155477950-Book-by-Dignam-and-Lowry-Company-Law.pdf - Company law Alan Dignam John Lowry 2009 LLB 2650021 This subject guide was prepared for the

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Unformatted text preview: Company law Alan Dignam John Lowry 2009 LLB 2650021 This subject guide was prepared for the University of London External System by: uu A. Dignam, BA, (TCD), PhD (DCU), Professor of Corporate Law, Queen Mary, University of London and uu J. Lowry, LLB, LLM, Professor of Law and Vice Dean, Faculty of Laws, University College London, University of London This is one of a series of subject guides published by the University. We regret that owing to pressure of work the authors are unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the end of this guide. Publications Office The External System University of London Stewart House 32 Russell Square London WC1B 5DN United Kingdom Published by the University of London Press © University of London 2009. Reformatted and reprinted 2010 Printed by Central Printing Service, University of London All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. Company Law page i Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2 Forms of business organisation . . . . . . . . . . . . . . . . . . . . . . 9 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.1 The sole trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.2 The partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.3 The company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.4 Some general problems with the corporate form . . . . . . . . . . . . . . 15 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3 The nature of legal personality . . . . . . . . . . . . . . . . . . . . . 21 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.1 Corporate personality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.2 Salomon v Salomon & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.3 Other cases illustrating the Salomon principle . . . . . . . . . . . . . . . . 24 3.4 Limited liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4 Lifting the veil of incorporation . . . . . . . . . . . . . . . . . . . . . 29 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.1 Legislative intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.2 Judicial veil lifting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3 Veil lifting and tort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5 Company formation, promoters and pre-incorporation contracts . . . . . . . . . . . . . . . . . . . . . . . 39 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 5.1 Determining who is a promoter . . . . . . . . . . . . . . . . . . . . . . . 41 5.2 The fiduciary position of promoters . . . . . . . . . . . . . . . . . . . . . 41 5.3 Duties and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.4 Pre-incorporation contracts . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.5 Freedom of establishment . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6 Raising capital: equity . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 6.1 Private and public companies . . . . . . . . . . . . . . . . . . . . . . . . 51 6.2 Raising money from the public . . . . . . . . . . . . . . . . . . . . . . . . 52 6.3 Insider dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.4 Regulating takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 page ii University of London External System 7 Raising capital: debentures . . . . . . . . . . . . . . . . . . . . . . . 61 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 7.1 Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.2 Company charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.3 Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 7.4 Avoidance of floating charges . . . . . . . . . . . . . . . . . . . . . . . . 68 7.5 Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 8 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 8.1 Overview – the maintenance of capital doctrine . . . . . . . . . . . . . . . 77 8.2 Raising capital: shares may not be issued at a discount . . . . . . . . . . . . 77 8.3 Returning funds to shareholders . . . . . . . . . . . . . . . . . . . . . . 8.4 Prohibition on public companies assisting in the acquisition of their own shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 83 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 9 Dealing with insiders: the articles of association and shareholders’ agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 9.1 The operation of the articles of association . . . . . . . . . . . . . . . . . 91 9.2 The articles of association . . . . . . . . . . . . . . . . . . . . . . . . . . 91 9.3 The contract of membership . . . . . . . . . . . . . . . . . . . . . . . . . 93 9.4 Shareholders’ agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 96 9.5 Altering the articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 10 Class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 10.1 Shares and class rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 10.2 Classes of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 10.3 Variation of class rights . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 11 Majority rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 11.1 The rule in Foss v Harbottle – the proper claimant rule . . . . . . . . . . . 111 11.2 Forms of action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 11.3 Derivative claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 11.4 The statutory procedure: Part 11 of the CA 2006 . . . . . . . . . . . . . . 116 11.5. The proceedings, costs and remedies . . . . . . . . . . . . . . . . . . . . 118 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 12 Statutory minority protection . . . . . . . . . . . . . . . . . . . . . 121 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 12.1 Winding up on the ‘just and equitable’ ground . . . . . . . . . . . . . . . 123 12.2 Unfair prejudice – s.994 CA 2006 . . . . . . . . . . . . . . . . . . . . . . 125 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Company Law page iii 13 Dealing with outsiders: ultra vires and other attribution issues . . . . 133 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 13.1 The objects clause problem . . . . . . . . . . . . . . . . . . . . . . . . 135 13.2 Reforming ultra vires . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 13.3 Other attribution issues . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 14 The management of the company . . . . . . . . . . . . . . . . . . . 145 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 14.1 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 14.2 Categories of director . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 14.3 Disqualification of directors . . . . . . . . . . . . . . . . . . . . . . . . 151 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 15 Directors’ duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 15.1 Directors’ duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 15.2 The restatement of directors’ duties: Part 10 of the CA 2006 . . . . . . . . 163 15.3 Relief from liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 15.4 Specific statutory duties . . . . . . . . . . . . . . . . . . . . . . . . . . 178 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 16 Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . 185 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 16.1 Introducing corporate governance . . . . . . . . . . . . . . . . . . . . . 187 16.2 The debate in the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 17 Liquidating the company . . . . . . . . . . . . . . . . . . . . . . . . 195 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 17.1 Liquidating the company . . . . . . . . . . . . . . . . . . . . . . . . . . 197 17.2 The liquidator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 17.3 Directors of insolvent companies . . . . . . . . . . . . . . . . . . . . . . 201 17.4 Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 page iv University of London External System 1 Introduction Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Approaching your study . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 The examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 page 2 University of London External System Introduction This subject guide acts as a focal point for the study of Company law on the University of London External System LLB. It is intended to aid your comprehension by taking you carefully through each aspect of the subject. Each chapter also provides an opportunity to digest and review what you have learned by allowing a pause to think and complete activities. At the end of each chapter there are sample examination questions to attempt once you have completed and digested the further reading. Company law requires students to develop their existing understanding of tort, contract, equity, statutory and common law interpretation. It also provides students with new conceptual challenges such as corporate personality. This combination of development and new challenge can initially be a difficult one and the initial learning period will be greatly eased if you understand the everyday context within which company law issues affect businesses. All of the major national newspapers cover company law issues in their business sections. Keeping on top of business and general news developments will help to put your learning into context and aid your comprehension of the subject. It may even stimulate your enjoyment of company law! Learning outcomes By the end of this chapter and the relevant reading, you should be able to: uu approach the study of Company law in a systematic way uu understand what the various elements of the subject guide are designed to do uu begin your study of Company law with confidence. Company Law 1 Introduction page 3 1.1 Company law Company law is about the formation of companies, their continuing regulation during their life and the procedures for dealing with their assets when they are terminated in a liquidation. The state (the Government) consequently plays a major role in company law. However, self-regulation, as we will see, also plays a significant part in the regulation of larger companies and is widely discussed in the theoretical literature. Company law is one of those subjects that students describe as difficult and lecturers describe as challenging. The difficulty or challenge involved for the student in understanding company law is to overcome the attitude that law is somehow compartmentalised. Most of your previous undergraduate teaching has tended to package subjects neatly – tort, contract, equity, etc. While this provides a nice orderly initial learning experience it is unhelpful for students when they come to subjects like company law where tort, contract, and equity all combine. The result can be an initial disorientation which clears over time. As such, it is important that you have a good knowledge of tort, contract and equity, and understand how the common law works, before you tackle this subject. 1.1.1 Reforming company law Since the election of the Labour government in 1997 there has been an ongoing review of company law which resulted in the Companies Act 2006. It is very important that any student of company law has extensive knowledge of this reform project. The various consultation papers and the Final Report of the Department for Business Enterprise and Regulatory Reform (BERR)† Company Law Review Steering Group (CLRSG) are available at The Final Report forms the basis of the Government’s 2002 and 2005 White Papers. These are also available at the same web address. The proposals of the CLRSG and the Government’s response, together with the relevant provisions of the Companies Act 2006, are discussed where they impact on each individual chapter, but we also expect students to go through these background documents themselves. A good working knowledge of these documents is, in our view, essential to your success on this Company law course. † BERR used to be the Department for Trade and Industry (DTI). In June 2009 BERR became the Department for Business, Innovation and Skills (BIS) The Companies Act 2006 has been brought into force during the period 2007–2009. 1.2 Approaching your study This guide is designed to be your first reference point for each topic covered on the course. Read through each chapter carefully. The activities occur at points in each chapter where you need to pause and digest the information you have just covered. That means you should stop and think about what you have just learned. Feedback to many of the activities is provided at the end of the guide. However, try not to read the feedback immediately. Use the activity to aid your reflection. Read it and think generally about the issues it is trying to address. Do this throughout the chapter and when you have completed it move to the essential reading.† After this give yourself some time to think about what you have learned or if things are unclear you may need to read over certain points again. Once you have read the chapter and the essential reading, attempt, in writing, the chapter’s activities. Use them as an opportunity to test your understanding of the area. At this point read the feedback provided to see if you are on the right track. Once you have completed this, move to the further reading. Again, after completing the further reading, give yourself time to think and re-read. Finally, you should attempt the sample examination question at the end of each chapter. Use the ‘Reflect and review’ section at the end of each chapter to keep track of your progress. † Note that in this subject guide we ask you to do the essential reading after you have worked through the chapter. page 4 University of London External System Go through the guide like this, covering each chapter in turn. Each chapter builds up your knowledge of the subject and so dipping into the guide as you feel like it will not work. Later chapters presume you have covered and understood the earlier ones. As we explain below, you will also have to monitor case developments, reform initiatives and seek out new company law writing to flesh out your understanding of the subject and develop your independence of thought. 1.2.1 Essential reading Primary textbook ¢¢ Dignam, A. and J. Lowry Company Law. (Oxford: Oxford University Press, 2008) fifth edition [ISBN 9780199232871]. This subject guide is centred on this textbook, which was written by the authors of this guide. References in the text to ‘Dignam and Lowry’ are references to this textbook. It is your essential reading and so much of your study time should be taken up reading the textbook, though you will also have to study numerous case reports, complete the further reading and keep up to date with academic company law writing. Other texts to consult ¢¢ Davies, P. Gower and Davies Principles of Modern Company Law. (London: Sweet & Maxwell, 2008) eighth edition [ISBN 9780421949003]. Readings from Davies are specified in each chapter. Like ‘Dignam and Lowry’ this book (‘Davies’) is cited using just the author’s name. ¢¢ Pettet, B., J. Lowry and A. Reisberg Pettet’s Company Law: Company and Capital Markets Law. (Pearson, 2009) third edition [ISBN 9781405847308]. This text is particularly interesting as it fleshes out the interaction of company law with capital markets and securities regulation. ¢¢ Sealy, L.S. and S. Worthington Cases and Materials in Company Law. (Oxford: Oxford University Press, 2008) eighth edition [ISBN 9780199298426]. ¢¢ Hicks, A. and S.H. Goo Cases and Materials in Company Law (Oxford: Oxford University Press, 2008) sixth edition [ISBN 9780199289851]. A statute book is a good addition to your personal company law library. These are generally updated every year and it is important that you use the most up to date version. The choice is between: ¢¢ Core Statutes on Company Law. (Palgrave Macmillan) ¢¢ Blackstone’s Statutes on Company Law. (Oxford: Oxford University Press) You are currently allowed to bring one of these into the examination. Check the Regulations for up to date details of what you are allowed to bring into the examination with you. Please note that you are allowed to underline or highlight text in these documents – but you are not allowed to write notes or attach self-adhesive notelets, etc. on them. See the Regulations and the Learning skills for law study guide for further guidance on these matters. Legal journals A good Company law student is expected to be familiar and up to date with the latest articles and books on company law. Company law articles often appear in the main general UK legal academic journals: ¢¢ Modern Law Review (MLR) ¢¢ Oxford Jo...
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