Introduction to Business Law: The Formation & Structure of Businesses

Business

•       Human society has for many thousands of years engaged in business

•       Business is far older than money itself

•       Neolithic people, even before the formation of cities and complex societies engaged in trade

•       As a species trade is almost innate in us

•       Even simple societies could not exist without it!

Bu’sinėss (bĭ’zn-) n. Task, duty; thing that is one’s concern; habitual occupation; serious work; thing needing dealing with.

•       The dictionary definition of business is very broad

•       We are concerned with the commercial definitions and the legal definitions

The Basis of Business

•       Relationships between individuals involving ‘business’ are contractual relationships

•       The basis of all business is the contract

•       The parties make and agreement between themselves and accept that this agreement is bound by law

•       The parties must have intended to create a legal relationship

The Relationship

•       As a social animal humans form complex relationships

•       Usually with other humans

•       But occasionally with non-human entities

•       Such as a business

•       This works both ways

There are many way of conducting business

•       Sole Trader

•       Partnership

•       Limited Company

•       Public Limited Company

•       It is essential to determine which is the best option

Sole Trader

•       Speaks for itself!

•       Individual conducting business without formal company or partnership structure

•       May not be operating the business alone

•       The profits of the business are his/hers (subject to tax and liabilities)

•       The business liabilities (debts) also fall to the sole trader (serious personal risk)

Partnerships

•       Two or more persons who run the business between them

•       Subject to legal rules governing business relationships between individuals (contract, tort and agency)

•       A partnership is not a seperate legal entity to its members

•       The partners are personally liable for the business debts

Agency

•       By section 5 of The Partnership Act 1890

•       Every partner is an agent of the firm and his other partners for the purpose of business of the partnership

•       An agent has the power to make contracts on behalf of a third party, his or her principal

•       This has enormous significance

•       If one partner makes a contract all other partners are bound by it

•       If the contract proves to be a disaster the consequences will extend to each partner personally

•       If the partnership assets are insufficient to pay debts they fall personally on the partners jointly and severally

•       The agency of the partner only extends to contracts made

•       ‘…for carrying on in the usual way business of the kind carried on by the firm of which he is a member…’

•       If a partner ordered a new till or a freezer for a restaurant the other partners would be liable (ordinary course of business)

•       Section 5 can disallow a partner from agency (usually expressed in the partnership deed)

•       ‘…unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person who is dealing with either knows he has no authority or does not believe him to be a partner…’

Business Organisations

•       Companies are created by registration under the Companies Act 1985

•       The Companies registrar will issue a certificate of incorporation and the company will then exist as a corporate body

•       The Company is a separate legal entity from those who own it

Salomon v Salomon & Co Ltd [1897]

•       Salomon was a boot repairer of many years standing

•       He formed a limited company and sold his business to the company for £39,000

•       The company paid the purchase price by issuing him £20,000 in shares

•       Regarding him as having lent the company £10,000 with the balance in cash

•       Unsecured creditors lent the company a further £8,000

•       Salomon registered all the companies assets as security for his £10,000 loan

•       The company got into difficulties and was wound up

•       Salomon took all of the companies assets

•       Secured creditors with charges on assets take precedence over unsecured creditors

•       The unsecured creditors claimed that Salomon should repay their loans as he was the same person as the company

•       Salomon owned all but 7 of the companies shares but… he was one person and the company another… he was not liable for the company’s debts

Macaura v Northern Assurance Ltd [1925]

•       Macaura and his nominees owned all the shares in this timber company

•       The company owed money to Macaura but not to anyone else

•       Macaura insured the company assets (timber) in his own name

•       Two weeks later the timber was destroyed in a fire

•       Macaura claimed on the policy…

•       Macaura was not allowed to recover the insurance as the company owned the timber not him

•       Only the owner of the goods can insure them

Companies as Separate Entity

•       If a wrong is done to a company it must sue the wrongdoer

•       Its members do not have locus standi to do this

•       If a company does wrong to a person they must sue it

•       Its members do not have liability

Limited Liability

•       Purchasers of shares in a company are only committed to a pay the price of the shares

•       If the investors have fully paid up they have no financial liability should the company go into liquidation

•       It is the shareholders who benefit from the limited liability the company will be liable for any debt it incurs

Perpetual Succession

•       A company can be liquidated at any time by special resolution of the members

•       Under such circumstances the company ceases to exist (along with its liabilities)

•       Companies can of course continue to exist indefinitely a state known as perpetual succession

Ownership of Property

•       A company can own property and this property will continue to be owned regardless of who owns the shares

•       This property can be given as security for loans to the company by the use of fixed  charges

Contractual Capacity

•       The company can enter into contracts and sue and be sued on these contracts

•       While the power is delegated to human agents within the company (usually the directors) it remains the company that assumes the rights and liabilities the contracts create

Tortious Liability and Rights to Sue in Tort

•       A company can sue and be sued in tort (civil wrong other than breach of contract)

•       Anyone injured by a company’s negligence can sue it

•       It can sue anyone who ‘injures’ it by negligence, trespass or defamation

Criminal Liability

•       The commission of a criminal act will in most case require the defendant to have committed a guilty act (Actus Reus)

•       While possessing the requisite state of criminal mind (Mens Rea) usually intention or recklessness

•       On first examination it would seem that companies could not form any mens rea since while they are separate legal entities they do not possess minds

•       The courts have been prepared to regard the controllers of companies as being ‘the mind’ of the company

Tesco Supermarkets Ltd. v Nattrass [1971]

•       A person sufficiently senior in a company could be regarded as the mind of the company and therefore the company could possess mens rea in criminal behaviour

•       Persons without seniority are merely the hands of the company so even if they have guilty minds it is not the mind of the company

Private & Public Companies

•       Public Companies (Plc’s) can offer their shares to the public

•       The articles of association of private companies restricts the distribution of shares

•       Most commonly the shares must first be offered to existing members of the company

Private Company Shares

•       Shares may be sold only to persons of whom the shareholders approve

•       The articles of association may not make provision for selling shares to the public

•       It is illegal to offer a private company’s shares to the public

Public Company Shares

•       Public companies make up only about 1% of all registered companies

•       However they tend to be very much larger that the private companies

•       The assets of the 1% of companies that are public far outweigh the the assets of the 99% of private companies

Public Limited Companies

•       Plc’s may register with the London Stock Exchange but most do not

•       Around 2000 Plc’s are listed on the LSE but most are on alternative investment markets

•       Private limited companies may convert to Plc’s by special resolution

•       The principle difference between private and public companies is the availability of the Plc’s shares on the market

•       Companies Act 1985 s.81 forbids private companies from selling shares to the public

•       A public offer is an invitation to the public to buy the shares and is known as a subscription

•       In order that subscribers (new purchasers of shares) and members (existing shareholders) may make sensible investment decisions

•       Public Companies must make information available to them

•       This is published in an annual report and accounts

Companies Act 1985
Reporting Requirements

•       s.238.—(1)  A copy of the company's annual accounts, together with a copy of the directors' report for that financial year and of the auditors' report on those accounts, shall be sent to—

•       (a)  every member of the company,

•       (b)  every holder of the company's debentures, and

•       (c)  every person who is entitled to receive notice of general meetings,

Not less than 21 days before the date of the meeting at which copies of those documents are to be laid in accordance with section 241

•       Individual Company Accounts

•       The directors of every company must prepare for each financial year of the company:

•       A balance sheet as at the last day of the year; and

•       A profit and loss account: the company’s ‘individual accounts’.

Companies Act 2006

•       The new Companies Act 2006 imposes greater obligations on companies to report their activities

•       These incorporate the latest views on transparency and ethical investing

•       Many investors these days are interested in the company’s activities as well as its profitability

•       The new Act seeks to involves shareholders in a much more hands on approach

•       New requirements have been introduced for public companies,

•       Some of the provisions of these requirements only apply to companies whose shares are listed on the main board of the LSE

•       Exempting companies whose shares are listed on AIM

1. Main trends and factors likely to affect future development, performance and position of the business

•       These could be political trends at home or in the countries the company trades in

•       Current investor trends such as ethical investing 

•       Requires Information on environmental matters, employees and social issues to be incorporated into company reports

•       Many of the larger Plcs and global companies have invested heavily in establishing themselves as ethical corporations

•       United Nations Global Compact on Corporate Ethics

•       Information on contractual and other arrangements essential to the company's business must be reported in the company report

•       Such information may assist not only in a determining the companies performance but may also allow investors to shun unethical investments

Transparency under the 2006 Act

•       Under the new Act companies must publish their annual report and accounts on their website;

•       Disclose results of polled votes at general meetings on their website;

•       Give certain minority shareholders the right to require independent scrutiny of any polled vote, the results of which must be published on the company's website.

•       Political donations and expenditure

•       The 2006 Act contains simplification and clarification to the existing provisions requiring shareholder approval for political donations and expenditure

•       Clarifies a number of grey areas (such as expenditure relating to Trade Unions).

•       Transparency Obligations Directive

•       The Act brings into force the European Directive (2001/34/EC) imposing obligations on main list companies in relation to financial reporting, disclosure of major acquisitions or disposals of its shares and the dissemination of information about the company to its shareholders and the public generally.

•       The 2006 Act also introduces a statutory compensation scheme for misleading or inaccurate statements in reports.

•       PLc’s are now required to put annual reports on the web