FORMATION OF A COMPANY aof cq60/22clc.pptx

law clc

1. COMPANY FORMATION M.A. Bùi Hà Hạnh Quyên [email protected] Faculty of Economics, Academy of Finance, Hanoi, Vietnam 1

2. Content I. OVERVIEW OF COMPANY II. FORMATION OF COMPANY 2

3. I. OVERVIEW OF COMPANY THE NATURE OF COMPANY THE CORPORATE VEIL: tấm rèm che pháp lý CLASSIFICATION OF COMPANIES 3

4. 1. THE NATURE OF COMPANY 4

5. The company is a separate legal entity A company has a legal identity of its own, which is quite separate from the legal identity of its owners. It follows that if a wrong is done to a company, only the company has the right to sue, not those who own the company’s shares. Conversely, a person who is injured by a company will have the right to sue the company, but will not have the right to sue the company’s shareholders or its officers. 5

6. Exercise List the conditions for an organization to be recognized as a legal person under the Civil Code 2015 (Vietnam)? 6

7. Example: Salomon v Salomon and Co Ltd [1897] Mr Salomon was a shoemaker in England.  His sons wanted to become his business partners so he converted his business into a limited company (A Salomon & Co Ltd). A Salomon & Co Ltd purchased Mr Salomon’s business for above market value. His wife and his five children became subscribers.  The two eldest sons became directors of the company. Mr Salomon was allocated 20,001 of the company’s 20,007 shares. The company gave Mr Salomon £10,000 in debentures and received an advance of £5,000 from Edmund Broderip , on security of the debentures. Salomon’s business eventually failed and it defaulted on its interest payments on the debentures (half held by Broderip ). The company went into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining.  Salomon claimed this amount under his retained debentures. This would leave nothing for unsecured creditors. The company’s liquidator argued that Salomon should be responsible for the company’s debts. Salomon sued for the £1,055. Held. The company had been formed properly and without any fraud. Although Salomon owned all but six of the issued shares he was one person and the company was another. Salomon therefore had no more obligation to pay the company’s debts than he had to pay his next-door neighbour’s debts. 7

8. Liability (Limited company) 8

9. Example ABC Co. Ltd has 3 member: A, B and C After 10 years, ABC Co. Ltd is loss-making and all outstanding debts of company are £70.000. But the company’s remaining assets are only £20.000. => Does the company have to use all this remaining assets to pay debts? A B C Paid up capital 10.000 50.000 40.000 Other assets 70.000 60.000 90.000 9

10. Perpetual succession Perpetual succession is the continuation of a corporation’s existence despite the death, bankruptcy, change in membership or an exit from the business of any owner or member, or any transfer of stock, etc. “Perpetual succession” is one of the factors explaining a corporation's legal existence as separate from those of its owners. 10

11. Ownership of property A company can own property, and this property will continue to be owned by the company regardless of who owns the shares in the company. This can be important when a company is trying to borrow money, because the company can give its own property, both present and future assets, as security for a loan . 11

12. Example: Macaura v Northern Assurance Ltd [1925] 12

13. Example: Macaura v Northern Assurance Ltd [1925] Facts Mr Macaura sold all timber to a company (Irish Canadian Saw Mills Ltd) in which he and his nominees held all the shares. Subsequently Mr Macaura insured the timber against fire on policies in his own name. After two weeks, a fire broke out and he claimed the insurance. The insurance company, Northern Assurance Co Ltd, argued that Mr Macaura did not have an insurable interest as a  shareholder  in the company. They argued that the company is a separate legal entity. Issue : Does Mr Macaura have an  insurance interest ? Held House of Lords  held that he did not have an insurable interest. Claim failed because he has no legal or equitable interest needed to sure on insurance policy and a mere moral certainty of profiting or losing not enough. In  English law  in order to insure an asset, you need to have insurable interest in the asset and before he sold the timber he had complete ownership but once he sold the timber to the company, the timber belong to the company NOT him so therefore he didn’t have any insurable interest in the company. 13

14. Contractual capacity 14

15. Criminal liability A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intention. A corporation has none of these; it must act through living persons, though not always one or the same person. They are agents of company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. 15

16. Example In 1994 a company called OLL Ltd, and its managing director, were both found guilty of manslaughter after four sixth form students died as a result of grossly inadequate safety measures while on a canoe trip across Lyme Bay. The “mens rea” of the managing director was attributed to the company. The managing director was sentenced to three years’ imprisonment, reduced on appeal to two years, the company was fined £60000, which represented all of its assets. This case was the first one in which a company had been convicted of manslaughter. Such convictions are very difficult to secure and new statutory regulation of corporate manslaughter is proposed by the government. 16

17. 2. THE CORPORATE VEIL Only the company itself can be liable in respect of a wrong done by the company. The owners of the company will normally be free of any liability. They are said to be protected by the ‘veil of incorporation’. But there are circumstances in which a court or a statute will “lift the corporate veil” (Piercing the corporate veil) so that the members of the company are not protected by the company’s artificial legal personality. 17

18. Where the company was formed for a fraudulent purpose Gilford Motor Co Ltd v Horne [1933] 18

19. Gilford Motor Co Ltd v Horne [1933] Mr Horne was employed as managing director of GMC Ltd. In his contract of employment Horne agreed that after leaving GMC he would not solicit its customers. When his contract was terminated Horne did begin to solicit GMC’s customers. He knew that GMC would not allow him to get away with this, so he formed a company, the sole purpose of which was to employ him while he continued to solicit the customers. Horne’s defence , when sued by GMC, was that his promise in his contract of employment was binding only on himself, not on the new company. Held. An injunction was granted preventing either Horne or the company from soliciting GMC’s customers. The Court “pierced the corporate veil” and ordered an injunction against Horne. Courts can “pierce the corporate veil” if a company is simply a mere device to evade legal obligations, though this is only in limited and discrete circumstances. 19

20. If the company can be characterised as an enemy in time of war A country at war with another country is likely to restrict the activities of citizens of the other country, who may be regarded as enemy aliens. If a company is owned by enemy aliens then the court may lift the veil and regard the company as having an enemy character. 20

21. EXAMPLE: Daimler Ltd v Continental Tyre and Rubber Co Ltd [1916] Fact: The Continental Tyre Co was registered in England. It was owed money by Daimler and sued to recover the debt. Daimler argued that as all but one of the £25.000 shares in the Continental Tyre Co were owned by German residents the company should not be allowed to sue on the debt when Britain was at war with Germany. Held: The company could not sue on the debt. The company had assumed an enemy character and therefore anyone trading with it would be trading with the enemy. 21

22. Groups of companies regarded as one Commonly one company, known as a holding company, owns a majority or all of the voting shares in another company, known as a subsidiary company. As a general principle, the veil of incorporation will hang between the two companies. In exceptional circumstances, a court may lift the veil either on the grounds of agency or on the grounds of economic reality. 22

23. Example: DHN Foods Ltd v London Borough of Tower Hamlets [1976] Fact. DHN was the holding company in a group of three companies. There were two subsidiaries, wholly owned by DHN. One subsidiary owned land used by DHN, the other owned vehicles used by DHN. The land was subject to compulsory purchase by the Government, and DHN sought compensation for disturbance of its business. Held. The group of companies could be treated as one economic enterprise, because they were virtually a partnership with the three companies as partners. Consequently DHN was entitled to damages. However, this is likely to only be followed where the subsidiaries are wholly owned and serve no purpose other than to own the parent company’s assets.   23

24. Treating a company as a partnership in order to wind it up Ebrahimi v Westbourne Galleries [1972] Facts: Mr Ebrahimi and Mr Nazar were partners. They decided to incorporate as the business was highly successful, buying and selling expensive rugs. Mr Ebrahimi and Mr Nazar were the sole shareholders in the company and took dividends rather than director's salary for tax reasons. A few years later, when Mr Nazar's son came of age, he was appointed to the board of directors and Mr Ebrahimi and Mr Nazar both transferred shares to him. After a falling out between the directors, Mr Nazar and his son voted to remove Mr Ebrahimi as a director and excluded him from the management of the business. Mr Ebrahimi decided to petition the court for relief.  Judgment: The House of Lords stated that as a company is a separate legal person, the court would not normally entertain such an application. However, they believed that as the company was so similar in its operation as it was when it was a  partnership , they created what is now known as a quasi- partnership.Based on the personal relationship between the parties it would be inequitable to allow Mr Nazar and his son to use their rights against Mr Ebrahimi so as to force him out of the company and so it was just and equitable to wind it up. The company was wound up and Mr Ebrahimi received his capital interest. 24

25. Other situations where the veil may be lifted The courts have the power to lift the veil in other situations if they think that this is the best way to do justice in the case . The Companies Act requires all companies other than private limited companies to have at least two members. If the number of members falls to only one, the sole member can become liable for the company’s debts which arose more than six months after the membership of the company was reduced to one. Section 214 of the Insolvency Act allows a court to make directors liable for wrongful trading. This liability arises only in respect of the liquidation of insolvent companies where directors have continued to run the company when they knew, or should have known, that there was no reasonable prospect of avoiding insolvency. 25

26. Exercises Take an example of “the corporate veil”. Take an example: the court “lifts the corporate veil”. 26

27. 3. CLASSIFICATION OF COMPANIES 27

28. INCORPORATION 28

29. LIABILITY Company Characteristics Example Limited by shares Cty cổ phần In the event of liquidation, a member’s liability is limited to paying off any amount unpaid on his/her shares Most companies are limited by shares. Limited by guarantee Ko yêu cầu các thành viên góp vốn tại thời điểm joined vào cty , nhưng cần cam kết đóng góp 1 khoản khi cty gặp vấn đề The liability of members of companies limited by guarantee is limited to paying an amount which they have agreed to contribute in payment of the company’s debts in the event of the company being wound up. A charity or non-commercial organization… Unlimited The members of the unlimited company will have unlimited liability. It means they can be called upon to contribute to the company’s assets if the company goes into liquidation. C. Hoare & Co; Credit Suisse International … 29

30. Public company and Private company 30

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32. II. FORMATION OF COMPANY FORMATION OF REGISTERED COMPANIES PROMOTERS AND PRE-INCORPORATION CONTRACTS THE COMPANY NAME 32

33. 1. FORMATION OF REGISTERED COMPANIES A registered company is formed by promoters: sáng lập viên , who must register certain documents with the Registrar of Companies: cơ quan đăng kí kinh doanh . If the Registrar is satisfied with the documents, he will issue a Certificate of incorporation: chứng nhân đăng kí doanh nghiệp , and the company will then exist as a corporate body. 33

34. The documents which must be sent to the Registrar of Companies 34

35. Certificate of Incorporation The Registrar must issue a Certificate of Incorporation if satisfied that all the requirements have been complied with. The certificate will show the company’s registered number. In UK, The Registrar will also advertise the fact of the company’s incorporation in the London Gazette 35

36. Company’s constitution: những văn bản mang tính định hướng cho hoạt động của công ty A company’s constitution is contained in its memorandum and articles of association . The memorandum of association sets out the structure of the company. The articles of association form a contract between the company and members and among the member themselves. They are the internal rules of the company. 36

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38. Articles of association If a company does not register its own articles a model set of articles will be used. These model articles are contained in Table A of the Companies Regulations 1985 (as amended by Companies Regulations 2007). Table A articles can be used by either public or private companies, but are not suitable for all companies. The articles of most companies will at least use Table A as a basis for their own articles. If Table A is adopted in its entirety then this can be stated in the memorandum of association and there is no need to print separate articles to be sent to the Registrar. 38

39. Contents of Table A 39

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41. Companies “off-the-shelf” Those who form such companies register themselves as the company’s first director and company secretary and take one share. When a customer wishes to buy an “off the shelf company”, the share is transferred to whoever the customer nominates, and the original director and secretary resign and, having first procured the appointment of a new director and secretary, notify Companies House that they have resigned. 41

42. Companies “off-the-shelf” 42

43. 2. PROMOTERS AND PRE-INCORPORATION CONTRACTS 43

44. PROMOTER Promoters are people who undertake to form a company and take the preliminary steps for it. 44

45. Are all promoters subscribers? Are all subscribers members? 45

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47. Fiduciary duties to the company The duties of promoters are as follows: 1. The promoters must act honestly, for the benefit of the company. 2. To disclose the secret profit: Promoters must disclose all the private arrangement resulting them profit by the promotion of the company. Any profits which they make from promoting the company and fails to disclose must be returned to the company. However, if they disclose them and the company gives consent, they may retain legitimate profits. 47

48. Duties of promoters 48

49. Erlanger v New Sombrero Phosphate Co (1878) Facts Erlanger (E) was a French banker who bought the lease for the Anguilian island of “Sombrero”, phosphate mining for £55,000. E then established New Erlanger Phosphate Co (P), before selling Sombrero’s lease to P for £110,000 through a nominee. One of P’s directors was the Lord Mayor of London, who was independent of E’s initial group of founders. Two other directors were abroad, and the other directors were puppet directors of E. Due E’s strong control over P, the company was essentially an extension of Erlanger. P ratified the sale of the lease. Many people invested in P due to E’s skills at promotion. Eventually, the investors realised that E had sold the lease to P for double the price he had bought it for, and P sued E for recession due to non-disclosure and an account of profits. Issues: Was E liable to P due to not disclosing to his conflict of interest? Held E was a promoter for P. The House of Lords unanimously held that the relationship between a promoter and a newly formed company attracts a fiduciary relationship. The majority also held that the contract can be rescinded. A promoter owes duties of good faith and honesty to the company. E should have declared any conflicting interests to the company promoted and cannot make any “secret profits”. A promoter who breaches any duty to the company by failing to disclose to the company conflicting interests would be liable. The company is able to seek remedies such as rescission of contract and recovery of profits. A constructive trust can also be formed for the profits gained by the promoter in breach of his or her duties. 49

50. PRE-INCORPORATION CONTRACT: hợp đồng tiền công ty In practice, promoters will need to contract with third parties for such things as a lease of premises, business equipment and connection to utilities so that once the certificate of incorporation is issued the company can begin trading. They are pre- incorporation contracts. Pre-incorporation contract is a contract made on behalf of company before incorporating . 50

51. Features of pre-incorporation contract 51

52. Example: Kelner v Baxter (1866) Facts A group of promoters for a new hotel company, the “Gravesend Royal Alexandra Hotel Company” (Gravesend) entered into a contract for wine. This contract was purportedly on behalf of Gravesend, but Gravesend had not at that point been registered. It was a “pre-incorporation contract”. Gravesend was eventually registered, but by that stage the wine had been consumed before the money had been paid. Gravesend soon went into liquidation. The promoters, as Gravesend’s agents, were sued. The promoters argued that, as Gravesend had been incorporated, the contract had subsequently been ratified and the liability had passed to the company. Issues: Were the agents liable for the pre-incorporation contract post ratification by Gravesend? Held The Court of Common Pleas held that because the company did not exist at the time of the signing of the agreement it would be wholly inoperative unless it was binding on the promoters. A stranger cannot, by subsequent ratification, relieve the promoters from that responsibility of liability. 52

53. A promoter can avoid potential liability if: Not making contracts until the company has been incorporated  Không ký kết hợp đồng tiền công ty. Using an “off-the-shelf” company  mua lại cty đã thành lập Agreeing a draft only with the third party on the basis that the company, once formed, will enter into the agreed form with the third party.  thỏa thuận bản dự thảo , ký lại sau khi đc thành lập 53

54. Home work Take an example of “pre-incorporation contract”. 54

55. 3. THE COMPANY NAME 55

56. Prohibited names (i) The words ‘limited’ or ‘unlimited’ or ‘public limited company’, or their Welsh equivalents, can only be used at the end of the name. (ii) The Registrar will refuse to register a name which is identical to the name of another company already on the register. Nor will a name be registered if it is identical except for: (i) the inclusion of the word ‘The’ at the beginning of the name; (ii) the way the letters which spell out the name are differently punctuated or differently divided into words; or (iii) the use of the words ‘company’, ‘limited’, unlimited’ or ‘public limited company’ at the end of the name. (iii) The Registrar will refuse to register a name the use of which would, in the opinion of the Secretary of State, constitute a criminal offence or be offensive. (iv) Regulations made by the Secretary of State prohibit the use of certain words which suggest a connection with the Government or with local authorities. The Registrar can register such a name but permission from an appropriate body may be required. 56

57. Passing-off If a company registers a name which is too similar to the name of an established business, an action for the tort of passing-off might be brought by the established business to prevent the company from trading under its registered name. If such a passing-off action is brought the court will grant an injunction to prevent use of that name. However, a passing-off action will only be successful if the use is likely to divert customers away from the established business or cause confusion between the two businesses. 57

58. Business names Sometimes companies trade under a name other than their registered corporate name. A company which does trade under another name will have to comply with the Business Names Act 1985. The Act will apply if the company carries on business in any name other than its exact registered name, except that it may add to that name that it is carrying on business as a successor to a former owner of that business. Even if the company does trade under another name it must continue to print its proper corporate name on all business documents, as explained above. 58

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