BUSINESS AND
FINANCE
BUSINESS and FINANCE
(slides for 2 sessions)
Related papers in pack:
Certificate of Incorporation, Form IN01, contents sheet to Articles
of Association and 2 Hand Outs.
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BUSINESS AND
FINANCE
Going to be looking at 4 things:
• Different types of business entity,
• How to set up a private limited company,
• How a company operates on a legal level, and
• Different types of finance and security interest.
Aim:
To give you the basic language of these topics, and
To show how it’s used in context.
In passing, you’ll understand some basic points about
English company and finance law.
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DIFFERENT TYPES OF
BUSINESS ENTITY
Start with “Certificate of Incorporation of a Private Limited
Company”. There’s one in your pack.
Whose seal appears?
2 points
Company registration done nationally not locally.
The language of registration.
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REGISTRATION
The Register – a book ( or, now, a computer)
The Registrar – a person
The Registry or Registration Office – a place
Sample language
– to file a Form X at Companies House / the Companies Registration Office OR with the Registrar of Companies.
- to register the mortgage at the Land Registry
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REGISTRATION
What do you have to register?
What DON’T you have to register?
Births, marriages and deaths
Many things to do with companies
Many things to do with real property
Certain types of intellectual property (patents, trade and
service marks and registered designs but not copyright)
Ships, aircraft, motor vehicles etc
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DIFFERENT TYPES OF
BUSINESS ENTITY – THE
COMPANY
Back to the Certificate
“…incorporated under the Companies Act 2006 as a private company limited by shares..”
Let’s look at 5 things
COMPANIES ACT 2006
PRIVATE
COMPANY
LIMITED
BY SHARES
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DIFFERENT TYPES OF
BUSINESS ENTITY – THE
COMPANY
COMPANIES ACT 2006
The longest in British Parliamentary history: 1,300 sections,
nearly 700 pages and 15 schedules
Brought into force in 8 stages. The final provisions came into
effect on 1 October 2009
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Natural persons v legal persons
Co – separate legal entity, can hold property and sue and be
sued in its own name
Other types of legal person e.g. local authorities. Creatures
of statute.
Companies Act 1908…..1929….1948…1985
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DIFFERENT TYPES OF
BUSINESS ENTITY – THE
COMPANY
PRIVATE
Private v public
Be careful
a) A Public Limited Company (PLC)
b) A public (i.e. state-owned) company
Most companies (over 95%) are private limited companies and abbreviation is LTD and not PLC.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
An aside
The process of privatisation started in many countries 20-30 years ago
Companies providing “utilities” (e.g. gas, water, electricity and telephone) were public (state-owned) corporations e.g. The Gas Board
The State transferred the business to a PLC e.g. British Gas PLC
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Shares of British Gas PLC quoted / listed on the Stock Exchange and offered to the public
Privatisation- move from ownership by the state to ownership by private investors, from the public to the private sector.
Confusingly, what these private investors own is shares in a PLC, a public limited company
Opposite of privatisation? Nationalisation.
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AN ASIDE –PRIVATE
EQUITY
Private equity v venture capital (seed capital)
Structures – of funds and of investments.
Why “private”?
Rewards
Exits
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
LTD
Members limited liability
No minimum share capital
CANNOT issue securities to public
PLC
Ditto
Minimum share capital ( but not much - £50K)
CAN issue securities to the public
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Securities - debt securities (obligazioni) and equity securities (azioni).
Debt securities – it’s a loan. The lender should receive interest and principal. (Loan stock, commercial paper, [medium term] notes and bonds.)
Equity securities – it’s not a loan, it’s a contribution to the share capital of the company. Usually, the shareholder /member will get a vote and a dividend.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
In order for a company’s securities to be listed / quoted on a
stock exchange, the company has to be a PLC.
DON’T mix up “securities” and “security”.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Lender and borrower / Bank and customer
Is the bank ready to make an unsecured loan
or will it want security?
An obligor gives / grants security over an item
of property / asset to secure the payment of a
debt or performance of some other obligation.
The obligor is often the borrower but
sometimes it’s a 3rd party such as a parent
company or an independent guarantor.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Different types of security
A mortgage (also known as a charge although technically
they’re different) over……pretty much anything.
Real and personal property, immoveable and moveable,
tangible and intangible.
An aside – what do these terms mean? Examples.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Often civil lawyers will call a security interest a pledge when
common lawyers wouldn’t.
Wording – to grant security over…; to have a security
interest in
Security usually has to be created and often has to be
registered but sometimes occurs “by operation of law”. E.g.
a lien.
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DIFFERENT TYPES OF
BUSINESS ENTITY –
THE COMPANY
Cf US v UK and other common law uses
US – “lien” has very wide meaning
UK – “lien” refers to a very specific type of security interest, being a passive right to retain but not sell property until the debt or other obligation is discharged.
“retain” - must have possession or control.
E.g. mechanic, repairman, solicitor, warehouseman
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AN ASIDE (1) –
“EQUITY”
1. Pre 1873 two court systems in parallel – courts of common
law and of equity. The courts of equity gave “fair” results
when “the rigour of the common law” would lead to an unfair
result.
2. Abolished by Supreme Court of Judicature Act 1873.
However, certain “equitable remedies” survive. These
remedies are used when damages do not provide an
adequate remedy. In short, the court says: “do – or don’t do –
something”.
Examples. Injunctions. Orders for Specific Performance.
.
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AN ASIDE (2) –
“EQUITY”
3. Dictionary meaning. “a situation in which all people are
treated equally and no one has an unfair advantage” [≠
inequity]:
“a society run on the principles of equity and justice”
4. equity as opposed to debt e.g. equity / debt capital
markets.
(The debt capital markets are only part of the debt markets.
The other main part is bank lending.)
5. equities (plural) - shares
6. equity in a project / your house
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AN ASIDE (3) – “EQUITY”
2001. Buy house for 100. Financed by
a) bank lending of 75 ( “a mortgage loan”) and
b) your savings of 25.
Ratios. Loan to value – 75% . Debt to equity – 3:1
2003. Value of house has fallen to 70. “negative equity”-5.
2009. Sell house for 200. Repay loan - your “equity” is 125.
Increase in value:
-of house = 100%,
-of your equity = 500%.
The effect of “leverage”. Leveraged finance. “Leveraged” comes
from “lever”, the law of levers (Physics).
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DIFFERENT TYPES OF
BUSINESS ENTITY
Back to Slide 6
Most businesses are companies but could be:
• Sole trader / practitioner, or
• Partnership
• Different types of partnership
a) general. (Partnership Act 1890)
b) limited. (Limited Partnerships Act 1907)
c) limited liability partnership (LLP Act 2000).
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DIFFERENT TYPES OF
BUSINESS ENTITY
General partnership
Not a separate legal entity
Every partner jointly and severally liable
Limited partnership
Not a separate legal entity
Limited partners not liable, general partner liable without limit i.e. has “unlimited liability”
NB with both types of P, position with being a separate legal entity differs from jurisdiction to jurisdiction
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DIFFERENT TYPES OF
BUSINESS ENTITY
LLP
Separate legal entity
Partners not liable
Too new for me!
Different things in different jurisdictions.
Law Firms
Traditionally general partnership. Recently, LLP.
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DIFFERENT TYPES OF
BUSINESS ENTITY
Back to Companies – LIMITED
Can you have UNlimited companies?
Yes but very rare.
How is liability limited? Usually “by shares”- what does this
mean?
Occasionally will be by guarantee. E.g. trade associations,
clubs.
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DIFFERENT TYPES OF
BUSINESS ENTITY
Is the limit on a shareholder / member’s (mean the same
thing) liability always effective?
Yes……..except “the courts will pierce the corporate veil” in
cases of fraud.
(Veil – wedding dress, some clothes worn by Muslim women)
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DIFFERENT TYPES OF
BUSINESS ENTITY
A slightly different point is the personal liability of a director
if a co goes into insolvent liquidation in certain
circumstances.
Can lead to a majority shareholder being liable as a “shadow
director”.
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DIFFERENT TYPES OF
BUSINESS ENTITY
In E&W, virtually all companies have a share capital and to
“own” a company you have to own all the shares in it.
But in some jurisdictions, you own a company by having
“ownership interests” and not shares.
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DIFFERENT TYPES OF
BUSINESS ENTITY
An aside, the language of a group of companies.
Parent company and subsidiary (over 50%).
Wholly owned subsidiary – 100%
European holding company
Ultimate parent / holding company V intermediate parent /
holding.
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DIFFERENT TYPES OF
BUSINESS ENTITY
Back to the Certificate
What do you need to do get a Certificate like that?
Putting it another way, how do you set up a company?
I’ll show you – it’s EASY
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SETTING UP A PRIVATE
LIMITED COMPANY
How easy?
It can be done in a few hours and very cheaply. (Fees £25,
min capital £1).
From scratch or by adapting a shelf company.
Notary? No – used very little in common law countries.
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SETTING UP A PRIVATE
LIMITED COMPANY
Let’s do it from scratch – Form IN01 (Application to register
a company)
Memorandum of Association
Articles of Association
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SETTING UP A PRIVATE
LIMITED COMPANY
MEMORANDUM of ASSOCIATION
Before Companies Act 2006
Long, complicated objects clause because a company can only do what is has power to do as set out in its objects clause.
Ultra / intra vires
Now
All companies can do anything. They have “unrestricted objects”. Can forget about Memorandum.
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SETTING UP A PRIVATE
LIMITED COMPANY
ARTICLES of ASSOCIATION
a company’s constitution ( charter, statutes)
a contract between the company and its members
how the company will make decisions and the articles
include various matters connected with the shares. See later.
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SETTING UP A PRIVATE
LIMITED COMPANY
THE OFFICERS
Company Secretary (no longer needed for LTD)
Director (at least one) – service address, residential address
(Position pre 2006 Act with confidentiality orders.)
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SETTING UP A PRIVATE
LIMITED COMPANY
SHARES
Look at 2 things – types of shares and the share capital itself
1. Types of shares
A) Normal case
Ordinary shares of £1 each
3 main types of right
• to vote at General Meetings (both Annual and Extraordinary – AGM and EGM). Written resolutions.
• to receive any dividend or other distribution
• to receive any distribution on winding up
Each share has equal rights – pari passu
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SETTING UP A PRIVATE
LIMITED COMPANY
B) Special cases
Rights can be changed. For example..
i) Votes
A shares and B shares ( Joint ventures)
Golden shares (after privatisations)
Enhanced rights e.g. 10 votes per share on x) everything or y) particular matters
Non voting shares
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SETTING UP A PRIVATE
LIMITED COMPANY
ii) Rights to dividend and other distributions
( extra shares, in specie)
Preference shares
E.g. 3% cumulative redeemable preference shares 2015
An aside – to redeem, redemption
Religious meaning, legal meaning
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SETTING UP A PRIVATE
LIMITED COMPANY
2. The share capital itself
Authorised and issued (can be different)
Nominal or par value (means the same)
Previously could be issued nil paid, partly paid, fully paid or
at a premium
(deferred payment, payment in tranches).
Post 2006 Act, can only be issued fully paid.
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SETTING UP A PRIVATE
LIMITED COMPANY
The company has an authorised capital of £1,000 divided into
1,000 shares with a par / nominal value of £1 each of which
a) 100 shares have been issued fully paid,
b) 100 shares have been issued partly paid (50p) and
c)100 shares have been issued nil paid.
Above is possible but highly unlikely.
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SETTING UP A PRIVATE
LIMITED COMPANY
Hurray!
We’ve done it – we’ve set up a company.
Easy, wasn’t it?
Even though it was easy, we could have made it even easier
by using a
SHELF COMPANY.
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PAYMENT TERMS – AN
ASIDE – TO BE EXPANDED
Pay in advance – advance payment
Pay a deposit and the balance on completion. ( If don’t complete, buyer may lose the deposit – forfeiture)
COD – cash on delivery
Payment 30/60 days after, say, delivery or date of invoice
Letters of Credit (LCs) in international transactions
Pay in installments (payment “milestones”)
Retain part of the price ( a “retention”) until, say, end of the warranty period
Defer payment (“deferred payment terms”)
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LET’S LOOK AT THE
MODEL FORM OF
ARTICLES
MODEL ARTICLES FOR PRIVATE COMPANIES LIMITED BY SHARES
INDEX TO THE ARTICLES
PART 1
INTERPRETATION AND LIMITATION OF LIABILITY
1. Defined terms
2. Liability of members
PART 2
DIRECTORS
DIRECTORS’ POWERS AND RESPONSIBILITIES
3. Directors’ general authority
4. Shareholders’ reserve power
5. Directors may delegate
6. Committees
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THE MODEL FORM OF
ARTICLES
DECISION-MAKING BY DIRECTORS
7. Directors to take decisions collectively
8. Unanimous decisions
9. Calling a directors’ meeting
10. Participation in directors’ meetings
11. Quorum for directors’ meetings
12. Chairing of directors’ meetings
13. Casting vote
14. Conflicts of interest
15. Records of decisions to be kept
16. Directors’ discretion to make further rules
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THE MODEL FORM OF
ARTICLES
APPOINTMENT OF DIRECTORS
17. Methods of appointing directors
18. Termination of director’s appointment
19. Directors’ remuneration
20. Directors’ expenses
PART 3
SHARES AND DISTRIBUTIONS
SHARES
21. All shares to be fully paid up
22. Powers to issue different classes of share
23. Company not bound by less than absolute interests
24. Share certificates
25. Replacement share certificates
26. Share transfers
27. Transmission of shares
28. Exercise of transmittees’ rights
29. Transmittees bound by prior notices
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THE MODEL FORM OF
ARTICLES
DIVIDENDS AND OTHER DISTRIBUTIONS
30. Procedure for declaring dividends
31. Payment of dividends and other distributions
32. No interest on distributions
33. Unclaimed distributions
34. Non-cash distributions
35. Waiver of distributions
CAPITALISATION OF PROFITS
36. Authority to capitalise and appropriation of capitalised sums
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THE MODEL FORM OF
ARTICLES
PART 4
DECISION-MAKING BY SHAREHOLDERS
ORGANISATION OF GENERAL MEETINGS
37. Attendance and speaking at general meetings
38. Quorum for general meetings
39. Chairing general meetings
40. Attendance and speaking by directors and non-shareholders
41. Adjournment
VOTING AT GENERAL MEETINGS
42. Voting: general
43. Errors and disputes
44. Poll votes
45. Content of proxy notices
46. Delivery of proxy notices
47. Amendments to resolutions
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THE MODEL FORM OF
ARTICLES
PART 5
ADMINISTRATIVE ARRANGEMENTS
48. Means of communication to be used
49. Company seals
50. No right to inspect accounts and other records
51. Provision for employees on cessation of business
DIRECTORS’ INDEMNITY AND INSURANCE
52. Indemnity
53. Insurance
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“DIFFERENT TYPES OF FINANCE
AND SECURITY INTEREST”. TO BE
EXPANDED
Already covered a lot in passing.
Why it’s important even if you’re not a finance lawyer.
Bankability
Secured / unsecured
Specific purpose or for general corporate purposes
Key terms of facility agreements – cps, reps and warranties,
covenants, events of default
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