purpose for which the company is set up, and the activities which it proposes to carry out. Its original purpose was to protect
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shareholders and investors by limiting the ventures for which their investment could be used. Anything outside of this range was ultra vires and therefore void. Proposed activities could be stopped in advance by an individual shareholder, and ultra vires contracts did not bind the company. In fact, the objects clause was often drafted very widely, so as to give the company as much freedom as possible. Companies can later limit or extend their objects by special resolution (75 per cent majority of votes cast) at a general meeting. Private compa-nies can also change their objects by a written resolution approved by 100 per cent of share-holders without having to call a meeting.
The potential importance of the objects clause has been lessened by two changes:
1. Since the Companies Act 1989, s.110, it has been permissible to state simply that the object of the company is to ‘carry on business as a general commercial company’. This effectively renders the ultra vires doctrine irrelevant so far as trade and business activities are concerned, although any non-business activity might still be affected. However, most existing companies still keep their original objects, and many new companies do not use this ‘general commercial’ formula.
2. As a result of EU law, the ultra vires rule was restricted as regards any transaction decided on by the directors. This became s.35 of the Companies Act 1985. The 1989 Act clarified and extended s.35, so that now ‘the validity of an act done by the company shall not be called into question on the ground of lack of capacity by reason of any-thing in the company’s Memorandum’. This will be discussed in more detail later in this chapter.
Liability clause This merely states that the liability of members is limited. It need not even state whether the limitation is by shares or by guarantee.
Capital clause A company limited by shares must state the amount of the share capital with which it is to be registered, and how this will be divided into shares of a fixed amount.
This is the company’s authorised or nominal capital, and represents the number of shares which a company can issue. A public company must have an authorised capital of at least
£50,000 (see earlier). The authorised capital does not necessarily represent the amount of capital which a company can raise, because shares are often issued at a premium, that is, for more than their nominal value. They cannot be issued at a discount. The authorised capital can be increased later by special resolution if, for example, the company wishes to expand.
Association clause The Memorandum ends with a statement that the subscribers wish to be formed into a company. For public companies there must be at least two subscribers whose names and addresses appear at the end. Each must take at least one share, and the Memorandum must say how many he does take. Each must sign and signatures must be wit-nessed. Private limited companies can now be formed with only one subscriber.
Other clauses In appropriate cases, some other clauses must be included before the asso-ciation clause. For example:
● If the company is public, there must be a statement that the company is to be a public one.
● If the company does not wish to submit any Articles of Association, it must provide in its Memorandum that it is adopting Table A; see later.
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The Articles of Association
These regulate the internal affairs of the company and the position of the members. They cover such matters as meetings, voting and other rights of shareholders, transfer of shares, div-idends, the position of directors and their powers of management. Articles must be printed and signed by the subscribers of the Memorandum, and the signatures must be witnessed.
A company need not, however, submit any Articles. It may simply provide in the Memorandum that it is adopting Table A, a model set of Articles published in regulations made under the Companies Act 1985 (or, before the 1985 Act, set out in Schedules to the earlier Companies Acts). Table A has been changed from time to time, and a company which adopts Table A keeps the version existing at the time when it was formed. In any event, the Table A current at the time of incorporation always applies except in so far as it is expressly or impliedly overruled by actual Articles. Most companies do in fact submit their own printed Articles, for example, so as to give greater protection to the directors: see Bushell v. Faith (1970) (later).
The Articles may later be altered under the 1985 Act, s.9. This can be done at a general meeting of shareholders by special resolution (75 per cent of votes cast), or by a written resolution agreed by all members in a private company. The alteration must not:
● clash with the Memorandum;
● oblige existing shareholders to take more shares or to provide more capital without their written consent;
● discriminate between members; or take away the rights of any class of shareholders, with-out approval of the change by a special resolution of shareholders of that class;
● be illegal; and
● the alteration must be for the benefit of all shareholders and the company as a whole.
Statement of directors, company secretary, etc. – Form G.10
This must be signed by the subscribers of the Memorandum, and filed with it. It must give particulars of the first director or directors, with his/her/their consent to act. Particulars include information about any other directorships which they have.
The first company secretary must be nominated on this form, with consent to act.
A director can serve as company secretary, but only if there is at least one more director;
the company must have at least two officers. The secretary is, in effect, responsible for administering the requirements of the Companies Acts, particularly as regards the registers, information and documents which must be kept and made available.
Those named and consenting to act on this form automatically become the first direc-tors and secretary. The address of the registered office must also be given here; see above.
Statutory declaration
A person named as a director or the company secretary (above), or a solicitor engaged in forming the company, must complete a statutory declaration that the registration require-ments of the Companies Acts have been complied with. The Registrar can accept this declaration as sufficient evidence.
The registration fee This is currently £20.
The certificate of incorporation
On receipt of the above documents and his fee, the Registrar will satisfy himself that the statutory requirements have been met; for example, that the purposes are lawful, that
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the chosen name is available, that all of the required documents have been submitted, and that the Memorandum (and Articles if submitted) are in the proper form, printed, signed and the signatures witnessed.
If he is satisfied, the Registrar must then sign a certificate stating that the company is incorporated, and the company comes into existence on the date given in the certificate.
The company’s registered number given in the certificate must thenceforth be used in all of the company’s official documents and business letters.
A certificate of incorporation is conclusive evidence of the matters which it states. For example, if any future dispute arises over exactly when the company was formed (e.g. over taxation or an allegedly pre-incorporation contract), the date in the certificate is conclusive, even if it is alleged that the Registrar’s office accidentally put the wrong date. If the certifi-cate states that the company is public, again this is conclusive evidence that it is public. The company’s affairs cannot, therefore, be challenged later by any allegation of irregularities in the registration procedure. Exceptionally, however, registration may later be challenged by the Crown, through the Attorney General, on grounds that the objects were illegal or contrary to public policy: see Bowman v. Secular Society (1917).
As we have seen, a private company can start its activities immediately from the date of incorporation. A public company must satisfy the further requirements of s.117 before doing business or borrowing money.