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Separate Personality And Limited Personality Notes

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1. Separate Personality
Limited Personality

and

Table of Contents
Reading - Textbook......................................................................................................................................... 3
Gower Chapter 1: Types and Functions of Companies]...............................................................3
Purposes of the Company................................................................................................................... 3
Different Categories of Registered Companies........................................................................... 4
Unregistered Companies and other forms of Incorporation................................................6
European Community Forms of Incorporation..........................................................................7
Conclusion................................................................................................................................................. 8
Gower Chapter 2: Advantages and Disadvantages of Incorporation.....................................8
Legal Entity Distinct from its Members......................................................................................... 8
Limited Liability...................................................................................................................................... 9
Property................................................................................................................................................... 10
Suing and being sued.......................................................................................................................... 10
Perpetual Succession.......................................................................................................................... 10
Transferable Shares............................................................................................................................ 11
Management under a Board Structure........................................................................................ 11
Borrowing............................................................................................................................................... 11
Taxation................................................................................................................................................... 11
Formalities, Publicity and Expense.............................................................................................. 11
Conclusion.............................................................................................................................................. 12
Cheffins, Company Law: Theory, Structure and Operation (pp497-508)..............................12
Limited Liability - Asset or Liability................................................................................................. 12
Articles and Comment................................................................................................................................. 13
Hansmann, Kraakan & Squire, Law and the Rise of the Firm (2005-6) 119 Harv LR

1335............................................................................................................................................................... 13
ASSET PARTITIONING AND ENTITY SHIELDING...................................................................13
THE ECONOMICS OF ENTITY SHIELDING................................................................................. 14
Cost-Benefit Trade-offs and Lessons from History................................................................14
Conclusion.............................................................................................................................................. 18
Freedman, Limited Liability: Large Company Theory and Small Firms (2000) 63 MLR
3, 317 - 354................................................................................................................................................. 19
INTRODUCTION................................................................................................................................... 19 LIMITED LIABILITY: ECONOMIC ANALYSIS AND ALTERNATIVE TESTS....................19
EXTENDING LIABILITY: LLCS, LLPS AND DEREGULATION...............................................19
THE LIMITED LIABILITY DEBATE - APPLYING GENERAL ARGUMENT TO SMALL
FIRMS........................................................................................................................................................ 20
THE LLC: PROOF OF THE EFFICIENCY OF LIMITED LIABILITY IN CLOSE
CORPORATIONS?................................................................................................................................. 23
ALTERNATIVE TESTS OF LIMITED LIABILITY........................................................................ 24
CONCLUSION......................................................................................................................................... 24

Reading - Textbook
Gower Chapter 1: Types and Functions of Companies]
Purposes of the Company
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
Business Vehicles: Companies and Partnerships (Limited and Unlimited)
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.
Non-Business Vehicles: Charitable, Community Interest and Limited by
Guarantee Companies
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

The Advantages of the Modern Corporation
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.
Different Categories of Registered Companies
Companies can be classified according to a few different criteria even though all are subject to the Companies Act 2006.
Public / Private
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.
Officially listed and traded companies / Not listed
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.
Limited and Unlimited Companies
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.
Size: Large, Medium, Micro
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 Activity: For Profit / Not for Profit
Company limited by guarantee has long been available as a vehicle of choice for nonprofit 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.
Unregistered Companies and other forms of Incorporation
Statutory and Chartered Companies
Prior to 1844, all companies came into existence by private acts of parliament / exercise of prerogative powers - some still exist today eg BBC Charter; still possible to create a legal entity using this method today but it is rare.
Many utilities were formerly incorporated by private Acts as this allowed them to operate monopolistically.
Chartered by the crown - rare for this to have ever been granted to an ordinary trading concern; some artistic, scholarly or charitable bodies may still seek a crown charter today for prestige reasons. Note also 'letters patent' corporations.
Since these entities are not incorporated under the Companies Act, CA regulation does not apply to them unless so expressly enacted. S718 of the CA 1985 enacted Sched 22 which applied most but not all CA provisions to unregistered companies. Now replaced by S1043 of CA 2006 - problem of inadequate regulation and unfair competition were partly solved but note that S1043 only applies this to for-profit entities. Further,
important areas like director's removal, fair dealings by directors, distribution of profits and assets, registration of charges, takeover offers and unfair prejudice remain unregulated for such entities.
S1041 - such companies may instead incorporate the normal way - to encourage this,
they do not need to wind up and re-incorporate, if they are a joint stock company
(company limited by shares).
Building Societies, Friendly Societies and Co-operatives
Building Societies Acts 1986-1997 - to help individuals buy houses - many Building
Societies have de-mutualised, operate more like banks and have therefore incorporated;
Friendly Societies Act 1992 - self-help response to sickness, ill-health - now largely superseded by insurance and the state; Industrial and Provident Societies Act 2002 -
provide for formation of co-operatives - useful in a small area of commercial activities - membership and financial rights usually accorded on the basis of participation eg purchases for retail co-operatives.
These entities fall outside the scope of this book / syllabus.
Open-Ended Investment Companies
Open-Ended Investment Company - a 1996 invention - for collective investment along the lines of Unit Trusts - S235 FSMA 2000. This had previously been done through companies limited by shares but with a Unit Trust type arrangement, it was possible to have a freely traded unit which would sell at a price which better reflects the value of the underlying investment; appropriate regulatory rules would apply.
European Community Forms of Incorporation
European Economic Interest Grouping
EEIG - based on French Groupement d'Interest Eonomique - designed to enable existing business undertakings in different member states form an autonomous body to provide common services ancillary to the primary activities of its members. Profits belong to members, who are jointly and severally liable for debts; no need for delegation to managers though managers may bind the EEIG viz third parties - this is more like a partnership than a company limited by shares.
EEIG basic requirements: Council Regulation 2137/85





written contract between members;
registration in Member State where it is to have its principle establishment; at least two members - may be companies at least two members must carry on the principle activities in different member states full legal capacity but Q of corporate personality a Q of national law
UK: EEIC Regulations 1989 - Companies Registrar as registering authority -parts of the Companies Act and Insolvency Act apply to EEIGs
Ancillary only - Art 3 EC regulations - EEIG activities 'shall not be related to the economic activities of its members and must not be more than ancillary to those activities'.
EEIGs may not exercise management functions over its members' activities or that of any other undertaking, hold shares in a member company, employ over 500 workers, or be a member of another EEIG. Today - fewer than 300 EEICs in
GB.

European Company (SE - Societas Europaea)
EuroCo to facilitate cross-border M&A and their mainstream activities within the
Community - but note that European M&A often results in a Luxembourgish SARL,
although this has been made easier by the Cross-Border Mergers Directive (Dir 2005/56/EC). Alternative approach - takeover offer of share SPA - can result in ad infinitum chain of parent and subsidiary companies.
So what good is the EuroCo? Psychological - M&A negotiations and the need for a
'neutral option'. SE by itself is not much good - unlike what was originally envisioned in 1959, taxation, competition law, IP and insolvency of a EuroCo are not settled at the EC
level, so it does not lead to seamless cross-border operations. EC law is only applicable viz formation, transfer of the EuroCo registered office, board structure and employee involvement. SE proposal started as a sausage but ended up only being the sausage skin.
Other areas - domestic law: Reg 2157/2001, Arts 9(1)©(ii) and 10. This results in a partial harmonisation of EC law and may result in competition between member states.
SE can only be formed by an existing company not natural persons - and these companies must already have a cross-border presence. Main methods of formation:
M&A; EuroCo holding company; formation of a subsidiary EuroCo; transformation - Reg 2157/2001, Arts 2 and SS2-4. Merger route is only open to public companies.
Transformation: public co which has had a subsidiary in another member state for at least two years may convert itself into a EuroCo - may also convert back to a public company in accordance with domestic law - Reg 2157/2001 Art 66.
Take up rate of EuroCos has been low - low 100s; only a small minority are operational rather than being shell companies.
Despite this, EC wants to launch Societas Privata Europaea (SPE) for SMEs.
Conclusion
Range of options for companies had been stable for a long time but post-2000, several new vehicles have emerged on the EC level and the domestic leel - different driving forces as the policy level. LLP - response to desire of large partnerships to find a form of incorporation which limited liability but provided the tax advantages of a partnership.
CIC - government desire to channel entrepreneurial ability towards socially useful project. CIO - desire to privatise the welfare state. EuroCo - aimed at deepening single market by promoting cross-border mergers. Only the EuroCo touches upon a core area of company law but uptake has been limited.
*Note also the existence of the European Co-operative Society (SCE)

Gower Chapter 2: Advantages and Disadvantages of Incorporation
Legal Entity Distinct from its Members
Legal person not natural person - note that a firm is a corporation aggregate unlike eg the office of a bishop which is a corporation sole and is personified.
Full meaning and consequences of separate legal personality only fully grasped in
Salomon v Salomon [1897] AC 22 HL.
Facts:
S was a sole trader - prosperous leather merchant for many years. 1892: he converted his business into a limited company. Salomon & Co Ltd was incorporated. Members: S,
Mrs S and 5 S children. S = MD; S & Co purchased S' business for £39K, which was on the high side. 20,007 shares issued; 20,001 held by S; 1 each by Mrs S and 5 S children; 2 elder sons were directors but were nominees of S so S&Co was a one man Co.
S also held £10K debenture against the company (a bond). S&Co went into involuntary liquidation - could S claim his bond money in priority to unsecured creditors, leaving nothing for them?
Held:

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