Reform of UK Company Law

Contracts between companies and third parties, however, may turn out to be unenforceable on ordinary principles of agency law if the director or employee obviously exceeded their authority. As a general rule, third parties need not be concerned with constitutional details conferring power among directors or employees, which may only be found by laboriously searching the register at Companies House. However, if it would appear to a reasonable person that a company employee would not have the authority to enter an agreement, then the contract is voidable at the company's instance so long as there is no equitable bar to rescission.

The third party would have a claim against the probably less solvent employee instead. First, an agent may have express actual authority, in which case there is no problem. Her actions will be attributed to the company. Second, an agent may have implied actual authority also sometimes called "usual" authority , which falls within the usual scope of the employee's office. The Companies Act section 40 makes clear that directors are always deemed to be free of limitations on their authority under the constitution, unless a third party acting in callous bad faith takes advantage of a company whose director acts outside the scope of authority.

Corporate entities

For employees down the chain of delegation, it becomes less and less likely that a reasonable contracting party would think big transactions will have had authority. For instance, it would be unlikely that a bank cashier would have the authority to sell the bank's Canary Wharf skyscraper. Problems arise where serious torts, and particularly fatal injuries occur as a result of actions by company employees. All torts committed by employees in the course of employment will attribute liability to their company even if acting wholly outside authority, so long as there is some temporal and close connection to work.

Even with additional regulation by government bodies, such as the Health and Safety Executive or the Environment Agency , companies may still have a collective incentive to ignore the rules in the knowledge that the costs and likelihood of enforcement is weaker than potential profits. Criminal sanctions remain problematic, for instance if a company director had no intention to harm anyone, no mens rea , and managers in the corporate hierarchy had systems to prevent employees committing offences.

This creates a criminal offence for manslaughter , meaning a penal fine of up to 10 per cent of turnover against companies whose managers conduct business in a grossly negligent fashion, resulting in deaths. Without lifting the veil there remains, however, no personal liability for directors or employees acting in the course of employment, for corporate manslaughter or otherwise.

If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership. Then, in return for money he lent the company, he made the company issue a debenture , which would secure his debt in priority to other creditors in the event of insolvency.

The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company.

There could not, in general, be any lifting of the veil. This principle is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act , section stipulates that company directors [48] must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.

A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK and therefore British its directors and shareholders were German and therefore enemies, while the First World War was being fought. There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable.

The present rule under English law is that only where a company was set up to commission fraud, [51] or to avoid a pre-existing obligation can its separate identity be ignored. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary i.

Rejecting the claim, and following the reasoning in Jones v Lipman , [53] the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation. The potentially unjust result for tort victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been changed in Chandler v Cape plc so that a duty of care may be owed by a parent to workers of a subsidiary regardless of separated legal personality.

This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate "groups" or a " concern " as single economic entities exist in many continental European jurisdictions.

This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc.

History of company law in the United Kingdom

It is very rare for English courts to lift the veil. Because limited liability generally prevents shareholders, directors or employees being sued, the Companies Acts have sought to regulate the company's use of its capital in at least four ways. After that, the capital can be spent. This is a largely irrelevant sum for almost any public company, and although the first Companies Acts required it, since there has been no similar provision for a private company. Nevertheless, a number of EU member states kept minimum capital rules for their private companies, until recently.

In , in Centros Ltd v Erhvervs- og Selskabsstyrelsen [61] the European Court of Justice held that a Danish minimum capital rule for private companies was a disproportionate infringement of the right of establishment for businesses in the EU. A UK private limited company was refused registration by the Danish authorities, but it was held that the refusal was unlawful because the minimum capital rules did not proportionately achieve the aim of protecting creditors.

Less restrictive means could achieve the same goal, such as allowing creditors to contract for guarantees. This led a large number of businesses in countries with minimum capital rules, like France and Germany, to begin incorporating as a UK " Ltd ". France abolished its minimum capital requirement for the SARL in , and Germany created a form of GmbH without minimum capital in The second measures, which originally came from the common law but also went into the Second Company Law Directive , were to regulate what was paid for shares.

Initial subscribers to a memorandum for public companies must buy their shares with cash, [64] though afterwards it is possible to give a company services or assets in return for shares. The problem was whether the services or assets accepted were in fact as valuable to the company as the cash share price otherwise would be. At common law, In re Wragg Ltd said that any exchange that was "honestly and not colourably" agreed to, between the company and the purchaser of shares, would be presumed legitimate.

This laissez faire approach was changed for public companies. Shares cannot be issued in return for services that will only be provided at a later date. This refers to a figure chosen by a company when it begins to sell shares, and it can be anything from 1 penny up to the market price.

UK law always required that some nominal value be set, because it was thought that a lower limit of some kind should be in place for how much shares could be sold, even though this very figure was chosen by the company itself. This has led to the criticism for at least 60 years that the rule is useless and best abolished.

The third, and practically most important strategy for creditor protection, was to require that dividends and other returns to shareholders could only be made, generally speaking, if a company had profits. The concept of " profit " is defined by law as having assets above the amount that shareholders, who initially bought shares from the company, contributed in return for their shares.

The Companies Act states in section that dividends , or any other kind of distribution, can only be given out from surplus profits beyond the legal capital. The prohibition on falling below the legal capital applies to "distributions" in any form, and so "disguised" distributions are also caught. This has been held to include, for example, an unwarranted salary payment to a director's wife when she had not worked, [76] and a transfer of a property within a company group at half its market value.

If distributions are made without meeting the law's criteria, then a company has a claim to recover the money from any recipients. They are liable as constructive trustees , [79] which probably mirrors the general principles of any action in unjust enrichment. The Court of Appeal held that ignorance of the law was not a defence.

A contravention existed so long as one ought to have known of the facts that show a dividend would contravene the law. Directors can similarly be liable for breach of duty, and so to restore the money wrongfully paid away, if they failed to take reasonable care. Legal capital must be maintained not distributed to shareholders, or distributed "in disguise" unless a company formally reduces its legal capital.

Then it can make distributions, which might be desirable if a company wishes to shrink. A private company must have a 75 per cent vote of the shareholders, and the directors must then warrant that the company will remain solvent and will be able to pay its debts. But this means it is hard to claw back any profits from shareholders if a company does indeed go insolvent, if the director's statement appeared good at the time.

If not all the directors are prepared to make a solvency statement, the company may apply to court for a decision. In public companies, a special resolution must also be passed, and a court order is necessary. In particular, while no ordinary shareholder should lose shares disproportionately, it has been held legitimate to cancel preferential shares before others, particularly if those shares are entitled to preferential payment as a way of considering "the position of the company itself as an economic entity".

First, a company may issue shares on terms that they may be redeemed, though only if there is express authority in the constitution of a public company, and the re-purchase can only be made from distributable profits. Crucially, the directors must also state that the company will be able to pay all its debts and continue for the next year, and shareholders must approve this by special resolution. From the shareholder's perspective, the company buying back some of its shares is much the same as simply paying a dividend, except for one main difference.

Taxation of dividends and share buy backs tends to be different, meaning that often buy backs are popular just because they " dodge " the Exchequer. The fourth main area of regulation, which is usually thought of as preserving a company's capital, is prohibition of companies providing other people with financial assistance for purchasing the company's own shares. The main problem which the regulation was intended to prevent was leveraged buyouts where, for example, an investor gets a loan from a bank, secures the loan on the company it is about to buy, and uses the money to buy the shares.

However, in a company's case, the bank is likely to be only one among a large number of creditors, such as employees , consumers , taxpayers , or small businesses who rely on the company's trade. Only the bank will have priority for its loan, and so the risk falls wholly on other stakeholders. Financial assistance for share purchase, especially indemnifying a takeover bidder's loan, was therefore seen as encouraging risky ventures that were prone to failure, to the detriment of creditors other than the bank. It was prohibited from It became possible to " take private " a public company on its purchase, change the company from a plc to an Ltd.

The result has been a growing number of leveraged buyouts , and an increase in the private equity industry of the UK. Corporate governance is concerned primarily with the balance of power between the two basic organs of a UK company: The term "governance" is often used in the more narrow sense of referring to principles in the UK Corporate Governance Code. This makes recommendations about the structure, accountability and remuneration of the board of directors in listed companies, and was developed after the Polly Peck , BCCI and Robert Maxwell scandals led to the Cadbury Report of However, put broadly corporate governance in UK law focuses on the relative rights and duties of directors, shareholders , employees , creditors and others who are seen as having a " stake " in the company's success.

The Companies Act , in conjunction with other statutes and case law, lays down an irreducible minimum core of mandatory rights for shareholders, employees, creditors and others by which all companies must abide. UK rules usually focus on protecting shareholders or the investing public, but above the minimum, company constitutions are essentially free to allocate rights and duties to different groups in any form desired.

The constitution of a company is usually referred to as the " articles of association ". These rules may always be changed, except where a provision is a compulsory term deriving from the Companies Act , or similar mandatory law. In this sense a company constitution is functionally similar to any business contract, albeit one that is usually variable among the contracting parties with less than consensus.

Even if companies' articles are silent on an issue, the courts will construe the gaps to be filled with provisions consistent with the rest of the instrument in its context, as in the old case of Attorney General v Davy where Lord Hardwicke LC held that a simple majority was enough for the election of a chaplain. Typically, a company's articles will vest a general power of management in the board of directors, with full power of directors to delegate tasks to other employees, subject to an instruction right reserved for the general meeting acting with a three quarter majority.

In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame , [] a shareholder sued the board for not following a resolution, carried with an ordinary majority of votes, to sell off the company's assets. The Court of Appeal refused the claim, [] since the articles stipulated that a three quarter majority was needed to issue specific instructions to the board. Shareholders always have the option of gaining the votes to change the constitution or threaten directors with removal, but they may not sidestep the separation of powers found in the company constitution.

Of the most important is a member's right to vote at meetings. Votes need not necessarily attach to shares, as preferential shares e. However, ordinary shares invariably do have votes and in Pender v Lushington Lord Jessel MR stated votes were so sacrosanct as to be enforceable like a "right of property". Technically speaking, shareholders have very few rights in the Companies Act , because only in a handful of places are "shareholders" those who invest capital in a company expressly identified as the subject of rights.

Anybody can become a company member through agreement with others involved in a new or existing company. However, because of the bargaining position that people have through capital investment, shareholders typically are the only members, and usually have a monopoly on governance rights under a constitution. In this way, the UK is a "pro-shareholder" jurisdiction relative to its European and American counterparts. Since the Report of the Committee on Company Law Amendment , chaired in by Lord Cohen , led to the Companies Act , as members and voters in the general meeting of public companies, [] shareholders have the mandatory right to remove directors by a simple majority, [] while in Germany, [] and in most American companies predominantly incorporated in Delaware directors can only be removed for a "good reason".

While shareholders have a privileged position in UK corporate governance, most are themselves institutions - mainly asset managers - holding "other people's money" from pension funds, life insurance policies and mutual funds. Thousands or perhaps millions of persons, particularly through pensions , are beneficiaries from the returns on shares.

Historically institutions have often not voted or participated in general meetings on their beneficiaries' behalf, and often display an uncritical pattern of supporting management. Under the Pensions Act sections to require that pension fund trustees are elected or appointed to be accountable to the beneficiaries of the fund, while the Companies Act section ensures that directors are accountable to shareholders. However, the rules of contract , equity and fiduciary duty that operate between asset managers and the real capital investors have not been codified. Government reports have suggested, [] and case law requires, [] that asset managers follow the instructions about voting rights from investors in pooled funds according to the proportion of their investment, and follow instructions entirely when investors have separate accounts.

Institutional investors, who deal with other people's money, are bound by fiduciary obligations, deriving from the law of trusts and obligations to exercise care deriving from the common law. The Stewardship Code , drafted by the Financial Reporting Council the corporate governance watchdog , reinforces the duty on institutions to actively engage in governance affairs by disclosing their voting policy, voting record and voting. The aim is to make directors more accountable, at least, to investors of capital. While it has not been the norm, employee participation rights in corporate governance have existed in many specific sectors, particularly universities , [] and many workplaces organised as partnerships.

Since the turn of the 20th century Acts such as the Port of London Act , Iron and Steel Act , or the Post Office Act required all workers in those specific companies had votes to elect directors on the board, meaning the UK had some of the first " codetermination " laws in the world.

By contrast in 16 out of 28 EU member states employees have participation rights in private companies, including the election of members of the boards of directors, and binding votes on decisions about individual employment rights, like dismissals, working time and social facilities or accommodation. Crucially, the Companies Act section defines "members" as those with the ability to vote out the board.

Under section a "member" is anybody who initially subscribes their name to the company memorandum, or is later entered on the members' register, and is not required to have contributed money as opposed to, for instance, work. A company could write its constitution to make "employees" members with voting rights under any terms it chose. In addition to national rules, under the European Company Statute , businesses that reincorporate as a Societas Europaea may opt to follow the Directive for employee involvement. Or an SE can have a one tiered board, as every UK company, and employees and shareholders may elect board members in the desired proportion.

In the Report of the committee of inquiry on industrial democracy [] the Government proposed, in line with the new German Codetermination Act , and mirroring an EU Draft Fifth Company Law Directive , that the board of directors should have an equal number of representatives elected by employees as there were for shareholders.

But reform stalled, and was abandoned after the election. Many businesses run employee share schemes , particularly for highly paid employees; however, such shares seldom compose more than a small percentage of capital in the company, and these investments entail heavy risks for workers, given the lack of diversification.

Directors appointed to the board form the central authority in UK companies. In carrying out their functions, directors whether formally appointed, de facto , or " shadow directors " [] owe a series of duties to the company. These may not be limited, waived or contracted out of, but companies may buy insurance to cover directors for costs in the event of breach.

The first director's duty under section is to follow the company's constitution, but also only exercise powers for implied "proper purposes". Prior proper purpose cases often involved directors plundering the company's assets for personal enrichment, [] or attempting to install mechanisms to frustrate attempted takeovers by outside bidders, [] such as a poison pill. The all-important duty of care is found in section Directors must display the care, skill and competence that is reasonable for somebody carrying out the functions of the office, and if a director has any special qualifications an even higher standard will be expected.

However, under section courts may, if directors are negligent but found to be honest and ought to be excused, relieve directors from paying compensation. The "objective plus subjective" standard was first introduced in the wrongful trading provision from the Insolvency Act , [] and applied in Re D'Jan of London Ltd. The policy was void when the company's warehouse burnt down. Hoffmann LJ held Mr D'Jan's failure was negligent, but exercised discretion to relieve liability on the ground that he owned almost all of his small business and had only put his own money at risk.

The courts emphasise that they will not judge business decisions unfavourably with the benefit of hindsight, [] however simple procedural failures of judgment will be vulnerable. Cases under the Company Director Disqualification Act , such as Re Barings plc No 5 [] show that directors will also be liable for failing to adequately supervise employees or have effective risk management systems, as where the London directors ignored a warning report about the currency exchange business in Singapore, where a rogue trader caused losses so massive that it brought the whole bank into insolvency.

The central equitable principle applicable to directors is to avoid any possibility of a conflict of interest , [] without disclosure to the board or seeking approval from shareholders. This core duty of loyalty is manifested firstly in section which specifies that directors may not use business opportunities that the company could without approval. Shareholders may pass a resolution ratifying a breach of duty, but under section they must be uninterested in the transaction. This absolute, strict duty has been consistently reaffirmed since the economic crisis following the South Sea Bubble in Even though the directors used their votes as shareholders to "ratify" their actions, the Privy Council advised that the conflict of interest precluded their ability to forgive themselves.

Similarly, in Bhullar v Bhullar , [] a director on one side of a feuding family set up a company to buy a carpark next to one of the company's properties. The family company, amidst the feud, had in fact resolved to buy no further investment properties, but even so, because the director failed to fully disclose the opportunity that could reasonably be considered as falling within the company's line of business, the Court of Appeal held he was liable to make restitution for all profits made on the purchase. The duty of directors to avoid any possibility of a conflict of interest also exists after a director ceases employment with a company, so it is not permissible to resign and then take up a corporate opportunity, present or maturing, even though no longer officially a "director".

The purpose of the no conflict rule is to ensure directors carry out their tasks like it was their own interest at stake. Beyond corporate opportunities, the law requires directors accept no benefits from third parties under section , and also has specific regulation of transactions by a company with another party in which directors have an interest. Under section , when directors are on both sides of a proposed contract, for example where a person owns a business selling iron chairs to the company in which he is a director, [] it is a default requirement that they disclose the interest to the board, so that disinterested directors may approve the deal.

The company's articles could heighten the requirement, say, to shareholder approval. Further detailed provisions govern loaning money. Directors pay themselves by default, [] but in large listed companies have pay set by a remuneration committee of directors. Finally, under section directors must "promote the success of the company". This somewhat nebulous provision created significant debate during its passage through Parliament, since it goes on to prescribe that decisions should be taken in the interests of members, with regard to long term consequences, the need to act fairly between members, and a range of other " stakeholders ", such as employees, [] suppliers, the environment, the general community, [] and creditors.

However, the duty is particularly difficult to sue upon since it is only a duty for a director to do what she or "he considers, in good faith, would be most likely to promote the success of the company". There is also a duty under section to exercise independent judgment and the duty of care in section applies to the decision making process of a director having regard to the factors listed in section , so it remains theoretically possible to challenge a decision if made without any rational basis.

The Reform of United Kingdom Company Law - Google Книги

But section 's criteria are useful as an aspirational standard because in the annual Director's Report companies must explain how they have complied with their duties to stakeholders. Litigation among those within a company has historically been very restricted in UK law. The attitude of courts favoured non-interference. The board of directors invariably holds the right to sue in the company's name as a general power of management.

A majority of shareholders would also have the default right to start litigation, [] but the interest a minority shareholder had was seen as relative to the wishes of the majority. Aggrieved minorities could not, in general, sue. Only if the alleged wrongdoers were themselves in control, as directors or majority shareholder, would the courts allow an exception for a minority shareholder to derive the right from the company to launch a claim.

In practice very few derivative claims were successfully brought, given the complexity and narrowness in the exceptions to the rule in Foss v Harbottle. This was witnessed by the fact that successful cases on directors' duties before the Companies Act seldom involved minority shareholders, rather than a new board, or a liquidator in the shoes of an insolvent company, suing former directors.

The new requirements to bring a " derivative claim " are now codified in the Companies Act sections Under section a shareholder must, first, show the court there is a good prima facie case to be made. This preliminary legal question is followed by the substantive questions in section The court must refuse permission for the claim if the alleged breach has already been validly authorised or ratified by disinterested shareholders, [] or if it appears that allowing litigation would undermine the company's success by the criteria laid out in section If none of these "negative" criteria are fulfilled, the court then weighs up seven "positive" criteria.

Again it asks whether, under the guidelines in section , allowing the action to continue would promote the company's success. It also asks whether the claimant is acting in good faith, whether the claimant could start an action in her own name, [] whether authorisation or ratification has happened or is likely to, and pays particular regard to the views of the independent and disinterested shareholders.

Still, the first cases showed the courts remaining conservative. According to Wallersteiner v Moir No 2 , [] minority shareholders will be indemnified for the costs of a derivative claim by the company, even if it ultimately fails. While derivative claims mean suing in the company's name, a minority shareholder can sue in her own name in four ways. The first is to claim a "personal right" under the constitution or the general law is breached. For losses reflective of the company's, only a derivative claim may be brought. This residual protection for minorities was developed by the Court of Appeal in Allen v Gold Reefs of West Africa Ltd , [] where Sir Nathaniel Lindley MR held that shareholders may amend a constitution by the required majority so long as it is " bona fide for the benefit of the company as a whole.

This was so in Greenhalgh v Arderne Cinemas Ltd , [] where the articles were changed to remove all shareholders' pre-emption rights, but only one shareholder the claimant, Mr Greenhalgh, who lost was interested in preventing share sales to outside parties. In Ebrahimi v Westbourne Galleries Ltd , [] Lord Wilberforce held that a court would use its discretion to wind up a company if three criteria were fulfilled: Given these features, it may be just and equitable to wind up a company if the court sees an agreement just short of a contract, or some other "equitable consideration", that one party has not fulfilled.

So where Mr Ebrahmi, a minority shareholder, had been removed from the board, and the other two directors paid all company profits out as director salaries, rather than dividends to exclude him, the House of Lords regarded it as equitable to liquidate the company and distribute his share of the sale proceeds to Mr Ebrahimi. The drastic remedy of liquidation was mitigated significantly as the unfair prejudice action was introduced by the Companies Act Now under the Companies Act section , a court can grant any remedy, but will often simply require that a minority shareholder's interest is bought out by the majority at a fair value.

The cause of action, stated in section , is very broad. A shareholder must simply allege they have been prejudiced i. A court must at least have an "equitable consideration" to grant a remedy. Generally this will refer to an agreement between two or more corporators in a small business that is just short of being an enforceable contract, for the lack of legal consideration.

A clear assurance, on which a corporator relies, which would be inequitable to go back on, would suffice, unlike the facts of the leading case, O'Neill v Phillips. Mr O'Neill was then demoted, but claimed that he should be given 50 per cent of the company's shares because negotiations had started for this to happen and Mr Phillips had said one day it might. Lord Hoffmann held that the vague aspiration that it "might" was not enough here: Unfair prejudice in this sense is an action not well suited to public companies, [] when the alleged obligations binding the company were potentially undisclosed to public investors in the constitution, since this would undermine the principle of transparency.

However it is plain that minority shareholders can also bring claims for more serious breaches of obligation, such as breach of directors' duties. While corporate governance primarily concerns the general relative rights and duties of shareholders, employees and directors in terms of administration and accountability, corporate finance concerns how the monetary or capital stake of shareholders and creditors are mediated, given the risk that the business may fail and become insolvent.

Companies can fund their operations either through debt i. In return for loans, typically from a bank, companies will often be required by contract to give their creditors a security interest over the company's assets, so that in the event of insolvency, the creditor may take the secured asset. The Insolvency Act limits powerful creditors ability to sweep up all company assets as security, particularly through a floating charge , in favour of vulnerable creditors, such as employees or consumers.

If money is raised by offering shares, the shareholders' relations are determined as a group by the provisions under the constitution. Company constitutions typically require that existing shareholders have a pre-emption right , to buy newly issued shares before outside shareholders and thus avoid their stake and control becoming diluted. Actual rights, however, are determined by ordinary principles of construction of the company constitution. Money is typically distributed to shareholders through dividends as the reward for investment. These should only come out of profits , or surpluses beyond the capital account.

If companies pay out money to shareholders which in effect is a dividend "disguised" as something else, directors will be liable for repayment. Companies may, however, reduce their capital to a lower figure if directors of private companies warrant solvency, or courts approve a public company's reduction. Because a company buying back shares from shareholders in itself, or taking back redeemable shares, has the same effect as a reduction of capital, similar transparency and procedural requirements need to be fulfilled.

Public companies are also precluded from giving financial assistance for purchase of their shares, for example through a leveraged buyout , unless the company is delisted and or taken private. Finally, in order to protect investors from being placed at an unfair disadvantage, people inside a company are under a strict duty to not trade on any information that could affect a company's share price for their own benefit. Shares differ from debt in that shareholders rank last in insolvency.

Taxation of profits on shares can also be treated differently with a different tax rate under the Income Tax Act to capital gains tax on debt which falls under the Taxation of Chargeable Gains Act This makes the distinction between shares and debt important. In principle, all forms of debt and equity arise from contractual arrangements with a company, and the rights which attach are a question of construction.

It is even possible for creditors to contract to be subordinated behind shareholders in insolvency — it is just unlikely, and strongly discouraged by the regulatory framework. To give people shares initially there is formally a two step process. First, under CA section , shares must be "allotted", or created in favour of a particular person. Second, shares are "issued" by being "transferred" to a person.

In a typical company constitution, directors are entitled to issue shares as part of their general management rights, [] although they have no power to do so outside the constitution. An authorisation must state the maximum number of allottable shares and the authority can only last for five years. Under CA section , existing shareholders have a basic pre-emption right , to be offered any new shares first in proportion to their existing holding.

Shareholders have 14 days to decide whether to buy. Furthermore, by special resolution a three-quarter majority vote under CA sections , shareholders may disapply pre-emption rights. A Statement of Principle This suggests that the general practice is to disapply the pre-emption rights on a rolling basis for routine share issues e.

The market for corporate control , where parties compete to buy controlling stakes in companies, is seen by some as an important, although perhaps limited, mechanism for the board of directors ' accountability. Since the UK has taken the approach that directors, particularly of public companies, should do nothing with the effect of frustrating a takeover bid, unless shareholders approve it by a majority at the time of the takeover.

Rule 21 of the City Code on Takeovers and Mergers consolidates this now. In the US, defensive tactics must merely be employed in good faith , and be proportionate to the threat posed with regard to factors like the offer price, timing and effect on the company's stakeholders. After much debate, the EU 's newly implemented Takeover Directive decided to leave member states the option under articles 9 and 12 of whether to mandate that boards remain "neutral". Even with the UK's non-frustration principle directors always still have the option to persuade their shareholders through informed and reasoned argument that the share price offer is too low, or that the bidder may have ulterior motives that are bad for the company's employees, or for its ethical image.

Under common law and the Takeover Code , directors must give out information to shareholders relevant to the bid, [] but not merely recommend the highest offer. In Hogg v Cramphorn Ltd [] the director, purportedly concerned that a takeover bidder would make many workers redundant, issued a block of company shares to a trust, thus ensuring the bidder would remain outvoted.

Buckley J held the power to issue shares creates fiduciary duty to only do so for the purpose of raising capital. Directors cannot plead they acted in good faith if a court determines their interests may possibly conflict. UK workers have a minimal measure of job security, with very limited rights to be consulted, and no formal rights outside collective bargaining to participate in elections for the board or codetermine dismissal issues in works councils.

Employees do have rights before dismissal or redundancies to reasonable notice, dismissal only for a fair reason, and a redundancy payment, under the Employment Rights Act Beyond rules restricting takeover defences, a series of rules are in place to partly protect, and partly impose obligations on minority shareholders. Under CA section when a takeover bidder has already acquired 90 per cent of a company's shares it can "squeeze out" or compulsorily purchase the minority's shares at the same price per share as paid for the rest of the takeover.

Any person appearing on the public register as a director will, from December , be able to apply to have their name removed if they did not consent to act. The day but not the month or year of the date of birth of all company directors and PSCs will be omitted from the information on the register available for public inspection. The provision is subject to certain exceptions, for example where the date of birth was contained in a document that was registered before the provision came into force. The SBEE will also alter the content of statements of capital. Companies will no longer be required to include the amount paid up and unpaid on each share.

Instead, companies will be required to specify the aggregate amount unpaid on the total number of shares. Clearly this change will reduce the administrative burden associated with the filing of annual returns. Location of certain company statutory books at the central registry — June Companies will, with shareholder approval, have the option to stop maintaining, in part, their own sets of company books which are currently either kept at their registered office or alternative inspection location.

Instead, companies will be able to elect to keep their registers of PSCs, members, directors and secretaries at Companies House. The obligation to maintain and update the information will remain as before but the company will no longer keep the records, instead the information will be sent to Companies House which will maintain the records.

Companies will however still be obliged to safely retain the hard copy books covering the period before they elected to keep their records at Companies House.

Companies need not take any action now and may feel that, bearing in mind the requirement to keep other statutory records, the benefit of this facility is limited. Since , all UK companies have been required to have a director who is a natural person prior to that all directors could be corporate or other legal entities. The SBEE will require all directors to be natural persons, subject to certain potential exceptions which have yet to be confirmed. Companies may wish to start compiling a list of those group companies with corporate directors on their boards and give some thought, in principle, to how such corporate directors might be replaced.

Existing directors who are not natural persons will automatically cease to be directors 12 months after the provision comes into force. Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken. Information about gender pay gaps — In Force March The SBEE requires regulations to be made by 25 March which require businesses with or more employees to publish information showing whether there are differences in the pay of male and female employees.

Large companies are expected to be required to disclose information concerning: Accelerated strike off procedure — October The SBEE will enable a company to be struck off the register slightly faster including: Changes to information filed at Companies House — October , December and April as indicated a.

Director and secretary consent to act — October The SBEE will remove the requirement for a director to provide formal consent to act as a director and replace it with an obligation on the company to make a statement that the appointee has consented to act. Location of certain company statutory books at the central registry — June Companies will, with shareholder approval, have the option to stop maintaining, in part, their own sets of company books which are currently either kept at their registered office or alternative inspection location. Abolition of corporate directors — October Since , all UK companies have been required to have a director who is a natural person prior to that all directors could be corporate or other legal entities.

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