15

Part II
RUNNING A BUSINESS AS A COMPANY LIMITED
BY SHARES

When a business is run by a company, it is owned by a person (the company) which is quite
separate from the individuals involved, even though they are the directors and shareholders of
the company. The company’s separate legal personality leads to a number of complications in
running the business. Decisions affecting the business must be made either by the directors or
by the shareholders. Broadly, it depends on the Companies Acts or on the company’s
constitution (in particular its articles of association) whether a particular decision rests with
the directors or with the shareholders.

This Part describes how to form a company, how to manage the company and its affairs in
compliance with the Companies Acts and its constitution (the memorandum and articles of
association), how to join and leave a company, and what liability may be incurred by the
company and its directors in running the business.
16 Business Law and Practice
 Why, and How to, Form a Company 17

Chapter 3
Why, and How to, Form a Company

3.1 Why form a company? 17

3.2 Liability of the company 17
3.3 Forming a company 19
3.4 How to form a company 19
3.5 Tailoring the company to the client’s needs 21
3.6 Fast track route – a shelf company 22
3.7 Immediate obligations and practicalities 23
3.8 The elective regime 25
3.9 Shareholders’ agreements 25
3.10 Holding companies and subsidiary companies 27
3.11 Summaries and checklists 27

3.1 Why form a company?

The effect of a company being ‘limited’ is that liability for debts and obligations rests with the
company itself and does not pass to individuals involved in the company. This is important
protection for entrepreneurs. However, there are circumstances in which the officers of the
company do become personally liable either to the company itself or directly to third parties.

This is sometimes referred to as ‘lifting the veil of incorporation’, and happens only in
exceptional circumstances (eg Crown Prosecution Service v Compton [2002] EWCA Civ 1720,
where the company in question was a front for money laundering of the proceeds of drug
trafficking, or Ratiu v Conway [2005] EWCA Civ 1302, where the Court of Appeal held that
the veil could be lifted when examining a breach of fiduciary duty – see Chapter 6).

3.2 Liability of the company

Although a company is a separate legal entity, it does not have a physical existence and
therefore it needs real people to act on its behalf (agents). When an agent acts for the company,
he may be restricted in what he can do by the objects clause of the company and by his own
authority. An act may be unauthorised because it is ultra vires the company or because it is
outside the scope of the authority of the agent acting for the company.

3.2.1 Ultra vires acts

A particular course of action is ultra vires the company if it is not within the scope of the
company’s permitted activities as stated in the objects clause in the company’s memorandum.
At common law, an action which is ultra vires would be void. The doctrine had to be loosened
when the UK entered the European Community in 1972, as it was incompatible with
European law. The process of rolling back the doctrine has come to its ultimate conclusion
with the CA 2006. So, under modern company law the doctrine has little effect, not least as
ss 39 and 40 of the CA 2006 mean that being outside the objects clause cannot be pleaded
against a company by a third party with which that company has contracted. Once an act is
undertaken (ie some legal obligation has been incurred) that action cannot be challenged,
even if it is outside the scope of the objects clause. Both the company and the other party to the
transaction are bound by the act. The validity and enforceability of the contract is not affected
by the fact that the action was outside that which is permitted by the company’s constitution
(CA 2006, s 39). However, any member can challenge a proposed ultra vires act on the basis
that the company does not have the capacity to enter into the transaction concerned, and may
18 Business Law and Practice

ask the court to grant an injunction restraining the proposed action. This can be done only
before any legal obligation is incurred by the company on the contract. After that, an aggrieved
member’s only remedy is to claim against the directors for breach of duty.

The outsider dealing with the company is not obliged to check the constitution of the company
to see whether a particular transaction is authorised by the objects clause. The only relevance
of the ultra vires rule to a third party dealing with the company is that an act which is not
permitted by the objects clause could be restrained by injunction prior to it being undertaken,
by which time both sides may have spent a great deal of time and money conducting
protracted negotiations.

Where an objects clause is retained after 1 October 2009, it will operate as an article which
restricts the directors, not the company. In effect, therefore, the ultra vires doctrine retains
relevance only in so far as it means that the directors could be in breach of their duties to the
company if they act outside the objects. Many existing companies will therefore wish to
remove their objects clause after 1 October 2009. New companies formed after that date will
not have such a clause.

3.2.2 Liability for acts of agents

The agents acting for the company are, principally, the directors and the secretary. This
relationship is governed by the normal rules of agency. The officers of the company may have
actual authority to act, thereby binding the company by their actions, or they may bind the
company by acts within their apparent (ostensible) authority. Apparent authority is based on a
representation to the third party by the company that the person in question is acting with the
company’s authority. The representation by the company could even just be a failure to correct
a mistaken impression.

For example, the company secretary has, normally, actual authority to make contracts on
behalf of the company relating to the administrative side of the company’s business. If a person
had never formally been appointed to the post of company secretary but had been held out by
the directors as holding that position, the person in question would have the same apparent
authority as if he was the company secretary. The third party has no duty to make enquiries
unless there is some reason for him to doubt the authority of the agent with whom he is
dealing (see 6.4.2).

The Court of Appeal considered this area extensively in Smith v Henniker-Major & Co (A
Firm) [2002] 2 BCLC 655. The interpretation was that it would protect a genuine third party
from a defective decision of the board, and quite likely from where there had been no decision
of the board. The judges seem to have been keen to interpret the relevant section as intended
to protect the third party dealing with the company. To that end, they also considered the
origin of the section, that is Article 9 of the First Directive on Company Law (68/151/EEC
[1968(1)] OJ Special Edition 41.5).

An outsider dealing with the company is entitled to assume that the power of the directors to
act on behalf of the company is unfettered. The third party is not required to consult the
constitution (CA 2006, s 40(2)). A company cannot escape liability on a contract by denying
the authority of the board to act on its behalf, provided the outsider is acting in good faith. He
will be acting in good faith even if he knows that the directors are acting outside the scope of
their actual authority. For these purposes, bad faith involves some element of fraud or
deception, for example conspiracy with the directors to cheat the company and thereby the
members.

If a member hears in advance that the directors are proposing to act beyond their authority,
that member can apply to the court for an injunction to restrain the proposed misconduct.
Once the unauthorised act has taken place, the aggrieved member’s only remedy is to require
 Why, and How to, Form a Company 19

the directors who are in breach of duty to indemnify the company for any loss it has suffered
and account to the company for any profit they have made.

3.3 Forming a company

If a client wishes to run his business as a company, either a company must be created or an
existing ‘shelf ’ company will have to be bought. Once the client owns ‘the company’, it may
then be necessary to adapt it to suit that client’s needs and to consider what action to take in
order for the business to begin trading as a company. The shelf company route will often be
used for speed. It does involve more thought, as the shelf company has to be adapted to the
commercial needs of the client (see 3.6).

The formation of companies is not a skill to be neglected, as many law firms will incorporate
their own shelf companies so that they have one ‘oven ready’ when the client walks through
the door. Having formed the shelf company, the trainee solicitor may then subsequently have
the job of adapting it for the client.

3.4 How to form a company

The CA 2006 has simplified the process of forming a new company. Under s 9, the
requirements are to file:
(a) the memorandum, giving details of the subscribers and signed by them;
(b) an application for registration, specifying matters such as the proposed name of the
company, registered office, whether the company is limited by shares or guarantee, and
whether the company is private or public;
(c) a statement of capital and initial shareholdings, which replaces the authorised share
capital;
(d) a statement of the proposed officers, including directors and secretary, if any;
(e) the address of the registered office;
(f) a copy of the articles of association; and
(g) a statement of compliance, the form of which has yet to be decided (s 1068).

One person is able to form either a private or public company. However, a public company
needs two directors.

3.4.1 The company name

The application for registration must contain the intended name of the company. A client may
already have in mind the name by which he wishes the company to be known, but he does not
have complete freedom of choice. A company cannot be registered with a name which is the
same as that of an existing company. Therefore it is important to search the index of names at
Companies House at an early stage to ensure that the desired name is not already in use. It
would also be wise to search the Trade Mark Index to make sure that the proposed name is not
already registered as a trade mark. The Registrar will not accept a company name if it is
offensive, or suggests criminal activity, and the use of certain words requires written approval
of the Secretary of State (see 4.2.1). If the chosen name is not already in use by another
company, there is no procedure for reserving that name. Consequently, there is no means of
preventing the formation of a new company which bears the name the client has chosen
between the date of the search and the date on which the application for incorporation is
received by the Registrar.

There is a new adjudication procedure to deal with disputes over a company’s name, under
which a company may be told to change its name if an objection is made within 12 months of
the company having been registered (CA 2006, ss 66–74).
20 Business Law and Practice

3.4.2 The memorandum

Under the CA 2006, the memorandum has become a more basic document. Much of the
information which used to be required in the memorandum is now to be found in the
application for registration. The memorandum therefore ceases to have its former central role.

The memorandum must be printed and then signed by at least one subscriber (unless it is
submitted electronically, see 9.1). Any subscriber automatically becomes a member of the
company as soon as the company is registered. The following must be written in the
memorandum:
(a) the name, address and occupation of each subscriber;
(b) the number of shares he intends to take in the company when it is formed.

Usually there are two subscribers. It is common for them to agree to take one share each at this
stage, the true number of shares they require being allotted to them after incorporation.
Alternatively, the subscribers may agree to take the full number of shares they ultimately
require. The main purpose of signing as subscriber at this stage is to ensure that there will be at
least one member of the company when it comes into existence. The subscribers’ signatures to
the memorandum should be witnessed and the document dated. One person can witness both
the subscribers’ signatures where there are two subscribers.

3.4.3 The articles of association

The Companies Act 2006 provides a precedent for a set of articles of association for a private
company limited by shares (see 4.7.2). The articles of a company can comprise this precedent
in its entirety without amendment. Alternatively, it could be totally rejected in favour of a
different set of articles specifically drafted for a particular company. Neither of these options is
usually chosen. A common way of providing articles for a company is to utilise the precedent
but to make specific amendments to it in order to make it more appropriate to the particular
company.

The articles must be printed and signed by the subscribers to the memorandum. The date
must be included and the signatures must be witnessed in the same way as for the
memorandum.

3.4.4 Registered office

The company is obliged to keep most of its ‘statutory books’ (see 3.7.1) at the registered office,
for example internal registers and minutes of meetings. However, the registered office does not
have to be, and frequently will not be, a place where the company carries on business. As the
company has no physical existence, it has a registered office so that those who need to do so
can ‘find’ it, for example to serve official notices or legal documents. It is not unusual for the
registered office of a company to be its auditor’s office or its solicitor’s office. The registered
office can be a place where the company carries on its business, provided that the statutory
books are properly kept there.

3.4.5 The certificate of incorporation

If all the documents required are correctly prepared and sent to the Registrar, together with
the fee, the Registrar will issue a certificate of incorporation (CA 2006, s 15(1)). It is this which
brings the company into existence. Once the certificate is issued, it is conclusive evidence that
the company has been properly formed and came into being on the date stated. When a
company is formed, it will be allocated a company number by the Registrar. From then on
every document sent to the registry must bear that number, as that is the way in which the
company is identified at Companies House.
 Why, and How to, Form a Company 21

A public company must also be issued with a trading certificate before it can do business or
use its borrowing powers. This certificate confirms that the company has met the requirement
for authorised minimum capital for a public company under CA 2006, s 761.

3.4.6 Separate legal identity of the company

Once the certificate of incorporation has been issued, the company then exists as a legal
person. This means that the company can, for example, own property or have debts quite
independently of the people who are involved in the running of that company, ie the directors
and shareholders. So, for example, employees are employed by the company, and the company
will be named as the employer in any contract of employment. Even though it will be the
directors who allocate employment duties and arrange for wages to be paid, they do so on
behalf of the company and not in a personal capacity. Therefore, any employment claims, such
as claims for breach of contract or redundancy, should be made by employees against the
company and not against the directors (or shareholders). Only the company’s money is
available to pay any such claims.

3.4.7 Pre-incorporation contracts

Prior to incorporation the company does not exist, and there is no guarantee that it will ever
exist. Any attempt to act on behalf of the company prior to the date stated on the certificate of
incorporation is ineffective. The company, when it is incorporated, has no obligation under
any contract purportedly made on its behalf before its registration. Any person who tries to act
on behalf of the company before incorporation does so at his own risk, as he is personally
liable on any contract made. If, when the company is formed, the directors wish the company
to be party to the pre-incorporation contract, they cannot adopt the existing contract but must
enter into a contract of novation (an entirely new contract) with the other party, replacing the
earlier contract.

3.4.8 Miscellaneous matters

On forming a company, the secretary will receive a form from HM Revenue and Customs
requiring that details of the company and its directors be provided to it. This is to keep HM
Revenue and Customs up to date with potential taxpayers, both the company and the
individuals behind it.

If the new company does not trade and had no significant accounting transactions, it can file
dormant company accounts under ss 480 and 481 of the CA 2006. That is, it will usually be
able to file Form DCA declaring that it is indeed dormant and has been since formation. Only
a balance sheet is needed; a profit and loss account is not required. The accounts do not need
to be audited (see 8.1).

One person can form a private company.

3.5 Tailoring the company to the client’s needs

When considering the best methods by which to form a company for a client, perhaps the
most obvious way is to prepare all the documents personally after discussion with the client. A
company formed in this way is often called a ‘tailor-made’ company. This would involve
preparing the memorandum; searching the index of names; drafting the articles, using CA
2006 or other precedents (many firms will have their own in-house precedents for the more
complex documents); completing the forms; and sending all these to the Registrar of
Companies with the necessary fee.

It is also possible to take all the required documents to the Companies Registry, where the new
company can be incorporated on the same day, provided that all the necessary documentation
is in order and the name does not require approval (see 4.3). The documents must be
22 Business Law and Practice

submitted before 3 o’clock in the afternoon. The main Companies Registry is at Companies
House in Cardiff, but there are branches of the Registry located in London, Birmingham,
Manchester, Leeds and Edinburgh which also provide this speedier service.

Alternatively, a company could be formed with the assistance of law stationers (ie a company
whose business includes the provision of services in connection with company formation and
administration). This is sometimes known as a semi-tailored company. The law stationers
would arrange a search in the index of names, and would normally supply a standard
memorandum, articles with standard amendments (and possibly some optional amendments
as well) and the forms. The solicitor would complete the forms, discuss the other documents
with his client, obtain the client’s signature where necessary, and return all documentation to
the law stationers, which would then lodge the papers and the fee with the Registrar for
registration.

Note that electronic submission of documents is valid, see 9.2.

3.6 Fast track route – a shelf company

Where a client wants to run a business through the medium of a company, it is possible to buy
a company which has been incorporated already and therefore already exists, ie a shelf
company. The shelf company will not have been trading, but will have been formed in
anticipation of somebody wanting to buy it and use it as a method of running a business. As
the company is already in existence, this can be a much quicker way of getting a client ‘in
business’ in the form of a company than creating a company from scratch, which may be time-
consuming because of the need to apply for registration. This method of obtaining a company
is therefore used frequently.

Shelf companies are generally formed with standard articles, making them suitable for most
purposes (see further 4.5). If a shelf company is purchased, the supplier will send the buyer
the certificate of incorporation, the memorandum and articles (and possibly other
documentation, eg internal registers).

Nominees (usually employees of the supplier of the shelf company) will have been named as
directors, will have signed as subscribers to the memorandum and thus will have become the
first two members and directors of the company on incorporation. Before sending ‘the
company’ to the buyers, they will have to hold a board meeting at which they appoint the
buyers as directors (having received their signed consents to act as such). The buyers become
directors of the company from that time. The original two directors will send with the other
documentation their resignations, which may take effect immediately or from the next board
meeting (which will be held by the buyers). In this way the original directors are replaced by
those who have bought the shelf company.

The subscribers’ shares must also be transferred into the names of the buyers. The correct way
to do this is to ensure that the original subscribers’ names are entered on the register of
members. They then transfer their shares in the usual way by stock transfer form. A common
practice has grown up whereby the original subscribers are not entered on the register of
members but simply renounce their right to take up their shares in favour of the buyers
without completing a stock transfer form. Although not strictly correct, this method does not
seem to cause any problems in practice.

Further directors may be appointed either by the board or by the members.

The share capital will need to be increased as the shelf company will often have been formed
with only two shares. The shares will be allotted to the new members.

If the shareholders are also directors, then ensure that they are complying with ss 182–189 and
190–196 of the CA 2006 (concerning directors’ dealings with the company).
 Why, and How to, Form a Company 23

The company name will be changed, or possibly kept and a trading name used.

The registered office will be changed.

A new company secretary will need to be appointed, if it is decided to have a company

secretary at all.

The articles may need to be amended. Those supplied will usually be the CA 2006 precedents.

The accounting reference date may be changed, if required by the buyers.

3.7 Immediate obligations and practicalities

Once a company has been formed or a shelf company acquired, certain matters will have to be
dealt with as a matter of priority.

3.7.1 Statutory books

The statutory books comprise the register of members, register of directors, register of
directors’ residential addresses, register of company secretaries, register of charges, minutes of
board meetings and of general meetings, accounting records, and copies of directors’ service
contracts. These must be written up on incorporation, and amended from time to time to
reflect any changes so that they are always up to date. If this requirement is not satisfied, any
director or other officer of the company in default may be liable to a fine.

Under the CA 2006, company records are defined in s 1134. They include registers, minutes,
agreements and other documents required to be kept by company legislation. As before, they
can be kept in hard copy form or as an electronic version.

Companies no longer need to keep records for as long as they once did. Thus, minutes of
directors and general meetings need be kept for only 10 years from the date of the meeting
(CA 2006, ss 248 and 355). Records of former members must be kept for 10 years (s 121).

Public access to the register of members’ names is retained. However, the party requesting
access must provide information about himself and the use to which the information will be
put (CA 2006, ss 116–118). The purpose of these provisions is to counteract the problem of
copies of the register being used for direct mail shots, or to intimidate members (as happened
with animal rights activists and GlaxoSmithKline plc).

Companies House will have greater powers to specify the manner in which company
information is submitted. At the time of writing, further provisions on electronic
communication are to be brought into effect. There is a new offence of filing misleading
information (s 1112).

There is a power for the Secretary of State to make regulations concerning correction of the
Companies House records (CA 2006, ss 1075, 1076, 1093, 1095).

3.7.2 Registration for VAT

Most businesses, except those with a very small turnover, must register for VAT with HM
Revenue and Customs. The company will be allocated a VAT number and must make returns
every three months.

3.7.3 Stationery
All stationery used by the company must bear the company name, its place of registration, its
registered number, the address of the registered office, and either the names of all the directors
or the names of none of them (s 82). If the company trades under a business name, the
company name must appear on all stationery, as must an address within Great Britain where
documents can be served on the company (usually the address of the registered office).
24 Business Law and Practice

3.7.4 Employees: PAYE and national insurance

If the company is to have employees working for it (in many cases the directors themselves will
be employees) then the directors should contact the local tax inspector (HM Revenue and
Customs) to arrange for the deduction of income tax from wages under the PAYE scheme and
for the payment of national insurance contributions by them and on their behalf.

3.7.5 Insurance
Insurance should be taken out in the company’s name, for example for any motor vehicles, for
injury to employees or for occupier’s liability.

3.7.6 Bank account

Although not legally necessary, it is essential from a practical point of view that the company
has a bank account. The bank will require the directors to sign a mandate form, giving
specimen signatures and specifying who can sign cheques on the company’s behalf and
whether there is any limit. For example the directors might decide that one director’s signature
is sufficient for cheques up to, say, £500, but that for any amount in excess of that sum two
directors must sign the cheque. Thus the directors can tell the bank when it is authorised to
pay out company money. They will probably make this decision at the first board meeting of
the company.

3.7.7 The first board meeting

The directors will need to hold the first board meeting soon after incorporation because they
will need to make decisions on a variety of matters.

At the start of the meeting a chairman may be elected from among the directors and the
person so elected will then take charge of the meeting.

A list of some of the things which might be done at the first board meeting of a company is
given below. It is not necessary for the directors to deal with all the items listed. Many other
matters may be dealt with and almost certainly trading matters will be discussed. There is no
particular format for board meetings, and exactly what happens in individual cases will
depend on the circumstances pertaining and the people involved.

[Link] Opening a bank account

See 3.7.6.

[Link] Appointing an auditor

The first auditor of the company is appointed by the directors. Theoretically, there is no
urgency about this appointment, because the only requirement is that an auditor is appointed
before the first AGM, but it is common for the directors to appoint an auditor much earlier
than this, often at the first board meeting.

[Link] Awarding directors’ service contracts

Directors often deal with the terms of their own service contracts (including terms as to
remuneration, working hours, holidays and duration) at this meeting. If they attempt to award
themselves fixed-term service contracts for more than two years, the fixed-term element can
be valid only if approved in advance by the members in general meeting by ordinary
resolution. (See further 6.8.3.)

[Link] Adopting a company seal

The company seal is one way in which the company can sign documents, although the
counter-signatures of either two directors or one director and the secretary are necessary in
addition. A company does not have to have a company seal. It can rely instead on the
 Why, and How to, Form a Company 25

signatures of directors or the secretary, but most companies do have one, and it makes
company documents look more official. If the company is to have a seal then it must be
formally adopted by the board of directors and needs a resolution of the board to authorise its
use each time it is required.

[Link] Fixing an accounting reference date

The accounting reference date is the date to which the company must make up its accounts
each year, ie it is the final day of the company’s accounting year. When a company is formed,
the Registrar will allocate a date, which will be the last day of the month in which the company
was incorporated. For example, if the date given on the certificate of incorporation is any date
in June, the company will be given 30 June as an accounting reference date. At the first board
meeting, the directors may wish to consider choosing a different date. If they select a different
date, they must file a change of accounting reference date with the Registrar of Companies
(CA 2006, ss 394 and 395). The accounting reference date can be changed at any time during
the company’s existence by a resolution of the board and the filing of Form 225.

[Link] Using a business name

For practical reasons, if a business name different from the company’s name is to be used, it
should be used immediately in order to build up the goodwill of the business. This decision
lies with the directors, so if they want to trade under a business name they should decide to do
so at the first board meeting. (See further 4.2.1.)

[Link] Allotting shares to the shareholders

The directors are likely to issue some or all of the available capital at the first board meeting, as
this will raise money for the company and give it some working capital. (The details of issuing
shares are given in Chapter 10.) The directors must ensure that they have authority to allot
shares (it must either be included in the articles, or be given by ordinary resolution of the
members at a general meeting: CA 2006, s 549) and that they are not bound by the statutory
pre-emption rights in s 561 of the CA 2006. These can be removed either by the articles or by
special resolution of the members. (For a private company with only one class of share, the
directors can allot shares and grant other rights over the shares, provided there is nothing to
the contrary in the articles: CA 2006, s 550.) If the directors do issue shares, they must also
resolve to stamp the company seal (if the company has one) on the share certificates issued to
members.

[Link] Approving the cost of formation

As the company does not exist before its incorporation, the cost of forming the company
cannot be incurred on behalf of the company, and those instructing the solicitor to act are
personally liable for any costs. However, once the company is in existence, it is common for the
directors to resolve that the expense of incorporating the company should properly come out
of company funds.

3.8 The elective regime

The aim of the elective regime was to deregulate the company, that is, to lessen the formal
requirements where they were not necessary. The overall effect of the CA 2006 is to deregulate
private companies. In effect, the elective regime has become the norm under the CA 2006.

3.9 Shareholders’ agreements

A shareholders’ agreement is essentially a contract. It can be made by all members of a
company, or just some of them. Even people who are not shareholders can be party to the
agreement if this is appropriate.
26 Business Law and Practice

A shareholders’ agreement can be made at any time during the lifetime of a company, but is
most commonly made when a new company is set up, thereby establishing areas of agreement
between those involved.

3.9.1 Why use a shareholders’ agreement?

Members are already bound by one contract: the articles. However, the articles only form a
binding contract in respect of membership rights, and are ineffective so far as non-
membership rights are concerned. Therefore, if members wish to agree between themselves
some matter which is unrelated to their membership rights, they may enter into a
shareholders’ agreement to this effect (see 3.9.2).

The articles are a public document, open to public inspection at the Companies Registry. Any
agreement which members wish to keep secret can be dealt with in a shareholders’ agreement,
which is a private contract between the parties which the general public have no right to see.

Additionally, the articles can be altered at any time by special resolution of the members, ie
75% of the votes of those present at a general meeting. A shareholders’ agreement, like any
other contract, cannot be amended except with the unanimous consent of the parties to that
contract. Therefore any attempted variation of a shareholders’ agreement will provide a
remedy for breach of contract where a variation of the articles would not.

3.9.2 Common provisions in a shareholders’ agreement

A shareholders’ agreement usually contains a series of mutual promises by the parties to the
agreement, which provide the consideration for the contract. Examples include the following.

[Link] Typical clauses in a shareholders’ agreement

(a) An undertaking that the company will not alter or modify provisions of its
memorandum or articles, or will not do so without the consent of all parties.
(b) Similar undertakings regarding changes in capital or share capital structure.
(c) Requirements on unanimity for major decisions (eg sale of the business).
(d) Restrictions on borrowing, etc.
(e) Agreements regarding further financing.
(f) Agreement on dividend policy.
(g) Any disputes are to be referred to arbitration.
(h) The right for each party, or specific parties, to be a director and/or be employed or take
part in management, or right to nominate a specified number of directors.
(i) Agreements not to compete, etc.
(j) Agreement on confidentiality.
(k) Agreement on intellectual property.
(l) Duration of the agreement and exit provisions: ie buy out rights for (or against) all or
particular members; pre-emption rights; option agreements.
(m) Provisions for the resolution of deadlock.
(n) The denial of intention to create a partnership (in a joint venture company).
(o) The power to require the other members to join in a resolution for the voluntary
winding up of the company.

[Link] Further provisions that may apply, especially in the shareholder agreement of a joint
venture (JV) company
(a) Scope of the agreement, ie the purpose for which the JV company has been formed.
(b) The representations and warranties between the shareholders themselves.
(c) The provision of share capital for the JV company.
 Why, and How to, Form a Company 27

(d) The shareholders’ steering committee.

(e) The frequency and conduct of shareholders’ meetings.
(f) The membership of the board of directors.
(g) Business plan, share capital and loans.
(h) The provision of executive directors and seconded personnel.

3.10 Holding companies and subsidiary companies

A business may be so structured that it is run by a ‘group’ of companies, consisting of a holding
company (sometimes called the parent company) and one or more subsidiary companies. A
company is a holding company if it owns a majority of shares in the subsidiary company, or if
it has power to control the composition of the board of directors. In some ways, a group of
companies can be seen as one big organisation (eg annual accounts must be produced for the
group as a whole and not just for each individual company). However, the principle that each
company is a separate legal entity still applies, so that, save in exceptional circumstances, the
debts of the subsidiary company cannot be claimed from the funds of the holding company
and vice versa.

Owners of a business may decide to set up a group of companies rather than just one company
for a variety of reasons, for example there may be tax advantages, or each subsidiary company
may be concerned with a different aspect of the group’s business.

3.11 Summaries and checklists

3.11.1 Documents, etc needed for company formation
(1) memorandum
(2) articles
(3) application for registration (including name, and whether limited by shares or
guarantee)
(4) statement of capital and initial shareholdings
(5) statement of proposed officers
(6) address of the registered office
(7) statement of compliance
(8) fee.

3.11.2 Matters to consider on company formation

(1) practicalities, eg registration for VAT, ordering stationery
(2) first board meeting

and, if appropriate:
(3) shareholders’ agreement
(4) group structure.

3.11.3 Use of a shelf company

A shelf company:
(1) is already incorporated
(2) is not trading
(3) is formed by company formation agents
(4) needs to be adapted to suit the client’s purposes.

Adaptation of the shelf company (before starting to trade):

28 Business Law and Practice

(1) choose a new name for the company

(2) members:
transfer the subscription share to new members
(3) shares:
allot shares to members
(4) appoint new directors (and remove the old ones):
every private company has at least one director (CA 2006, s 154)
every other company must have at least two directors
(5) if any director is also a shareholder, consider the following problems:
ss 177–187 of the CA 2006 (declaration of interest in contract with the company)
ss 190–196 of the CA 2006 (substantial property transactions involving director)
(6) new secretary:
every public company should have a secretary
(7) change the registered office
(8) adopt new articles of association
(9) accounting reference date – change it?