1. Separate Personality and Limited Personality

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...

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