10. Distributions and maintenance of capital

This chapter examines the controls imposed on return of a company’s capital to its members, first by considering the common law general principle that return of capital to shareholders is illegal unless permitted by statute. It then discusses the problem of how to distinguish between a legal distribution of profits and an illegal return of capital; transfer of profits to a capital redemption reserve and use of profits to pay up bonus shares; company’s issuance and redemption of redeemable shares or purchase of its own shares; purchased shares as treasury shares; and how a company may reduce its issued share capital by special resolution. The chapter also looks at capitalisations and employees’ share schemes. It includes analysis of three court cases that are particularly significant to distributions and the maintenance of capital.

9. Control of a company

This chapter discusses how control of a company can be identified and how it can change. It considers takeovers, the City Code and compulsory acquisition of remaining shares. There is full discussion of the provisions for disclosure of significant holdings both to warn of potential takeover moves and to disclose in the public interest who has significant control of a company. The statutory definitions of holding company, subsidiary and wholly owned subsidiary are considered.

7. Offering shares to the public

This chapter focuses on public offering of shares as a source of finance for companies, with emphasis on the legal requirements to provide the necessary information to prospective investors. It also considers the importance of a marketplace for selling shares at the best possible price, as well as the regulation of the financial services industry by the Financial Services and Markets Act 2000. In addition, it discusses two controls on share offers to the public under the Companies Act 2006 with respect to payment of underwriting commission and repayment of subscribers’ money if a share offer is not completely successful. The chapter examines the regulatory regimes for securities markets, some of the main reasons or advantages for going public, the prospectus requirement and any exemptions to it and how the law deals with misleading statements and omissions in prospectuses.

6. Shares

This chapter considers one way of becoming a shareholder of a company with a share capital: by taking shares from the company in exchange for a contribution of capital. The number and class of shares of the company that the member holds determines the extent of the member’s undertaking to contribute capital, and of entitlement to share in distributions and vote at meetings. Share allotment in exchange for a capital contribution is explained, and the need for public companies to have a minimum contributed capital is emphasised. The chapter also looks at possible remedies available to a person who has been induced to take an allotment of shares by a misrepresentation, including rescission of contract. Finally, it examines ways of altering a company’s share capital.

1. Overview

This chapter provides an overview of the work’s contents. It introduces the basic ideas of company law. A company is an artificial legal person capable of owning property, being a party to contracts, and being a claimant or defendant in legal proceedings. A company is created by registration at Companies House under the Companies Act 2006. A company is both an association of members (shareholders) and a person separate from its members. Members are not liable for the company’s debts. Members are only liable to make an agreed capital contribution in return for their shares. Members appoint directors to manage the company’s business and represent the company. Every company must have articles of association which set out the company’s constitution.

19. Acting for a company: agency and attribution

This chapter deals with the legal relationship of agency that exists between the company and the agent, explaining the process involved in an agent’s authentication and the execution of documents for the company he or she represents. It considers two ways in which a company may become contractually bound to another person (a ‘contractor’) under the provisions of the Companies Act 2006: through a written contract to which the company’s common seal is affixed, or when someone has made a contract on behalf of the company. It also discusses the company’s capacity to enter into contracts, including the ultra vires rule, and attribution by a court so as to impose criminal liability on a company. A number of court cases relevant to the discussion are cited.

13. Corporate governance

This chapter surveys corporate governance. It identifies the key problem of the separation of ownership and control in companies that are not owner-managed. Shareholders are seen as the owners of the company but directors manage the company and can do so for their own benefit rather than the shareholders’. There is a list of the numerous legal controls on directors, which are studied in other chapters. There is discussion of two ways of looking at directors, either as stewards who must account for their actions to the owners or as entrepreneurs whose wealth-creating work deserves reward. The UK Corporate Governance Code, which applies to premium listed companies, is discussed, as are shareholder activism and investor stewardship.

20. Company insolvency and liquidation

This chapter deals with procedures and legislation governing the insolvency and liquidation of a company and who are qualified as insolvency practitioners. It discusses insolvency procedures such as administration, voluntary arrangement, creditors’ voluntary winding up, winding up by the court and the appointment of a provisional liquidator. It considers the effect of insolvency and liquidation procedures on floating charges, court control of insolvency and liquidation procedures, and liability for fraudulent trading and wrongful trading. The legal principles underlying disqualification orders against a company’s directors, the use of an insolvent company’s name, the order of the application of assets in liquidation and the dissolution of a company are also examined.

17. Company officers, secretary and auditor

This chapter focuses on company officers (secretaries, auditors and managers), with emphasis on their responsibilities and liabilities under the Companies Act 2006 (CA 2006) and the appropriate sanctions for breach of its requirements. It first considers who, in general terms, is an ‘officer’ or ‘manager’ of a company for the purposes of criminal or fiduciary liability. Then it deals with the appointment and qualifications of secretaries and the appointment and reappointment of auditors. There is discussion of auditors’ remuneration, integrity and independence, the required contents of an auditor’s report and an auditor’s investigative powers. There is analysis of an auditor’s liability in contract and tort for negligence in carrying out the audit and negligent misstatement in an auditor’s report. The chapter cites relevant legislation, including CA 2006 and UK Corporate Governance Code, and considers two particularly significant cases: Caparo Industries plc v Dickman [1990] 2 AC 605 and Stone and Rolls Ltd v Moore Stephens [2009] UKHL 39, [2009] AC 1391.

8. Share transfer

This chapter discusses some of the procedures to be followed when transferring some or all of a company member’s shares to another person, for sales on and off the London Stock Exchange, transfers of all or a part of a member’s holding and transfers of certificated and uncertificated shares. After describing share certificates and uncertificated shares, the chapter considers the problem of who should bear the loss when a transfer of shares is forged or fraudulent. It also explores transmission of shares on death or bankruptcy.