United Kingdom Corporate Law

Sources of Corporate Law

The principal source of English corporate law is the Companies Act 2006, the longest Act of Parliament in British legislative history, which consolidated and modernised earlier legislation including the Companies Acts 1985 and 1989. The Act is supplemented by secondary legislation, including the Companies (Model Articles) Regulations 2008, the Small Companies and Groups (Accounts and Directors’ Report) Regulations, and the Insolvency Act 1986. The common law, particularly the equitable principles governing fiduciary duties, remains relevant to the interpretation of directors’ obligations. The United Kingdom Supreme Court and the Court of Appeal of England and Wales provide authoritative judicial guidance on corporate law matters.

Formation of a Company

A company is formed by registration under Part 2 of the Companies Act 2006. The application for registration must include the memorandum of association, the articles of association, a statement of capital and initial shareholdings, a statement of the company’s proposed officers, and a statement of compliance. The memorandum of association is a brief document confirming the subscribers’ intention to form a company and to become members. The articles of association constitute the company’s constitutional document, regulating the internal affairs of the company. Upon registration, the Registrar of Companies issues a certificate of incorporation, which is conclusive evidence of compliance with registration requirements.

The Companies Act 2006 distinguishes between public limited companies (plc), which may offer shares to the public and must have a minimum share capital of £50,000, and private limited companies (Ltd), which are prohibited from offering shares to the public. A private company need not have a minimum share capital. The limited liability partnership (LLP), governed by the Limited Liability Partnerships Act 2000, combines the organisational flexibility of a partnership with limited liability. LLPs are separate legal entities and must be registered at Companies House.

The Corporate Constitution

The articles of association are the primary constitutional document. The Companies Act 2006 provides model articles for private companies limited by shares, private companies limited by guarantee, and public companies. Companies may adopt the model articles in whole or in part, or may draft bespoke articles. Section 33 of the Act provides that the articles have contractual effect, binding the company and its members as if they had been signed and sealed. The articles may be entrenched, requiring a higher than default majority for amendment. The company’s name is subject to statutory restrictions, including prohibitions on names suggesting connection with government or local authorities. Every company must have a registered office in the jurisdiction of its incorporation.

Share Capital

The allotment of shares is governed by Part 17 of the Companies Act 2006. Directors may allot shares only if authorised by the articles or by ordinary resolution of the shareholders under section 551. Pre-emption rights under section 561 require that shares offered for cash must first be offered to existing shareholders in proportion to their holdings. Shares may be paid for in cash or in kind, and the directors must ensure that the consideration is adequate. The maintenance of capital doctrine restricts the return of capital to shareholders. Sections 677 to 683 prohibit a company from giving financial assistance for the acquisition of its own shares, subject to exceptions for private companies. The reduction of capital under sections 641 to 653 requires shareholder approval by special resolution and court confirmation, or, for private companies, a solvency statement. Companies may purchase their own shares subject to authorisation by the articles and compliance with procedural requirements. Distributions of dividends are governed by sections 829 to 853, which require that distributions be made only out of distributable profits, defined as accumulated realised profits less accumulated realised losses.

Corporate Governance

The division of powers between the board of directors and the general meeting is determined by the articles of association. Under the model articles, directors exercise all powers of the company subject to the articles and any directions given by special resolution. Directors’ duties are codified in sections 170 to 181 of the Companies Act 2006, representing the first statutory codification of fiduciary duties in the Commonwealth. Section 171 requires directors to act within the company’s constitution. Section 172, the duty to promote the success of the company, embodies the principle of enlightened shareholder value, requiring directors to have regard to the likely consequences of decisions in the long term, the interests of employees, the need to foster business relationships, the impact on the community and environment, the desirability of maintaining a reputation for high standards of business conduct, and the need to act fairly as between members. Section 173 requires directors to exercise independent judgment. Section 174 imposes a duty of reasonable care, skill, and diligence, measured by reference to both the knowledge, skill, and experience reasonably expected of a person carrying out the director’s functions and the director’s own knowledge, skill, and experience. Section 175 prohibits directors from exploiting any property, information, or opportunity belonging to the company. Section 176 prohibits directors from accepting benefits from third parties. Section 177 requires directors to declare interests in proposed transactions.

Derivative Claim

Part 11 of the Companies Act 2006 introduced a statutory derivative claim, replacing the common law exceptions to the rule in Foss v Harbottle. Sections 260 to 264 permit a member of a company to bring proceedings on behalf of the company in respect of a cause of action arising from the breach of a director’s duty. The court must grant permission for the claim to proceed, applying criteria including whether a person acting in accordance with section 172 would seek to continue the claim and whether the member is acting in good faith.

Company Secretary and Accounts

Every public company must appoint a company secretary with the requisite knowledge and experience. Private companies are not required to appoint a secretary. Companies must prepare annual accounts in accordance with applicable accounting standards, and must file accounts with the Registrar of Companies. Public companies and large private companies must have their accounts audited. Companies House, the registrar of companies, maintains the public register of company information.

Winding Up and Insolvency

The winding up of a company may be voluntary or compulsory. Members’ voluntary liquidation occurs where the directors have made a statutory declaration of solvency. Creditors’ voluntary liquidation occurs where the company is insolvent, and creditors supervise the liquidation. Compulsory liquidation is ordered by the court upon a petition presented by creditors, shareholders, or the Secretary of State. The liquidator collects and realises the company’s assets, distributes proceeds to creditors in the statutory order, and applies to the court for dissolution. Section 214 of the Insolvency Act 1986 imposes liability for wrongful trading on directors who knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step to minimise losses to creditors. Transactions at an undervalue and preferences may be challenged by the liquidator under sections 238 and 239 of the Insolvency Act 1986.