A legal guide to investing in the UK for foreign investors

Transcription

1 A legal guide to investing in the UK for foreign investors July fourth edition

2 Introduction The UK has successfully retained its leadership position in Europe for inward investment. The UK s financial and professional services and the strength of London remain a powerful draw and it is still the most attractive destination for Foreign Direct Investment (FDI) into Europe. Britain attracted 728 foreign direct investment projects in the UK in 2010, 7% higher than in This compared to 562 projects in France and 560 in Germany. 1 Initially, the legal system in the United Kingdom, the way in which investment in companies is made, the restrictions on acquiring businesses in the UK and the rules on money laundering, financial services, employment, tax law and other areas, can be difficult to understand. We hope that you will find this Herbert Smith guide useful in explaining the key legal issues affecting your planned or existing investment in the UK. It aims to explain those legal areas to the overseas investor and act as a glossary or step by step guide for the reader. It is very much an introduction to the subject and is not intended to be a comprehensive guide to all legal issues. English law, like all legal systems, is subject to regular change. What you read here reflects the law at the date we published this guide. We intend to update the guide periodically, but please be careful to check with us, before relying on it, that the law as stated here is still in force. We would welcome the opportunity to discuss any of these issues with you. Please feel free to get in touch with your usual Herbert Smith contact or one of the partners named overleaf. Herbert Smith LLP July 2012 Fourth Edition 1 Source: UK Trade & Investment (the government department responsible for attracting inward investment to the UK) press release of 31 May 2011 citing Ernst & Young s European Attractiveness Survey of

3 Herbert Smith LLP A Legal guide to investing in the UK for Chinese investors Herbert Smith LLP Herbert Smith LLP is a leading international legal practice with over 1,500 lawyers based in its offices in Europe, the Middle East and Asia. We are committed to providing high quality and innovative legal services to corporations, governments, financial institutions and all types of commercial organisations. The firm advises on corporate law, dispute resolution, banking and finance, energy and projects, and offers a full range of specialist services including investment funds, regulatory, construction, insurance, tax, intellectual property and information technology. London office: Exchange House Primrose Street London EC2A 2HS Contacts Corporate London Patrick Mitchell T patrick.mitchell@herbertsmith.com James Palmer T james.palmer@herbertsmith.com Litigation London Sonya Leydecker T sonya.leydecker@herbertsmith.com Finance London Malcolm Hitching T malcolm.hitching@herbertsmith.com EC/Competition London James Quinney T james.quinney@herbertsmith.com Employment London Peter Frost T peter.frost@herbertsmith.com Tax London Bradley Phillips T bradley.phillips@herbertsmith.com Intellectual Property London Mark Shillito T mark.shillito@herbertsmith.com Financial Services Regulation London Martyn Hopper T martyn.hopper@herbertsmith.com Real Estate London Ian Cox T ian.cox@herbertsmith.com Legal Knowledge London Richard King T richard.king@herbertsmith.com Simone Pearlman T simone.pearlman@herbertsmith.com Business Development London Matthew Fuller T matthew.fuller@herbertsmith.com

4 Herbert Smith LLP A Legal guide to investing in the UK for Chinese investors Editor Simone Pearlman T simone.pearlman@herbertsmith.com Defined terms: See Appendix of Abbreviations at the end of this guide. With thanks to the large team of partners, professional support lawyers and associates who have made this publication possible. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith LLP 2012

5 Herbert Smith LLP A Legal guide to investing in the UK for Chinese investors Contents 1. Introduction to the English legal system 1 2. Foreign investment restrictions 3 3. Regulations and procedures of English companies basic company law 5 4. The differences between a private company and a public company Acquisitions of private companies Takeovers of public companies Restrictions on acquiring regulated businesses Financial services regulation Raising finance Competition law Merger control Employees Tax Intellectual property Commercial agreements E-commerce Privacy and data protection Product safety and liability Money laundering Litigation Arbitration Alternative dispute resolution Acquiring and investing in property 101

6 Herbert Smith LLP A Legal guide to investing in the UK for Chinese investors 1. Introduction to the English legal system The following is a brief overview of the English legal system which is historically derived from what is known as the common law. The legal system (civil law, common law or a mixture of both) Scotland, England and Wales, and Northern Ireland are largely separate jurisdictions for legal purposes. Scotland has a mixed common law and civil law system whereas England and Wales and Northern Ireland have a common law system. Sources of English law The rules governing civil and criminal law have evolved from three sources: Legislation which includes statutes/acts of Parliament. Legislation is approved by the Queen before it becomes law. Common law made by judges. It has evolved over centuries from the judgment of cases appearing before the courts. These judgments set precedents against which future cases are judged. For example, murder is a common law offence and theft is an offence under the Theft Act (statute). There are also specialist tribunals (for example, for tax) but decisions of tribunals are not generally binding on other tribunals so have limited precedential value. They prove useful for understanding how the law may be interpreted. European Community law which is binding in all UK legal systems. The interpretation of legislation made by Parliament is for the courts when they hear cases. When conflicts arise between common law and legislation, these are dealt with by the courts, with legislation taking priority over case law. Parliament is held to be sovereign. Where EC law conflicts with national law, the UK courts are required to apply the EC law or to interpret national law to fit in with EC law. Judges may interfere with the decisions of the Executive, that is, with the decisions of Ministers, many regulators and official bodies that are empowered to make administrative decisions. This is typically on the basis that those administrative or government agencies have failed to exercise their discretion or decision-making power appropriately or reasonably or in accordance with their own protocols or operating principles. This is known as the principle of judicial review. Judges therefore maintain a great deal of influence on the balance of power in the English legal system. The basic differences between civil law and common law The English legal system is based on the common law. The legal systems of other European countries are based on Civil Codes books defining what can and cannot be done. 1

7 The differences between practising in a civil or a common law system are huge, affecting not only the ways that laws are made but the way in which lawyers think and the make up of the personnel within the courts. For example in the common law system, English judges in a very real sense make the law on the job: they interpret and apply, usually relying closely on established precedent (the principles laid down in older cases), but in doing so they create the law. On the other hand, within the civil law system, codes are typically constructed and commented upon by panels of legal scientists or academics, whose work is crafted to a great design, with detail flowing naturally from basic principles. The role of the judges in a codified system is then to apply and interpret the handiwork of the great codifiers. One important difference that results is the principle of freedom of contract. While there are some legislative provisions and principles of case law restricting what parties can and cannot put into contracts, essentially English law allows parties to a contract to write their own terms and conditions. The agreement that results is a matter for their negotiation and reflects the individual circumstances of their transaction. This gives great flexibility to parties in writing and concluding commercial contracts when relying on English law. Legal principles developed by the English judges over centuries determine how certain phrases and clauses should be interpreted in English law, and draftsmen must be careful to take these into account when preparing contracts. But the essential point is that no party has to start from a fixed template or prescribed set of terms when seeking to conclude a commercial deal or transaction under English law. The material in this guide relates only to the laws of England and Wales unless otherwise stated. 2

8 2. Foreign investment restrictions Most foreign investment into the UK is not regulated. However, authorisation is required for investment in sensitive areas, such as defence, and regulated areas, such as banking, media and financial services. These are covered in more detail in Chapter 7 below. Foreign investors should be aware of EC competition law rules and sector-specific policies. Some reference is made to these in Chapter 10 below. Exchange control or currency regulations In the UK, there are no exchange control or currency regulations affecting inward or outward investment, the repatriation of income or capital, the holding of currency accounts or the settlement of currency trading transactions. However, there are separate restrictions relating to the provision of funds/dealing with the assets of sanctioned individuals and entities (ie financial and trade sanctions, for example, which can either be regime specific and designate specific individuals and entities, or non-regime specific ie designations of individuals and entities relating to terrorism and specific terrorist organisations). Types of business vehicles Partnership Partnerships are defined but they have no separate legal personality. A partnership is unable to contract in its own name and therefore it is individual partners who enter into contracts jointly. This means that if a partnership becomes insolvent, the creditors are entitled to satisfy debts owed to them by enforcement against the personal assets of each of the partners themselves; partners have unlimited personal liability. For tax purposes, a partnership is transparent which means that, broadly speaking, the activities of the partnership are treated as carried on by the members and not the partnership itself. Accordingly, the partnership as a whole does not pay tax, the partners are taxed separately on their share of the profits and losses of the partnership as though each partner was carrying on a separate trade. Limited liability partnership (LLP) An LLP has the flexibility of a partnership with the added advantage of limited liability for its members. Legally, an LLP is a separate legal entity from its members and can contract in its own name. For tax purposes, it is treated as a partnership. It has to comply with company, rather than partnership, law. Company A company is an artificial legal person with a separate legal identity from that of its owners/shareholders. The company may therefore enter into contracts in its own right. If the company becomes insolvent it will be wound up and any assets divided amongst the creditors but creditors are not able to access the assets of the shareholders. A company can have another company (or companies) as its shareholder(s) and therefore may fall to be treated as its shareholder company s subsidiary. There are different types of companies, which are explored further in Chapters 3 and 4. The most common form of corporate vehicle established by foreign companies in the UK is a private limited liability company. For tax purposes, companies are treated as opaque which means they are taxed separately from their shareholders. 3

9 Joint venture A joint venture is a collaborative commercial arrangement between two or more parties to work towards a common business goal. It is not strictly a business vehicle as it can be structured in different ways as a company, partnership or through a simple contractual arrangement. Branch A branch is not a company but is an operation of an overseas company in the UK. It cannot contract in its own name but rather acts as agent for its overseas company. A branch (or a place of business, both a UK establishment for the purposes of the Companies Act 2006) must file certain details with the Registrar of Companies in England and Wales. Significant tax consequences may flow from the decision to use a partnership, LLP, company or joint venture or branch (permanent establishment) and early advice should always be sought. A business may be located anywhere in the UK, provided that necessary building permits and planning consents are obtained (see Chapter 23 below). 4

10 3. Regulations and procedures of English companies basic company law The nature of a company A company is a distinct legal entity, separate from its shareholders (or members), directors and employees, which can own property, enter into contracts and sue and be sued in its own name. However, it has no physical corpus. It must operate through others, principally the shareholders as a body and the board of directors. The legal framework The rules governing the operation of a company incorporated in England and Wales are to be found in the following principal sources: Companies Act 2006 The UK company law regime is set out in the Companies Act 2006 (the 2006 Act). The 2006 Act has been fully in force since 1 October It replaces the Companies Act It should be noted that for companies incorporated prior to 1 October 2009, there are some transitional provisions which mean that the 2006 Act applies in a different way to those companies. This summary focuses on UK company law as it applies to companies incorporated after 1 October 2009 and does not cover the transitional provisions for companies incorporated before that date. Insolvency Act 1986 This Act contains provisions relating to the insolvency and winding up of companies. Common law Parts of the law relating to English companies has no statutory basis but has been established by judges through case law. This body of case law is known as the common law. Financial services law The Financial Services and Markets Act 2000 (FSMA) sets out the UK regime for financial services and securities law. In particular, there are restrictions on offering or promoting securities and companies need to produce a prospectus when they offer their shares to the public (subject to certain exceptions). See Chapter 4 for further details. In addition, companies whose shares are traded on the Official List will need to comply with the Listing, Prospectus, Disclosure and Transparency Rules issued by the Financial Services Authority (the FSA). These govern the requirements for admission to listing, the continuing obligations of listed companies and the obligation to prepare, and the contents of, a prospectus on admission of securities to trading. For companies admitted to AIM (the Alternative Investment Market), the equivalent requirements are set out in the AIM Rules for Companies, issued by the London Stock Exchange. All companies whose shares are traded on a stock exchange will also need to comply with the rules of the relevant exchange. 5

11 Types of companies Five types of companies can be formed and registered in England and Wales: Private companies limited by shares This is the most common type of company. The phrase limited by shares means that the liability of the shareholders of the company in the event of the company going into liquidation and being unable to pay its debts is limited to the extent of payment of the nominal value of the shares issued to those shareholders. Public companies limited by shares Only public companies are authorised to offer securities to the public a private company cannot do so. See Chapter 4 below for the main differences between public and private companies. Private companies limited by guarantee and not having a share capital These are not common they are normally non-profit making organisations. Private unlimited companies These companies do not have any limit on the members liability to contribute to the company s assets in the event of the company going into liquidation and being unable to pay its debts. They are therefore not used very often. Societas Europaea (SE)/European Company It is also possible to form a public limited liability company called the Societas Europaea, known as the SE (or European Company). The SE can be used by companies or groups with operations in more than one Member State of the EEA and is registered in one of these Member States. SEs are governed by Council Regulation 2157/2001/EC and in the UK by the European Public Limited Liability Company Regulations (SI 2004/2326). SEs are not companies formed under the 2006 Act but certain provisions of law which govern public limited liability companies formed and registered in the UK may apply to SEs registered in the UK, where the matter is not addressed in the Council Regulation and the intention behind the Council Regulation is that the matter should be governed by national law. Registration formalities In order to form and register an English company certain documents must be submitted to the Registrar of Companies, known as Companies House: the constitutional documents for the company, that is to say its memorandum and articles of association; and an application for registration (which includes certain information about the company such as the proposed name, whether the company will be public or private, a statement of proposed officers and a statement of intended registered office) and a statement of compliance confirming that the company has been validly put forward for registration. Companies House provides a certificate of incorporation. Standard registration takes eight to ten working days and costs 40. However, a company can also be incorporated on a same day basis for a fee of 100. There are separate charges for electronic registration. 6

12 Once the company has been incorporated and registered, it is a distinct legal entity, separate from its members. A person who purportedly contracts in the name of, or as agent for, a company before its incorporation, however, incurs personal liability unless there is an agreement to the contrary. Constitutional documents The documents which govern the constitution of the company are: the memorandum of association; and the articles of association. Memorandum of association Each company must have a memorandum of association. Under the 2006 Act, the memorandum of association is a short, standard document simply stating that the subscribers wish to form a company, agree to become members of the company and subscribe for at least one share each. The memorandum of association is therefore merely a historical document with no continuing operation. Articles of association Every company must have articles of association. The articles govern the internal affairs of the company and regulate a great range of matters (subject to the requirements of the 2006 Act). These include the rights attached to the company s shares (including voting rights), the powers of the directors, the regulation of shareholders and directors meetings, the alteration of capital and the transfer of shares. Under the 2006 Act, there is no requirement for a company to have a statement of its objects and a company s objects are completely unrestricted unless they are expressly limited by the articles of association. The articles of association constitute a contract between the company and its members. They may be altered by a special resolution of the shareholders (subject to any special entrenched provisions in the articles). Regulations made under the 2006 Act, the Companies (Model Articles) Regulations 2008, SI 2008/3229, set out three sets of model form articles of association, for private companies limited by shares, private companies limited by guarantee and public companies. These apply as the default articles of association for companies of that type incorporated under the 2006 Act, but can be either excluded completely in favour of a bespoke set of articles or adopted with variations. Statutory books The company must keep certain statutory books and records: Register of members: This contains the names and addresses of shareholders and the number of shares held by each shareholder in the company. If there are joint holders of shares, the register must show the name of each joint holder. On a transfer of shares, the transferee does not become a member until his name is registered as a member in the register of members, which the company is not allowed to do until the stamp duty has been paid (or the transfer has been certified as being exempt from stamp duty). Stamp duty is not payable however on an issue by the company of new shares. The register of 7

13 members must be open for inspection to the public but inspection is only permitted by a person who has a proper purpose for the inspection. Register of directors and secretaries: Directors and secretaries are able to use a service address (which can be the company s registered office) for the public register rather than a residential address. This register must be kept open to public inspection. Register of directors residential addresses: This is the separate private register of directors residential addresses. Register of charges over the company s assets: The company must keep a register of all charges specifically affecting property of the company and all floating charges over the undertaking or any property of the company and enter a short description of the property charged, the amount of the charge and the names of the persons entitled to it. Particulars of charges (including any floating charge) must be registered with the Registrar of Companies within 21 days of creation of the charge. If a charge is a fixed charge over the company s land, the charge must also be registered at the Land Registry or Land Charges Registry. All directors service contracts must be kept available for public inspection and members may request copies. Minutes of general meetings and minutes of board meetings and copies of any written resolutions of the company or the board must be kept by the company. Adequate accounting records must be kept by the company. The statutory books must be kept at the company s registered office, or at one other location (which must be notified to the Registrar of Companies) in the part of the UK in which the company is registered (or partly at the registered office and partly at the other location). Reporting requirements A company must submit an annual return and annual accounts to Companies House. All annual returns must be delivered to Companies House within 28 days of the made-up date given on the relevant form. There is an annual document processing fee of 40 (or 14 if delivered electronically). It is a criminal offence not to deliver the company s annual return within 28 days of the made-up date. There is no charge for filing the company s annual accounts, although there is an automatic civil penalty (in the form of a statutory fine) for late filing of accounts. A company must also notify Companies House as and when there are any changes to its particulars, such as the registered office, directors or changes in share capital (including any new issue of shares). In addition certain shareholder resolutions must be filed at Companies House (see the paragraphs on resolutions later in this Chapter). Shares The share capital of a UK company comprises shares of a specified nominal amount which may or may not be divided into one or more classes. The rights attaching to shares are imposed by the 2006 Act, the company s articles of association and any shareholders agreements. 8

14 Share capital The concept of a company s authorised share capital has been abolished by the 2006 Act. There is therefore no ceiling on the number of shares that a company can issue provided that the directors have the necessary allotment authority (as described below). A company s issued share capital is the number of shares actually subscribed for and issued by the company. Classes of shares The rights attaching to each class of shares in the company are set out in the articles of association of the company. There are no limits on what these class rights can be; there can be an infinite number of variations. However, there are customary classifications and classes of shares which are regularly used. The common classes of shares are: Ordinary shares Every company will normally have an ordinary share capital. This is the basic type of capital which will form the basis of the rights of the other classes of shares. Ordinary shares will typically have a right to vote at all general meetings, have a nonpreferential, but unlimited, right to participate in the profits in the company and have a non-preferential, but unlimited, right to participate in any surplus assets on a winding-up. Preference shares Preference shares will generally not have a right to vote at general meetings of the company except in special circumstances. Preference shares will rank in priority to ordinary shares both as regards the right to receive a dividend and the right to be repaid capital on a winding-up. However, the rights of the preference shares are generally limited: the right to the dividend will be fixed and on a winding-up the preference shareholders do not generally have any right to participate in any surplus assets. Non-voting shares There could be another class of shares which have identical rights to the ordinary shares except that they have no right to vote at general meetings. Redeemable shares Redeemable shares are shares which are liable to be redeemed by the company on a specified date or dates or in specified circumstances. When a share is redeemed, the shareholder receives a payment of the amount specified in the articles of association to be payable on redemption, the shares are cancelled and the company s share capital is reduced by the nominal amount of the shares redeemed. Convertible shares Convertible shares are shares which are liable to be converted into shares of another class. The most common type of convertible shares are preference shares which are convertible into ordinary shares. The articles of association will set out the circumstances in which the shares convert. Deferred shares Deferred shares are shares which have no right to vote, to participate in the profits or, except in extreme circumstances, to participate on a winding-up. They normally serve one of two purposes. Firstly, if the share capital is being re-organised in such a way that a proportion of the company s existing share capital is no longer needed or relevant, then the surplus shares may be converted into deferred shares. Secondly, deferred shares are sometimes issued which are convertible into ordinary shares in certain circumstances and are used as, for example, an incentive to management. 9

15 Issuing new shares Directors of a private company with only one class of share capital do not need shareholder authority to allot shares of the same class. However, for private companies with more than one class of shares and for public companies, the directors are required under the 2006 Act to have authority to issue new shares, either by a provision in the company s articles of association or by an ordinary resolution of its shareholders. The 2006 Act also contains pre-emption rights for shareholders on the issue of new shares for cash (but not for any other consideration, such as shares). If a company proposes to allot new shares for cash, it is required to offer those shares first to the existing shareholders in proportion to the shares held by them. However, the pre-emption rights can be disapplied by a special resolution of the shareholders of the company, or in the case of a private company may be excluded by a provision in the articles of association. Maintenance of share capital One of the basic principles of UK company law is that share capital of the company (including any premium paid on it over its nominal value) is regarded as the permanent capital of the company. Subject to certain limited exceptions, once its share capital has been issued, it is not possible for the company to reduce its capital or any share premium account or buy back its own shares. The 2006 Act provides for certain limited exceptions to this rule, including a reduction of capital procedure. For public companies, the procedure requires a court order but for private companies a special resolution of shareholders and a solvency statement from the directors covering a 12 month period are all that is required. The 2006 Act also permits the purchase by the company of its own shares (using profits available for distribution or the proceeds of a new issue of shares) with the approval of shareholders. Transfer of shares The articles of association of a company can, as part of the description of the rights attaching to particular classes of shares of the company, impose restrictions on the ability of shareholders to transfer those shares. In particular, the articles of association of private companies often contain pre-emption rights which give the existing shareholders a first right to buy the shares of any shareholder who wishes to transfer them. This would not apply in the case of a company whose shares are listed on the London Stock Exchange because, in order for a class of shares to be listed, the shares must be freely transferable. Relationship between the company and its shareholders A shareholder s relationship with the company in which he holds shares is a contractual one. Under the 2006 Act, the articles of association bind the company and its members to the same extent as if they were covenants on the part of the company and each member to observe the provisions. The articles of association therefore constitute a form of contract between the company and its shareholders and between the shareholders themselves. The shares held by the members give a right of participation in the company on the terms of the articles of association. A shareholder does not have a proprietary interest in the underlying assets of the company. Shareholders are entitled in proportion to their respective shareholdings to a share of the distributed profits of the company and, on a winding-up, to the surplus assets of the company after the company s creditors have been repaid in full. The shareholders are not regarded as part owners of the company the company has its own separate legal personality. Shareholders are not liable for the acts of the company, except in certain circumstances when the corporate veil can be pierced. 10

16 The concept of the articles of association as a contract is subject to the limitation that it is possible for the articles to be amended at any time, or even completely replaced, with the approval of a special resolution of the shareholders of the company. The definition of a member of a company is concerned with the legal ownership of the shares, that is the person whose name appears on the register of members. No notice of any trust can be entered on the register of members. The legal and beneficial ownership of shares is, however, frequently separated because it may be commercially convenient for shares to be registered in the name of a trustee or nominee but actually beneficially owned by a different person. The beneficial owner of the shares, if he is not also the legal owner, therefore has no special status in relation to the company and only has rights against the legal holder. The articles of association may however expressly provide for a member to nominate another person to exercise all or any of his rights on his behalf. There are no restrictions on foreign shareholders, except in regulated industries, such as financial services (see Chapter 7 below). Management Division of powers Articles usually delegate to the directors the exercise of the powers of the company not required by the articles or the 2006 Act to be exercised by the shareholders in general meeting or by shareholder resolution. Management structure Companies have a single-tiered board. Under the 2006 Act, private companies must have at least one director and public companies at least two. Subject to this, the articles may prescribe a maximum or minimum number of directors. Directors can be executive (with a service contract) or non-executive, with varying roles and duties. Corporate directors are permitted, but at least one of the directors must be an individual. The minimum age for a company director is 16 years. There is no maximum age. There are no restrictions on foreign directors. Directors duties The 2006 Act sets out the complete statutory statement of the duties a director owes to the company. The statutory directors duties are: a duty to act within the powers conferred by the company s constitution; a duty to promote the success of the company for the benefit of the members as a whole; a duty to exercise independent judgment; a duty to exercise reasonable care, skill and diligence; a duty to avoid conflicts of interest; a duty not to accept benefits from third parties; and a duty to disclose an interest in a proposed transaction with the company. The duties apply to all of the directors of a company but the statutory statement of duties does not cover all the obligations that a director may owe as a director of a company. Others are scattered throughout the 2006 Act, such as the duty to deliver accounts and the obligation to disclose an interest in an existing transaction with the company, and in other statutes, for example, the Insolvency Act

17 Directors transactions The 2006 Act sets out certain restrictions on transactions between a company and its directors, including requiring shareholder approval before directors can acquire non-cash assets from the company and prohibiting the company from making or guaranteeing a loan to one of its directors without prior shareholder approval subject to certain exceptions. Directors liability Directors may be personally liable for, among other things: a breach of their statutory duties under the 2006 Act; a breach by the director or the company of requirements or restrictions in the 2006 Act; fraudulent or wrongful trading if the company becomes insolvent (Insolvency Act 1986). Directors can be disqualified from acting as a director for up to 10 years under the Company Directors Disqualification Act Shareholder approvals Acts of all shareholders in their capacity as members, whether or not decided on at meetings, are regarded as the acts of the company itself. Annual General Meeting (AGM) A public company must hold an AGM within six months of its financial year-end. Twenty one clear days notice of the AGM is required, unless all who are entitled to attend and vote consent to short notice being given. There is no statutory requirement for a private company to hold an AGM but there may be an express requirement to hold one in the company s articles of association. General Meeting (GM) Any shareholder meeting other than an AGM is a general meeting. Generally the minimum statutory notice period required for a general meeting which is not a public company AGM is 14 clear days. For listed companies, however, the minimum statutory notice period for general meetings other than AGMs is 21 clear days. Listed companies can reduce the minimum notice period for these meetings to 14 clear days if (i) shareholders have passed an annual resolution to shorten the notice period to 14 clear days; and (ii) the company allows shareholders to appoint a proxy by electronic means via a website. Shareholders holding 90% (in the case of private companies) or 95% (in the case of public companies) of the nominal value of shares giving a right to attend and vote may agree to shorter notice of general meetings. The articles of association may specify a longer notice period (but the articles of association cannot specify a shorter period). Resolutions There are two types of resolution prescribed by the 2006 Act: Ordinary resolution which requires the consent of more than 50% of those present and voting. Special resolution which requires the consent of not less than 75% of those present and voting. 12

18 An ordinary resolution is the most common type of resolution. Most decisions of the company are made by ordinary resolution. A special resolution is required (inter alia) to alter the articles or to change the name of the company. All special resolutions must be filed at Companies House within 15 days of being passed and the 2006 Act specifies certain ordinary resolutions which are required to be filed at Companies House (eg an ordinary resolution authorising directors to allot shares). Under the 2006 Act, certain resolutions (eg to remove a director) require special notice to be given to the company. Resolutions requiring special notice are not effective unless notice of the intention to move the resolution is given at least 28 days before the meeting. Calling a general meeting A general meeting is convened by way of a notice given by the company to all shareholders entitled to receive notice of general meeting (this is determined by the class rights of the shares in question set out in the articles of association). The notice must state the time and place for the meeting and specify the business which is to be conducted at the meeting. The directors of any company may also convene a general meeting whenever they think fit. In addition, under the 2006 Act, the members of the company may requisition a meeting by serving notice on the directors requiring them to do so. In order to be valid, a requisition must be executed by members holding at least 5% of the paid-up share capital of the company giving a right to vote at general meetings. The members of a public company may also require the directors to circulate a notice of an additional resolution that they wish to be put to the members at an AGM. Such a requisition must be executed by members holding at least 5% of the total voting rights of all the members having the right to vote at that AGM or at least 100 members in number and holding shares with an average sum paid up per member of at least 100 in nominal value. Proceedings at general meetings The quorum requirement for a general meeting is set by the company s articles of association. Generally, unless there are special class rights requiring a member of each class to be present to create a quorate meeting, or the company is a single member company, the quorum requirement is two members. Under the 2006 Act, any member entitled to attend and vote at a general meeting may appoint a proxy, who need not be a member, to attend in his place. The members must be informed of their right to appoint a proxy. When the notice of meeting is sent out by the company, a form of proxy will be made available to shareholders which will state that if a shareholder wishes to appoint a proxy, unless the shareholder specifies otherwise, the chairman of the meeting will be deemed to be the proxy for the shareholder. In order to be valid, forms of proxy must be returned at least 48 hours before the relevant meeting. Unless a poll (that is a ballot vote) is demanded, voting on resolutions at general meetings is by way of a show of hands. Unless the articles provide otherwise, on a show of hands each member present in person and every proxy present who has been duly appointed by a member, has one vote regardless of the number of shares he/the appointing member holds. The articles of association set out who may demand a poll, but the 2006 Act contains certain restrictions on what the articles may provide. The articles cannot provide that a demand for a poll must be made by more than five members (present in person or by proxy) or by members (present in person or by proxy) holding more than 10% of the voting rights. 13

19 Equally the articles cannot exclude the right to demand a poll except on election of the chairman of the meeting or an adjournment of the meeting. On a poll, unless the articles provide otherwise, each shareholder present, whether in person or by proxy, has a number of votes equal to the number of shares held by him. Class meetings If a company s share capital is, or is to be, divided into separate classes of shares then it is possible that a separate meeting of the holders of the shares of one or more of those classes may be required in addition to a general meeting of all the shareholders. The company will be required to seek the approval of the members of a class of shares by way of a separate class meeting if the rights attaching to that class of shares are to be varied. There may also be additional obligations to call class meetings set out in the articles of association of the company. Articles of association will often provide that the creation of a new class of shares ranking in priority to the existing class will constitute a variation of the class rights of the existing class. If a separate class meeting is required, the 2006 Act provides that the quorum at the class meeting must be two persons holding, in person or by proxy, at least one-third in nominal value of the issued shares of the class in question. However, at an adjourned meeting, this quorum is reduced to one person present in person or by proxy. Written resolutions of private companies The 2006 Act sets out the procedure for written resolutions of private companies, as an alternative to holding a shareholder meeting. In relation to resolutions required by the 2006 Act, or any other enactment, the 2006 Act procedure must be used even if the company s articles contain a procedure for written resolutions. The 2006 Act provides that a written resolution can be passed if agreed to by 50% of the members for an ordinary resolution and 75% of the members for a special resolution. Once passed, a written resolution will have the same effect as a resolution passed at a general meeting. Under the 2006 Act, shareholders in a private company may requisition the circulation of a written resolution. The required percentage is 5% of the total voting rights of all members entitled to vote on the resolution, or any lower percentage specified in the articles. There is also a right to have a statement of no more than 1,000 words circulated with the resolution. There are special procedures for certain types of written resolutions (for example, share buy-backs and directors service contracts) which are set out in the provision in the 2006 Act relating to approval of that matter. A written resolution is not permitted when using the powers in the 2006 Act to remove a director or remove an auditor. The 2006 Act does not permit public companies to use written resolutions. 14

20 4. The differences between a private company and a public company The 2006 Act imposes certain additional restrictions on public companies for the protection of shareholders and creditors. In addition, a key difference between a public company and a private company is that only a public company may make an offer of its shares to the public. The principal benefit, therefore, of setting up a public company is the increased access to capital through public issues of securities. The principal differences between private and public companies are set out below. Payment for share capital There are a number of detailed rules in the 2006 Act concerning the payment for shares allotted by companies, most of which relate only to public companies: a public company must have an issued share capital of not less than 50,000 (or the Euro equivalent) before it can carry on business as a public company; a public company may not allot shares unless at least 25% of the nominal value of the share and the whole of any premium has been paid up; a public company is prohibited from allotting shares for a consideration other than cash, unless an expert s valuation is obtained; a public company is prohibited from accepting an undertaking to do work or perform services as consideration for the allotment of shares; where a public company allots shares as fully or partly paid in exchange for a non-cash consideration, any undertaking which forms part of that consideration (eg to transfer assets to the company) must be performed within five years of the allotment and an expert s valuation and report on the consideration given will usually be required; and the original subscribers to the memorandum of a public company must pay for their shares in cash. Maintenance of capital If at any time the net assets of a public company are reduced to 50% or less of its calledup share capital, the directors must convene a general meeting within 28 days of the date on which any one of them becomes aware of the fact. The purpose of the meeting is to consider what measures, if any, should be taken to deal with the situation there is no obligation to undertake specific measures. Distribution of profits A company can only pay dividends out of distributable profits. A public company can only make a distribution if its net assets do not fall below the aggregate of its called-up share capital and undistributable reserves. The availability of profits is determined by reference to the company s latest statutory accounts. If these do not disclose sufficient profits, then special accounts may be drawn up to base the distribution on. 15

21 Loans to directors Where a group of companies includes a public company, the rules restricting loans to directors and their connected persons are extended, in relation to each company in the group, to credit transactions of a similar nature to loans. Purchase of own shares Both public and private companies may issue redeemable shares. They may also buy back their own shares in certain circumstances. However, only a private company can buy back or redeem its shares out of capital where it has insufficient profits available to fund the buy-back. Purchases by public companies must be made out of distributable profits or the proceeds of a fresh issue. Only a public company which is listed on the Official List or on AIM may buy back and then hold and resell its own listed shares, rather than cancelling them on buy-back. Shares held by the company in this way are referred to as treasury shares. Financial assistance for acquisition of shares A public company cannot give financial assistance (including the giving of a guarantee or indemnity or the grant of any security over its assets) for the purchase of its own shares or the shares of its holding company or to discharge a liability incurred for that purchase. Under the 2006 Act, a private company cannot give financial assistance for the acquisition of shares in a public company. Private companies may provide financial assistance for the purchase of its own shares, although there are still other factors to consider when deciding whether it is able to do so, in particular the common law capital maintenance requirements and the duty of the directors to promote the success of the company. Accounting requirements Public companies cannot take advantage of the provisions contained in the 2006 Act permitting small and medium sized companies to file short-form accounts with Companies House. Public companies that have securities listed on an EU regulated market must produce their consolidated, or group, accounts in accordance with International Financial Reporting Standards (IFRS). However, they can choose whether to prepare their individual financial statements in accordance with IFRS or UK GAAP. Private companies and unlisted public companies can choose IFRS or UK GAAP in both or either of their individual and group accounts. Companies with securities traded on AIM (which is an exchange regulated market but not an EU regulated market) are required to prepare their accounts in accordance with IFRS. Other matters Other differences between a public and a private company include the requirement to have at least two directors for a public company rather than one for a private company, the ability of members of private companies to agree to written resolutions instead of having resolutions proposed at general meetings, the availability of certain relaxations contained in the 2006 Act (a number of these apply only to private companies eg the ability to dispense with an AGM, the ability to carry out a capital reduction without going to court) and the requirement to have, and qualifications required for, the company secretary. 16

22 Public offers of security and requirements to produce a prospectus A private company may not offer its shares or securities to the public. Only a public company may do so. The 2006 Act contains a broad definition of an offer to the public for this purpose, including (subject to certain exemptions, for example for existing shareholders and employees) any offer that is not a purely domestic concern of those making and receiving it. In addition, the Prospectus Rules issued by the FSA under the Financial Services and Markets Act 2000 require all companies to produce a prospectus on any offer of transferable securities to the public in the UK, whether listed or not (the definition of an offer to the public for this purpose is different to the definition in the 2006 Act). In addition, a prospectus is required on an admission of securities to trading on a regulated market in the UK, which includes a listing on the London Stock Exchange Main Market (but not an admission of securities to AIM). The prospectus must be approved by a regulatory authority, which for UK incorporated companies, and certain companies incorporated outside the EEA Member States, will be the FSA. Public listed companies The Listing, Prospectus, Disclosure and Transparency Rules issued by the FSA and the Admission and Disclosure Standards of the London Stock Exchange set out continuing obligations for companies whose securities are listed on the Official List and traded on the Main Market of the London Stock Exchange. These continuing obligations largely relate to the circumstances in which public announcements are required to be made by the company (for example, any price sensitive information or a decision to pay a dividend), the contents of its annual accounts, half-year results and interim management statements, the form of any circulars sent to its shareholders, publicity regarding dealings by the directors, certain other senior managers and their connected persons in the company s securities and restrictions on those dealings, and transactions which require publicity or shareholder approval. In relation to the governance of public listed companies, the UK Corporate Governance Code covers a wide-range of issues, such as board composition, the remuneration of directors, the relationship between a company and its auditor. The Code does not have the force of law but public listed companies are required to report annually on their compliance with the Code and explain any extent to which they have not complied. 17