0582894182_Cover(Pettet) 4/2/05 9:52 am Page LONGMAN LAW SERIES LONGMAN LAW SERIES Company Law Company Law second edition second edition Ben Pettet Ben Pettet Professor I.H Dennis (University College London) Professor J.A Usher (University of Exeter) The second edition of this popular book on company law combines theoretical and jurisprudential issues with an up-to-date account of legal developments across the field of company law The author demonstrates that the needs of shareholders in companies which have dispersed ownership of shares cannot be properly understood without an analysis of the law relating to securities regulation and capital markets second edition Company Law is arranged in six sections: Foundation and Theory; The Constitution of the Company; Corporate Governance; Corporate Finance Law; Securities Regulation; Insolvency and Liquidation Strong coverage of theory and policy is provided, together with analysis of core legal problems at an appropriate depth for modular courses The role of self-regulation is examined in some depth and discussion of law reform in the shape of the DTI's Company Law Review is included There is also a companion website for the book at www.pearsoned.co.uk/pettet, which features regular updates to the law so that lecturers and students will remain up to date with new legislative and case developments Ben Pettet New to this edition • Inclusion of the EC Directive on Takeover Bids • Major changes brought about by the Enterprise Act 2002 • Standard Chartered Bank v Pakistan National Shipping Corporation 2002 and other important case law developments • Details of the EC Financial Services Action Plan legislation • Coverage of the Companies (Audit, Investigation and Community Enterprise) Act 2004 Company Law is essential reading for LL.B courses in universities and also covers the requirements of the University of London (External) LL.B The book offers excellent foundation reading for postgraduate LL.M.s in company and capital markets law and is an excellent critical survey of a dynamic field of law for students qualifying professionally in the fields of accounting, finance and company secretaryship Ben Pettet LL.B., Barrister, is Professor of Company and Capital Markets Law, University College London He is a well-known researcher and writer in the field of company law www.pearson-books.com Cover image © Photonica Free updates for this book at www.pearsoned.co.uk/pettet Company Law Editorial Advisory Board COMPANY LAW LONGMAN LAW SERIES GENERAL EDITORS PROFESSOR I.H DENNIS, University College London PROFESSOR J.A USHER, University of Exeter PUBLISHED TITLES ERIC BARENDT AND LESLEY HITCHENS, Media Law: Cases and Materials R HALSON, Contract Law JONATHAN HERRING, Family Law NICHOLAS J MCBRIDE AND RODERICK BAGSHAW, Tort Law BEN PETTET, Company Law ROGER J SMITH, Property Law ROGER J SMITH, Property Law: Cases and Materials MAURICE SUNKIN AND ANDREW LE SUEUR, Public Law MARTIN WASIK, THOMAS GIBBONS AND MIKE REDMAYNE, Criminal Justice: Text and Materials WILLIAM WILSON, Criminal Law: Doctrine and Theory Visit the Company Law, second edition Companion Website at www.pearsoned.co.uk/pettet to find regular updates in the field of Company Law COMPANY LAW SECOND EDITION BEN PETTET Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2001 Second edition published 2005 © Pearson Education Limited, 2001, 2005 The right of Ben Pettet to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP ISBN-13: 978-0-582-89418-1 ISBN-10: 0-582-89418-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Pettet, B G Company law / Ben Pettet.––2nd ed p cm.––(Longman law series) Includes index ISBN 0-582-89418-2 Corporation law––Great Britain I Title II Series KD2079.P48 2005 346.41′066––dc22 2005043015 10 10 09 08 07 06 Typeset in 10/12pt Plantin by Printed in Great Britain by Henry Ling Ltd., at the Dorset Press, Dorchester, Dorset The publisher’s policy is to use paper manufactured from sustainable forests CONTENTS Prefaces Acknowledgements Table of cases Table of statutes Table of statutory instruments Tables of European legislation Treaties and conventions Secondary legislation xv xviii xvix xxx xli xliii xliii xliii PART I FOUNDATION AND THEORY THE 1.1 1.2 1.3 1.4 1.5 1.6 NATURE OF COMPANY LAW Preliminary Rationale, abstract and agenda Scope of this work The genesis of company law The present companies legislation European community legislation A The harmonisation programme B The Company Law Programme: UK Implementation C The EC Commission’s Company Law Action Plan 1.7 Company law, corporate law or corporations law? 1.8 Focus – the main business vehicle A Company limited by shares B Public or private C Small closely-held and dispersed-ownership companies D The Company Law Review and law reform 1.9 Other business vehicles A Other types of companies B Other organisations and bodies C Partnerships CORPORATE ENTITY, LIMITED LIABILITY AND INCORPORATION 2.1 Corporate entity A The ‘Salomon’ doctrine B Piercing the corporate veil C Corporate liability for torts and crimes 2.2 Limited liability A The meaning of limited liability B The continuing debate about the desirability of limited liability C Fraudulent trading and wrongful trading v 3 10 11 11 11 13 14 15 15 15 16 17 18 18 20 20 23 23 23 24 28 31 31 31 33 Contents 2.3 2.4 2.5 Groups of companies Incorporation A Formal requirements B Certificate of incorporation C Publicity and the continuing role of the Registrar D Promoters and pre-incorporation contracts E Right of establishment Company Law Review and law reform 37 39 39 42 43 44 46 46 LEGAL THEORY AND COMPANY LAW 3.1 The role of theory in company law 3.2 The nature and origins of the corporation A The theories B Rationale and application of the theories 3.3 Managerialism 3.4 Corporate governance A Alignment B The Cadbury Report and self-regulation C Global convergence in corporate governance 3.5 Stakeholder company law A Social responsibility B Industrial democracy C Stakeholder company law D The Company Law Review and stakeholders 3.6 Law and economics A Efficiency as a moral value B The theory of the firm 3.7 Future issues 47 47 48 48 49 50 53 53 54 55 58 58 60 61 64 66 66 67 75 CURRENT REFORM MECHANISMS 4.1 Modern company law 4.2 The agencies of company law reform A Department of Trade and Industry B The Law Commission C City and institutional input D Academics E European Commission 4.3 The 1998 Review A Structure B Guiding principles C Swift progress D The Final Report and subsequent developments E Treatment in this book 77 77 77 77 80 80 81 81 81 81 82 82 83 84 PART II THE CONSTITUTION OF THE COMPANY ENTRENCHMENT OF RIGHTS 5.1 Entrenchment of expectation versus flexibility vi 85 87 87 Contents 5.2 5.3 5.4 5.5 5.6 Memorandum of association Articles of association Shareholder agreements Changing the constitution and reconstruction A Introduction B Contract C Alteration of articles D Alteration of the memorandum E Variation of class rights F Compromises and arrangements under s 425 G Other methods of reconstruction Company Law Review and law reform ORGANISATION OF FUNCTIONS AND CORPORATE POWERS 6.1 Introduction 6.2 The institutions of the company: the board and the shareholders 6.3 The ultra vires doctrine A Introduction B Reform of the rule – an overview C Underlying complications – objects and powers D Shareholder intervention E The current legislation – background matters F Core provisions of the legislation G Ratification H Pulling it together I An alternative approach 6.4 Company Law Review and law reform RELATIONS WITH THIRD PARTIES: AGENCY AND CONSTITUTIONAL LIMITATIONS 7.1 Contractual relations with third parties 7.2 Agency 7.3 The Turquand doctrine 7.4 The ‘relationship’ between Turquand and agency 7.5 Sections 35A and 35B 7.6 Company Law Review and law reform PART III CORPORATE GOVERNANCE THE GOVERNANCE PROBLEM AND THE MECHANISMS OF MEETINGS 8.1 Alignment of managerial and shareholder interests 8.2 The role and functioning of the board of directors A Directors as managers and ‘alter ego’ B Appointment and retirement of directors vii 87 88 94 97 97 98 98 100 101 106 110 111 112 112 112 114 114 115 116 121 121 123 127 127 129 130 131 131 131 134 135 138 142 143 145 145 146 146 147 Contents 8.3 8.4 8.5 8.6 C Proceedings at directors’ meetings D Remuneration of directors The role and functioning of the shareholders in general meeting A The general meeting as the residual authority of the company B Resolutions at meetings C The shareholders’ general meetings D Convening of meetings and notice E Shareholder independence – meetings and resolutions F Procedure at meetings Problems with the meeting concept Meetings in small closely-held companies Company Law Review and law reform DUTIES OF DIRECTORS 9.1 Introduction 9.2 Common law duties of care and skill 9.3 Fiduciary duties A The scope of the duty of good faith B The no-conflicts rule C Duty in respect of employees 9.4 Relief for directors A Ought to be excused B Exemption and insurance 9.5 Duty not to commit an unfair prejudice 9.6 Company Law Review and law reform 10 OTHER LEGAL CONSTRAINTS ON DIRECTORS’ POWERS 10.1 Constraints on directors’ powers 10.2 Statutory controls affecting directors A Introduction B Part X enforcement of fair dealing C Controls over issue of shares D Statutory provisions in terrorem 10.3 Monitoring of directors A Introduction B The policy of disclosure of the financial affairs of the company C Accounts and reports D Publicity E Non-statutory reports F The role of the auditors G Company secretary H Government and other agencies 10.4 Conclusions 10.5 Company Law Review and law reform viii 148 149 151 151 152 152 153 154 155 157 158 159 160 160 161 164 164 166 176 176 176 176 177 178 179 179 179 179 179 181 182 184 184 185 185 188 188 189 190 191 192 193 Contents 11 ROLE OF SELF-REGULATION 11.1 Reliance on self-regulation 11.2 Techniques of Cadbury A Different approaches B Structural and functional alterations C Assumptions of responsibility D Enhanced quality of disclosure 11.3 The Greenbury Report 11.4 The Hampel Report: evolution of the Combined Code 1998 11.5 The Higgs Review and the Combined Code 2003 11.6 The Combined Code 2003 A Listing Rules compliance statements B Excerpts and summary of the main provisions 11.7 The ‘profession’ of director? 11.8 Conclusions 11.9 Company Law Review and law reform 194 194 196 196 196 197 197 198 198 199 201 201 202 209 210 210 12 SHAREHOLDER LITIGATION: COMMON LAW 12.1 Introduction: shareholder litigation generally 12.2 The doctrine of Foss v Harbottle 12.3 The principle of majority rule 12.4 The ‘exceptions’ to Foss v Harbottle 12.5 Meaning of ‘fraud on a minority’ 12.6 The striking out of derivative actions A Introduction B Types of action and costs C Striking out derivative actions 12.7 The Breckland problem 12.8 Company Law Review and law reform A The work of the Law Commission B Company Law Review and law reform 212 212 213 214 215 217 219 219 219 221 226 228 228 229 13 SHAREHOLDER LITIGATION: STATUTE 13.1 Winding up 13.2 Unfair prejudice A The alternative remedy failure B Unfair prejudice 231 231 232 232 233 PART IV CORPORATE FINANCE LAW 251 14 TECHNIQUES OF CORPORATE FINANCE 14.1 Some basic concepts of corporate finance A Assets and capital B The aims of the company C Cash flows and capital raising 14.2 Financing the company A Initial finance 253 253 253 254 254 255 255 ix Disqualification of directors Subsequently, many cases have been decided in this way under what has become known as the Carecraft procedure.52 The details of the rationale behind it were recently summarised by Jonathan Parker J in Official Receiver v Cooper:53 [T]he public interest in relation to proceedings under [section 6] lies in the protection of the public against persons acting as directors or shadow directors of companies who are unfit to so That in turn involves ensuring, so far as possible, that disqualification orders of appropriate length are made in all cases which merit such orders and that they are made as speedily and economically as is reasonably practicable The Carecraft procedure represents, in my judgment, an important means of advancing that public interest In the first place, it avoids the need for a contested hearing, with the attendant delays and inevitably substantial costs Not only does this benefit the taxpayer, who ultimately bears the burden of the Secretary of State’s costs (in so far as they are not recovered from the respondent) and of the costs of a legally aided respondent, it also avoids the situation where a nonlegally aided respondent against whom an order for costs is made is in effect buried under an avalanche of costs, causing his financial ruin in addition to any disqualification order made against him In the second place, the Carecraft procedure discourages respondents from requiring the Secretary of State to prove at a contested hearing allegations which the respondent knows to be true In the third place, the Carecraft procedure encourages respondents to recognise their wrong doing and to face the consequences of it.54 The judge in Carecraft proceedings is not bound to make a disqualification order, and is not bound by the length of period of disqualification which the parties have agreed is appropriate On the other hand, the case comes before him on agreed facts and those are the only facts on which he can base his judgment.55 The Insolvency Act 2000 established a regime56 under which the Secretary of State can accept a ‘disqualification undertaking’ from a director The aim of this new administrative procedure was to avoid the need to use the Carecraft procedure which although a summary procedure nevertheless involves to some extent, the expense of a court process The basic rules on disqualification undertakings are set out in s 1A of the CDDA.57 Statistically it is looking as though disqualification undertakings are replacing Carecraft in most situations in which in the past Carecraft would have been used For instance, in 2003–2004 disqualifications under s by court order numbered 213, whereas disqualifications under s by means of disqualification undertakings numbered 1,154.58 Whereas in the last year prior to the coming into use of disqualification undertakings, there were 1,548 disqualifications under s by court order.59 52 53 54 55 56 57 58 59 A director who is unwilling to become involved in Carecraft procedure is not able to prevent the bringing of full disqualification proceedings by offering undertakings to the court not to act as a director; see Re Blackspur Group plc [1998] BCC 11, CA [1999] BCC 115 It was held here that the respondent could make the admissions and concessions for the purpose of Carecraft proceedings only, and without prejudice to other proceedings [1999] BCC 115 at p 117 Secretary of State for Trade and Industry v Rogers [1997] BCC 155, CA Insolvency Act 2000, ss 6–8 amending the CDDA 1986 And sections and Companies in 2003–04 (DTI: London, 2004) p 44 Ibid 424 Other grounds 23.4 OTHER GROUNDS A Disqualification after investigation Section 8(1) provides in effect that if it appears to the Secretary of State from a report made by inspectors under various enactments (or from information or documents obtained under certain enactments) that it is expedient in the public interest that a disqualification order should be made against any person who is (or has been) a director,60 he may apply to the court for an order The court may make the order where it is satisfied that his conduct in relation to the company makes him unfit to be concerned in the management of a company.61 Under these provisions therefore, and unlike the s cases where there is an insolvency, the test of unfitness is to be applied using only Pt of Sch 1, and the case law.62 Under this ground the maximum period of disqualification is 15 years B Disqualification on conviction of an indictable offence The court63 has power to make a disqualification order against a person convicted of an indictable offence64 in connection with the ‘promotion, formation, management, liquidation or striking off of a company, or with the receivership or management of a company’s property’.65 An example of this occurred in R v Georgiou.66 The defendant was convicted of carrying on insurance business without the necessary authorisation under the Insurance Companies Act 1982 He was also disqualified from being a director for five years.67 His argument that the court had no jurisdiction to disqualify him because he had not used the company as a vehicle for the commission of the offence and so the misconduct was not ‘in connection with management’ was rejected by the Court of Appeal; carrying on insurance business through a limited company was sufficiently a function of management C Disqualification for persistent breaches of the companies legislation Here, the ground for disqualification is where it ‘appears to the court that [the person] has been persistently in default in relation to the provisions of the companies legislation requiring any return, account or other document’ to be sent to the Registrar of Companies.68 If the respondent has been found guilty69 of three or more such defaults within the five years ending with the date of the Secretary of 60 61 62 63 64 65 66 67 68 69 Or shadow director of any company See also CDDA 1986, s 22 (4) and (5) Ibid s (2) Ibid s (1) (a) Defined so as to include certain criminal courts; ibid s (2) Whether on indictment or summarily CDDA 1986, s (1) (1988) BCC 322 Under CDDA 1986, s Ibid s (1) Technically, CDDA 1986, s (3) applies here 425 Disqualification of directors State’s application for disqualification, it is treated as conclusive proof of persistent default.70 The maximum period of disqualification is five years D Disqualification for fraud in a winding up It is provided that the court71 may make a disqualification order against a person if, in the course of a winding up it appears that he: (a) has been guilty of an offence for which he is liable (whether he has been convicted or not) under section 458 of the Companies Act (fraudulent trading), or (b) has otherwise been guilty, while an officer or liquidator of the company receiver of the company’s property or administrative receiver of the company, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or administrative receiver.72 Here, the maximum period of disqualification is 15 years E Disqualification on summary conviction This provision permits disqualification in certain circumstances where a person is convicted of certain offences Broadly, it relates to convictions for failures to comply with companies legislation relating to returns, accounts and similar matters to be sent to the Registrar of Companies.73 If there have been three of these within the five years ending with the date of the current proceedings74 then the court may disqualify him for a period of up to five years.75 F Disqualification for fraudulent or wrongful trading Section 10 of the CDDA 1986 fits with the fraudulent and wrongful trading provisions76 by giving the court power to disqualify in addition to any other order that is being made under those provisions.77 As many of the facts that give rise to a disqualification order under s (i.e unfitness and insolvency) may also trigger liability for fraudulent or (more usually) wrongful trading, this additional power of the court makes sense 23.5 HUMAN RIGHTS CHALLENGES It is very possible that proceedings under the CDDA 1986 are going to become fertile ground for challenges on the basis that in some way or other, they have 70 71 72 73 74 75 76 77 Ibid s (2) Defined in CDDA 1986, s (2) Ibid s (1) See CDDA 1986, s (1) Including those proceedings See CDDA 1986, s (2)–(5) There are marked similarities between this and the s provisions but the main point is that s applies only where criminal proceedings are ongoing See p 33 above See e.g Re Brian D Pierson (Contractors) Ltd [1999] BCC 26 426 Epilogue infringed the European Convention on Human Rights which was incorporated into UK law by the Human Rights Act 1998 and came into force on October 2000.78 Even prior to this date it has made its appearance in the cases.79 In Hinchliffe v Secretary of State for Trade and Industry80 the director wished to argue that various aspects of the disqualification proceedings infringed art of the Convention and sought, as the judge put it: ‘whatever adjournment of the disqualification proceedings is necessary to ensure that they will not be heard before the passage into law of the Bill presently before Parliament for incorporation of the European Convention on Human Rights into English law, so as to give the English court the power and duty to apply the provisions of that Convention.’81 The director’s argument failed, mainly on the ground that it was held that the court could not embark on the speculative course of whether a Bill before Parliament would be passed into law in its then form In EDC v United Kingdom82 the former director applied to the European Commission of Human Rights against the UK government alleging that there had been unreasonable delays in the disqualification proceedings which constituted a violation of art of the Convention The relevant part of art provided that ‘in the determination of his civil rights and obligations everyone is entitled to a hearing within a reasonable time’ The proceedings had begun in 1991 and ended in 1996 and in all the circumstances of the case had failed to meet the reasonable time requirement in art (1).83 23.6 EPILOGUE This last chapter in this book has covered the disqualification of directors The penalty of disqualification in effect makes a public statement that disqualified directors should, for a time at least, no longer be part of the corporate world; that they are not fit to be doing what they have done in the past; that in respect of their efforts at work, the nation is better off without them As a final thought, it is worth raising the question whether the government has got the balance right And not only the balance as regards the operation of the area of law concerned with disqualification, but also as regards all the regulatory aspects of mainstream company law, and as regards the regulation which is imposed on the capital markets, by the EU and UK regulatory authorities Disqualifications are now averaging a figure of about 1,500 per year The process involves the public imposition of very high levels of disapproval by the judicial system, the heavy arm of the machinery of the state It is cast upon people who were 78 79 80 81 82 83 Disqualification cases involving human rights arguments will probably come to be regarded as the exact opposite of Carecraft procedure Arguments based on art have also arisen in judicial review proceedings connected with disqualification; see R v Secretary of State for Trade and Industry, ex parte McCormick [1998] BCC 379 [1999] BCC 226 Ibid at p 227, per Rattee J Application No 24433/94 [1998] BCC 370 Subsequent cases are less encouraging for directors; see e.g DC, HS and AD v United Kingdom [2000] BCC 710; WGS and MSLS v United Kingdom [2000] BCC 719; Re Westminster Property Management Ltd [2001] BCC 121, CA 427 Disqualification of directors in the main running small businesses, trying their best to earn a living, and usually providing employment for others in the process The vast majority will have got into difficulties, not through planned fraud, but by struggling on, trying to pretend to their employees and to their families that they were on top of the problems; hoping that things would turn out for the best Many will have also suffered personal insolvency as a result of the collapse of their business, or come very close to insolvency The Company Law Review has expressed the view that the evidence suggests that small firms are the main job creators.84 Almost without exception, the agencies of government responsible for setting levels of regulation, and enforcing them, are operated by salaried employees, whose work environments will be very different, and will involve relatively high levels of certainty, of reward, and advancement; certainties which are no part of the life of an entrepreneur There is a danger that over the years the government agencies will misjudge the balance If so, in due course, it may be found that fewer able people will choose to make their living through entrepreneurial activity Arguably, this is happening in other areas of life in the UK, where high levels of regulation and relatively poor rewards are making essential jobs increasingly unattractive; and then it is found that there are shortages Although company law has many areas where the rules are permissive, left largely in the hands of business people, the ultimate fact is that if the state acting on behalf of the general populace wants to intervene and make new rules, it will Company law is, in essence, public regulation of the organisational structures through which production takes place, and of the capital markets through which money is raised to finance the production process The agencies of the state know that they bear the responsibility for ensuring a stable yet vital commercial environment by means of an unbiased approach to both laissez-faire and regulation If they get the balance wrong, the economy will suffer It is not an easy balance to strike and there is no panacea 84 In the sense of new jobs Thus the example is given of statistics available to the DTI which show that between 1989 and 1991 over 90% of additional jobs created were in firms with fewer than ten employees even though they accounted for only 18% of total employment in 1989; see DTI Consultation Document (February 1999) The Strategic Framework, para 2.19 428 INDEX Accounts and audit, 12, 39, 55, 185–91, 192–3, 198, 207–8 Agency, 5, 45, 69–71, 73–4, 118, 131–41 Alternative Investment Market (AIM), 15, 259, 262, 370 Articles and memorandum of association, 40–2, 110–15, 146–51 alteration of, 98–101 capital, 263–7 company secretary, 190–1 constitution, 39–42, 87–103, 106, 109–29 contracts with the company, 175 directors, 146–51 enforcement, 89–91 entrenchment of rights, 87–103 incorporation, 39–42 minority shareholders, 215–16 shareholder agreements, 95–6 shares, control over issues of, 181 voting, 157 Berle and Means companies, 17, 50–3 Branches, 13, 19 Bubble Act, 9, 326 Business organisations, 20 Cadbury Report, 54–5, 80, 190, 194–9, 209–11 Capital, 16, 253–4, 276–80 articles and memorandum of association, 88, 263–7, 282 authority to issue, 266 buybacks, commercial use of, 290 cash flows, 254–5 Company Law Review and reform, 292–3 debt, role of, 262–3 discounts, 276–8 dividends and distributions, 290–2 increase and alteration, 265–6 maintenance, 6, 12, 280–93 minimum, 16, 42 premiums, 278–80, 293 preferential subscription rights, 266–7 purchase of own shares, 286–90 raising, 6, 12, 254–5, 262–3, 276–80 reduction of capital, 282–6, 293 variation of class rights, 101–6, 285–6 Capital markets, 3, 6–7, 313–400 see also theories in securities regulation/capital markets law Charitable donations, 59–60 Chartered companies, 19 Class rights, variation of, 101–6, 285–6 Collective investment schemes, 350–5 Combined Code, 195, 198–211 Committee of European Services Regulators (CESR), 335–6 Community Interest Company (CIC), 19, 84 Company Law Review and reform, 4, 46, 74–84, 130, 193, 428 academics, role of, 81 agencies of reform, 77–81 capital, 292–3 City and institutional input, 80 Companies (Audit, Investigations and Community Enterprise) Bill, 84, 190 constitution of the company, 111 contractual relations, 142 corporate governance, 210–11 Department of Trade and Industry (DTI), 77–81, 84 directors, 172, 178 429 Index European Commission, 81 financial assistance, 308–9 incorporation, 46 Institute of Chartered Accountants of England and Wales (ICAEW), 80 Law Commission, role of, 80, 228–9, 248–9 Law Society, 80 self-regulation, 210 shareholder litigation, 228–30, 248–9 shareholder meetings, 159 small companies, 16–18 stakeholders, 64–6 structure 81 ultra vires, 115, 130, 142 unfair prejudice, 233, 248–9 Company secretary, 16, 190–1, 197 Compromises and arrangements, 106–10 Concession theory, 48–9 Conflicts of interest, 107, 151, 166–76 Constitution, entrenchment of rights and, 4–5, 87–142 articles and memorandum of association, 39–42, 87–103, 106, 109–29 changing the, 97–111 Company Law Review and reform, 111 expectation versus flexibility, 87 reconstruction, 97–111 shareholder agreements, 4, 94–7, 98 Contractual relations, 12 agency doctrine, 5, 131–41 Company Law Review and reform, 142 contract theory, 48–9 creditors, 31–2 directors, 175–6 legislation, effect of, 138–41 pre-incorporation contracts, 44–5 property rights theory, 71–2 shareholder agreements, 4, 94–8 third parties, 131 Turquand doctrine, 134–8 Control directors, 112–13, 181–2 managerialism, 50–3 ownership and, separation between, 3, 17, 52–6, 112–13 shares, over issues of, 181–2 Corporate entity, 23–30 Corporate finance, 6, 253–309 see also capital, shares, public offerings assets, 253–4 bonds, legal nature of, 275 cash flows, 254 Company Law Review and reform, 275 debentures, legal nature of, 275 debt, role of, 262–3 initial finance, 255–6 venture capital, 255–7 Corporate governance, 5, 53–8, 76, 145–60 Cadbury Report, self-regulation and, 54–5, 80, 190, 194–9, 209–11 Combined Code, 195, 198–211 Company Law Review and reform, 210–11 creditors, 53–4 directors, disclosure, 185 dispersed share ownership, causes of, 56–7 EC law, 13–14 global convergence, 55–8, 76 share ownership, patterns of, 55–6 shareholder meetings, 151–9 Corporate veil, piercing the, 26–30 24–8 Corporate social responsibility (CSR), 53, 58–60, 63 Creditors, 31–7, 53–4, 108–10, 413–15 CREST 79, 259 Crimes, liability for, 30–1, 33, 41, 425, 426 430 Index Debentures and bonds, 275 Debt finance, 262–3 Department of Trade and Industry, 77–81, 84, 191–2, 403–4 Derivative actions, 219–26, 228–9, 244–8 Directors, see also disqualification of directors, duties of directors accountability, 207–8 appointment of, 147–9 board of directors, 112–13, 146–7, 196–7, 202–6, 212–13 Chartered Director, certificate of, 209–10 Combined Code, 202–6 corporate governance, disclosure, 185, 190 dismissal, managers and alter egos, as, 146–7 meetings, proceedings at, 148–9 monitoring, of, 184–92 non-executive, 196–7, 199–201, 210–11 professionalisation of, 209–10 publicity, 188 remuneration, 149–51, 198, 200, 206–7 retirement and removal of, 147–8, 182–3 shadow, 35–6 shares, controls over issue of, 181–2 unfair prejudice, 183 Disclosure, 13, 43–45, 185, 190–1, 197–8, 273–5 Dispersed-ownership companies, 3, 5, 7, 16–17, 56–7 Disqualification of directors, 8, 184, 192, 417–28 breaches of companies legislation, persistent, 425–6 Carecraft procedure, 423–4 commercial morality, 420–2 criminal offences, conviction of, 425, 426 duration of disqualification, 419, 423 fraud in winding up, 426 fraudulent trading, 426 grounds, 419–24 human rights challenges, 426–7 insolvency, 419–20 undertakings, 423–4 unfitness, 420–4 wrongful trading, 426 Dividends and distributions, 290–2 Duties and powers of directors, 160–93 accounts and reports, 185–90 business opportunities, conflicts and, 167–72 care and skill, 161–3, 229 Company Law Review and reform, 178 competing directors, conflicts and, 172 conflicts of interest, 151, 166–76 contracts with the company, 175–6 employees, duty to, 176 exemptions, 176–7 fair dealing, enforcement of, 179–82 fiduciary duties, 160, 164–79, 306 good faith, meaning and scope of, 164–5, 177–9 insider dealing, 180 insolvency, 184 insurance, 176–7 loans, 180 nominee directors, 173–4 relief for breach, 176–7 statutory controls affecting directors, 179–84 unfair prejudice, 5, 160–1, 177–8 wrongful trading, 162–3, 183–4, 192 Economic analysis of the law, 66–75 agency costs, shirking and nexus of contracts, 69–71, 73–4 efficiency as a moral value, 66–7 firm, theory of the, 67 property rights theory, 71–3 transaction cost economics, 67–8, 71 Employees, 59–61, 176 431 Index Entrenchment see constitution, entrenchment of rights and European Community law, 11–14, 38 capital maintenance, 293 capital markets, 314, 332–7, 352, 358, 361–5 Company Law Action Plan, 13–14 corporate governance, 13–14 directives, 12–13, 79–80 employee representation, 60–1, 65 establishment, right of, 46 European Works Council, 61, 65 financial services, internal market in, 330–7, 343–4 harmonisation programmes, 11–13, 16, 81 incorporation, 43 insider dealing and market abuse, 314, 335, 374–5, 378–82, 386–8 Investment Services Directive (ISD), 332–4, 336–7, 358 investor compensation, 358–9 Markets in Financial Instruments Directive (MiFID), 336–7 prospectuses and listing particulars, 362–5, 371–2 public and private companies, 16 public offers, 361–3 takeovers, 58, 391–3, 397–400 ultra vires, 121, 130 European Company (Societas Europea), 13, 19 European Co-operative Society (Societas Cooperativa Europea), 19 European Economic Interest Grouping (EEIG), 19 Fair dealing, 179–82 Fiction theory, 48–9 Fiduciary duties, 44, 119, 129–30, 160, 164–79, 306, 314 Financial assistance for purchase of own shares, 6, 281–2, 294–309, 397 breach, consequences of, 294–5, 305–8 Company Law Review and reform, 308–9 exceptions, 299–305, 309 groups of companies, 294–9 knowing assistance and knowing receipt, 307–8 meaning, 299 principal/larger purpose exception, 299–303, 309 private company exception, 303–4, 309 Financial Ombudsman Service, 359 Financial Services Authority (FSA), 7–8, 50, 193, 318–23, 371–2 accountability problems, 321–3 authorisation, 343–5, 349–50, 355 competent authority, as, 363–4 disciplinary measures, 356–7 enforcement, 355–8 Financial Services and Markets Tribunal, 357 Handbook and Principles for Business, 347–9, 355, 394–5 market abuse, 384–6 objectives and duties, 327–9 takeovers, 394–5 Financial services see regulation under the Financial Services and Markets Act 2000 Firm, theory of the, 67 Foreign companies, 19 Formation of companies, 12, 39–43 Forum of European Securities Commissions (FESCO), 334–5 Fraud on the minority, 127, 129, 216–19 Fraudulent trading, 33–7, 426 Good faith, 164–5, 177–9 Government and other agencies, monitoring by, 191–2 Greenbury Report, 80, 198 Groups of companies accounts, 39 432 Index financial assistance, 294–9 holding companies, 34–9 Konzernrecht, 38 limited liability, 34–8 parents and subsidiaries, 34–6, 38–9 pyramiding, 37, 51 wrongful trading, effect on structures, 34–7 Hampel Report, 80, 198–9 Higgs Review, 199–201 Holding companies, 34–9 Human rights law, 357, 426–7 Incorporation procedure, 23, 39–46 certificate of incorporation, 42–3 disclosure doctrine, 43 establishment, right of, 46 formal requirements, 39–42 pre-incorporation contracts, 44–5 promoters, 44–5 publicity, 43 Registrar of Companies, 42–3 Indoor management rule, Industrial democracy, 61–2 Initial public offerings (IPOs), 6, 258–62 Insider dealing and market abuse, 8, 313–14, 324–7, 374–88 directive, effect of, 314, 335, 374–5, 378–82 directors, 180 enforcement, 382–4 Financial Services Authority, 384–6 market egalitarianism, 374–5, 378–9 tipping, 380–1 Insolvency and liquidation, 357–8, 403–28 see also winding up administration orders, 405–6 administrative receivers, 406 company voluntary arrangements, 110–11, 405–7 corporate rescue, 405 development of insolvency law, 403–4 directors, disqualification of, 419–20 limited liability, 31 pre-insolvency remedies, 405–7 reconstruction, 110–11 remedies, 405–7 wrongful trading, 33–5, 162–3, 183–4, 192 Insurance, 176–7, 190 International Organisation of Securities Commissions (IOSCO), 329–30, 375 Investigations, 191–2, 314, 415–16 Investor protection, 7, 326–7, 358–9, 372–3 Joint stock companies, 9, 14, 403 Lamfalussy procedure, 336, 400 Law reform see Company Law Review and law reform Legal personality, 4, 9, 15, 20, 23, 28, 48 Legal theory see theory in company law, theory in securities regulation Limited liability, 4, 23–8, 31–2, 75 fraudulent trading, 33–7 group structures, 37–8 insolvency, 31 partnerships, 20–2, 79 Salomon doctrine, 23–8, 37 wrongful trading, 33–7 Limited partnerships, 21 Liquidation see insolvency and liquidation Listing Rules, 194–5, 198–9, 201, 258–62, 362–8, 396 London Stock Exchange, 15–16, 257–62, 360–3 Managerialism, 50–3 Majority rule principle, 214–19 Market abuse see insider dealing and market abuse Market conduct, 374 Meetings, 7, 107–8, 148–9, 191 see also shareholder meetings 433 Index Memorandum of association see articles and memorandum of association Mere facade test, 26–7 Mergers see takeovers and mergers, regulation of Mind and will of the company, directing, 28–9 Mortgages, 272 Names, 40–1 Nature of company law, 3–22 corporations aggregate and corporations sole, meaning of, 14–15 dispersed-ownership companies, 3, 16–17 European Community influence, 11–14 function of company law, 4–8 history of company law, 9–10 legislative structure, 10–11 private or public companies, 4, 15–18 securities regulation, relationship with, 6–7 shares, companies limited by, 15 small closely-held companies, 3, 16–17 Ombudsman, 359 Open-ended investment companies (OEICs), 19, 351–5 Operating and Financial Review, 187 Organisation of functions and corporate powers, 112–30 Parent companies, 39 Partnerships, 10, 18, 20–2, 55, 79 Poison pills, 398–9 Pre-emption rights, 102 Pre-incorporation contracts, 44–5 Private companies, 4, 15–18, 37, 181–2, 303–4, 309 Prospectuses and listing particulars, 8, 362–3, 368–72 Public companies, 4, 15–18, 37, 42, 56–7, 182, 291–2, 309 Public offerings, 16, 361–73 contents of prospectus, 368–9 continuing obligations, 369 directives, 361–3 electronic trading, 259–60 Financial Services and Markets Act 2000, 363–73 Financial Services Authority, 371–2 flotation 6, 260–2 initial public offerings (IPOs), 6, 258–62 listed securities, 15–16, 365–9 London Stock Exchange, 15–16, 257–62, 361–4 management, effects on 257–8 promoters, 44–5 prospectuses and listing particulars, 8, 362–5, 370–72 remedies for investors, 372–3 rights issue, 262 unlisted securities, 370–1 Purchase of own shares, 286–90 see also financial assistance for purchase of own shares Quasi-corporations or near corporations, 20 Ratification, 127–9, 217–18, 229 Real entity theory, 50 Receivers, 406 Reconstruction, 97–111 Reform of company law see Company Law Review and reform Regulation under the Financial Services and Markets Act 2000, 338–60 see also Financial Services Authority ancillary regimes, 349–50 appointed representatives, exemption of, 345–6 authorisation, 343–4, 349–50, 353–4 business test, 340 434 Index collective investment schemes, 350–5 compensation schemes, 358–9 conduct of business, 326, 346–50 damages and restitution, 357–8 exempt persons, 345–6 financial promotion, 342–3, 354 Financial Ombudsman Service, 359 insolvency, private actions for, 357–8 internal market in financial services, 330–7, 343–4 market abuse, 384–8 ombudsman, 359 open-ended investment companies, 351–5 overseas collective investment schemes, 355 Part IV permission, 343–5, 356 prescribed activities and investments, 341 public offerings, 363–73 recognised clearing houses and investment exchanges, 359–60 register, 345 regulated activities, 326, 339–40, 343–4 territorial scope, 341 unit trusts, 351–2, 354 Salomon doctrine, 23–8, 37 Schemes of arrangement, 106–10 Securities see shares Securities and Exchange Commission (SEC), 315–18, 375, 382–3 Securities and Investments Board (SIB), 316–25, 330, 347 Securities regulation, 3, 6–7, 313–400 see also theory in securities regulation Self-dealing, 175–6, 327 Self-regulation, 5, 194–211 assumptions of responsibility, 196 Cadbury Report, 54–5, 80, 190, 194–9 Combined Code, 198–209 Company Law Review and law reform, 210 disclosure, enhanced quality of, 197–8 Greenbury Report, 80, 198 Hampel Report, 80, 198–9 Higgs Review, 199–201 structural and functional alteration, 196–7 takeovers, 393–5 Shareholder litigation, 212–30 Breckland problem, 226–7 Company Law Review and reform, 228–30, 248–9 costs, 219–26 derivative actions, 219–26, 228–30, 244–8 dispersed-ownership companies, Foss v Harbottle doctrine, 90–2, 121, 213–27 fraud on a minority, meaning of, 216–19 Law Commission, 228–9, 248–9 majority rule principle, 214–19 minority shareholders 213–27, 237–45 share purchase orders, 237–43 statute, 231–49 unfair prejudice, 5, 232–49 winding up, 231–2, 248 Shareholder meetings, 7, 83, 151–7 articles of association, 113 Company Law Review and reform, 159 compromises and arrangements, 106–7 conflicts of interest, 107 consent, concept of shareholder, 158–9 convening of, 153–4 corporate governance, 151–9 function and role of shareholders, 151–7 independence of shareholders, 154–5 notice of, 153–5 problems with, 157–8 435 Index procedure, 155–7 proxies, 156–8 quorum, 155–6 residual authority, seen as, 151–2 resolutions, 113, 152, 154–5, 159 small closely-held companies, in, 158–9 Shareholders, 79, 112–13 see also shareholder litigation, shareholder meetings agreements, 4, 93–7, 98 class rights, variation of, 101–6, 109–11, 285–6 Combined Code, 208–9 directors and, entrenchment, managerial interests with, alignment of, 145–6 minority, 127, 129, 217–27, 237–45, 407 nature of, 267–8 patterns of ownership, 55–6 rights of, 3, 70, 101–5, 215–20, 285–6 small companies, 200–1 Shares, see also capital, shareholders classes and types, 268–71 deferred shares, 269 depositary receipts, 270–1 directors’ control over issues of, 181–2 disclosure of interests, 273–5 fair dealing, 179–82 financial assistance for purchase of own, 6, 281–2, 294–309, 397 multiple voting and non-voting, 269–70 ordinary shares, 268 preference shares, 101–2, 181–2, 268–9 restrictions on transfer, 272–3 sale, transfers on, 271–2 security interests, 272 transfers and transactions, 271–4 warrants, 270 Small closely-held companies, 3, 16–17 Company Law Review, 16–18 dispersed ownership companies, compared with, 3, 16–17 securities regulation, shareholder activism, 200–1 shareholder agreements, 93–4 shareholder meetings, 158–9 Social responsibility, 53, 58–60, 63 Stakeholder theory, 50, 58–66, 76 Statutory companies, 18–19 Subsidiary companies, 34–5, 38–9 Table A see articles and memorandum of association Takeovers and mergers, regulation of, 12, 13, 389–400 City Code, 314, 390, 395–9 Competition Commission, 398 control, market for corporate, 390 defences, 398–9 directive on, 58, 391–3, 399–400 goals of regulation, 390–1 hostile bids, 8, 109–10, 398–9 mandatory bids, 396–7 Panel on Takeovers and Mergers, 390, 393–5 self-regulation, 393–5 timetable, Theory in company law, 47–76 see also theory in securities regulation/capital markets law Theories in securities regulation/capital markets law, 313–37 aims of securities regulation, 323–5 company law, relationship with, 313–14 efficient capital markets hypothesis (ECMH), 325 Financial Services Action Plan (FSAP), 334–6 Financial Services Authority (FSA), 318–23, 327–9 integration, 330–7 internal market, 330–2 436 Index International Organisation of Securities Commission, 329–30 Investment Services Directive (ISD), 332–4, 336–7 Markets in Financial Instruments Directive, 336–7 passports, 332–3 self-regulatory organisations, 314, 319–20, 347, 356 techniques of securities regulation, 326–7 Treasury, role of the, 322–3 Torts, liability for, 28–32 Trade unions, 20 Turquand doctrine, 134–8 UK Listing Authority, 258–61, 363–72 ultra vires doctrine, 4–5, 114–30 agents, 118 Company Law Review and reform, 115, 130, 142 Foss v Harbottle rule, 215 legislation, effect of, 121–7 memorandum and articles, 114–28 objects and powers, 114–21, 125, 130 partnerships, 21 ratification, 127–9 shareholder intervention, 121 social responsibility, 59–60 third parties, effect on, 125–30 Unfair prejudice, 78, 93, 100, 160–1, 177–8 Company Law Review and reform, 233, 248–9 directors, removal of, 183 share purchase orders, 237–43 shareholder litigation, 5, 232–49 winding up, 248 Unincorporated associations, clubs and societies, 20 Unit trusts, 20, 350–1, 354 Variation of class rights, 101–5, 109–11, 285–6 Venture capital, 255–7 Vicarious liability, 29 Voting, 104, 152–8, 183, 197, 269–70 Winding up, 8, 231–2, 248, 408–16 appointment of liquidators, 411–12 collection and distribution of assets, 412–14 court, by the, 408–9 effects, 410–11 fraud, 426 misconduct, malpractice and adjustment of pre-liquidation transactions, 415–16 remedies, 416 unfair prejudice, 248 voluntary, 408 Wrongful trading, 33–7, 162–3, 183–4, 192 437