Company Law and Shareholders

Company Formation

Memorandum And Articles Of Association

Notion Of Separate Juridical Personality

Main features of Company Law:

1. The minimum number of shareholders is 2
2. a company must have a capital divided into shares
3. It must have a memorandum and articles of association
4. For a company to come into existence the company must be registered at the registrar of the companies.
5. A company has a separate juridical personality
6. Limited liability notion which is the limited liability of the shareholders
7. To disclose a lot of information about themselves, there are strict disclosure requirements
8. The applicable legislation on company law is very lengthy and can be very complex
9. It is relatively easy to transfer the shareholders’ interest in the company to somebody else and this ease of transferability is also regarded as an attractive feature of company law

What Vehicles Are Used To Carry Out Business?

The people who carry out trade are traders. Trade takes place through different forms of vehicles. Trading can take place by means of a natural person. In practice however, very little trading takes place by individuals, the vast majority of transactions take place through one or other vehicles recognised by the law; example: government organisations, partnerships, limited liability companies… The overwhelming majority of transactions take place by Limited liability companies or companies for short. The question is but why is it that in Malta so many transactions take place through companies and so many traders are companies. The reason is because of the notion of limited liability. This is because if a trader becomes bankrupt he will be protected by this notion since he only loses his share of the company and he personally will not be found liable. A company is a separate person from the trader with its own commitments and property present and future. As a rule the shareholder will not be liable for the liabilities of the companies itself. This is a general rule.

1. 1. A Company Must Have 2 Shareholders

That is the general rule but it is subject to an exception. Historically because a company must be regarded as a partnership when the original legislation was enacted the law required a company to at least have two shareholders. It was realised by traders and advisors that this rule was outdated as the practical reality didn’t turn out in this way. As time went by the legislators realised that this type of set up wasn’t practical. Later on legislation was passed to allow single member company – there are certain requirements to be satisfied. The law recognises the separate juridical person independently of how many shareholders there are.

What happens when a 2 person company is reduced to a single member, does it cease to exist. If a company which is set up with 2 or more shareholders then it will have a 6 month period within which a second member can be re-introduced into the company. If this 6 month period passes then there will be consequences. In the case of a public company there is no limit to the number of shareholders.

2. 2. Idea Of The Share Capital

Every company must have a share capital divided into shares. For the company to be formed there must be shares. The members must hold shares in the company. Usually the nominal value for every share is 1 euro. The shareholder pays into the company an amount equivalent to the shares. Issued share capital is subscribed into nominal and preference shares. In a private company it says that the issued share capital must be the equivalent of the euro equivalent of Lm500 or 1200 euro. The law does not require the shares to be fully paid up. The law requires 20% to be paid up. The amount paid up depends on the agreement that was decided on the formation of the share capital. The minimum is 1200 shares. Fundamentally what happens to a shareholder who has paid only 20% of the share and not the full hundred percent of the share? What happens to the share continues to be a liability to the share holder.

There is another notion in our law of the authorised capital. This is that amount of capital which can be issued at some stage in the future by the company. The issued share capital comes within the authorised capital. The authorised capital must be either equivalent to the issued share capital or more then the issued share capital. Only the issued share capital is reflected in a payment made to the company. The unissued shares within the authorised capital go out to nobody and no one has any liabilities or rights on them.

Lecture 2

2 individuals getting together and setting up business to operate a stationary and it is decided to be a joint venture. The two go to an advisor and the advisor would usually advise individuals to set up a limited liability company through which they will then exercise the business. The main reason for this is for the principle of limited liability of the shareholders. One question the advisor would ask would be how much money is to be put into the business (e.g. 40,000 and 60,000 respectively). It is possible that the advisor will aid them to set up the company where one shareholder (x) will have 60000 shares at one euro each and the other y will have 40000 shares of the same value.

The advisor will first distinguish between the authorised capital (the maximum amount of capitol that the company may eventually issue). In this case it would be 100,000 euro.

If there is an authorised share capital of 300,000 divided into 300,000 shares of euro each

Issued share capital 100,000 divided into 100,000 shares of a euro. This is coming from the money from X (60000) and of Y (40000).

The authorised is the maximum capital that can be issued by a company from time to time as long as the authorised capital remains what it is. If the company is set up in this format in the future the company may issue the remaining shares that have not been issued.

When a share is issued it may not be fully paid up. The capital may be divided therefore into paid up and unpaid capital.

Shares can be of different types: the typical distinction is between ordinary shares and preference shares. The ordinary shares may be divided into different groups themselves then because what they are called is not important. The most important thing is the definition of the respective rights and obligations which attach to the shares and to include these in the memorandum of the association.

The basic rights of the shareholders

1. To vote at general meetings – this is the meeting of the members. When the meeting takes place there will be items to discuss and to vote upon. It is the shareholders who vote on the resolutions being discussed. Generally each share carries with it 1 vote.
2. The right to receive dividends from the company. If the company has made a profit and there are sufficient profits available for distribution then these will be distributed by way of dividend. This is made payable to the shareholders usually on a yearly basis.
3. If the company is put into liquidation, at the end of the liquidation process if the company has paid off all its creditors, the shareholders will have a right to a repayment of the amount of capital that they would have contributed to the company plus possibly a share of any surplus profits that will remain after everybody has been paid.

This generally applies to the ordinary shares of a company. Sometimes the company also issues preference shares. These form part of the capital of the company as much as the ordinary shares but they are given certain preferential rights over the ordinary shareholders. These rights have to be defined in the memorandum of the association of a company.

The rights of the preferential shares are linked up with the rights of the voting and also with the dividends. It could also be that the preference shares have 2 votes per share. But usually the preference shareholders do not have a right to vote. They are called preference shares because of the preference given when it comes to dividends. These rights in relation to dividends depend upon what is state in the memorandum of association.

Shares are sometimes divided into different costs. This is to give the shareholders specific rights with regard to the appointment of directors. In this case, why is it desirable to classify shares as such? The shareholder who holds the majority of the shares is entitled to appoint the whole board of directors.

Memorandum And Article Of Association

A memorandum is a document that needs to be signed by the original shareholders and although visually it looks like one document it is two documents together. The first is the memorandum and the second is the articles of association. These are also referred to as the constitution of the company. The basic distinction between them is that the memorandum has to contain ad validitatem a number of clauses that are identified in the law. For example, the share capital clause, the objects of the company and the name of the company. The memorandum by law requires these details written down. The other characteristic is that the memorandum contains clauses that are of interest not only to the shareholders but to the outside world.

The articles of association contain clauses that regulate the internal management of the company. They do not interest third parties but regulate how the company operates at board level and at general level.

The companies Act in so far as the Memorandum is concerned identifies a number of clauses or a number of provisions that need to be included in the memorandum of association. The companies act doesn’t say much except that every company must have a set of articles of association. What the law does say however is in relation to the articles of association is to actually recommend a draft set of articles of association that can be adopted by the shareholders to the company. This is unusual as the articles of association is a contractual document. It is the agreement of the shareholders. And because of this you do not usually find specimens being set up by the law in a contractual context. The companies act gives you a specimen of an ‘articles of association’. The shareholders can do one of three things:

1. To simply adopt completely the specimen which is recommended by the law
2. To discard altogether the articles set out in the first schedule and to create your own tailor made articles of association
3. A hybrid: where you draw up your own articles of association but you make clear reference to the provisions in the first schedule of the companies act and amend and alter the first schedule as the case may be.

The memorandum and articles are a form of contract certainly to the shareholders and arguably between the shareholders and the company and it is a set of documents that needs to be signed by the original shareholders of the company.

What the law does here is identify a number of provisions or clauses that have to be included in the memorandum.

The first clause is the Name clause. The law requires the memorandum to state the name of the company. Every company has to have a name in practice it is the individual name of the company that identifies the company as a separate legal person. Every company will also have a particular registration number. This is given to it by the registrar when the company is formed. Obviously each company has a number that is different from the registration numbers of other companies. The same goes for the name of the company, no two companies can have the same name and as far as possible the registrar tries to avoid allowing companies with names which are too similar to each other. The name of the company may change, however the registration number may not change. The name may change slightly or it can be a totally different name. There are a number of rules that one would look at like the registrar of companies has a right to refuse a company its name if it deems that the name is offensive to the public or if it is too similar to another company’s name. At law, the name of a company has to end with specific words or abbreviations. Here one must distinguish between private and public companies. The vast majority in Malta are private companies. If a company ends with ltd or limited at the end then it is a private company. If it is a public company then the company should end with the abbreviations plc or public limited company.

There is also the registered office clause. Every company must have a registered office. The registered office is mentioned in the memorandum of association. The registered office of a company has to be somewhere in Malta but this does not mean that the company must carry on business in Malta. However if it is registered in Malta, there must be a physical representation of the company in Malta. This would be to receive any goods and information such as judicial letters at a physical identifiable address. It is not possible to have as a registered office, a P.O. box.

Another clause is the status of a company clause. This is to see whether the status is either of a public or a private one. There has to be a clause in the memorandum saying whether it is a public or private company. This clause is really not essential at all since the name clause itself requires the end bit which shows that it is a public or private company.

The next clause is the objects clause. Every company is obliged to identify what the object of the company going to be. Or what the activity of the company is going to be. It doesn’t mean that if the company is going to do hotel business then the objects are going to only mention hotel business. The objects could also have other ideas even though it has no current plans to carry out those activities.

The clauses can be changed after a week or after ten years there is no restrictions. So if the company is set up with one objects clause and then they decide to change their objects later they then need to change their memorandum. Although our law requires the objects can be mentioned, the objects can be mentioned in pretty wide terms. What cannot be done is to say in the objects clause is that the company is being set up to carry on trade in general.

There is a distinction between the objects of a company and the powers of a company. The powers of a company are those activities ancillary to the carrying out to the object of a company that are necessary to be carried out from time to time in connection with the business of a company. In practice however almost all memorandum of association will identify quite a long list of these powers. Strictly speaking the company cannot carry out activities that go beyond its objects. If it does so, the company will be acting ultra vires. The repercussion could be that if the directors enter into a line of business that does not fall within the objects then the company can say that it is not bound by these activities. The law is not however so straightforward.

Next, there is the share capital clause. The share capital clause must identify the authorised capital of the company and also the issued share capital of the company. The authorised share capital clause will list the amount of money and how many shares it is divided into. The issued capital clause must also state the extent to which the shares have been paid up. It is also necessary to identify who the subscribers to the memorandum of association are and the number of shares taken up by each of the subscribers. Thus the share capital clause is linked with the subscribers clause.

This is where the subscribers clause comes in. The subscribers are called so as they subscribe to the memorandum of association and as evidence that they have subscribed to the memorandum and articles of association, they have to sign both documents.

The management clause is the clause which requires the memorandum of association to identify the number of directors that the company would have and the names, addresses and id card numbers or passport numbers of the first directors of the company. A company is managed by the directors not by the shareholders. The whole concept of a company is that the shareholders invest their capitol into the company, appoint directors to manage the company and hold them responsible for their dealings. Then the shareholders would go to an AGM and would be informed by the directors on the performance of the company. When one speaks of the number of directors, that number need not necessarily be a fixed number, but it could be stated as a range. In other words the clause could read; the company shall be managed by a board of not less than three but not more than six directors. It is generally not advisable to choose just one number. There is no maximum number of directors. There is, in a sense, a minimum. Here there must be a distinction between public and private companies. In the case of private companies there may be a minimum of 1 director. In the case of a public company the minimum number of directors is 2.

The individual shareholder need not be a director. A shareholder or director may be a company, similarly a board of directors may be composed of 4 directors, 3 individuals and 1 could be a company. In such a case it would be called a corporate director. In the case of a corporate director you give the name together with the registered office and the registration number if it is a Maltese company. If it is not a local company the location where the company is registered is given as well as the company’s office address.

A company being an artificial person cannot itself appear in court, or in contracts. There is thus in company law the notion of judicial representation of a company. In other words a company must appoint or refer to somebody who will have the judicial representation of a company, in other words the right to represent the company in judicial acts. Similarly a company must have an individual or individuals who will have the right to represent to the company all contractual documents. The memorandum of association must define the manner in which the representation of the company is to be exercised and it does so in the representation clause mentioned. It must also identify the first person or persons vested in such representation.

The Company Secretary Clause

Under the law as it stands today every company must have what is called a company secretary? A company secretary has certain functions under the company’s act. The company secretary is a person appointed by a board and the company secretary has a variety of functions which primarily relate to the meetings and to filing certain returns and notifications to the registrar of companies. The company secretary is expected to attend to the general meeting and is expected to take minutes of the meetings, to circulate relevant documentation, to include in the notices the agenda for these meetings, to ensure that who is supposed to receive the documentation receives such documentation and to circulate the minutes. There is a whole list of events that need to be notified to the registrar of companies.

The Duration Clause

Another clause that is sometimes inserted in the memorandum of association is the duration clause. An important principle is involved here. When a company is set up if one mentions nothing in the memorandum of association, then the company will continue in existence for an indefinite period of time. There need not be no end – an infinite lifetime. .It is also however possible to include a clause in the memorandum of association which establishes a predetermined period of time for the lifetime of the company. It is not common practice to include a duration clause and if you do not include a duration clause then the company will have an indefinite lifetime. Even though a company may be formed for an indefinite duration, it does not mean that the company will exist forever as there may be situations where the company may be put into liquidation and in that case after a period of time during which the assets and liabilities of a company are liquidated, the company will then be struck off the register and it will then seize to exist.

Limitation Of Liability Clause

The liability of the shareholder is limited to the amount remaining unpaid of the shares held by them. A shareholder is limited in his responsibility to the company only to the extent if the shares are not fully paid up. If the shares are fully paid up he has no more liabilities to the company. If they are not fully paid up he has the liability (potentially) to remain the remaining percentage. This clause need not be added to the memorandum as the principle is a fundamental of company law.

The Articles Of Association

This is a document that is primarily intended to regulate the internal affairs of a company (the way a company is run – issue of shares, how the meetings are held, powers of the directors etc).There will usually be a set of clauses regulating shares in a company. Some clauses will regulate how a company issues shares to the existing shareholders or to the public at large. One typical clause that you would find in a company is that whenever the company is going to issue shares the company must offer them to the shareholders offering them the shares pro-rata to be added to those which they already have. The articles will usually also regulate what happens if one of the shareholders does not take up the offers of shares that are put to him. If the other shareholders are not interested in acquiring additional shares, the company may offer them to 3rd parties.

Another set of clauses regulates shares in respect of share transfer.

There would also be a set of clauses which regulates meetings – there are two types of meetings

• General meetings – meetings of the shareholders
• Board of directors meetings – meetings of the board of directors

The articles would regulate matters such as time needed to convene meetings, quorums and so on. Anything relating to how meetings are convened and held are usually detailed in the articles of association.

There are other types of clauses such as the clauses regarding the managing director. A managing director is a person appointed by the directors from amongst themselves, and the function of the managing director is to handle the day to day business of the company in the interest of the company. Whilst the board of directors as a board may meet once a month or once every three months, the exercise of the director’s function cannot be exercised only when such meetings are convened.

The companies act gives us a model set of articles of association. These are found in the 1st schedule of the companies act. It is possible for the articles to incorporate by reference in schedule one of the companies act. In practice what is done is that the shareholders agree on a new set of articles to the exclusion of the specimen articles in schedule one of the companies act. What the shareholders do is to draw up a set of articles for themselves. Many of the articles in such an ad hoc set of articles of association will be copied from the standard articles which are found in the companies act.

The articles of association like the memorandum of association have to be signed by the subscribers.

The Notion Of The Registration Of A Company.

In order for a company to become a separate legal person, it must be registered with the registrar of companies. In order to register a company there is a straightforward process. What you essentially need is to draw up a set of memorandum and articles of association, agreed and signed by the shareholders. Once you have the document the initial paid up issued share capital of the company must be deposited in a bank account.

Lecture 5 is about directors. Particular decisions about the company. In the vast majority of companies the directors have the vast majority of powers. Difference between board of directors and general meeting. Separate Juridical Personality whether private or public the company is endowed with a separate juridical personality.

The notion of limited liability which had mentioned quite briefly and im going to expand on it right now. To begin with when we talk of LLC we have a little bit of a misnomer. Because the limited liability is not of the company but it is that of the shareholders.

The main features of companies (need to be looked up)

Who Has The Authority To Take A Particular Decision On Behalf Of The Company?

The general principle is that the board of directors of a company has the authority to exercise all the powers of eth company except those powers which either by law or by the memorandum and articles of the company need to be exercised by the company in general meetings. The powers of the company are vested in the board of directors. They have all the powers of the company except those powers which by law (company’s act) or by the memorandum and articles have to be exercised by the general meeting (shareholders) So in determining the answer as to who has the power to exercise a particular function, 1st one has to see what one is talking about. Then one needs to check whether the law says anything about this particular function, whether the memorandum and articles say anything and if both do not say that that function has to be exercised by the general meeting then that function has to e be exercised by the board of directors. The memorandum of a company may well identify a number of decisions which may require shareholder approval. In practice the number of functions that are separately identified by the memorandum and articles are very limited. Typically these are the appointment of directors, the declaration of dividends.

Given that the memorandum and articles of association is a contractual document it has to be examined in order to determine who has such power.

In practice, in the vast majority of companies the directors have very wide ranging powers. In fact usually in these vats majority of companies, the powers of the general meeting are limited to those which are mentioned in the companies act. Usually the directors will be empowered to exercise any power of the company except those that the law specifically gives to the general meeting. Usually the memorandum and articles of association does not fetter the wide powers that the directors exercise.

The board of directors is almost always empowered by the articles of association to delegate its powers and usually the board of directors will delegate its powers to a managing director or through a chief executives or a general manager. They will than take decisions on behalf of the company as they have been empowered by the board of directors to do so.

In reality when issues regarding who has the power to take decisions on behalf of the company, very often the answer is the directors, however it should not be assumed that they always have such authority

The Notion Of Separate Juridical Personality

The fundamental principle here is that a company whether private or public, is endowed with separate juridical personality. It has a juridical personality as the law gives the company a legal personality of its own, but it is the law that gives the company its own personality. The legal personality is separate, meaning that it is different from that of the shareholders. In theory the principle of separate personality is different. Any identity that has a separate personality is at law like any other person. The practical implications to this are; that a company because it constitutes a legal person has rights which can be considered its own and obligations which can be considered its own; it is subject to rights which are its own and not of the shareholders or anybody else. It is subject to obligations which are its own liabilities and obligations and not the liabilities and obligations of its shareholders of any other person. Another repercussion of separate personality is that a company can sue and be sued in its own name. This links up with another notion which is in a sense related to it. This is the notion of limited liability.

The Notion Of Limited Liability

When we talk of limited liability of a company it is a misnomer as it is not the company which has limited liability but it is the liability of the shareholders which is limited. The liability of the shareholders is limited to the amount left unpaid of the shares held by them.

Why Is Limited Liability Elevated To Such A High Level?

The aura surrounding limited liability is indeed justified. If you look back over time, especially in the developed jurisdictions like the US and GB much of the huge business undertakings that took place over all these decades would not have been possible had the notion of limited liability not existed. The very large project including the building of railways, canals, roads etc became possible because people in the relevant countries were able to invest part of their savings in the large organisations that were to undertake these projects so that the collection of savings that were invested by what turned out into millions of people were turned into these funds. Why is it that millions of investors parted with their savings to fund these projects, the reason was limited liability? People realised that if they invested a part of their savings in projects and those projects failed, the most that the investing family includes would be the amount actually invested. This realisation spread quickly amongst families at large and you had millions families investing. Once that idea of limited liability was introduced the authorities extended limited liability not just to large operations but also to the smaller organisations, the family run companies etc. This also had the effect of promoting trading and trading opportunities. There is no doubt that a lot of people who invest in companies would probably not invest if there is a risk of unlimited liability. If people in Malta were not to invest through the limited liability company notion trading and business in Malta would also slow down considerably. This is briefly why the notion of limited liability assumes such an important concept in the economy of a country. The notion of limited liability has its own drawbacks and could give rise to unfairness vis-à-vis people who deal with companies.