#16731 - Separate Personality And Limited Personality

Re Stanley [1906]: ‘the word company has no strictly legal meaning’. Syllabus thus adopts definition of companies created in the UK by registration under the Companies Act (about 2 million companies)

Companies and related forms:

Partnership – Limited Partnership – Limited Liability Partnership – Company Limited by Shares – Community Interest Company – Company Limited by Guarantee – Charity

Two main types: partnership and company.

Partnership: Partnership Act 1890; Law of agency; small body of people (initially)

Company: Companies Act 1006; distinct legal person; more complex (initially)

Historically, companies had to be larger but this included cases of bare trustees eg Salomon; post-EX Directive 89/667, can have one man legal companies.

Note hybrid vehicle of LLP – created by LLP Act 2000 (common for lawyers and accountants): avoids cumbersome shareholder / director division of duties when in fact the positions may be fused (Ah Mah and Palm Oil Sdn Bhd) but taxed like a partnership.

LLP is different from LP – governed by Limited Partnership Act 1907 – merely allows for sleeping partners in LP with limited powers (eg cannot bind partnership viz outsiders). Useful in VC and PE industries.

No requirement that a company must be for profit; a company may be for profit in a very loose sense eg incidentally make a profit but did not aim to make a profit. Not for profit is not the same as a charity – narrow definition; hybrid status of CIC – Community Interest Company – may be used for a private but not for profit interest such as a condominium sinking fund incorporated as a company (like Arcadia MCST).

Alternative structure for not for profit entity: Company Limited by Guarantee

Common for Art Galleries eg ‘Friends of the National Trust’
Instead of liability being limited by value of paid up shares, members instead agree to indemnify company up to X should entity go bust
Theoretically, members are a lifebelt not a source of capital but shares can have nominal values and so do the guarantee amounts
More convenient and less risky than a trust
Limited by guarantee – no need for cumbersome membership transfer (ie issue new shares or transfer shares) – may join and resign like a club
Guaranteed Company not suitable if for profit
No shares means no long term working capital or working capital must be raised through debt but this can be partially overcome through CIC hybrid

Some clarifications:

Company not just for large groups – can be a sole trader
Company need not be for profit

However, a company (unlike a trust or partnership) facilitates association of a large number of people carrying out large-scale business

Why?

Large and fluctuating board of shareholders may delegate management to small, skilled group of directors
Separate legal personality – managing risk

Three main purposes of companies today:

Not for profit – easier to have a company than a trust or charity
Single trader / small group of partners incorporated – substitute for partnership
Enable investing by the public – a bit like a trust but for the purpose of raising capital and making a profit

There are some hybrids that cut across these categories eg a family business trying to expand using outside capital may be a cross between two and three.

Companies can be classified according to a few different criteria even though all are subject to the Companies Act 2006.

Public – may offer debentures to the public (S755 CA) (plc) ; private – may not do so (Ltd)

Offering of debentures – subject to Financial Services and Markets Act 2008

Being a public company is often a source of prestige, conveying social and economic importance. In many continental countries, public companies are regulated by separate legislation. However, there is some distinction wrt regulation in the UK nevertheless. Indeed, the Company Law Review argued that the public / private division was too simplistic and resulted in over-regulation of SMEs (OK post-2006).

S4(2)(a): default rule is that all companies are private unless specifically incorporated as a public company.

Change in position compared to 1908 – used to have fewer public companies than private companies as private company status was desirable to escape regulatory requirements but post-Companies Act 1980 / 2^nd EC Company Law Directive concerns over raising capital led to increased regulation of public companies. In response, P made it easier to incorporate as a private company.

Note that not all public companies’ shares are publically traded – a public company may be traded eg on LSE but need not be listed even if plc. However, a listed company is subject to the FSMA 2000 and the regulatory oversight of the Financial Conduct Authority.

Within listed companies there is a further distinction between Main Market and secondary market companies. Within the main market, some have premium listing while others have only standard listing – different regulatory requirements. To get on Main Market, a company must get on to the Official List prepared by the FSA in its capacity as UK Listing Authority (UKLA). UKLA is basically about due diligence and information disclosure but UKLA may impose additional regulatory requirements post-listing.

This is the legal cornerstone of the UK Corporate Governance Code which operates on a “comply or explain” basis.

Hence, the term public company is ambiguous – should say publicly-traded company if speaking to a capital markets lawyer.

S3(4): may have a company with share capital contributed by members but their liability is not limited to the amount of paid up capital. Only about 100 to 200 per year of such companies – not an attractive proposition.

In return – lighter regulation: S448 – no need to publish accounts; S658 – no rule against acquiring own shares

May be a good alternative to partnership for those who value privacy or flexibility wrt capital structure.

These are not technical legal categories but CA does recognise need to differentiate between different sizes of companies. Company Law Review: 90% of active companies have fewer than five shareholders; 65% have turnover of less than 200K pa. However, Review said no to differentiated regulation – wrong to create barrier to expansion.

2006 Act adopted CLR recommendation of common set of rules but opt out approach for larger companies – but Department for Business, Innovation and Skills is looking into creating a special category of micro-company

Company limited by guarantee has long been available as a vehicle of choice for non-profit entities. However, there was no vehicle specifically designed for non-profits until the CIC in 2004.

CIC is formed under Companies Act 2006; may be limited by shares or guarantee; regulated by Companies (Audit, Investigations and Community Enterprises) Act 2004 – designed for a company which aims to promote the interests of the community or a subsection of it rather than the private profit of its members. CIC should turn a profit but that profit is more to do with LR viability rather than commercial gain.

NFP which are also charities: results in double-regulation (concurrent with Charities Act 2011). So should there be a special form of regulation for charitable companies? Charity Commission for England and Wales suggested Charitable Incorporated Organisation (CIO) – on an optional basis; endorsed by Company Law Review – now in Charities Act 2011 Part 11 but still very similar to a normal company legally.

Prior to 1844, all companies came into existence by private acts of parliament / exercise of...

#16731 - Separate Personality And Limited Personality - Company Law

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