ESTABLISHING A BUSINESS IN THE UK

Transcription

1 ESTABLISHING A BUSINESS IN THE UK

2 ESTABLISHING A BUSINESS IN THE UK Contents Page no A BUSINESS STRUCTURES 1 B OTHER ASPECTS OF CONDUCTING BUSINESS IN THE UK 7 C PRIVATE VERSUS PUBLIC STATUS 13

3 ESTABLISHING A BUSINESS IN THE UK A BUSINESS STRUCTURES Types of Business Entity It is possible, of course, for an overseas corporation to trade in its own right in the UK. Commercial and taxation issues often point, however, to the establishment of some form of formal UK business entity. The most common types of UK business entity through which business may be carried on in the United Kingdom are: - as a separate limited company; - in respect of an overseas company, by way of registration of a UK establishment; - as a sole trader (only applicable to individuals rather than corporations); - by way of partnership; and - through a limited liability partnership ("LLP") which is a hybrid between a traditional partnership and a company having a separate legal corporate identity with limited liability but operated on a day to day basis and taxed more like a partnership. Persons carrying on business either as a sole trader or in a partnership are, in most cases, personally responsible for meeting the debts and liabilities of the business out of their own personal assets (to the point of bankruptcy). A UK company is, however, a separate legal person from its owners/managers and, in the case of the most common form of trading company, the liability of its members is limited to the amount of money which they have paid up or agreed to pay up in respect of their shares in the company. This Memorandum does not deal with matters solely relating to business carried on as sole trader or through a partnership or LLP (although various issues set out in Part B may be relevant to such businesses), but focuses on the carrying on of business through a UK company or as a registered UK establishment. For further information on LLPs, see the firm s separate briefing note entitled Limited Liability Partnerships.

4 Establishing a Separate UK Company Types of company There are various forms of UK company: - a private company limited by shares; - a public company limited by shares; - a private company limited by guarantee; and - an unlimited company. The following commentary deals with companies limited by shares, which are almost always the corporate vehicles used in carrying on any business activity. Private versus Public Status Company legislation generally relates to both private and public companies alike. There are, however, a number of differences, the most important of which are summarised in Part C - most overseas businesses choose a private company, at least initially, as this is the least regulated vehicle and is therefore easier and cheaper to run. The Registration Process A central registry (known as Companies House and headed by the Registrar of Companies) exists to deal with both the initial registration and ongoing monitoring of companies to ensure their compliance with law. UK companies will be incorporated either in England and Wales (registered and monitored by Companies House in Wales) or in Scotland (registered and monitored by Companies House in Scotland). However, broadly the same corporate legislation applies to each. Registration of a private limited company is straightforward and, upon submission of the relevant documentation (including particulars of members and directors and of the proposed constitution) and application fee, Companies House will issue a certificate of registration. Company and Business Names Before any documentation is prepared or submitted to Companies House, it is important to establish that the proposed company name is available. A company may take any name that it chooses, subject to certain exceptions or restrictions including: - every company must have a name different from that of any other registered company (a name search can be undertaken at Companies House to check existing registrations); - a private company limited by shares must have the words Limited or Ltd as the last word of its name; and 2

5 - certain words or expressions which are identified as sensitive may only be used as part of a company name with the consent of the Registrar of Companies (or other relevant body as prescribed by statute). Securing registration of a company name does not, however, guarantee that the company may freely use that name in business. In particular: - the Registrar of Companies may require a name initially accepted for registration to be changed within 12 months of registration, if it is considered confusingly similar to another registered name; - use of a name may infringe a registered trademark of a third party, so a trade mark search is desirable to check the availability of a chosen business name; and - existing businesses may be able to challenge the use of a name where that use damages the goodwill or reputation of that existing business, under a common law action in passing-off or under a procedure pursuant to the Companies Act As there is no UK register of business names, the best course of action is to search at Companies House and the Trademarks Registry for conflicting or confusingly similar registrations, and to check relevant directories and trade journals for existing unregistered business names. Stevens & Bolton LLP can assist with any required searches. A company may use one or more different business names, although only the registered name may end with Limited or Ltd. All company correspondence (including business letters, orders for goods or services, invoices, receipts, facsimile transmissions and ) and the company s website(s) must also state the company s full registered name, place of registration, registration number and registered office address. There is no requirement to state the names of all directors, but if the name of any director is shown, the names of all directors must be stated. Company s Constitution The articles of association are a UK company s key constitutional document. The articles of association contain provisions relating to the day to day management and administration of the company (e.g. provisions in respect of the calling and holding of board and general meetings, appointments and powers of directors and share issue and transfer provisions). Although day to day affairs are generally within the powers of the directors, the articles of association will usually reserve certain matters (e.g. share capital changes) to the shareholders, as do a number of mandatory requirements set out in statute. The articles may also contain information relating to the company s share capital. In particular, if the company s shares are divided into different classes with different rights attaching to each class (e.g. as to voting or dividends), these rights will typically be set out in the articles of association. 3

6 Conduct of the Company s Business Shareholders and General Meetings The shareholders deal with certain matters which cannot be delegated to the board of directors (e.g. an alteration to the articles of association). Such matters are determined by written resolution of the shareholders or by resolution of the shareholders in general meeting (the percentage vote required in both cases depending upon the type of resolution in question). There are various requirements as to convening general meetings including as to the length of notice to be given (although this may in most cases be waived if the requisite majority agree). For private companies, most decisions (with limited exceptions) can now be taken by written resolution. Directors and Board Meetings The day to day management of the company is usually vested in the board of directors who will exercise their powers by passing resolutions at board meetings on the basis of a simple majority vote, unless otherwise agreed. There are few formalities with respect to the calling of board meetings save that reasonable notice must be given to all directors. Subject to the articles of association, directors may also pass resolutions in other ways, without the need for a meeting. If the articles of association so provide, the directors may delegate some or all of their functions to a committee of directors (which may consist of only one director) or to a managing director. The minimum number of directors for a public company is two, and for a private company, one although it is usually desirable for practical reasons for there to be at least two. A director need not be a British national or resident in the UK and is not required to hold any shares in the capital of the company of which he/she is director unless this is expressly required in the articles of association of the company. A director may be a corporation, however a company must have at least one director who is a natural person. The directors have certain legal duties, including statutory duties introduced by the Companies Act 2006, towards the company in connection with their management of the company s affairs which include a duty to promote the success of the company for the benefit of its members as a whole and a duty to exercise reasonable skill, care and diligence in carrying out such office. Additionally, directors are subject to various restrictions and other statutory regulations (e.g. shareholder approval is required where a director takes a loan from the company; a director who is personally interested in a contract is obliged to declare in advance the nature of his interest at a board meeting and other types of conflict may require shareholder approval). There are strict penalties for directors who breach these regulations or do not comply with their duties to the company which include disqualification from acting as a director of any UK company, fines and even imprisonment. Any non-executive or shadow directors (i.e. persons who, not being formally appointed directors, control the board of directors of a company) will also generally fall within the above obligations and are therefore potentially subject to the same liabilities. 4

7 Secretary Every public company must have a secretary. A private company may, but is not required to, have a secretary. A secretary may also act as a director. The secretary s functions are largely administrative and include the requirement to convene board and general meetings, to maintain the statutory books (see below) and to ensure timely filing of relevant documentation with Companies House. Auditor As a general rule, a company must appoint and have annual accounts audited and reported on by an independent person acting as auditor (who must be properly qualified for such purpose). However, some small companies are exempt from the requirement to appoint an auditor (but not the obligation to prepare annual accounts). Publicity Requirements Every private limited liability company is required to keep the following records: - a register of members; - a register of directors and secretaries; - a register of directors residential addresses; - a register of charges (if any); - minute books and records of shareholder and board meetings and resolutions; - copies of directors service contracts; and - accounting records (which must satisfy certain criteria). Some of these registers are required to be available for public inspection at the registered office (or other permitted location). Further publicity requirements apply to public companies. Other filing requirements include: - Annual return. This is required to be delivered annually, comprising details of the directors and secretary, registered office, particulars of issued share capital and shareholder details; - Annual accounts. A copy of the annual accounts (see above) must be delivered to Companies House within a prescribed period after the end of the accounting reference date to which such accounts relate. Failure to do so will render the company liable to a fine; - Registration of charges. Particulars of certain types of security given by the company over any of its assets must be registered within 21 days. If this is not done, then the charge will be void against any creditor or liquidator of the company and any monies secured by the charge will become immediately due and payable; - Notification of the appointment and resignation of officers; - Filing of certain resolutions passed at general meetings, e.g. change in issued share capital, alteration of the articles of association; 5

8 Overseas Companies Establishing an Operation other than through a Company An existing overseas company wishing to establish a business entity in the UK can set up a separate UK subsidiary company (in which case the procedural and regulatory requirements are as set out above). Alternatively, an overseas company may register a UK establishment. This regime is subject to registration and on-going filing requirements similar to those required in respect of a UK company. Further, similar restrictions and obligations apply in relation to the name of the overseas entity (including in relation to business stationery) (see above). Registering a UK establishment is considerably less common than establishing a UK company. The appropriate structure to adopt will depend upon the business s intended commercial objectives and activities in the UK and tax considerations will also play a significant part (as to which see Part B below). Whereas a UK subsidiary is at law an entirely independent legal entity, a UK establishment is not. 6

9 B OTHER ASPECTS OF CONDUCTING BUSINESS IN THE UK Employees There is a wealth of employment legislation in the UK which will generally apply to protect any persons employed in the UK regardless of the nationality or location of any such employer. In some cases it may even apply if the person is working overseas for a UK company. Some of this legislation is derived from European Union directives which, as a member of the European Union, the UK is required to implement. An example is the Working Time Directive which requires, amongst other things, a limit on a worker s average weekly working hours to 48 (subject to certain exemptions and exclusions). Employees are also able to opt out of the average 48 hour working week. UK employment legislation covers not only staff once employed, but is also relevant to recruitment; e.g. in recruiting employees, it is unlawful to discriminate on the grounds of sex, pregnancy, gender reassignment, marital status, religion or belief, disability, sexual orientation, colour, race, nationality, national or ethnic origin or age. It is also unlawful to discriminate against staff on these grounds during and after employment. Once employed, an employee is legally entitled to be given, no later than two months after the start of his or her employment, a statement of terms of his or her employment (containing certain particulars as prescribed by statute which include, for example, provisions relating to notice period, sick pay, holiday entitlement and disciplinary and grievance rules). Examples of further UK legislation include: - Dismissal of employees. Employees with a year s service are currently eligible to claim unfair dismissal if they are dismissed unfairly e.g.: if there is no fair reason for their dismissal or if a fair procedure was not followed before dismissing them. (There are a few exceptions where employees with less than a year s service are also able to claim unfair dismissal e.g. if an employee is dismissed as a result of his/her involvement with a trade union.) The current qualifying period for unfair dismissal claimants employed after April 2012 is two years. It is also unlawful to dismiss an employee for a discriminatory reason, for example, because of his/her race or because he/she is disabled. In most cases, employers also have to follow a fair dismissal procedure before they dismiss an employee and must usually invite the employee to a meeting, hold a meeting and give the employee the right to appeal against the dismissal. - Redundancy. Where an employee is made redundant, he or she may be entitled to a statutory redundancy payment (calculated by reference to a prescribed formula which takes into account the age and number of years service of the employee). - Health and safety at work. - Working Time Regulations. There are limits on the number of hours workers may work. Workers are also entitled to rest breaks and rest periods, as well as to 5.6 weeks holiday per annum (including bank and public holidays). This is equivalent to 28 days holiday for a full time worker. - National minimum wage. The national minimum wage level changes in October each year but as at October 2014 the National Minimum Wage is 6.50 for workers aged 21 or over. 7

10 - Transfers of undertakings. On a transfer of an undertaking or business or where there is a service provision change (which may include taking over a contract from a previous contractor), employment rights of employees employed in that undertaking may transfer to the new business or service provider automatically and that new business or service provider will also inherit any claims relating to the employees who transfer. - Illegal working. If an employer employs someone who does not have the right to work in the UK they face a civil penalty of up to 20,000 per illegal worker plus a potential two years in prison if they knowingly employ someone illegally. Under legislation designed to reduce the number of illegal workers, employers should carry out checks to ensure that prospective employees have the right to work in the UK before the person starts work and, if the person has limited leave to remain in the UK, employers should carry out further checks at least every 12 months. - Discrimination. It is unlawful to discriminate against someone directly or indirectly or to harass someone the grounds of sex, pregnancy, marital status, gender reassignment, religion or belief, disability, sexual orientation, colour, race, nationality, national or ethnic origin or age. It is also unlawful to victimise a person if they make a claim of discrimination by treating him/her less favourably. - Entitlement to notice. After one month's service, employees are entitled to notice from their employer of the termination of their employment. The minimum statutory right is to one week's notice, rising by one week for each year of service, up to a maximum of 12 weeks. - Pension provision. Employers with over five employees must designate a private pension scheme to which employees can contribute. The employer currently need not contribute to the pension scheme on the employee s behalf. Employers are required to operate the Pay As You Earn (PAYE) withholding system under which UK income tax is deducted at the time that the salary is paid to the employee (although different rules may apply to employees who are foreign nationals). The reporting obligations of a company under PAYE extend not only to cash benefits but also to benefits in kind. This requirement applies not only to a UK company but also to an overseas company operating a branch or place of business in the UK. Further, employers are also required to account for National Insurance contributions ( NICs ) on the earnings of employees. Employers must deduct NICs (at the appropriate rate) from employees earnings but must also account to HM Revenue & Customs for employer s NICs. These employer s NICs are a cost (albeit a corporation tax deductible expense) to the employing entity and may not (other than in very limited circumstances) be passed on to the employee. NICs are part of a social security system which provides cash benefits for sickness, unemployment and retirement. This includes a state pension scheme which provides a basic pension and a second tier state pension. Immigration A business looking to establish itself in the UK or to hire overseas nationals should seek immigration advice at an early stage. Over the past few years a points based immigration system has been phased in and changes to this system are still being made on a regular basis, often with little notice. In many cases, it is increasingly becoming more difficult for overseas nationals from outside the European Economic Area ("EEA") to come to the UK to work, particularly if they are regarded as low 8

11 skilled workers or are not well paid. It can also take several weeks or even months for immigration applications to be processed. The work permit scheme was abolished in November 2008 for non EEA nationals. New work permits are now only issued to Romanian and Bulgarian nationals, and they have free movement rights from 1 January The work permit scheme for non EEA nationals has been replaced by Tier 2 of the points based system. Employers now need to register as sponsors with the UK Border Agency before they are able to apply for and issue certificates of sponsorship to non-eea nationals they wish to employ. In order to register as sponsors, employers have to agree to take on a number of relatively onerous obligations, including record keeping and reporting obligations, and must have in place procedures which enable them to carry out these obligations. There are also restrictions as to whom the sponsor may issue certificates of sponsorship. The sponsor will usually need to show it has advertised the position in Job Centre Plus and one other place, as set out in the relevant Code of Practice, and that there are no suitable EEA employees to fill the position. The position must be a graduate level position and the person must have the skills required to carry out the position. The person will also need to be paid a market rate salary for the position as set out by the Home Office. There are exceptions where advertising the position is not necessary. This includes where the UK business is transferring an employee from an associated overseas company and the person has worked for the associated overseas company for at least twelve months; also if the position being filled is listed as a shortage occupation or the person will earn above a certain level of salary per annum. Once the certificate of sponsorship has been issued the prospective employee needs to apply for entry clearance or further leave to remain before being able to start work in the UK. He/she will need to show that he/she has sufficient points to be granted entry clearance or further leave to remain and prospective earnings are taken into account. In most cases prospective employees also need to satisfy English language requirements. There are other potential routes enabling people to come to the UK to work. For example, individuals who have recently completed a degree at a UK university may be able to apply to switch into Tier 2 (General) more easily and without the employer first needing to advertise the position. Commonwealth nationals with a grandparent born in the UK may be able to apply under the ancestry category, which allows them to work in the UK. There are also routes available for those with at least 1 million who wish to invest in the UK and for entrepreneurs who wish to set up a business or join an existing business in the UK. The various immigration routes should be considered at an early stage as it can take time for the company and individual to obtain all the documents they need to support the application. There are also strict maintenance requirements in many cases whereby people wishing to enter the UK need to show they have savings of a certain amount or they will not be granted the right to enter the UK. Non EEA nationals may be able to obtain entry to the UK for up to six months as a business visitor but should be aware that business visitors may only carry out very limited activities in the UK and may not work in the UK. 9

12 Business premises English property law is relatively complex. Land is held under either freehold ownership (i.e. absolute ownership whereby the owner is generally entitled to deal with the land as he sees fit - sometimes called a freeholder ), or leasehold title (i.e. where the occupier has leased the land from a freeholder or a superior leaseholder for a fixed period- usually called a tenant or sometimes a lessee ). A different regime operates in Scotland. The terms of leases can vary considerably and it is fairly common for leases to be between 5 and 10 years with upward only rent reviews taking place periodically and restrictions on disposing of the property, although longer terms are sometimes agreed. Longer leases are also often encountered in relation to longer term projects. The tenant is likely to be responsible for any repairs either directly or through the levy by the landlord of a service charge and it is wise to obtain a surveyor s advice on the extent of this liability - the obligation can often be more onerous than is expected. Depending upon the climate of the property market, it is possible for tenants to negotiate shorter leases, rent free periods and a right to terminate the lease earlier than the agreed expiry date. It should be noted that there will generally be many restrictions on the freedom of a tenant to use the premises as he wishes and, in particular, if he wishes to alter the premises in any way (or change their use) during the currency of the lease he is likely to need the landlord s consent (and the landlord will expect his costs to be paid by the tenant). Tenants and freeholders are also subject to a complex range of legislation regulating use of business premises - for example, relating to planning controls and protection of the environment. There are also regulatory regimes which will apply to the premises, such as the control of asbestos, fire prevention and accessibility for the disabled. Transfers of non-residential freehold properties or assignments of existing leases in the UK give rise to a charge to stamp duty land tax at a rate of 0%-4% (dependent upon value) and at a rate of 1% on the discounted net present value of rental streams upon the grant of a new lease. Corporation tax The tax treatment of a business will depend upon the nature of the business entity and the rules will vary depending upon whether or not such entity is deemed to be UK resident for tax purposes. A company will generally be tax resident in the UK if it is incorporated in the UK or its central management and control resides in the UK (i.e. if the board meetings are held here). A UK tax resident subsidiary is subject to UK corporation tax on its worldwide profits and gains (whether income or capital in nature). As mentioned in Part A, as an alternative to incorporating a subsidiary it may be that a non-uk tax resident entity establishes a permanent establishment (essentially a fixed place of business, such as a branch or factory) in the UK. Dependent upon the provisions of any double tax treaty there will ordinarily be a charge to UK corporation tax on the profits attributable to that permanent establishment. 10

13 The corporation tax regime in the UK is complex and dependent upon the industry concerned there may well be special charging regimes, additional indirect taxes or industry specific methods that may apply. It is therefore important to receive professional tax advice prior to the setting up of a business as taxation issues may determine the structure chosen. Cross-border transactions may also be impacted by the effect of thin capitalisation and transfer pricing rules. In the case of an overseas entity setting up in the UK, international aspects such as the tax effect of the extraction of profits and the application of any relevant double taxation treaties will also need to be considered. VAT registration Value Added Tax ( VAT ) is a general turnover tax charged on most supplies of goods and services made in the course of a business in the UK. If the level of taxable supplies made by business is in excess of the annual VAT registration threshold the business will be required to register for VAT with HM Revenue & Customs. VAT is charged ( output tax ) on the making of supplies of goods and services (currently 20%) but rates of 0% and 5% apply to certain types of product whilst others are exempt from VAT). Output tax charged to customers is accounted to HM Revenue & Customs whilst the VAT paid to supplies ( input tax ) is reclaimed. The making of exempt supplies will impact on the ability of an entity to fully recover the input tax suffered by it. VAT returns are made on a quarterly basis. Bank accounts Generally there are no restrictions on foreign-owned UK companies or overseas entities holding bank accounts in the UK, although registration papers and other information relating to the business and its officers will be required to be produced in advance. All banks also apply strict procedures to reduce the risk of money laundering. Contract law Subject to certain regulatory qualifications and restrictions, parties are generally free under English law to enter into commercial contracts as they see fit. Due to the way in which contracts are interpreted by the English courts (whereby greater emphasis tends to be given to the written words rather than to the surrounding circumstances or commercial objectives of the parties), the drafting should be as precise and detailed as possible. Commonly, businesses will establish a set of standard terms of trading which, having been drawn up in advance, will be designed to give maximum protection to the business and will also speed up the contract making process. However, there are statutory controls, in particular relating to attempts by businesses to restrict their liability, and generally to protect consumers. A UK distributor does not enjoy under English law any rights to statutory compensation upon termination of the arrangement as is the case in other jurisdictions. However, self-employed commercial agents are given greater protection including, in certain circumstances, the right to compensation upon termination of the agency relationship. 11

14 In the case of contracts entered into by companies it is important to note that if a contract is purportedly made by or on behalf of a company before the company has been formed (i.e. before the certificate of incorporation is issued by the Registrar of Companies) the person purporting to act for the company in respect of such contract may become personally liable for the company s obligations under such contract. Other legal controls and restrictions As regards trade generally, businesses in the UK are subject to considerable UK and EU legislation and judge-made common law. Examples include the following: - prevention of restrictive trade practices and unfair competition; - protection of the environment; - regulation of advertising; - financial services, including banking and insurance regulation; - regulation of significant business mergers and acquisitions; - legislation to protect misuse of databases (both electronic and in written form); - anti-bribery and corruption legislation. 12

15 C PRIVATE VERSUS PUBLIC STATUS 1. Establishing a plc A plc can be established either by incorporating a new company as a public limited company or by re-registering a private limited company as a public limited company. Incorporating a company as a public limited company The documentation required for registration of a public limited company is similar to that required for a private limited company (see Part A above). However a public company must comply with certain provisions of the Companies Act 2006 e.g. as to the minimum amount of share capital (see below). Further, the name of the company must end with the words public limited company or plc. Whereas a private company may commence business immediately upon incorporation, a newly incorporated public company may not commence business or exercise any borrowing powers until it has received from the Registrar of Companies an additional trading certificate confirming that the minimum capital requirements have been complied with (see 2 below). In order to obtain a trading certificate, it is necessary to make an application to the Registrar of Companies. It is not necessary, however, for a public company to obtain such a certificate if such public company has been established by way of re-registration of a private company (see below) which can commence trading immediately. Conversion of a private limited company to a public limited company The company must pass a special resolution to re-register as a plc. In particular the company name must be altered to end with the words public limited company or plc, and the issued share capital may have to be altered to reflect the minimum requirements (see 2 below). Changes to the Articles of Association are also often necessary and/or desirable. The company must then submit to the Registrar of Companies:: a copy of the special resolution to re-register as a plc; an application to re-register as a public company (which must include a statement of the proposed secretary, if the company does not already have one); the new articles of association; a copy of the most recent balance sheet (as at a date not more than seven months prior to the application), together with an unqualified auditor s report thereon; a written statement by the company s auditor that as at the balance sheet date the company s net assets are not less than its called up share capital and undistributable reserves; a statement of compliance by a director or the secretary that the requirements of the Companies Act as to re-registration have been complied with; and 13

16 a valuation report (only required where there has been an allotment of shares since the date of the relevant balance sheet otherwise than for cash, subject to some exceptions). If satisfied, the Registrar of Companies will issue a new certificate of incorporation on reregistration and a certificate enabling the company to do business as a plc. Re-registration takes effect automatically on the issue of this certificate. 2. Minimum capital requirements There are no minimum requirements for a private company. For a public company: issued share capital must be at least 50,000 (nominal value) (or the euro equivalent); and each share must be paid up as to at least 25% of its nominal value and the whole amount of any premium. 3. Company secretary The directors should ensure that the secretary of a public company has the requisite knowledge and experience to carry out the function of company secretary and either: is professionally qualified as a barrister, advocate or solicitor, or a member of a recognised professional body of accountants or secretaries; or for at least 3 of the 5 years preceding his appointment held the office of a secretary of a public company; or appears to the directors to be capable of discharging the functions of company secretary by virtue of holding or having held any other position or being a member of any other body. A private company is not required to have a secretary. Where a private company does choose to have a secretary, there are no such applicable statutory qualification requirements. 4. Directors A private company need only have one director; a public company must have at least two. Private companies may make quasi-loans to directors, whereas a public company may only make quasi-loans to directors if shareholder approval is obtained. 5. Administration and Decision-Making Private company shareholders may pass resolutions by means of written resolutions whereas public companies are required to hold general meetings. Private companies can take advantage of certain relaxations in administrative requirements e.g. they are not required to hold an Annual General Meeting and can dispense with the annual 14

17 appointment of auditors by relying on deemed reappointment provisions set out in companies legislation. 6 Transactions in Shares A public company may offer shares to the public whereas a private company may not. There are various market regulations which apply to certain dealings in the shares of public companies whereas such regulations will often not apply to private companies. Both public and private companies may issue redeemable shares, and both may purchase their own shares, subject to compliance with procedural formalities. However, only a private company can apply capital in the purchase or redemption of its shares where it has insufficient profits available. A public company may only effect a share capital reduction with court approval; however, a private company can take advantage of a share capital reduction procedure which does not require court approval. 7 Financial assistance Section 678 of the Companies Act 2006 restricts the ability of a public company to give assistance for the acquisition of shares in it. Whilst there are some exceptions, these generally fall into narrow categories. Therefore, for public companies, very real barriers to giving financial assistance exist. Private companies, however, are no longer generally subject to the financial assistance prohibition, having been removed from the scope of that prohibition with effect from 1 October Publicity requirements Small and medium-sized private companies may be permitted to prepare and/or file less detailed accounts with the Registrar. Similarly, dormant private companies may dispense with the services of an auditor. No such provisions apply to public companies. Private companies are allowed a longer period to file and deliver annual reports and accounts: 9 months after the end of the accounting reference period, as opposed to 6 months for public companies. In addition to the record keeping and publicity requirements relating to private companies (see Part A above), a public company whose shares are traded on a regulated market or a UK prescribed market is subject to disclosure requirements under the FCA s Disclosure Rules and Transparency Rules. Individuals who control the exercise of voting rights in a certain percentage of shares in a public company are liable to disclose details of such interest within the prescribed time limits. 15

18 9 Distribution of profits A public company is subject to restrictions on the distribution of profits additional to those applicable to all companies, i.e. a public company may only make a distribution if its net assets do not fall below the aggregate of its called-up share capital and its undistributable reserves. Briefly, undistributable reserves are defined in the Companies Act 2006 as: share premium account; capital redemption reserve; the amount by which the company s accumulated unrealised profits exceed its accumulated unrealised losses; and any other reserve prohibited from distribution by other legislation or by the company s articles. This effectively means that in the case of public companies, any net unrealised losses must be covered by realised profits. For further assistance, please contact Keith Syson or your usual contact at the firm. The information contained in this article is designed to provide a general introductory summary of the subject matters covered. It does not purport to be exhaustive or to provide legal advice, nor should it be used as a substitute for such advice. Stevens & Bolton LLP