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Company Law, 2nd Edition (Longman Law Series) PDF

485 Pages·2005·3.9 MB·English
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0582894182_Cover(Pettet) 4/2/05 9:52 am Page 1 LONGMAN LAW SERIES LONGMAN LAW Company Law Company Law SERIES second edition second edition Ben Pettet Ben Pettet Editorial Advisory Board C Professor I.H. Dennis (University College London) Professor J.A. Usher (University of Exeter) o The second edition of this popular book on company law combines theoretical and m jurisprudential issues with an up-to-date account of legal developments across the field of company law. The author demonstrates that the needs of shareholders in companies p which have dispersed ownership of shares cannot be properly understood without an analysis of the law relating to securities regulation and capital markets. a Company Lawis arranged in six sections: Foundation and Theory; The Constitution of the n Company; Corporate Governance; Corporate Finance Law; Securities Regulation; y Insolvency and Liquidation. Strong coverage of theory and policy is provided, together with analysis of core legal problems at an appropriate depth for modular courses. The role s e of self-regulation is examined in some depth and discussion of law reform in the shape of c L o the DTI's Company Law Review is included. n d a e fTehaetruer eiss arelsgou laa rc uopmdpaatensio tno wtheeb slaitwe fsoor tthhaet bleocotku raetr sw awnwd .spteuadresnotns ewdi.lcl roe.muka/ipn eutpte tto, wdahticeh ditio w n with new legislative and case developments. New to this edition • Inclusion of the EC Directive on Takeover Bids • Major changes brought about by the Enterprise Act 2002 • Standard Chartered Bankv Pakistan National Shipping Corporation 2002and other important case law developments B • Details of the EC Financial Services Action Plan legislation e • Coverage of the Companies (Audit, Investigation and Community Enterprise) Act 2004 n P Company Lawis essential reading for LL.B. courses in universities and also covers the e requirements of the University of London (External) LL.B. The book offers excellent t t foundation reading for postgraduate LL.M.s in company and capital markets law and is an e t excellent critical survey of a dynamic field of law for students qualifying professionally in the fields of accounting, finance and company secretaryship. Ben PettetLL.B., Barrister, is Professor of Company and Capital Markets Law, University College London. He is a well-known researcher and writer in the field of company law. C o v e r im a g e © P h o Free updates for this book at to n ic www.pearsoned.co.uk/pettet www.pearson-books.com a COMPANY LAW LONGMAN LAW SERIES GENERAL EDITORS PROFESSOR I.H. DENNIS, University College London PROFESSOR J.A. USHER, University of Exeter PUBLISHED TITLES ERIC BARENDT AND LESLEY HITCHENS, Media Law: Cases and Materials R. HALSON, Contract Law JONATHAN HERRING, Family Law NICHOLAS J. MCBRIDE AND RODERICK BAGSHAW, Tort Law BEN PETTET, Company Law ROGER J. SMITH, Property Law ROGER J. SMITH, Property Law: Cases and Materials MAURICE SUNKIN AND ANDREW LE SUEUR, Public Law MARTIN WASIK, THOMAS GIBBONS AND MIKE REDMAYNE, Criminal Justice: Text and Materials WILLIAM WILSON, Criminal Law: Doctrine and Theory Visit the Company Law, second edition Companion Website at www.pearsoned.co.uk/pettet to find regular updates in the field of Company Law COMPANY LAW SECOND EDITION BEN PETTET Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2001 Second edition published 2005 © Pearson Education Limited, 2001, 2005 The right of Ben Pettet to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. ISBN-13: 978-0-582-89418-1 ISBN-10: 0-582-89418-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Pettet, B. G. Company law / Ben Pettet.––2nd ed. p. cm.––(Longman law series) Includes index. ISBN 0-582-89418-2 1. Corporation law––Great Britain. I. Title. II. Series. KD2079.P48 2005 346.41′066––dc22 2005043015 10 9 8 7 6 5 4 3 10 09 08 07 06 Typeset in 10/12pt Plantin by 3 Printed in Great Britain by Henry Ling Ltd., at the Dorset Press, Dorchester, Dorset. The publisher’s policy is to use paper manufactured from sustainable forests. CONTENTS Prefaces xv Acknowledgements xviii Table of cases xvix Table of statutes xxx Table of statutory instruments xli Tables of European legislation xliii 1 Treaties and conventions xliii 2 Secondary legislation xliii PART I FOUNDATION AND THEORY 1 1 THE NATURE OF COMPANY LAW 3 1.1 Preliminary 3 1.2 Rationale, abstract and agenda 4 1.3 Scope of this work 8 1.4 The genesis of company law 9 1.5 The present companies legislation 10 1.6 European community legislation 11 A The harmonisation programme 11 B The Company Law Programme: UK Implementation 11 C The EC Commission’s Company Law Action Plan 13 1.7 Company law, corporate law or corporations law? 14 1.8 Focus – the main business vehicle 15 A Company limited by shares 15 B Public or private 15 C Small closely-held and dispersed-ownership companies 16 D The Company Law Review and law reform 17 1.9 Other business vehicles 18 A Other types of companies 18 B Other organisations and bodies 20 C Partnerships 20 2 CORPORATE ENTITY, LIMITED LIABILITY AND INCORPORATION 23 2.1 Corporate entity 23 A The ‘Salomon’ doctrine 23 B Piercing the corporate veil 24 C Corporate liability for torts and crimes 28 2.2 Limited liability 31 A The meaning of limited liability 31 B The continuing debate about the desirability of limited liability 31 C Fraudulent trading and wrongful trading 33 v Contents 2.3 Groups of companies 37 2.4 Incorporation 39 A Formal requirements 39 B Certificate of incorporation 42 C Publicity and the continuing role of the Registrar 43 D Promoters and pre-incorporation contracts 44 E Right of establishment 46 2.5 Company Law Review and law reform 46 3 LEGAL THEORY AND COMPANY LAW 47 3.1 The role of theory in company law 47 3.2 The nature and origins of the corporation 48 A The theories 48 B Rationale and application of the theories 49 3.3 Managerialism 50 3.4 Corporate governance 53 A Alignment 53 B The Cadbury Report and self-regulation 54 C Global convergence in corporate governance 55 3.5 Stakeholder company law 58 A Social responsibility 58 B Industrial democracy 60 C Stakeholder company law 61 D The Company Law Review and stakeholders 64 3.6 Law and economics 66 A Efficiency as a moral value 66 B The theory of the firm 67 3.7 Future issues 75 4 CURRENT REFORM MECHANISMS 77 4.1 Modern company law 77 4.2 The agencies of company law reform 77 A Department of Trade and Industry 77 B The Law Commission 80 C City and institutional input 80 D Academics 81 E European Commission 81 4.3 The 1998 Review 81 A Structure 81 B Guiding principles 82 C Swift progress 82 D The Final Report and subsequent developments 83 E Treatment in this book 84 PART II THE CONSTITUTION OF THE COMPANY 85 5 ENTRENCHMENT OF RIGHTS 87 5.1 Entrenchment of expectation versus flexibility 87 vi Contents 5.2 Memorandum of association 87 5.3 Articles of association 88 5.4 Shareholder agreements 94 5.5 Changing the constitution and reconstruction 97 A Introduction 97 B Contract 98 C Alteration of articles 98 D Alteration of the memorandum 100 E Variation of class rights 101 F Compromises and arrangements under s. 425 106 G Other methods of reconstruction 110 5.6 Company Law Review and law reform 111 6 ORGANISATION OF FUNCTIONS AND CORPORATE POWERS 112 6.1 Introduction 112 6.2 The institutions of the company: the board and the shareholders 112 6.3 The ultra vires doctrine 114 A Introduction 114 B Reform of the rule – an overview 115 C Underlying complications – objects and powers 116 D Shareholder intervention 121 E The current legislation – background matters 121 F Core provisions of the legislation 123 G Ratification 127 H Pulling it together 127 I An alternative approach 129 6.4 Company Law Review and law reform 130 7 RELATIONS WITH THIRD PARTIES: AGENCY AND CONSTITUTIONAL LIMITATIONS 131 7.1 Contractual relations with third parties 131 7.2 Agency 131 7.3 The Turquand doctrine 134 7.4 The ‘relationsh ip’ between Turquand and agency 135 7.5 Sections 35A and 35B 138 7.6 Company Law Review and law reform 142 PART III CORPORATE GOVERNANCE 143 8 THE GOVERNANCE PROBLEM AND THE MECHANISMS OF MEETINGS 145 8.1 Alignment of managerial and shareholder interests 145 8.2 The role and functioning of the board of directors 146 A Directors as managers and ‘alter ego’ 146 B Appointment and retirement of directors 147 vii Contents C Proceedings at directors’ meetings 148 D Remuneration of directors 149 8.3 The role and functioning of the shareholders in general meeting 151 A The general meeting as the residual authority of the company 151 B Resolutions at meetings 152 C The shareholders’ general meetings 152 D Convening of meetings and notice 153 E Shareholder independence – meetings and resolutions 154 F Procedure at meetings 155 8.4 Problems with the meeting concept 157 8.5 Meetings in small closely-held companies 158 8.6 Company Law Review and law reform 159 9 DUTIES OF DIRECTORS 160 9.1 Introduction 160 9.2 Common law duties of care and skill 161 9.3 Fiduciary duties 164 A The scope of the duty of good faith 164 B The no-conflicts rule 166 C Duty in respect of employees 176 9.4 Relief for directors 176 A Ought to be excused 176 B Exemption and insurance 176 9.5 Duty not to commit an unfair prejudice 177 9.6 Company Law Review and law reform 178 10 OTHER LEGAL CONSTRAINTS ON DIRECTORS’ POWERS 179 10.1 Constraints on directors’ powers 179 10.2 Statutory controls affecting directors 179 A Introduction 179 B Part X enforcement of fair dealing 179 C Controls over issue of shares 181 D Statutory provisions in terrorem 182 10.3 Monitoring of directors 184 A Introduction 184 B The policy of disclosure of the financial affairs of the company 185 C Accounts and reports 185 D Publicity 188 E Non-statutory reports 188 F The role of the auditors 189 G Company secretary 190 H Government and other agencies 191 10.4 Conclusions 192 10.5 Company Law Review and law reform 193 viii Contents 11 ROLE OF SELF-REGULATION 194 11.1 Reliance on self-regulation 194 11.2 Techniques of Cadbury 196 A Different approaches 196 B Structural and functional alterations 196 C Assumptions of responsibility 197 D Enhanced quality of disclosure 197 11.3 The Greenbury Report 198 11.4 The Hampel Report: evolution of the Combined Code 1998 198 11.5 The Higgs Review and the Combined Code 2003 199 11.6 The Combined Code 2003 201 A Listing Rules compliance statements 201 B Excerpts and summary of the main provisions 202 11.7 The ‘profession’ of director? 209 11.8 Conclusions 210 11.9 Company Law Review and law reform 210 12 SHAREHOLDER LITIGATION: COMMON LAW 212 12.1 Introduction: shareholder litigation generally 212 12.2 The doctrine of Foss v Harbottle 213 12.3 The principle of majority rule 214 12.4 The ‘exceptions’ to Foss v Harbottle 215 12.5 Meaning of ‘fraud on a minority’ 217 12.6 The striking out of derivative actions 219 A Introduction 219 B Types of action and costs 219 C Striking out derivative actions 221 12.7 The Breckland problem 226 12.8 Company Law Review and law reform 228 A The work of the Law Commission 228 B Company Law Review and law reform 229 13 SHAREHOLDER LITIGATION: STATUTE 231 13.1 Winding up 231 13.2 Unfair prejudic e 232 A The alternative remedy failure 232 B Unfair prejudice 233 PART IV CORPORATE FINANCE LAW 251 14 TECHNIQUES OF CORPORATE FINANCE 253 14.1 Some basic concepts of corporate finance 253 A Assets and capital 253 B The aims of the company 254 C Cash flows and capital raising 254 14.2 Financing the company 255 A Initial finance 255 ix

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