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UK Company Formation Law Guide

(England & Wales and Scotland)

An Overview of UK Company Formation Law and the consequences of the Companies Act, 2006

The principal governing legislation for all English & Welsh/Scottish companies can be found in the Companies Act 2006. This legislation was introduced to create a more corporate friendly environment for small to medium sized businesses and in most cases will make it more understandable for the non-professional to run and operate their business.

The ‘key’ changes introduced under the 2006 Companies Act are:

  • Directors can avail of Serviced Address providers to provide a contact address for themselves and need no longer provide their personal address details as was previously the case under the Companies Act 1985. Most company formation agents will provide 'serviced address' services
  • Private limited companies shall have more simple 'model' articles of association
  • The traditional listing of a company's objects within the memorandum of association shall be simplified to allow any and/or all legal non-prescribed activities
  • All companies must have at least one natural person as its director
  • Directors must have at least attained the age of 16
  • Directors duties have been codified by statute and will no longer require complicated case law reference
  • Small companies now have a separate, comprehensive 'code' of accounting and reporting
  • It is no longer necessary for a small company to have a company secretary
  • Annual general meetings (AGM's) are no longer compulsory
  • Small companies shall be freed from the complicated rules pertaining to the issuance, capitalization, preference format or otherwise of shares
  • Small companies shall be freed from the complicated rules pertaining to the issuance, capitalization, preference format or otherwise of shares
  • More administrative changes can be electronically submitted

General Company Formation Law and Information

1. Directors can be either individuals or corporate entities. However, from 1 October 2008, every company must have at least one director who is a "natural person", not a corporate entity.

2. A minimum of two people are required to make a company (usually one Director and one Secretary).

3. There are no residency or nationality restrictions for directors

4. A company secretary can be either an individual or company and may or may not be resident in the UK.

5. All companies must have at least one subscriber/shareholder at the time of incorporation

6. All companies must have a registered office address within either England or Wales (One jurisdiction legally) or Scotland.

7. A company submitting its annual return must be very specific about its objects and chose from a list provided from the Standard Industrial Classification (SIC) Code.

8. Since 1989 UK companies have not legally required a seal to give effect to their contracts and legal documents etc. However, seals are still very popular since their use is clear evidence that a company intends to bind itself.

9. The UK does not impose any duty on initially issued or allotted share capital although subsequent transfers should be verified by a stock transfer form (CF40) and stamped by the Stamping Office.

12. Shares should denominated in any currency but Pounds Sterling and Euros are the most popular.

Duties, Responsibilities & Common Terms Explained

Directors:

UK companies require at least one individual (i.e. non-corporate body) over the age of 16 to act in the capacity of a director. In simple terms, the director/s constitute the decision making body of a company commonly known as the board of directors (even when there is only one) and is/are liable at law for a company's actions. The director/s have a duty of care to the shareholder(s) of the company to act in the company's best interests even where doing so might come into conflict with their own personal interests.

The concept of a company being a fully separate legal entity to the director/s is accepted in English & Welsh and Scottish law save where they have acted in a fraudulent and/or reckless manner which could not be deemed reasonable by normal standards - In which case, the corporate "veil" can be lifted fully exposing the individuals behind a company to the full rigors of both civil and criminal law. However, in the vast majority of cases this will not occur provided the board of directors have acted in good faith even if their decisions have negative consequences for the company.

The Secretary:

There is no longer a legal requirement to appoint a company secretary. However, companies with only one director will often require a second signature on legal documentation. If a company secretary is not appointed, this documentation will need to be signed by an appointed witness.

The issuance of Shares and Share Capital since the 2006 Companies Act:

One of the most important changes introduced under the 2006 Act was the simplification of the issuance of shares - Historically, the UK had a very convoluted system of nominal and issued shares (ordinary or preference - see below) but this has now been changed in favour of a non-par value system very similar to that employed in the United States. The basic consequences are:

Companies no longer have to decide the total authorised share capital they wish to create. You simply issue the number of shares you need at the time of incorporation and can then issue a further uncapped amount at a later date subject to any restrictions imposed by the Articles of Association for your company.'

'What is "authorised share capital"?

This term no longer applies to companies registered after 01 October 2009. Prior to this date companies would declare an authorised or nominal share capital, which is the maximum value of shares that can be distributed to existing or potential investors. Or, the amount of share capital stated in the memorandum of association is the company's 'authorised' or 'nominal' share capital. It is the total share capital available to the company.

From 01 October 2009 companies no longer have a capped share capital. They simply issue what is required at the time of incorporation and can then issue further shares at a later date with no capped maximum (subject to the approval of existing shareholders who may have prescribed rights).

Types of Shares available:

In general there are two types of shares "ordinary" and "preference". Preference shares as the name suggests provide a benefit over and above those available to those holding ordinary shares. In most cases, the preference will relate to either voting rights and/or payment of company dividends depending on the provisions of the Articles of Association (if non-standard).

Memorandum & Articles of Association:

The Memorandum of Association of a company aims to set out what the company may do which traditionally was very extensive to allow for future flexibility. However, with the recent introduction of Standard Industrial Classification (SIC) Codes it now seems that the flexibility hitherto enjoyed by English & Welsh companies may be indirectly compromised.

Annual & Extraordinary General Meetings:

These are meetings that need no longer be held by most small companies but when there are non-director shareholders the shareholders may still wish to review the performance of the board of directors or assist them take major decisions. In simple terms, companies have Annual General Meetings (AGMs) to review such things as a company's annual accounts and related matters. Extraordinary General Meetings (EGMs) as the name suggests, can be called at any time of the year when there is a matter of sufficient gravity. It should be remembered that at all times the ultimate control will vest in the shareholders but unless they/it is/are the same as the directors day to day executive decisions remain the domain of the board of directors.

"Special" and "Ordinary" resolutions:

All companies are bound by their Memorandum & Articles of Association, and under the 2006 Companies Act far more decisions can now be taken by resolution. However, where it is deemed desirable changes can be made and/or meetings called by the shareholder(s) provided the applicable majority exists. In the case, of "ordinary" resolutions, which generally deal with day to day and/or matters of lesser importance, a simple majority is all that is normally required. In the case of "special" resolutions, which tend to deal with structural and matters of greater importance, majorities of either two thirds or three quarters are the norm.

The Registered Office Address (ROA):

This is the address where a company is officially located and where all service of process/official documents should be received. It does not have to be the address where the business is actually carried out and in is fact very often the address of a company's solicitor/accountant or company registration agent. Who provides your registered office address is very important since they will receive all documents from the Inland Revenue, Customs & Excise and Companies House in Cardiff and should be capable of advising and or dealing with such official correspondence. In addition, a copy of a company's official books must always be kept at the ROA for the benefit of both shareholders and other interested parties. Finally, the ROA is where all documents relating to a legal action should first be submitted.

Powers of attorney (POA):

Powers of attorney are documents granted by the board of directors in favour of third parties, known as attorneys-in-fact, in order to allow them to carry out functions deemed desirable by the board of directors. In general terms there are two main types of attorney, a General Power of Attorney (GP0A) and a Special Power of Attorney (SPOA). The first can give a wide range of powers to an attorney-in-fact whilst the second, tends to be very specific and time delimited. When looking at any POA it must always be remembered that no matter what terminology may be used in the document (i.e. such as irrevocable) all POA's General or Specific can be cancelled/abrogated at any point in time by the grantors, the board of directors.