BUSINESS AND FINANCE - English 4 Lawyers€¦ · · 2011-01-16BUSINESS AND FINANCE BUSINESS and...

BUSINESS AND

FINANCE

BUSINESS and FINANCE

(slides for 2 sessions)

Related papers in pack:

Certificate of Incorporation, Form IN01, contents sheet to Articles

of Association and 2 Hand Outs.

www.english4lawyers.com

1

BUSINESS AND

FINANCE

Going to be looking at 4 things:

• Different types of business entity,

• How to set up a private limited company,

• How a company operates on a legal level, and

• Different types of finance and security interest.

Aim:

To give you the basic language of these topics, and

To show how it’s used in context.

In passing, you’ll understand some basic points about

English company and finance law.


2

DIFFERENT TYPES OF

BUSINESS ENTITY

Start with “Certificate of Incorporation of a Private Limited

Company”. There’s one in your pack.

Whose seal appears?

2 points

Company registration done nationally not locally.

The language of registration.


3

REGISTRATION

The Register – a book ( or, now, a computer)

The Registrar – a person

The Registry or Registration Office – a place

Sample language

– to file a Form X at Companies House / the Companies Registration Office OR with the Registrar of Companies.

- to register the mortgage at the Land Registry


4

REGISTRATION

What do you have to register?

What DON’T you have to register?

Births, marriages and deaths

Many things to do with companies

Many things to do with real property

Certain types of intellectual property (patents, trade and

service marks and registered designs but not copyright)

Ships, aircraft, motor vehicles etc


5

DIFFERENT TYPES OF

BUSINESS ENTITY – THE

COMPANY

Back to the Certificate

“…incorporated under the Companies Act 2006 as a private company limited by shares..”

Let’s look at 5 things

COMPANIES ACT 2006

PRIVATE

COMPANY

LIMITED

BY SHARES


6

DIFFERENT TYPES OF


COMPANY

COMPANIES ACT 2006

The longest in British Parliamentary history: 1,300 sections,

nearly 700 pages and 15 schedules

Brought into force in 8 stages. The final provisions came into

effect on 1 October 2009


7

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Natural persons v legal persons

Co – separate legal entity, can hold property and sue and be

sued in its own name

Other types of legal person e.g. local authorities. Creatures

of statute.

Companies Act 1908…..1929….1948…1985


8

DIFFERENT TYPES OF


COMPANY

PRIVATE

Private v public

Be careful

a) A Public Limited Company (PLC)

b) A public (i.e. state-owned) company

Most companies (over 95%) are private limited companies and abbreviation is LTD and not PLC.


9

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

An aside

The process of privatisation started in many countries 20-30 years ago

Companies providing “utilities” (e.g. gas, water, electricity and telephone) were public (state-owned) corporations e.g. The Gas Board

The State transferred the business to a PLC e.g. British Gas PLC


10

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Shares of British Gas PLC quoted / listed on the Stock Exchange and offered to the public

Privatisation- move from ownership by the state to ownership by private investors, from the public to the private sector.

Confusingly, what these private investors own is shares in a PLC, a public limited company

Opposite of privatisation? Nationalisation.


11

AN ASIDE –PRIVATE

EQUITY

Private equity v venture capital (seed capital)

Structures – of funds and of investments.

Why “private”?

Rewards

Exits


12

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

LTD

Members limited liability

No minimum share capital

CANNOT issue securities to public

PLC

Ditto

Minimum share capital ( but not much - £50K)

CAN issue securities to the public

www.english4lawyers.com 13

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Securities - debt securities (obligazioni) and equity securities (azioni).

Debt securities – it’s a loan. The lender should receive interest and principal. (Loan stock, commercial paper, [medium term] notes and bonds.)

Equity securities – it’s not a loan, it’s a contribution to the share capital of the company. Usually, the shareholder /member will get a vote and a dividend.


14

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

In order for a company’s securities to be listed / quoted on a

stock exchange, the company has to be a PLC.

DON’T mix up “securities” and “security”.


15

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Lender and borrower / Bank and customer

Is the bank ready to make an unsecured loan

or will it want security?

An obligor gives / grants security over an item

of property / asset to secure the payment of a

debt or performance of some other obligation.

The obligor is often the borrower but

sometimes it’s a 3rd party such as a parent

company or an independent guarantor.


16

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Different types of security

A mortgage (also known as a charge although technically

they’re different) over……pretty much anything.

Real and personal property, immoveable and moveable,

tangible and intangible.

An aside – what do these terms mean? Examples.


17

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Often civil lawyers will call a security interest a pledge when

common lawyers wouldn’t.

Wording – to grant security over…; to have a security

interest in

Security usually has to be created and often has to be

registered but sometimes occurs “by operation of law”. E.g.

a lien.


18

DIFFERENT TYPES OF

BUSINESS ENTITY –

THE COMPANY

Cf US v UK and other common law uses

US – “lien” has very wide meaning

UK – “lien” refers to a very specific type of security interest, being a passive right to retain but not sell property until the debt or other obligation is discharged.

“retain” - must have possession or control.

E.g. mechanic, repairman, solicitor, warehouseman


19

AN ASIDE (1) –

“EQUITY”

1. Pre 1873 two court systems in parallel – courts of common

law and of equity. The courts of equity gave “fair” results

when “the rigour of the common law” would lead to an unfair

result.

2. Abolished by Supreme Court of Judicature Act 1873.

However, certain “equitable remedies” survive. These

remedies are used when damages do not provide an

adequate remedy. In short, the court says: “do – or don’t do –

something”.

Examples. Injunctions. Orders for Specific Performance.

.


20

AN ASIDE (2) –

“EQUITY”

3. Dictionary meaning. “a situation in which all people are

treated equally and no one has an unfair advantage” [≠

inequity]:

“a society run on the principles of equity and justice”

4. equity as opposed to debt e.g. equity / debt capital

markets.

(The debt capital markets are only part of the debt markets.

The other main part is bank lending.)

5. equities (plural) - shares

6. equity in a project / your house


21

AN ASIDE (3) – “EQUITY”

2001. Buy house for 100. Financed by

a) bank lending of 75 ( “a mortgage loan”) and

b) your savings of 25.

Ratios. Loan to value – 75% . Debt to equity – 3:1

2003. Value of house has fallen to 70. “negative equity”-5.

2009. Sell house for 200. Repay loan - your “equity” is 125.

Increase in value:

-of house = 100%,

-of your equity = 500%.

The effect of “leverage”. Leveraged finance. “Leveraged” comes

from “lever”, the law of levers (Physics).


22

DIFFERENT TYPES OF

BUSINESS ENTITY

Back to Slide 6

Most businesses are companies but could be:

• Sole trader / practitioner, or

• Partnership

• Different types of partnership

a) general. (Partnership Act 1890)

b) limited. (Limited Partnerships Act 1907)

c) limited liability partnership (LLP Act 2000).


23

DIFFERENT TYPES OF

BUSINESS ENTITY

General partnership

Not a separate legal entity

Every partner jointly and severally liable

Limited partnership

Not a separate legal entity

Limited partners not liable, general partner liable without limit i.e. has “unlimited liability”

NB with both types of P, position with being a separate legal entity differs from jurisdiction to jurisdiction


24

DIFFERENT TYPES OF

BUSINESS ENTITY

LLP

Separate legal entity

Partners not liable

Too new for me!

Different things in different jurisdictions.

Law Firms

Traditionally general partnership. Recently, LLP.


25

DIFFERENT TYPES OF

BUSINESS ENTITY

Back to Companies – LIMITED

Can you have UNlimited companies?

Yes but very rare.

How is liability limited? Usually “by shares”- what does this

mean?

Occasionally will be by guarantee. E.g. trade associations,

clubs.


26

DIFFERENT TYPES OF

BUSINESS ENTITY

Is the limit on a shareholder / member’s (mean the same

thing) liability always effective?

Yes……..except “the courts will pierce the corporate veil” in

cases of fraud.

(Veil – wedding dress, some clothes worn by Muslim women)


27

DIFFERENT TYPES OF

BUSINESS ENTITY

A slightly different point is the personal liability of a director

if a co goes into insolvent liquidation in certain

circumstances.

Can lead to a majority shareholder being liable as a “shadow

director”.


28

DIFFERENT TYPES OF

BUSINESS ENTITY

In E&W, virtually all companies have a share capital and to

“own” a company you have to own all the shares in it.

But in some jurisdictions, you own a company by having

“ownership interests” and not shares.


29

DIFFERENT TYPES OF

BUSINESS ENTITY

An aside, the language of a group of companies.

Parent company and subsidiary (over 50%).

Wholly owned subsidiary – 100%

European holding company

Ultimate parent / holding company V intermediate parent /

holding.


30

DIFFERENT TYPES OF

BUSINESS ENTITY

Back to the Certificate

What do you need to do get a Certificate like that?

Putting it another way, how do you set up a company?

I’ll show you – it’s EASY


31

SETTING UP A PRIVATE

LIMITED COMPANY

How easy?

It can be done in a few hours and very cheaply. (Fees £25,

min capital £1).

From scratch or by adapting a shelf company.

Notary? No – used very little in common law countries.


32


LIMITED COMPANY

Let’s do it from scratch – Form IN01 (Application to register

a company)

Memorandum of Association

Articles of Association


33


LIMITED COMPANY

MEMORANDUM of ASSOCIATION

Before Companies Act 2006

Long, complicated objects clause because a company can only do what is has power to do as set out in its objects clause.

Ultra / intra vires

Now

All companies can do anything. They have “unrestricted objects”. Can forget about Memorandum.


34


LIMITED COMPANY

ARTICLES of ASSOCIATION

a company’s constitution ( charter, statutes)

a contract between the company and its members

how the company will make decisions and the articles

include various matters connected with the shares. See later.


35


LIMITED COMPANY

THE OFFICERS

Company Secretary (no longer needed for LTD)

Director (at least one) – service address, residential address

(Position pre 2006 Act with confidentiality orders.)


36


LIMITED COMPANY

SHARES

Look at 2 things – types of shares and the share capital itself

1. Types of shares

A) Normal case

Ordinary shares of £1 each

3 main types of right

• to vote at General Meetings (both Annual and Extraordinary – AGM and EGM). Written resolutions.

• to receive any dividend or other distribution

• to receive any distribution on winding up

Each share has equal rights – pari passu


37


LIMITED COMPANY

B) Special cases

Rights can be changed. For example..

i) Votes

A shares and B shares ( Joint ventures)

Golden shares (after privatisations)

Enhanced rights e.g. 10 votes per share on x) everything or y) particular matters

Non voting shares


38


LIMITED COMPANY

ii) Rights to dividend and other distributions

( extra shares, in specie)

Preference shares

E.g. 3% cumulative redeemable preference shares 2015

An aside – to redeem, redemption

Religious meaning, legal meaning


39


LIMITED COMPANY

2. The share capital itself

Authorised and issued (can be different)

Nominal or par value (means the same)

Previously could be issued nil paid, partly paid, fully paid or

at a premium

(deferred payment, payment in tranches).

Post 2006 Act, can only be issued fully paid.


40


LIMITED COMPANY

The company has an authorised capital of £1,000 divided into

1,000 shares with a par / nominal value of £1 each of which

a) 100 shares have been issued fully paid,

b) 100 shares have been issued partly paid (50p) and

c)100 shares have been issued nil paid.

Above is possible but highly unlikely.


41


LIMITED COMPANY

Hurray!

We’ve done it – we’ve set up a company.

Easy, wasn’t it?

Even though it was easy, we could have made it even easier

by using a

SHELF COMPANY.


42

PAYMENT TERMS – AN

ASIDE – TO BE EXPANDED

Pay in advance – advance payment

Pay a deposit and the balance on completion. ( If don’t complete, buyer may lose the deposit – forfeiture)

COD – cash on delivery

Payment 30/60 days after, say, delivery or date of invoice

Letters of Credit (LCs) in international transactions

Pay in installments (payment “milestones”)

Retain part of the price ( a “retention”) until, say, end of the warranty period

Defer payment (“deferred payment terms”)


43

LET’S LOOK AT THE

MODEL FORM OF

ARTICLES

MODEL ARTICLES FOR PRIVATE COMPANIES LIMITED BY SHARES

INDEX TO THE ARTICLES

PART 1

INTERPRETATION AND LIMITATION OF LIABILITY

1. Defined terms

2. Liability of members

PART 2

DIRECTORS

DIRECTORS’ POWERS AND RESPONSIBILITIES

3. Directors’ general authority

4. Shareholders’ reserve power

5. Directors may delegate

6. Committees


44

THE MODEL FORM OF

ARTICLES

DECISION-MAKING BY DIRECTORS

7. Directors to take decisions collectively

8. Unanimous decisions

9. Calling a directors’ meeting

10. Participation in directors’ meetings

11. Quorum for directors’ meetings

12. Chairing of directors’ meetings

13. Casting vote

14. Conflicts of interest

15. Records of decisions to be kept

16. Directors’ discretion to make further rules


45

THE MODEL FORM OF

ARTICLES

APPOINTMENT OF DIRECTORS

17. Methods of appointing directors

18. Termination of director’s appointment

19. Directors’ remuneration

20. Directors’ expenses

PART 3

SHARES AND DISTRIBUTIONS

SHARES

21. All shares to be fully paid up

22. Powers to issue different classes of share

23. Company not bound by less than absolute interests

24. Share certificates

25. Replacement share certificates

26. Share transfers

27. Transmission of shares

28. Exercise of transmittees’ rights

29. Transmittees bound by prior notices


46

THE MODEL FORM OF

ARTICLES

DIVIDENDS AND OTHER DISTRIBUTIONS

30. Procedure for declaring dividends

31. Payment of dividends and other distributions

32. No interest on distributions

33. Unclaimed distributions

34. Non-cash distributions

35. Waiver of distributions

CAPITALISATION OF PROFITS

36. Authority to capitalise and appropriation of capitalised sums


47

THE MODEL FORM OF

ARTICLES

PART 4

DECISION-MAKING BY SHAREHOLDERS

ORGANISATION OF GENERAL MEETINGS

37. Attendance and speaking at general meetings

38. Quorum for general meetings

39. Chairing general meetings

40. Attendance and speaking by directors and non-shareholders

41. Adjournment

VOTING AT GENERAL MEETINGS

42. Voting: general

43. Errors and disputes

44. Poll votes

45. Content of proxy notices

46. Delivery of proxy notices

47. Amendments to resolutions


48

THE MODEL FORM OF

ARTICLES

PART 5

ADMINISTRATIVE ARRANGEMENTS

48. Means of communication to be used

49. Company seals

50. No right to inspect accounts and other records

51. Provision for employees on cessation of business

DIRECTORS’ INDEMNITY AND INSURANCE

52. Indemnity

53. Insurance


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“DIFFERENT TYPES OF FINANCE

AND SECURITY INTEREST”. TO BE

EXPANDED

Already covered a lot in passing.

Why it’s important even if you’re not a finance lawyer.

Bankability

Secured / unsecured

Specific purpose or for general corporate purposes

Key terms of facility agreements – cps, reps and warranties,

covenants, events of default


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BUSINESS AND FINANCE - English 4 Lawyers€¦ · · 2011-01-16BUSINESS AND FINANCE BUSINESS and...

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Transcript of BUSINESS AND FINANCE - English 4 Lawyers€¦ · · 2011-01-16BUSINESS AND FINANCE BUSINESS and...