Law on Companies
Companies

The trading company provides two important
factors which have underpinned the success of
capitalism:
1.
2.
The company provides a structure which allows for
the efficient separation of ownership of resources
and management of those resources; it is specially
designed as a capital raising vehicle.
The company provides a mechanism by which the
owner of capital can limit his or her liability to third
parties.
CHARACTERISTICS OF
COMPANIES





Artificial legal person with rights, powers
and liabilities of its own.
Separate legal entity – independent of
people that control or run the entity
Can sue and be sued in its own name
Perpetual succession - lifespan of the
company is not affected by the death of it
members or officers
Can hold and dispose of the property.
Powers of the company

The company has the legal capacity and powers
of an individual as well as the powers of a
Owners Corporation, including the power to








Issue and cancel the shares of the company;
Issue debentures of the company;
Grant options over unissued shares in the company;
Distribute any of the company's property among the
members;
Give security by charging uncalled capital;
Grant a floating charge over the company's property;
Arrange for the company to be registered or recognized as a
Owners Corporation in other jurisdictions (subsidiaries,
representative offices, branch offices);
Do anything that it is authorized to do by any other law.
Consequences of the Separate legal
entity doctrine
1.
Corporate capacity – the company can do most
things that a natural person can do:
The companies obligations and liabilities are its own and
not those of its participants
A company can sue and be sued in its own name
2.
3.
4.
Perpetual succession – continues until it is wound
down and deregistered irrespective of changes in its
participants;
A company’s property is not the property of its
participants;
A company can contract with its own controlling
participants.
How a company acts





A company does not have a physical existence. It must act
through other people.
Individual directors, the company administration, company
employees or agents may be authorized to enter into
contracts that bind the company
The management of the company is in the hands of the
directors, who are elected according to the rules of the
company or nominated in the constitution
Number of directors will sway according to the type and size
of the company
Public companies will have a board of directors consisting
of at least 3 directors – executive & non executive
Processes involved in setting up a
company




Step 1: Decide on your business structure
Step 2: Choose a company name
Step 3: Obtain consents - member(s), director(s)
and administration
Step 4: Complete and lodge the application
forms
Effect of the Rules or Constitution

A company’s constitution, if any, and any
replaceable rules, have effect as a contract
between:
The company and each member
 The company and each director and company
secretary
 A member and each other member
Ultra vires doctrine

Broad classification of Companies
Private vs. Public


Private legal entity vs. Public legal entity
Private company vs. Public company
Broad classification of Companies
Private vs. Public

Private Company
Usually the company is owned by the company's founders,
management or a group of private investors.
Commonly used for small or family owned businesses




May be formed by 1 person (Director & Shareholder)
Membership is limited to ~ 50 persons (excluding
employees who hold shares in the company)
Must have share capital
Cannot list their shares on the stock exchange
Broad classification of Companies
Private vs. Public
Public Company

The company that has sold a portion of itself to the public via an
initial public offering of some of its stock, meaning shareholders
have claim to part of the company's assets and profits





May have unlimited number of members
May invite the public to subscribe for any shares in, or debentures of,
the company and it may be required to prepare disclosure documents
when it issues shares
It is usually limited liability company. If it is a limited company, it
includes the word limited or an abbreviation thereof (For instance: Ltd.,
Plc.)
May be listed on the Stock exchange and comply with listing rules
Must prepare financial accountability statements, that must be audited,
and presented publicly.
Public companies have wider powers to raise capital from members of the
public than proprietary companies but are subject to more regulation.
Large Private Companies
vs. Small Private Companies
Classification is based on criteria in respect of revenue,
assets and number of employees
Large Private companies have increased reporting
obligations to members and Public
1.
•
•
•
2.
They must prepare financial statements
Those statements must be audited
The audited statements must be submitted publicly
Small Private companies are not required to
prepare financial statements or appoint an auditor
Specific classification of
Companies
A public company can be any one of the
following whereas private company can only be
one of two types
1. Companies limited by shares



Most common type
Either public or private in nature
Extent of members liability is restricted to the amount
unpaid on the issue price of shares held by the member
Specific classification of
Companies
2. Unlimited liability companies




Private or Public
No limitation on a member’s liability
Liability may extend to members personal assets
Suitable more to professional firms such as
solicitors which are not permitted to limit liability
Limited Liability



If the company is a limited liability company, the
shareholders' liability, should the company fail, is limited
to the amount, if any, remaining unpaid on the shares
held by them.
A company is a separate legal entity and, therefore, is
separate and distinct from those who run it. Only the
company can be sued for its obligations and can sue to
enforce its rights.
Incorporation is said to cast a veil over the company
(an entity separate from its owners and officers)
through which the courts cannot see
Lifting/piercing the corporate veil


In exceptional cases the law will look to participants in the
company in respect of breaches of law
Statutary exceptions usually include:
1.
Duty on directors to prevent insolvent trading; By law, a
director must prevent their company from incurring a debt
when it is insolvent or about to become so. Or else risk
exposing themselves to criminal prosecution, substantial fines
or to action by a liquidator, creditors of the company to recover
amounts lost by creditors due to your actions. Personal assets
- not just their company's - may be at risk
2.
Promoters remain personally liable on contract: – Anyone who
enters a contract on behalf of the company before the
company is formed may be personally liable under that
contract
3.
Winding up on just and equitable grounds;
4.
Directors pay a dividend to shareholders when there are not
sufficient company profits - Director may be personally liable to
creditors it is unable to pay its debts
Lifting/piercing the corporate veil

–
In exceptional cases the law will look to
participants in the company in respect of
breaches of law
General Law exceptions include the following:
1.
2.
3.
Agency. Where a subsidiary is found to be acting as
agent for a holding company. The courts look
beyond the separate entity principle and treat the
group of companies as one
Fraud. Where the company forms a cloak for fraud
i.e. the company was formed for fraudulent or
improper purpose
Avoid an existing obligation. Where the company
has been used solely or dominantly to do something
that one of its participants is prevented from doing.
Powers of directors


Directors power of management is usually
included in the articles of asociation or
prescribed in the replaceable rules
A Director is:




Responsible for managing the company’s business
A person who makes or participates in making
decisions that affect the whole or a substantial part of
the organisation
Who has the capacity to signifincally affect the
company’s financial standing
A receiver or manager of property of the company
What are the legal obligations of a
company officer?
Directors of all companies have various duties imposed
upon them under both the law, articles of asociation
and General Meeting decisions.
Common Law duties can be divided into two groups:
1.
Fiduciary duties
1.
2.
3.
4.
To act in good faith in the companies best interests
To exercise powers for a proper purpose
To maintain freedom to exercise their discretions
To avoid actual and potential conflicts of interest
Duties of reasonable care, diligence and skill
2.
1.
Directors must act using reasonable competence and keep
themselves informed about the company’s activities and
maintain supervision over its financial position
General Meeting of the Company








The shareholder shall have the following property rights:
1) to receive a part of the company's profit (dividend);
2) to receive the company’s funds;
3) to receive shares without payment if the authorised capital is
increased;
4) to have the pre-emption right in acquiring shares or
convertible debentures;
5) to lend to the company in the manner prescribed by law;
6) to receive a part of assets of the company in liquidation;
7) other property rights established by this and other laws.
General Meeting of the Company





Shareholders shall have the following non-property rights:
1) to attend the General Meetings;
2) to vote at General Meetings according to voting rights
carried by their shares;
3) to receive information on the company;
4) to file a claim with the court for reparation of damage
resulting from nonfeasance or malfeasance by the company
manager and Board members.
Raising and Maintaining Capital
Companies finance their operations through the
following sources
1.
Equity Capital
2.
Retained earnings
3.
Debt Financing
Equity Funds



Most Companies are incorporated with an
authorised share capital in the memorandum of
association.
Equity Capital represents the funds contributed
by members in return for a share in the company
The amount of authorised capital represents the
maximum number of shares that can be offered
to individuals and firms to raise funds for the
company.
Equity Funds
There are three main types of shares




Ordinary shares;
Preference shares;
Deferred shares.
Each class of share will have rights in respect of:


Control : This includes the right to receive information
and voting rights
Distribution: This includes the priority right to dividends
and distributions in the event of winding up
Equity Capital -Ordinary Shares

Ownership.







Ordinary shareholders are part owners of the company.
Have equal right to share the dividends with other ordinary
shareholders, if declared
They usually have the right to vote at shareholder meetings and
elect the board of directors who manage the operations of the
business on their behalf.
Have a right to be repaid capital contributed in a winding up after all
other claimants are repaid
Have a right to share in surplus assets pro rate in a winding up
The ordinary shareholders measure their return on their investment
from the dividends received from the company and any changes in
the market price.
Limited Liability.

A company may issue shares which are paid to less than their
nominal value. (E.g. A share with a nominal value of $1 may be
issued as a partially paid share for, say, 60 cents) In this case there
is a legal obligation on the shareholder to pay the remaining 40
cents if the company makes a call on the unpaid capital.
Equity
Capital
-Preference
shares
Preference shares are shares that give holders some right or preference



e.g. a guaranteed minimum dividend.
The rights attached to a preference share must be approved by special
resolution of members, or alternatively are set out in the company’s
constitution. This protects the interests of existing members by ensuring that
they agree to the terms of the preference shares.
Preference shareholders have limited rights in respect of:



Variation of their class rights
Payment of fixed dividends arrears
Can be



cumulative – entitled to an annual dividend regardles of whether it is declared in
that year or
non cumulative
Redeemable - preference shares that, according to their terms of issue, may be
redeemed at:



the company’s option, or
the members' option, or
a fixed time or on a specified date.
Equity Capital -Deferred Shares




The deferred aspect of the shares relates to the low
priority position of shareholders in regard to payment
of dividends and/or return of capital.
Are seen as the most risky and are often taken up by
directors to indicate their confidence in the company.
In times of success, these shares offer high returns
because deferred shareholders will have access to the
remaining distributable profits after ordinary dividends
are paid.
Deferred shares are not a common source of equity.
Equity Capital -Bonus shares

Bonus shares are shares issued where no
fee is payable to the company and the issue
does not require any increase to the
company’s share capital.
Equity Capital – Share Options







A share option represents the right to purchase shares in a
company, at a predetermined price within a specified period.
The maximum period of an option is five years.
Potential buyers generally pay a small premium to allow them to
participate
The advantage to option holders it that they can buy shares at the
option price regardless of the market price.
Disadvantageous if market price is lower than the share option
price.
Options are often issued to employees of companies of
encouraging profit consciousness and as a reward for periods of
service.
Another use of options is to attract investors to equity issues by
offering the option to take up more shares in the future
Internal Finance- Retained earnings




Internally generated funds from trading can also
be used as a source of equity finance.
Major source of finance for most firms.
The extent of these funds will be affected by the
dividend policy of the company.
Known as undistributed profits or retained
earnings
Debt Funds - Debentures
Debentures






Can be distinguished form other forms of debt financing in that funds are sought
from the public at large. In contrast to other forms of debt finance that require the
company to approach individual lending institutions.
Requires the preparation of a prospectus.
Lenders will be advised as to the terms and conditions, maturity date and interest
rates.
Amount regularly paid as interest is known as the coupon rate which will be close
to the market or effective rate of interest at the time of issue.
That is the debenture holder is a secured creditor The security arranged for
debenture holders can be in two forms:
1.
Fixed charge over specified asset; or
2.
Floating charge over unpledged (other creditors) assets.
There are three ways a company can make a debenture issue:
1.
Public issue
2.
Family Issue
3.
Private Placement

Debt Funds -Bank Term Loans




Term loans are provided for a number of
purposes such as the purchase of buildings
and real estate and financing capital
expenditure in industrial rural and commercial
fields.
The term of the loan will normally range from 3
to 10 years.
Normally interest will be charged at a variable
rate.
In addition to interest, banks will also charge
fees for the loan establishments and mortgage
arrangements
What is the difference between debt funding (debentures)
& equity Funding (shares)?

Equity funds represent funds raised via the issue of shares in
return for ownership interest in the company







Shareholders only have a residual claim on asets
Higher rate of return
Payment in the form of dividends which is not fixed
Dividends are not tax deductible
No maturity date
Shareholders have voting power
Debt funds represent borrowings from the public or financial
institutions






Lenders have prior claim on liquidation
Lower rate of return than shareholders
Interest payments fixed or variable
Interest payments are tax deductible
Maturity date
No voting rights for the debt holders
Maintenance of Capital

Common Law -Companies are required under common law to maintain their share
capital. This means they cannot return the capital paid by their shareholders to the
shareholders


The basic principle provides for the protection of creditors of the company
Statute –
1.

Prohibited self acquisition:
Reasons for the prohibition:






They have the right under the Corporations Act 2001 to buy back their shares from
shareholders if:




2.
Prevent officers enhancing their control through a block of voting shares
Prevent maipulation of share prices
Prevent manipulation of share prices
Prevent a false appearance of substance where a company’s assets consist of shares in itself
Avoid potential unfair treatment between shareholders
The buyback is fair and reasonable overall
The company’s capacity to repay its creditors is not significantly prejudiced
All shareholders are advised of the propsal; and
A majority of shareholders vote for the buyback
Dividends

Under s 254T, companies must pay dividends only out of profits
DIVIDENDS






Payment made out of company profits;
Dividends may be declared/paid from a profit
arising from the sale of fixed assets
Dividends cannot be paid out of capital;
Dividends may be declared/paid from unrealised
increases in genuine revaluations of fixed asset;
Dividends may be declare by a holding company
from the profits of its subsidiaries.
Directors can be personally liable if allow
dividends to be paid out when there are
reasonable grounds for suspecting company
insolvent.
Declaration of Dividends

Generally dividends must be declared before
payable
What types of disclosure documents are to be provided to potential
investors when raising capital?

As a general rule, if you are a public company offering securities for
sale (for example shares or debentures) then you must provide a
disclosure document of some sort to potential investors.
A disclosure document is the broad term used to describe all
regulated fundraising documents for the issue of securities (for
example shares or debentures).



There are three types of disclosure document:
a prospectus
an offer information statement, and
a profile statement.
These documents must be lodged with Sec. Comision before it can be
used to raise funds
Disclosure documents
A prospectus is the standard disclosure document and
has the broadest information requirements
An offer information sheet (OIS)has lower disclosure. A
copy of an audited financial report with a balance date
within the last six months must be attached to the OIS
A profile statement is a document setting out limited key
information about the company and the offer.
Shareholder participation and
Information




Notices and practices at meetings to be
improved for efficiency
Bundled resolutions
More information on company websites on
the component bundled resolutions
Categories of resolutions that should not be
bundled, e.g executive remuneration.