How are company decisions made?

For an owner-managed company which has only one or two directors and no employees, decisions will often be made informally and the resulting action performed by the same individuals. Ideally such decisions should be recorded as a board minute but this is not always possible.

In larger companies there may be more a structure to the business, with very junior or unskilled staff reporting to team leaders, who in turn may report to managers and senior managers (who will report to the directors) as is necessary to run the company.

What is most important is that directors maintain a close control of the company and ensure that there are reporting lines which, on important matters, eventually lead to the necessary information being provided to directors either for management information purposes or for approval.

Directors have a fiduciary duty to the shareholders of the company to ensure they promote the interests of the company. However, they also have non-fiduciary duties which extend to third parties in certain circumstances (most particularly creditors and the public at large) which require that they do not distance themselves from inappropriate or improper behaviour.

Directors’ duties were codified by Sections 171-177 of the Companies Act 2006, although these have been interpreted by case law oth prior to and since this legislation was introduced. Broadly speaking, a director has a duty to ensure that he continues to promote the success of the company, does not act in conflict with his own interests and performs his role to a requisite standard (which may be raised dependant on his/her skills and experience).

Is there any restriction on the choice of company name?

There are rules set out as regards a private company’s name:

It cannot contain any reference to a government department or any local or public authority;

It may not include any sensitive words without the approval of the Secretary of State (see attached list).

It may not be offensive;

It may not include any reference to a regulated profession, unless permission has been granted by that professions’ regulatory body (see attached list). A breach of this requirement could constitute a criminal offence.

A list of prohibited and sensitive words are published by Companies House. This list is constantly updated and can be found at: http://www.companieshouse.gov.uk/about/gbhtml/gp1.shtml

Directors and their control of a company

Once the company is set up and running, all of its trading activities are subject to the direction and management by its directors, which is commonly referred to as corporate governance and is subject to shareholders’ authority.

Directors will normally have a delegated authority (via the Articles or by resolution of the board of directors) to bind the company when dealing with creditors (including securing assets of the company), tax authorities, customers, potential customers, regulatory authorities, instruction of accountants and lawyers and all contact with the public at large.

The decision on direction, although broadly reviewed at annual shareholder meetings, will generally be a product of the directors’ decisions as regards marketing of the product or service, how it is perceived in the market and general brand development issues.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw

What are the benefits of a limited company?

A company is a separate legal person from the individuals who are involved with the company as director or shareholder. A company can own property and enter contracts in its own name and any liability attaching to those assets or arrangements will be that of the company.

There are a number of different types of company but the most common, and usually the best suited to an owner-manager business, is a private company limited by shares. Limited liability is the best way to protect your personal assets from any claims made against the business by creditors, because the maximum amount any shareholder can be required to contribute in the event of any loss suffered by the company is limited to any unpaid share capital as regards the shares issued to the shareholder.

There are additional benefits to running your business as a company in terms of corporation tax (which is at a lower rate that the higher earnings threshold), the ability of shareholders to withdraw profits by way of dividends (which again have tax benefits) and, because of the necessity to publish accounts, quite often it will provide access to perhaps higher profile customers, who would not be prepared to deal with individuals, with the associated commercial benefits that such sales may bring.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw

Shareholder’s Agreements – Part 1: the need for a shareholders agreement

The most common form of company business is a small owner-managed company, comprised of the same individuals who run the business, act as directors and who are also shareholders. This may be a business that is family-run and which has been going for some time, or it may be a joint enterprise between friends.

One of the most common problems that arise in such entities is where directors fall out, are ill or where there is an unresolvable disagreement as to how the company moves forward.

The company’s Articles of Association provides rules governing how directors agree decisions about the day-to-day running of a company, by a process of majority rule where directors are in disagreement, or by reverting to shareholders where the decision is more important or where it critically affects the intended business of the company.

This process works remarkably well but it is often the case that such decision-making leaves a bitter taste with minority shareholders or directors outvoted at such meetings or, as is often the case, directors/shareholders refuse to meet to enable such decisions to be made.

This process can often be completely ineffective where there is a deadlock between shareholders – usually where there is an even number of shareholders taking different sides with the effect that no shareholder resolutions can be passed (and often the directors are the same individuals and no decisions can be made by the company, which could be a breach of the directors’ duties and make them personally liable for any losses arising to the company or third parties).

These risks can be avoided in advance by the shareholders agreeing at the outset (although such agreement can commence at any time) a contract which governs their relationship. This is quite often referred to as a Shareholders Agreement.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw

INTRODUCTION

This is part of a series of blogs that form the basis for a company toolkit, by providing guidance on how to set-up a company, the critical considerations to deal with at the start of your business, ongoing issues that all companies face and options to consider when difficulties arise.

This series of blogs will consider how best to deal with issues facing companies and company directors, although many of these topics are also relevant to individuals who run their own business (where it is not a company).

These blogs cover matters broadly and of course all individual circumstances are different and it is essential when considering these matters that professional advice is sought. At Francis Wilks & Jones we can assist in advising on all legal matters. 

For more information call 020 7841 0390 

Shareholders’ role in administering company affairs

Shareholders have no right to be involved in the day-to-day running of the company unless they (as individuals) are also directors of the company (as often occurs in small owner-managed companies). It is a duty of directors to ensure a register of shareholders must be maintained by the company at all times.

However, this is not to say that shareholders have no involvement in the management of a company’s affairs. Annually the company (acting via its directors) must call a general meeting of shareholders (often referred to as an Annual General Meeting or “AGM”) to consider and pass shareholders resolutions including the approval of financial accounts, the reappointment of directors, approving loans to directors and the appointment of auditors.

Shareholders have no right to be involved in the day-to-day running of the company unless they (as individuals) are also directors of the company (as often occurs in small owner-managed companies). It is a duty of directors to ensure a register of shareholders must be maintained by the company at all times.

However, this is not to say that shareholders have no involvement in the management of a company’s affairs. Annually the company (acting via its directors) must call a general meeting of shareholders (often referred to as an Annual General Meeting or “AGM”) to consider and pass shareholders resolutions including the approval of financial accounts, the reappointment of directors, approving loans to directors and the appointment of auditors.

Any shareholder may call a meeting of shareholders between AGMs (often referred to as Extraordinary General Meetings or “EGMs”) provided s/he (together with any other shareholders requesting such a meeting) has a minimum amount of shares in the company.

An EGM or AGM provides an opportunity for shareholders to amend the company’s Articles of Association, remove directors or impose other conditions on how the company operates.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw

Company Memorandum and Articles of Association

A Memorandum of Association is an agreement by the initial shareholder(s) that they wish to form a company and agree to become members and will take at least one share each in the company.

An online version of the Memorandu of Association is available at;

http://www.companieshouse.gov.uk/forms/generalForms/pro_forma_of_ca_2006_memorandum_for_a_company_with_a_share_capital.pdf

A company is governed by its constitution and the Companies Act 2006.

The main constitutional document is called the ‘Articles of Association’ (the “Articles”) and is the internal rulebook for a company. Some of the most important provisions of a company’s Articles are the powers of directors, how meetings of directors may be called and must be conducted, the powers of shareholders and how shareholder meetings may be called and conducted and the issue and rights of shares.

Together the Memorandum and Articles of Association are the documents that outline how a company can be governed.  If amendments to any of these documents are required, these can be amended by shareholders’ resolution.  However, between shareholders, it is recommended to also ensure that a shareholders agreement is in place as early as possible.

Off the Shelf Companies

A would-be director can purchase a company that has been formed by company formation agents but which has not traded (these are known as “shelf companies”).  These companies come with the very basic constitutional requirements, but it is possible and often desirable to alter the company’s name and constitution to met your specific needs, as explained below.

Once you have filed the necessary forms, paid the necessary fees and received a Certificate of Incorporation, you are free to use that company’s name for the purpose of all contracts entered into.

It is not uncommon, perhaps sometimes as a result of the unavailability of a specific name that is sought, to form a company with an unrelated name but use a different trading name going forward. 

This is perfectly acceptable provided that there are no copyright or other brand issues (i.e. using already established names in a similar business) and you need to ensure that the company name is referred to in all contractual, statutory and other legal documents.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw

How do I form a company?

A company is formed by the filing of certain forms at Companies House and the payment of a fee. The company is incorporated when the Registrar of Companies issues a certificate of incorporation. To incorporate a private company limited by shares the information you need is:

- The company’s name (subject to availability at Companies House).

- The address of registered office (see below).

- The name, address, place of residence, nationality, date of birth and occupation of each director or company secretary. There must be at least one natural person appointed as director.

- The names and addresses of the shareholders, the number and class of shares and the nominal value of each share and the amount paid for each share issued.

- Details of any particular rights given to any shares (see Shareholders’ agreements below) should also be included. There must be at least one shareholder and one share issued.

It is possible to complete and file the forms yourself online using the Companies House Web Incorporation Service http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml, by filing the paper forms at Companies House yourself or with the assistance of solicitors.

For more information about forming a company call Francis Wilks and Jones on : 020 7841 0390 and ask for Senior Associate Sally Bradshaw