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Limited Company Shareholding
Dear Lorraine and Brenda,
With regard to this scenario we advise that you must consider the following: Firstly, A limited company is usually regarded as more credible and reliable firm than a sole trader or partnership. If company “South East Antique Shop” fails, business assets e.g. land, equipment, stocks, bad debts etc are liquidated and losses are paid. Creditors can only claim back as much money as the business owns (personal possessions cannot be claimed). If a private company limited by shares gets into debt, the owners (shareholders) are not personally liable for the business debts or any claims made against the company.
Generally, a limited company protects the individual from being sued and personal risk is restricted to how much is invested in the business and any financial guarantees given to obtain finance. This legal limitation, called ‘limited liability' is created through registration at Companies House. The process is known as incorporation. Without limiting personal liability businesses would be legally responsible for company debts and personal assets would be at risk. With limited liability, personal assets can remain intact even if the business fails under a burden of debt.
The articles of association are a set of rules for running the company. They set out the heart of any company's organisational structure by allocating power between the Board of Directors (the main management organ) and the general meeting (the main shareholder organ). Those forming a company can provide their own articles but if they do not a model set of articles (Table A) is provided by the CA 1985 (SI 1985, 805) and will apply. Table A is generally adopted with some slight amendments.
The articles can be altered if three-quarters of the members (by a special resolution) vote to do so (CA 1985, s.9). Additionally the CA 1985, s.303 gives members the right by simple majority (more than 50 per cent of the shareholders who vote, vote for the resolution) to remove a Director for any reason whatsoever. Therefore while the Board is the primary management organ under the constitution it is subject to the continuing approval of the shareholders in general meeting.
The Company is a private company and accordingly no offer or invitation shall be made to the public (whether for cash or otherwise) to subscribe for any shares in or debentures of the Company nor shall the Company allot or agree to allot (whether for cash or otherwise) any shares in or debentures of the Company with a view to all or any of those shares or debentures being offered for sale to the public.
(a) Subject to Article 5 below all unissued shares which are comprised in the authorised share capital with which the Company is incorporated shall be under the control of the directors and for the purposes of Section 80 of the Act the directors are unconditionally authorised to exercise the power of the Company to allot shares grant options over or otherwise dispose of the same to such persons and on such terms as they think fit at any time or times during the period of five years from the date of incorporation and the directors may after that period allot any shares or grant any such rights under this authority in pursuance of an offer or agreement made by the Company within that period.
(b)The authority given above may be renewed revoked or varied by ordinary resolution of the Company in general meeting.
(c)Subject to Chapter VII of Part V of the Act, and to the Regulations of the Company, the Company may purchase its own shares (including redeemable shares) whether out of distributable profits or the proceeds of a fresh issue of shares or otherwise.
(d)Subject to Chapter VII of Part V of the Act, any shares may, with the sanction of an Ordinary resolution, be issued on the terms that they are, at the option of the Company or the shareholder, liable to be redeemed on such terms and in such manner as the Company before the issue of the shares by Special resolution determine, and whether out of distributable profits or the proceeds of a fresh issue of shares or otherwise.
(e)Subject to Chapter VI of Part V of the Act, the Company may give financial assistance for the purpose of or in connection with any acquisition of shares made or to be made in the Company or its Holding Company.
In accordance with Section 91(1) of the Act, Sections 89(1) and 90(1) to (6) (inclusive) of the Act shall not apply to the Company.
(b)All unissued shares which are not comprised in the authorised share capital of the Company with which the Company is incorporated shall be offered to the members in proportion as nearly as may be to the number of the existing shares held by them respectively unless the Company in general meeting shall by special resolution otherwise direct. Such offer shall be made by written notice specifying the number of shares offered and a period (not being less than 14 days) within which the offer if not accepted will be deemed to be declined.
After the expiration of this period or, if earlier, on receipt of notice of non-acceptance, those shares so declined shall be offered to the members who have within the said period accepted all the shares offered to them in the proportion aforesaid in like terms in the same manner and limited by a like period as the original offer. The directors may in accordance with the provisions of this Article allot grant options over or otherwise dispose of such shares not accepted pursuant to such offers together with any shares not capable of being offered aforesaid except by way of fractions to such persons on such terms as they think fit provided that such shares shall not be disposed of on such terms which are more favourable to the subscribers therefor than the terms on which they were offered to the members. The provisions of this Article shall be subject to Section 80 of the Act.
The Company shall have a first and paramount lien on every share (whether or not it is a fully paid share) for all moneys (whether presently payable or not) called or payable at the fixed time in respect of that share and the Company shall also have a first and paramount lien on all shares (whether or not it is a fully paid share) registered in the name of any member whether solely or one of two or more joint holders for all such moneys presently payable by him or his estate to the Company. However the directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The Company's lien on a share shall extend to all dividends payable thereon.
In Barings Plc (In Liquidation) v Coopers & Lybrand (No.4)  2 BCLC 364. In that case a loss suffered by a parent company as a result of a loss at its subsidiary (a company in which it held all the shares) was not actionable by the parent - the subsidiary was the proper plaintiff. In essence you can't have it both ways - limited liability has huge advantages for shareholders but it also means that the company is a separate legal entity with its own property, rights and obligations.
There is really one central principle we can draw and two minor ones. The central principle is that the company is a separate legal personality from its members and therefore legally liable for its debts. This brings us to the minor principles. The first being that once the technicalities of the Companies Act are complied with, a one person company can have the benefits of corporate legal personality and limited liability. The second is that debentures can be used effectively to further shield investors from losses.
Section 213 of the Insolvency Act was designed to deal with situations where the corporate form was used as a vehicle for fraud. It is known as the 'fraudulent trading' provision. If in the course of the winding up of a company it appears to the court that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, those individuals can be called upon to contribute to the debts of the company. In Re Todd Ltd  BCLC 454, for example, a Director was found liable to contribute over £70,000 to the debts of the company because of his activities.
There is also the possibility that criminal liability could follow on with a term of imprisonment as the ultimate penalty. While the criminal penalty was intended to act as a strong deterrent to fraudulent behaviour it proved to have the unfortunate effect of neutralising the effectiveness of s.213 as the courts set a very high standard of proof for 'intent to defraud' because of the possibility of a criminal charge also arising. In Re Patrick & Lyon Ltd  Ch 786, this involved proving 'actual dishonesty, involving, according to current notions of fair trading among commercial men, real moral blame'. This standard proved very difficult to obtain in practice and in order to deal with the problem a new provision was introduced in s.214 of the Insolvency Act 1986 to deal with the lesser offence of 'wrongful trading'.
The Company is entitled to request at any time from the clearing and settlement agencies all information prescribed by applicable legal and regulatory provisions relating to the identity of the holders of the Company's shares or of financial instruments giving right to the Company's share capital, when these are not registered by the Company's share registrar.
The Company is also entitled to request in accordance with applicable legal provisions the identity of the holders of shares when it considers that some of the holders of shares the identity of whom was provided to the Company are holding shares on behalf of third parties.
The Company may request from any legal person holding more than 2.5% of the Company's share capital or the Company's voting rights to provide the Company with the identity of the persons who are, directly or indirectly, holding more than a third of the share capital or of the voting rights of that legal person.
Increases in share capital shall be effected, notwithstanding the existence of fractional shares (rompus). Whenever it is necessary to hold several shares of specific sort or class in order to exercise specific rights - notably in the case of an exchange or an allotment of shares during such transactions as a decrease in the amount of the share capital, or an increase by way of incorporation of retained earnings, of a merger, or by any other way, holders of a number of one share or a number below that required will not be granted any right with regard to the Company, and such holders shall be personally responsible for consolidating and possibly purchasing or selling the required number of shares.
In the event of a decrease in the amount of the share capital by way of a decrease in the number of shares outstanding, of an exchange of shares subsequent to a merger, a demerger, a share consolidation or a share split, holders of shares shall be required to sell or purchase such shares they either have in excess or are short of in order to allow the exchange of old shares with new ones.
Management/governance structure Essentially two-tier, with a board of directors accountable to a wider membership who will also be shareholders (the two terms are virtually synonymous). Members will typically hold voting rights at general meetings and will elect all or some of the directors.
Further embellishments may be added to this basic structure, e.g. an executive committee (smaller than the governing body, perhaps made up of honorary officers and senior staff), or a members' council, which may meet more frequently than the full membership and supervise the work of the directors.
However, it is possible (and quite common) to create a single-tier structure by simply stating that only directors may be members and vice-versa. Thus although these two roles will still exist within the company, the same people will perform both.
All companies are required to have a secretary, usually described as the senior administrator. This person may also be a member or director, but need not be. In funded community and voluntary organisations, the post of secretary will often form part of the job description of a member of staff.
Membership A company limited by shares may be either private or public (public limited company = PLC). In a company limited by shares, someone becomes a member by acquiring shares in the company. This may be by purchasing them, or the company's articles may specify that certain people (e.g. employees) are automatically entitled to receive one or more shares.
In a private company limited by shares, admission to membership is usually at the discretion of the directors, but an "open membership" system may apply where strict criteria are laid down, e.g. anyone who lives on such-and-such an estate is eligible to become a member. A co-operative company will automatically offer membership to everyone who shares a particular economic relationship with the company (e.g. employees in a worker co-operative, tenants in a housing co-operative, customers in a consumer co-operative, etc).The articles should always allow for the expulsion of members who act against the interests of the company.
In a public company, it is more common for membership to be open to all who apply though this is not obligatory.
Where there are members who have rather different interests in the company's work, the membership may be divided into two or more classes (e.g. representatives of statutory bodies, representatives of local business, community members, user-members and so on). In a conventional share-capital company, voting rights are apportioned in accordance with the number of shares each member holds (one share, one vote), but the articles may specify one member, one vote.
A private company must have a minimum of one member. As the single member may be another organisation, a one-member company is useful legal form for subsidiaries. It is not possible to register a single-member public company.
Transfer of Shares
No share or beneficial ownership of a share shall be transferred (otherwise than to the Company subject to Article 4 of the Company) until the rights of pre-emption hereinafter conferred have been exhausted. Any obligation to transfer a share pursuant to this Article is an obligation to transfer the entire legal and beneficial interest in such share.
A member who intends to transfer any share or any interest therein (including for this purpose the assignment of the beneficial interest in, or the creation of any charge or other security interest over, such share or the renunciation or assignment of any right to receive or subscribe for such share) ("the Seller") shall give notice ("the Transfer Notice") to the directors of his intention and the particulars of the shares ("the Transfer Shares") together with the price per share at which he is willing to sell ("the Specified Price"). A Transfer Notice once received by the directors is irrevocable unless paragraphs (d) or (h) apply.
The Transfer Notice shall constitute the Company as agent of the Seller for the sale of the Transfer Shares to the members other than the Seller ("the Offerees") at the Specified Price save that if the directors do not accept that the Specified Price constitutes a fair price they shall instruct the Auditors of the Company (who shall act as experts and not as arbitrators so that any provision of law or statute relating to arbitration shall not apply) to certify in writing ("Certificate of Value") the value of the Transfer Shares as between a willing seller and a willing buyer.
The Auditors' decision on the value of the Transfer Shares between a willing seller and a willing buyer is within the Auditors' complete discretion and their certification shall be final and binding on the members. The Specified Price in the Transfer Notice shall be substituted by the price in the Certificate of Value. The Company upon receipt of the Certificate of Value shall forthwith furnish a copy thereof to the Seller. The Seller shall bear the cost of the valuation.
If the Seller has not revoked the Transfer Notice upon expiry of the First Revocation Period the price (whether by reference to the Specified Price or the Certificate of Value) shall be fixed in the Transfer Notice as the final price ("the Final Price") and the directors shall by notice in writing ("the Offer Notice") inform the Offerees of the number and price of the Transfer Shares and shall invite the Offerees to apply in writing to the Company, within 21 days of the date of despatch of the Offer Notice (which date must be stated therein), for a maximum number of the Transfer Shares.
The Transfer Shares not capable of being allocated without involving fractions shall be allocated to the applicant Offerees in such proportion as the directors think fit. Any outstanding Transfer Shares may then be allocated in such manner as the directors think fit to those Offerees who applied for such Transfer Shares provided no Offeree shall be allocated shares in excess of the number of shares applied for by him.
If upon expiry of the 21 day period specified in the Offer Notice the directors shall have received applications for some but not all of the remaining Transfer Shares the directors may nominate within 14 days from the expiry of the Offer Notice a person or persons which may (subject to the Act) be the Company to whom the Transfer Shares not applied for will be allocated. The directors shall give notice in writing (the "Allocation Notice") of such allocations pursuant to paragraph (f) and this paragraph to the Seller and to the persons to whom the Transfer Shares have been allocated.
The Allocation Notice must specify the date of despatch of the Allocation Notice, the name and address of the persons to whom the allocations have been made, the price and method of payment and number of Transfer Shares to be allocated and the place and time for completion (which shall be 21 days from the date of despatch) and that the Allocation Notice is subject to the Seller's right of revocation pursuant to paragraph (h).
The Seller may revoke the Transfer Notice if after service of the Allocation Notice not all the Transfer Shares have been taken up. Notice must be given in writing by the Seller to the Company within 14 days of the date of the Allocation Notice (the "Second Revocation Period").
If the Seller has not revoked the Transfer Notice upon expiry of the Second Revocation Period the Seller shall be bound upon payment of the purchase price due in respect thereof to transfer the shares comprised in the Allocation Notice to the person or persons (which may be the Company subject to the Act) named therein on the day and at the time specified therein.
In the event that the Seller fails or refuses to transfer the Transfer Shares having become bound so to do the Company may receive the purchase price in trust for the Seller and may authorise some person to execute a transfer of the Transfer Shares in favour of the purchasers.
The directors may in their absolute discretion and without assigning any reason therefor decline to register the transfer of a share whether or not it is a fully paid share.
Under the companies Act 1985 Private Company Limited by Shares Articles of association – appointment of directors
(a) Clause 64 in Table A shall not apply to the Company (b) The maximum number and minimum number respectively of the directors may be determined from time to time by Ordinary Resolution in General Meeting of the Company. Subject to and in default of any such determination there shall be no maximum number of Directors and the minimum number of Directors shall be one. Whensoever the minimum number of the Directors shall be one, a sole Director shall have authority to exercise all the powers and discretions by Table A and by these Articles expressed to be vested in the Directors generally, and Clause 89 in Table A shall be modified accordingly.
The Directors shall not be required to retire by rotation and Clauses 73 to 80 (inclusive) in Table A shall not apply to the Company.
(d) No person shall be appointed a Director at any General Meeting unless either:
(i) he is recommended by the Directors, or (ii) not less than fourteen nor more than thirty-five clear days before the date appointed for the General Meeting, notice executed by a member qualified to vote at the General Meeting has been given to the Company of the intention to propose that person for appointment, together with notice executed by that person of his willingness to be appointed.
Subject to paragraph (d) above, the Company may by Ordinary Resolution in General Meeting appoint any person who is willing to act to be a Director, either to fill a vacancy or as an additional Director.
The Directors may appoint a person who is willing to act to be a Director, either to fill a vacancy or as an additional Director, provided that the appointment does not cause the number of Directors to exceed any number determined in accordance with paragraph (b) above as their maximum number of Directors and for the time being in force.
The Directors may exercise all the powers of the Company to borrow money without limit as to amount and upon such terms and in such manner as they think fit, and subject (in the case of any security convertible into shares) to Section 80 of the Act to grant any mortgage, charge or standard security over its undertaking, property and uncalled capital, or any part thereof, and to issue debentures,
Article 12 - Transfer of shares
Shares shall only be transferred to third parties to the Company by transfer from one account to another. Only fully paid shares are transferable. Shares shall be freely transferable.
Article 13 - Rights and duties attached to the shares
The ownership of shares implies a strict compliance with these articles of association as well as with the resolutions duly passed by any shareholders' meeting. Shareholders shall not bear losses in excess of the amount of their contributions to the share capital. Each share entitles the holder of such a share to a portion in the Company's net profit and net assets, which is in proportion of his shareholding.
Any shareholder who has held, for a period of a minimum two years, either alone or in association with other shareholders, and either directly or not, more than 34% in the share capital or in the voting rights, shall be entitled, as long as he is the main shareholder, to request that a list of candidates put by him be submitted to the next annual meeting; the latter shall choose the majority of board members within this list.
If need be, and provided that this complies with legal requirements, all shares shall be taken together, irrespective of any tax exemptions or allocations, in addition to any taxes likely to be covered by the Company, before any shares be redeemed during the life of the Company or when the Company is being wound up, so that, given their respective par value, all existing shares shall be redeemed at the same net value, irrespective of their origin or their date of issue.
If there's anything you need to know please let us know.
Pennington, R R (1995) Company Law (London: Butterworths). Pp. 109.
Hicks, A. and Good, S., 2004. Pp. 44. Cases and Material on Company Law.
Stone's Statutes on Company Law 2005 Pp. 47-49