1
LW 225: Company Law
WEEK 2 AND 3: CORPORATE GOVERNANCE
Corporate Governance: Sources of Company Law
● Common law and statute:
○ S170(4) Companies Act 2006:
■ “The general duties shall be interpreted and applied in the same
way as common law rules or equitable principles, and regard
shall be had to the corresponding common law rules and
equitable principles in interpreting and applying general
duties.‟
■ History of Company Formation:
■ Forms of partnership that had unlimited and limited liability,
called societas and commenda respectively, were rooted in
Roman law. However, the advent of the corporation generally is
rassociated with the granting of a royal charter to the Russia
Company in 1557, the English East India Company (1599) and
the South Sea Company (1711).
● Misled the public into buying shares, in which they
would receive gold
■ Important Statutes: Bubble Act 1720, Joint Stock
Companies Act 1844, Limited Liability Act 1855 , The Joint
Stock Companies Act 1856
Legal Personality and Limited Liability
● The case of Salomon v. Salomon [1897] AC 22:
● “The company is at law a different person altogether from [those
forming the company]: and...Nor are the subscribers as members liable,
in any shape or form, except to the extent and in the manner provided by
the Act…”
● Legal Personality: The company is altogether a different (legal) person and
entity. It is independent from the humans behind it. It can exist perpetually.
Sue and be sued and produce actions with legal effect just as human do. It is
born with the certificate of incorporation.
, 2
● Limited Liability: In case of insolvency each member of the company is
liable towards the corporate debts only up to amount of his investment in
the company. It functions as a massive safeguard for shareholders, who can
invest in a company by buying its shares without any risk to ever lose their
personal property in case of insolvency.
Incorporation
● Section 9 Companies Act 2006 requires:
○ delivery of the memorandum,
○ the application for registration and
○ a statement of compliance to the Registrar of Companies
○ Section 14 Companies Act 2006: if the Registrar is satisfied that the
requirements of the Act have been complied with he must register the
documents delivered to him.
○ Section 15: To give a certificate that the company is incorporated.
○ S15(4) provides that the certificate of incorporation is conclusive
evidence that the requirements of the Act have been met and the
company is duly registered. Thus, the company’s existence as such is
unchallengeable from the date of the issue of the certificate of
incorporation.
Effects of Registration
● Section 16 Effect of registration
○ (1) The registration of a company has the following effects as from
the date of incorporation.
○ (2) The subscribers to the memorandum, together with such other
persons as may from time to time become members of the company,
are a body corporate by the name stated in the certificate of
incorporation.
○ (3) That body corporate is capable of exercising all the functions of
an incorporated company
○ (4) The statutes and registered office of the company are as stated in,
or in connection with, the application for registration
○ (5) In the case of a company having a share capital, the subscribers to
the memorandum become holders of the shares specified in the
statement of capital and initial shareholdings
, 3
○ (6) the persons named in the statement of proposed officers-
○ (a) a director, or
○ (b) as secretary or joint secretary of the company, are deemed to have
been appointed to that office
Pre-incorporation contracts
● Until a company is registered it has no existence of any kind.
● S51 Companies Act 2006 now provides: Pre-incorporation contracts, deeds
and obligations
● A contract that purports to be made by or on behalf of a company at a time
when the company has not been formed has an effect, subject to any
agreement to the contrary, as one made with the person purporting to act for
the company or as agent for it. He is personally liable on the contract
accordingly.
● Liability of the company
○ Howard v. Patent Ivory Co. (1888) 38 Ch D 156: In certain
circumstances, the court could find that there had been a new
contract (“a novation”) formed between the company and the party
to the original contract. The company has to accept the contract
AFTER its incorporation with the company as the party to the
original contract.
Types of Companies:
● Limited and unlimited companies:
○ Limited liability companies have the advantage of holding their
members liable for the company debts only up to a fixed limit which
is always clear. There are two ways for setting the limit; either by
issuing shares or by taking guarantees from the members.
■ 99% of companies in the UK are limited liability
■ LLC
○ Unlimited Company: A legal entity being separate from its members;
it lacks the major advantage of limited liability.
■ 1% of companies are unlimited liabilities
● Listed and Unlisted Companies or Public and Private Companies:
, 4
○ Public companies are the ones which can invite the public to
subscribe for shares in the stock market as they are in need of very
large amounts for investment. (plc) (Vodafone, Virgin etc)
○ Private companies are prohibited to do that. (they get their funding
from shareholders or in the form of bank loans). (Ltd)
■ Usually family-owned or locally owned businesses
○ Partnerships
■ Persons (natural or legal) carrying on a business or profession
in common with a view of profit, without being incorporated.
The relevant law is the Partnership Act 1890. The only
requirement for the creation of a partnership is the agreement
between its members while the State does not act. The Limited
Partnerships Act 1907 has made it possible to form a limited
partnership consisting of:
● One or more partners (general partners) who are liable
for all debts of the firm
● And one or more partners who contribute capital to the
firm on entering the partnership but are not liable to pay
anything more to meet its debts and obligations. The
latter does not have the power to bind the firm. The
limited partnership must be registered with the registar of
companies
● It has not been a popular means of conducting business
but is merely used as a means to invest due to some tax
advantage
Corporate Governance: Debates and Concepts
● Ownership and Control
● The fundamental questions are:
○ who owns the corporation?
○ Who should control the corporation?
○ For the pursuit of what goals and whose interests?
● The doctrine of the “Separation of Ownership and Control” (The Berle
and Means Doctrine):
LW 225: Company Law
WEEK 2 AND 3: CORPORATE GOVERNANCE
Corporate Governance: Sources of Company Law
● Common law and statute:
○ S170(4) Companies Act 2006:
■ “The general duties shall be interpreted and applied in the same
way as common law rules or equitable principles, and regard
shall be had to the corresponding common law rules and
equitable principles in interpreting and applying general
duties.‟
■ History of Company Formation:
■ Forms of partnership that had unlimited and limited liability,
called societas and commenda respectively, were rooted in
Roman law. However, the advent of the corporation generally is
rassociated with the granting of a royal charter to the Russia
Company in 1557, the English East India Company (1599) and
the South Sea Company (1711).
● Misled the public into buying shares, in which they
would receive gold
■ Important Statutes: Bubble Act 1720, Joint Stock
Companies Act 1844, Limited Liability Act 1855 , The Joint
Stock Companies Act 1856
Legal Personality and Limited Liability
● The case of Salomon v. Salomon [1897] AC 22:
● “The company is at law a different person altogether from [those
forming the company]: and...Nor are the subscribers as members liable,
in any shape or form, except to the extent and in the manner provided by
the Act…”
● Legal Personality: The company is altogether a different (legal) person and
entity. It is independent from the humans behind it. It can exist perpetually.
Sue and be sued and produce actions with legal effect just as human do. It is
born with the certificate of incorporation.
, 2
● Limited Liability: In case of insolvency each member of the company is
liable towards the corporate debts only up to amount of his investment in
the company. It functions as a massive safeguard for shareholders, who can
invest in a company by buying its shares without any risk to ever lose their
personal property in case of insolvency.
Incorporation
● Section 9 Companies Act 2006 requires:
○ delivery of the memorandum,
○ the application for registration and
○ a statement of compliance to the Registrar of Companies
○ Section 14 Companies Act 2006: if the Registrar is satisfied that the
requirements of the Act have been complied with he must register the
documents delivered to him.
○ Section 15: To give a certificate that the company is incorporated.
○ S15(4) provides that the certificate of incorporation is conclusive
evidence that the requirements of the Act have been met and the
company is duly registered. Thus, the company’s existence as such is
unchallengeable from the date of the issue of the certificate of
incorporation.
Effects of Registration
● Section 16 Effect of registration
○ (1) The registration of a company has the following effects as from
the date of incorporation.
○ (2) The subscribers to the memorandum, together with such other
persons as may from time to time become members of the company,
are a body corporate by the name stated in the certificate of
incorporation.
○ (3) That body corporate is capable of exercising all the functions of
an incorporated company
○ (4) The statutes and registered office of the company are as stated in,
or in connection with, the application for registration
○ (5) In the case of a company having a share capital, the subscribers to
the memorandum become holders of the shares specified in the
statement of capital and initial shareholdings
, 3
○ (6) the persons named in the statement of proposed officers-
○ (a) a director, or
○ (b) as secretary or joint secretary of the company, are deemed to have
been appointed to that office
Pre-incorporation contracts
● Until a company is registered it has no existence of any kind.
● S51 Companies Act 2006 now provides: Pre-incorporation contracts, deeds
and obligations
● A contract that purports to be made by or on behalf of a company at a time
when the company has not been formed has an effect, subject to any
agreement to the contrary, as one made with the person purporting to act for
the company or as agent for it. He is personally liable on the contract
accordingly.
● Liability of the company
○ Howard v. Patent Ivory Co. (1888) 38 Ch D 156: In certain
circumstances, the court could find that there had been a new
contract (“a novation”) formed between the company and the party
to the original contract. The company has to accept the contract
AFTER its incorporation with the company as the party to the
original contract.
Types of Companies:
● Limited and unlimited companies:
○ Limited liability companies have the advantage of holding their
members liable for the company debts only up to a fixed limit which
is always clear. There are two ways for setting the limit; either by
issuing shares or by taking guarantees from the members.
■ 99% of companies in the UK are limited liability
■ LLC
○ Unlimited Company: A legal entity being separate from its members;
it lacks the major advantage of limited liability.
■ 1% of companies are unlimited liabilities
● Listed and Unlisted Companies or Public and Private Companies:
, 4
○ Public companies are the ones which can invite the public to
subscribe for shares in the stock market as they are in need of very
large amounts for investment. (plc) (Vodafone, Virgin etc)
○ Private companies are prohibited to do that. (they get their funding
from shareholders or in the form of bank loans). (Ltd)
■ Usually family-owned or locally owned businesses
○ Partnerships
■ Persons (natural or legal) carrying on a business or profession
in common with a view of profit, without being incorporated.
The relevant law is the Partnership Act 1890. The only
requirement for the creation of a partnership is the agreement
between its members while the State does not act. The Limited
Partnerships Act 1907 has made it possible to form a limited
partnership consisting of:
● One or more partners (general partners) who are liable
for all debts of the firm
● And one or more partners who contribute capital to the
firm on entering the partnership but are not liable to pay
anything more to meet its debts and obligations. The
latter does not have the power to bind the firm. The
limited partnership must be registered with the registar of
companies
● It has not been a popular means of conducting business
but is merely used as a means to invest due to some tax
advantage
Corporate Governance: Debates and Concepts
● Ownership and Control
● The fundamental questions are:
○ who owns the corporation?
○ Who should control the corporation?
○ For the pursuit of what goals and whose interests?
● The doctrine of the “Separation of Ownership and Control” (The Berle
and Means Doctrine):
