C1: Foundation and Theory of Company/Corporation Law

 Terms:
o Legal person: Pháp nhân
o Legal personality: Tư cách pháp nhân
o contribute capital: góp vốn
o officials (n): chức vụ. Vd: Công chức nhà nước (state officials)
o Act: Đạo luật
o Code: Bộ luật
o Laws: nói về nhiều ngành luật.
o Law: nói về cả hệ thống pháp lý của một hệ thống pháp luật QG
 Still terms but more confused:
o Incorporated:
o Unincorporated:
o Sole traders/proprietorship:
o Partnership:
o Companies limited by shares:
o Companies limited by guarantee (unlimited company + thuộc loại
registered company luôn):
o Limited Liability Partnership: (not has to be registered):

I- The Origin of Corporation Law:

1)The origin of organization:

 What is a corporation? ⇒ a group of individuals doing business together

o Corporation = A body formed and authorized by law to act as a single
person although constituted by one or more persons
o In the eye of laws: They have their rights and liabilities
o Latin verb “corporate": to furnish (cung cấp về mặt vật chất) (something)
with a body or to infuse (tạo ra/trao cho) with substance (những thứ thiết
yếu: quyền và nghĩa vụ)
o Corporation: artificial construct infused by the law with the ability to have
legal rights and incur legal liabilities
 Historical development of corporation law: See hand-outs (Chapter 1)

Company Law or Corporation Law:

 UK Law:
o The word “corporation" has a wider concept than “company", including
“corporation sole" and “corporation aggregate”
o Corporation sole: are limited by law to one member. It provided for a
separate legal personality for an individual position (the corporation sole is
 distinct in law from the individual who occupies the post). E.g, bishop,
mayor
 Example: People would often leave property (as an offering to
Saints) to Church → Church officials (Father A - “Bishop":
Corporate sole)
o Corporation aggregate: May have one or more member. Types of
corporation aggregate: statutory corporations, chartered corporation,
registered companies, building societies, co-operative and community
benefit societies, credit unions, and limited liability partnerships

→ A company is one type of corporation aggregate (incorporated entities only),

brought into being by the registration procedures laid down by CA2006 → not
including a partnership or any other unincorporated entities

 US Law:
o “Corporation” correspond to “company" → incorporated entities which are
created under and regulated by Corporation Act (Code)
o US Supreme Court: “A company is a person, artificial, invisible, intangible,
and existing only in the contemplation of the law. Being a mere creature of
law, it possesses only those properties which the character of its creation
confers upon it either expressly or as incidental to its very existence

2)Classification of Business organizations:

II- Categorization of business organizations:

1)Legal structures of Unincorporated Business Organizations:

  Sole traders/proprietorships: Doanh nghiệp tư nhân
 Partnerships: Công ty hợp danh
 Not corporate entities or legal person
 Come into existence either by agreement or by legislation, do not own the benefits
of separate legal status (tư cách pháp lý độc lập)

a)Sole traders/proprietorship: (Doanh nghiệp tư nhân)

 A sole trader:
o is an individual who is in business on his own account
o is a party to contracts, own all the property he/she in the course of trade and
service all income and profits from the business
o the business itself is not separate
 Setting up business as a sole trader/proprietorship:
o No law governing → don’t need to get a certificate. No B.O organization
law relevant to the formation, operation or management of a sole trader.
But when a sole trader does business, he needs to ensure it’s legal
o Can operate under name of the proprietor or trade name
o In the UK, a sole trader needs to register as self-employed with the
authorized agency [Her Majesty's Revenue & Custom (HMRC)] and may
need to comply with any law applicable to the particular type of his/her
business
 Personal liability of sole proprietor:
o Proprietor bears the risk of loss of the business ⇒ Will lose entire capital
contribution if the business fails
o Proprietor has unlimited personal liability ⇒ Creditors may recover claims
against the business from proprietor’s personal assets
 Advantages:
o Ease and low cost of formation
o Proprietor owns entire business
 E.g., hiring and firing employees
 No other approvals required
o Can make all management decisions and have the right to receive all profits
o The business can be easily transferred or sold
 Disadvantages:
o The owner legally responsible for business’ contracts and torts committed
in course of employment
o Sources of capital are limited to: personal funds p, any loans the owner can
obtain

b)Partnerships: (Hội Hợp danh)

US:
  Definition: Partnership is the relation which subsists between persons carrying on
business in common with a view of profit (s1, Partnership Act 1980 of the UK) →
Exist between person (mối liên hệ tồn tại giữa các cá nhân tiến hành kinh doanh
cùng nhau với mục đích lợi nhuận)
 How to decide whether or not a partnership exists? Look for an agreement exist
between member of a group. The agreement will be very specific: how can they
share product, the purpose of the group, type of business,…

Features of Partnership:

1. Formation: Exist based on agreement between members of a group. when the

partners agree doing business together, no need Cert. If it’s oral, you have to find
evidence that they’re sharing profits.
2. No separate personality: Not all partnership have separate personality
3. Minimum of two partners: Must have at least 2 partners
4. Unlimited liability of partners
5. Each partner is agent (đại diện) of the partnership and of other partners: Each
partner can enter into an agreement, a contract,… this means legal binding to
others.
6. Partnerships have no public disclosure obligations: The in4 about the internal
finance,… will not be disclose in public. But still have to submit their financial
situation to agency to pay the tax (to the agency, not the public). Most partnerships
nowadays, based on the website’s introduction we can easily know who the
partners are.
7. Partnership is automatically dissolved (chấm dứt/giải thể) every time there is a
change of partners: when a partner leaves a partnership, the close relation between
them is broken. Left partners will form a new a new relation between the partners

UK:

 Two types (unincorporated entities):

o Ordinary partnerships: has no legal existence distinct from the partners
themselves. Every member has unlimited liability for the debts and
obligations of the firm (Partnership Act)
o Limited partnership (LPs) (Limited Partnership Act): The active partners
(general partners: thành viên hợp danh) have unlimited liability but the
sleeping partners' (thành viên góp vốn) liability is limited to the amount that
they have agreed to contribute
 Limited liability partnerships: are incorporated entities provided for
by the Limited Liability Partnership Act.

*must be registered at Companies House

2)Legal structures of Incorporation Organizations:

💡 Corporate bodies: companies or corporations (incorporated bodies) ><

Unincorporated bodies

 Registered companies:
o Limited companies: Companies limited by shares: Public companies (plc),
private companies (Ltd)
o Unlimited companies: Companies limited by guarantee
 Limited liability partnership (LLPs)
 Chartered (chiếu lệnh hoàng gia) and statutory (đạo luật của nghị viện - luật thành
văn) corporations
 The word “incorporated” shows that the underlying purpose of registering certain
types of business is to confer (trao) corporate personality (Doanh nghiệp có tư
cách pháp nhân) on the organization

a)Registered companies: (most important)

a.1)Limited companies:

A company is a limited company if the liability of its members is limited by shares

guarantee (S3.1 CA 2006)

Only companies limited by shares may be a public company (s.755). All companies
limited by guarantees are private companies (because they can offer their shares to the
public, but guarantee don’t have anything to the public).

 Limited companies: are incorporated entities provided for by the Limited Liability
Partnership Act
o Companies limited by shares: Public companies (plc), Private companies
(Ltd)
o Companies limited by guarantee
 Unlimited companies (private): The liability is unlimited

Companies Limited by shares:

 A company is a limited company if the liability of its members is limited by shares

or by guarantee [s3.1 CA 2006]
 Only companies limited by shares may be a public company (Public companies
are able to offer their shares by advertisement to the public for investment
[s.7550])
  Companies limited by shares: If members’/shareholders' liability is limited to the
amount, if any, unpaid on the shares held by them, the company is “limited by
shares” [s.3.2]

→ Shareholders are not liable for the company's debts beyond the amount remaining
unpaid on his or her shares.

 Companies limited by shares may be public companies or private companies

o If members/shareholders’ liability is limited to the amount, if any, unpaid
on the shares held by them, the company is “limited by shares”
o Shareholders are not liable for the company’s debts beyond the amount
remaining unpaid on his shares. E.g: J subscribe to 3 shares - worth 10k
VND, only pay for 2 shares (K4 Đ.113 LDN) → don't have to pay for the
debt if problems arise after the date on which the company registers
adjustment of its charter capital. Within 90 days, he still has to pay. In UK,
he has to pay 10k (the amount unpaid on his shares, no limit on the time
pay) (10k is his debt to the company so he has to be responsible for the total
debt).
o Mệnh giá nội tại (nominal value) # mệnh giá thị trường (market value)
o You care about the % of the capital contribution, not the real value
 The name of a public limited company must end with “plc" or “public limited
company" and the name of a private limited company with ‘Ltd’ or ‘Limited’
 Shareholders' rights, responsibilities, and liabilities are determined by the number,
class, and value of their shares
 Internal structure and management rules are set out in the CA 2006, articles of
association (điều lệ) and shareholders' agreement

Companies limited by guarantees

 Definition: [s3.3, CA2006]

o being wound up: fall insolvency (mất khả năng thanh toán)
 Companies limited by guarantee must be formed without any share capital (s5),
thus, there are no shareholders, but the company must have one or more member.
Members don’t have to contribute to the capital, only pay membership fees

→ Is widely used mainly for non-profits org. (charities, community projects, clubs,
societies, clubs, societies and other similar bodies...). The sources of capital are
membership fees, government’s sponsorship

 Members are only liable to make a contribution to the assets of the company in the
event of its being wound up, and the amount of contribution is fixed at the outset
by the company's constitution
 Đều là cty TNHH, pay trong phần đã guarantee, can work as a real legal person
  Profit is not distributed among the members but put back into the company or used
to further the company's public purposes

a.2)Unlimited companies [s3.4]

 Incorporated at an gob governmental agency

 Separated legal personality, have clear organisational structure (like limited
company).
 In a winding up or formal liquidation, all shareholders bear joint, several and
unlimited liability for the company’s debts and financial obligation (>< limited
company)
 No public disclosure obligations (like partnerships).

b)Limited Liability Partnership:

 LLPs are incorporated governed by the LLP act 2000 (and extensive regulations
mar pursuant to both that Act and Company Act
 Are legal persons, all partners have limited liability (quite similar to cttnhh VN).

d)Chartered and Statutory Corporation:

 These corporation are formed by obtaining a charter (chiếu lệnh) of incorporation

from the Crown or securing a private Act of Parliament → This type of formation
is unlikely to happen today
 Many of these corporations are not-for-profit organization

III- The nature of companies:

 S15.1 of CA 2006 → separate legal personality of a company and limited liability

of its members are two key consequences of incorporation

1)The principle of corporate entity (separate legal personality):

 Separate legal personality: a company is a legal person in its own right, separate
and distinct from its member
 Has the legal capacities and powers of a natural person
o Sue or be sued in its own name
o Enter into and enforce contracts
o Hold title to and transfer property
o Hold civil and/or criminal liability violations of law
o The company will not die when its member die (perpetual lifetime)
 o The share capital, once subscribed must be maintained by the company, it
no longer belongs to the members and cannot be returned except some
exceptional cases
o In general, liability of members/shareholders is limited to the total value of
the shares that they agreed to buy (><VN: paid)
 Salomon v A Salomon & Co Ltd [1897] AC (House of Lords) (the leading case
which gave effect to the separate entity principle)
 Lý do TA công nhận tư cách pháp nhân (Salomon v. Salomon): the principle of
Independent Corporate Existence - a court decided “a member of a company can’t
own the assets of the company on his own name” (nguyên tắc pháp nhân riêng biệt
với công ty). Calcutta Court observed that “The Company was a separate person, a
separate body altogether from the shareholders and the transfer was as much a
conveyance, a transfer of property as if the shareholder had been a totally different
person”; “the position of a corporation in law is equal to a natural person and has a
legal entity of its own. The entity of the corporation is entirely separate from that
of its shareholders. It bears its own names and has a seal of its own. Its assets are
separate and distinct from those of its members. It can sue and be sued exclusively
for its own purpose. The liability of the members of the shareholders is limited to
the capital invested by them. The creditors of the members have no right to the
assets of the corporation”. the company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself → Salomon
free.

2)Limited liability:

 The doctrine of limited liability was introduced in 1855 (Limited Liability Act
1855) in UK
 A company, as a separate juridical person must satisfy claims and judgements
against it, to the extent of its assets → Limited liability of shareholders
 Advantages:
o encourages capital formation
o shields shareholders from the debts and obligations of the company
 Criticisms:
o With the shield of limited liability, the shareholders and managers may
have incentives to engage in high-risk business activities
o The legal personality of a company in some cases is abused by the
shareholders for wrongful or unjustifiable purposes

3)Lifting the company veil (Piercing the corporate veil, veil-piercing) (Cơ chế phá
hạn TNHH):

 veil refers to legal personality of the company

 lifted/pierce: we can bring the person behind the veil to the front, and impose
liability directly
 lifting the corporate veil refers to the possibility of looking behind the company's
separate personality to make the shareholders liable for their company's debts (an
exception to the rule that they are normally shielded by the corporate shell)
 Consequences: the company = shareholders, all the rights, activities, obligations of
the companies = the rights, activities, obligations of shareholders.
 Ground for lifting the corporate veil:
o The company is deemed to be nothing more than an “alter ego" of the
owners: a shareholder (or shareholders) dominates a company and misuses
it for improper purposes. Prove: these two elements, but how can we
know improper purposes
o The company was formed or used to facilitate the evasion of legal
obligation (sometimes tort obligation)
 Jones v Lipman [1962] 1WLR 832
o The company is used as a means to perpetuate a fraud
o Separateness has not been maintained between the company and its
shareholders (if can freely move in/out the capital → no separateness)
C2: Company Formation (Limited by shares)

I- Registering a company:

 Basic steps:
o Prepare registration documents
o Register company with the registrar of companies
o Post - registering steps: open account, obtain corporate seal (if required),
pay in capital
 Registration authority (The Companies House):
o Registrar of companies (s1060 CA2006): The Companies House
 Method of forming a company:
o A company is formed by one or more persons subscribing their names to a
memorandum of association and complying with the registration
requirements (S7 CA2006)
o A company is formed by 1/more persons subscribing their names to a
memorandum of association, expressing their desire/will to set up a
company together (a proof) (khế ước thành lập công ty)
o If the registration requirements are complied, the registrar of companies
must register the documents and issue a certificate of incorporation (S14,
15 CA2006)
 Document required for registration: See hand-outs
 Company ‘s name (tên chính thức) (part 5 CA2006):
o Companies are free to choose their name
o The name of a public ltd company must end w/
o However, there are some prohibitions:
 Has prohibited names (S.53)
 Suggests connection ww/ government or public authority (S54-56)
 Is the same as another name appearing in the registrar’s index of
company names (S66 CA2006)
 Business name (tên giao dịch) (part 41 CA2006):
o <. from its company name. Eg: Gas Appliances Limited (Company
name) & Flames For You (business name) → business name more
catchy
o Business names are not required to be registered, however business name
provisions must be adhered to
 The certificate of incorporation (an evidence for the existence): S15 CA2006
o If the certificate is revoked by the authority, the company will have to
dissolved
o The certificate must be signed by the registrar or authenticated by the
registrar's official seal
 oSimpler than in VN (no information of shareholders, legal representative, k
the hien nganh nghe kd - business activity (=VN))
 Commencement of business: (Khởi sự kinh doanh)
o A private company can start its business as soon as the certificate of
registration is issued
o A public limited company cannot conduct business unless it has obtained a
trading certificate from Companies House) + certificate of incorporation
 a trading certificate is issued if the company has a Minimum allotted
share capital (vốn điều lệ trên tổng số cổ phần đã đăng ký mua) of
50,000 ponds of which at least ¼ of the nominal value and all share
premium must be paid up (s761-763)
 E.g: Issued 100,000. Agreed to buy 50,000 each share worth 1 o-
und, 12,500 là số tiền cần phải có để được cấp trading cert
 It is an offence to trade without a trading certificate and the directors
are liable, on conviction, to a fine (phạt hành chính)

II-Promoters and pre-incorporation contracts:

1)Promoters (người thành lập):

 The term ‘promoter' is a term of business and not of law

 A promoter (có thể không phải là owner of co.) may be an individual, a firm, an
association of persons or even a company who decides to form a company and
take all or some of the necessary steps to form it: can be anybody who is directly
taking steps to form a company (người thành lập)
 Main functions performed by promoters: see hand-outs

Duty of promoters: (Promoters will owe fiduciary duty to the company)

 A promoter cannot be allowed to make any secret profits. If it is found that in any
particular transaction of the company, he has obtained a secret profit for himself,
he will be bound to refund the same to the company
 The promoter is not allowed to derive a profit from the sale of his own property to
the company unless all material facts are disclosed. If the contracts to see his own
property to the company without making a full disclosure, the company may either
repudiate

2)Pre-incorporation contracts: (Hợp đồng ký kết trước khi công ty được thành lập)

 Pre-incorporation contracts are those were made by the promoters before the
company was formed.
 S51 (1) CA2006: A contract that purports to be made by or on behalf of a
company at a time when the company has not been formed has effect, subject to
 any agreement to the contrary, as one made with the person purporting to act for
the company or as agent for it, and he is personally liable on the contract
accordingly.
 Notes:
o When the company is registered, it is not bound by the pre-incorporation
contract. See [Phonogram Ltd v Lane [1982] QB 938].
o The person who is made liable under S.51 can avoid personal liability by a
clear agreement on exclusion of personal liability with the other party to the
contract
o A company may not become a party to a pre-incorporation contract by
ratification (phê chuẩn)
o A company may become a party to a pre-incorporation contract by novation
(làm mới)
 Novation is a tripartite transaction in which the parties to the original
agreement, together with the company, enter into a new agreement

III- The article of association:

 Constitutional documents of a company: the agreement between members,

shareholders
o Articles of association
o Special resolutions
o Entered by all members
o Current statement of capital (báo cáo tài chính)
o Certificate of incorporation
 Notes:
o All constitutional documents must be registered with the registrar of
companies and are available for public scruntiny (S.30) and must be sent to
a member on request (S.32)
o Shareholders' agreement fall within S.29 must be registered
o The most important constitutional document of a company is it's article of
association

1)Article of association:

 Definition: The regulations governing a company's internal management including

the rights of shareholders, the conduct of meetings and the appointment, removal
and powers of directors
 Model articles: There are different sets of model articles for different types of
companies, these operate as the articles of a company to the extent that they have
not been excluded or modified (S19, S20) ⇒ they don't have to use the whole
content of articles, they are free to add in/leave out the articles that are suitable for
their situation. Google: Model for private/public company in the UK
  The Companies (Model Articles) Regulation 2008 (SI No. 3229)
 Do not content the details

b)Content of the Articles of Association:

 The content of the articles is a matter to be agreed upon by the original

shareholders of the company and may be changed from time to time as the
company develops
 Articles which are inconsistent with the law are void and unenforceable
 Ex: Articles purporting to override certain statutory rights or powers may be held
to be void and unenforceable

Characteristics that distinguish the AOA as a statutory contract from other typical
contracts:

 Amendment of a contract usually requires the agreement of all parties >< The
Articles can be amended by a special resolution which means a resolution passed
by a majority of not less than 75% (s21(1), s283(1)).
o Amending the articles of association

 A contract only binds those parties who agree to it >< All members at any time are
bound by the articles, so that a new member who has played no part in the drafting
of the articles. upon being registered as a member, is bound by the articles
 The articles cannot be challenged based on the doctrines of misrepresentation
mistake undue influence
 The court may not rectify (sửa chữa) the articles even if they do not represent the
intentions of the members on incorporation. However, the court can declare some
parts of the articles are unaffected, invalid and unenforceable

Amending the articles of association:

 A company may amend its articles by special resolution (S.21) → the relevant
special resolution and a copy of the new articles must be sent to the registrar of
companies (S26, S30)
o Special resolutions must be passed by shareholders representing not less
than 75% (caculated by number of voting rights not number of shares) the
total voting rights of shareholders who vote on the resolution
o Ordinary resolutions must be passed by not less than a simple majority 50%
+ 1 vote
o Not only special resolutions but ordinary resolutions entered by all
members can amend the articles → it’s a constitutional document
 Exceptions: matters that doesn’t require a special resolution to be amended
 o S.551(8) “Power of directors to allot shares etc: authorisation by company”:
A resolution of a company to give, vary, revoke or renew authorisation
under this section may be an ordinary resolution, even though it amends the
company’s articles
o S.685 Terms and manner of redemption

2)Shareholders’ agreement:

 Shareholders' agreement are usually entered into when the company is first
registered but may be entered into at any time. They may or may not be a part of
the official constitution of the company, but either ways can fundamentally affect
the way a company is managed and controlled. It can be kept confidential
 Parties to a shareholders' agreement:
o Shareholders' agreement are contracts entered into by two or more
shareholders, binding only those shareholders and can only be amended
with the agreement of all parties
o A company can be made a party to a shareholders’ agreement
 Enforcing shareholders' agreement:
o If a shareholder who is a party to a shareholders' agreement breaches the
agreement, any other shareholder who is party to the agreement who has
suffered loss caused by the breach may sue for damages (tiền BTTH) for
breach of contract
C3: Financing a Company

1. Highly leveraged company is more vulnerable to insolvency than a company with

low gearing because it has to pay for the debts, using its profits and turnover to
pay for the loan agreement
2. the dividend paid to shareholders comes from the company’s profit. It will reflect
the profitability of the company and will reduce a long period of poor trading

Distinguish: (ii) don’t have payment obligation of repaying anything to shareholders, (i)
there’s an obligation for debt payment

 Why the shareholder want to contribute in the capital:

o Have influence (main goal long-term investor)
o Earn profits (from selling to others & dividend)
 Types of corporate financing:
o Two ways: through borrowing (which creates debts/debt financing) and
though the investment of funds by owners (which creates equity capital -
equity financing)

Debt financing:

 Lending creates a debtor-creditor relationship

 Creditors have priority over equity holders and must be paid interest on the money
borrowed before dividends are paid to shareholders
 In a dissolution of the corporation, creditors receive their principal before equity
holders receive anything

Equity financing:

 occurs where a company issues shares to one or more investors who become
shareholders of the company. In return for the shares, the shareholder pays the
issue price of the shares to the company. The company receives its funding and the
shareholder receive and owns shares in the company
 Shareholders in a public traded company may sell their shares (two types: nominal
values, market values) in the stock market but the price depends on the success of
the business
 Compared to creditors, the shareholders have greater risk (lower priority than
creditors) but also the potential for greater return (increased profits benefit the
shareholders)

I- Shares and Share Capital of a Company:

1)Nature of shares and membership:

 Nature of Shares:
o “Share” is a fraction of share capital in a company. A share is a piece of
personal property (s541)
o A share is the interest of the shareholder in the company measured by a
sum of money, for the purpose of liability in the first place, and of interest
in the second, but also consisting of a series of mutual covenants (article of
association entered into by all the shareholders” (Farwell J. in Borlands
Trustee v. Steel [1901] 1 Ch 279)
o a share is a fraction of capital, denoting the holder’s proportionate financial
stake in the company and defining his or her ability to its equity funding.
And rights in the company
o a measure of the holder’s interest and rights in the company
o A species of property → can be transferred through sales/as a gift to
another person
 Membership:
o The relationship between a company and its shareholders is governed by a
‘standard form contract’ - the articles of association
o Shareholders are part-owners of the company, have the role as part of the
decision-making of the money, manifest in voting rights attached to their
shares
o The law usually requires that a shareholder is given a share certificate in
respect of his shares (S769, S776 CA20060
 But there’s situation where shareholders don’t receive share
certificate: (i) buy shares online (thể hiện trong sổ đăng ký cổ đông)
 You become shareholder when your name appears in the registered
list (K5D113 LOE)
 You don’t have the rights of a shareholder but still have rights over
the property until your name appears in the registered list

2)Classes of shares:

 Shares that provide the owners with the same rights and liabilities are called a
class of shares → various types of shares deliver financing flexibility to companies
(shareholders have different needs)

a)Ordinary shares:

 Most basic type of shares

 One ordinary share carries one vote
  Ordinary share carry the basic rights of shareholders (right to share in the profits
of the company; right to share the residual wealth of the company when the
company is wound up; right to vote on shareholder resolutions)

b)Other classes of shares:

 Optional:
o Preference shares (cổ phần ưu đãi)
o Redeemable shares (cổ phần ưu đãi thu hồi)
o Deferred shares (cổ phần không ưu đãi)
o Non-voting shares (cổ phần không biểu quyết)
o Dividend share (most common)
 Carry rights differing from ordinary shares:
o can provide more benefits associated with a certain right
o can set up a limitation on a certain right
 Preference shares:
o Most common: the dividend shares
o The dividend shares: Usually be entitles to have dividends paid at a
predetermined rate (e.g at a rate of 10% on their nominal value) in priority
to any dividend on the ordinary shares → 1st to receive profit distribution
 Preference shareholders have the first claim on the corporate profits
in any year, a right to priority over the ordinary shareholders when
capital is returned to the members in a winding up (phá sản)
o It is quite usual for preference shareholders to have no voting rights at the
shareholder meetings
 Redeemable shares (not a preference):
o Fully paid-up shares that either will be redeemed (bought back by the
company) at the option of the company or the shareholder, on certain dates
and subject to such terms are stated in the articles or company resolutions
 Deferred shares:
o have rights which are deferred to the ordinary shares; they will only get
dividends after a specified minimum has been paid to the ordinary
shareholders, and as regards to the return of capital on a winding up.
o E.g: founder of a company voluntarily owns as a demonstration → can
attract investors
o only founder owns this type of shares
 Non-voting shares (employee shares/awarded shares):
o Include dividend preference shares
o Carry no rights to vote and no rights to attend general meetings
o A company may issue with non-voting shares because they want them to be
able to benefit from dividends or distribution of but do not want them to
participate in decision making
3)Share capital:

 S547 CA2006
 Share capital: by total nominal value of the shares of a company that has been
issued (used for shares that have the buyers) /allotted (used for shares that do not
have the buyers)
 Initial share capital: total nominal value of the shares taken by or issued to the
first shareholders who sign the memorandum of association at the time of
registration) (based on the first shareholders)
o A statement of initial share capital must be included in an application to
register a company (S9)
 Paid - up share capital: is the sum of those parts of the nominal value of issued
shares already contributed to the company (the real amount of money that the
company receive from the shareholders)
o Reflects the real capital that has been contributed
o Not always disclosed
 Called - up share capital (vốn kêu gọi góp được): CA S547 also defines called-
up share capital as the sum of amounts paid for shares when issued, sums
subsequently called up (paid or not paid) and sums due on a specified date without
further call.
o reflects the flexibility on the term of payment
o attract more investors
 Note:
o Issue of Shares is the legal transfer of ownership of the share to the
investors by the company
o Allotment refers to the allocation of shares among the interested investors,
and it decides the overall composition of the shareholding

→ The key difference between allotment and issue of shares is that an allotment is
a method of share distribution while issue is the offering of the ownership of the
share to shareholders to hold, and later transfer to another investor. Allotment is
followed by the actual issue of ther share, which occurs when the name of the
owner is registered in the company’s register of members

o Member is a generic term covering shareholders, guarantors (of companies

limited by guarantee) and members of unlimited companies. All
shareholders are members of a company, but not all members are
shareholders

4)Alteration (Change: increase/decrease) of share capital:

 Each time the company’s share capital is altered; an updated statement of capital
must be sent to the registrar of companies
  A company having a share capital may alter its share capital ONLY in the ways
provided for in S617 of the CA 2006

a)Increasing the share capital:

 Allotting new shares is the only way to increase the SC. Loans and other profits
are another type of asset
 Allotting new share:
o S617 (2a): company may increase its share capital by allotting new shares
in accordance with Part 17 of CA2006
 offering of shares to the public ⇒ detailed securities regualtion must
be complied with
 The terms ‘allotment’ and ‘issue’ often used interchangeably
o For public companies: offer the shares to the public, detailed regulation
must be complied with
 Authority to allot new shares:
o Shareholders (in the form of ordinary resolution) and the board of directors
can allot in 2 situations (S550, 551)
 S550: for private companies with one class of shares only, the Act
authorize the directors to issue shares of the same class
 S551: In private companies with one class of shares seeking to issue
a different class; private companies with more than 1 class of shares;
public companies → either the articles, or an ordinary resolution can
authorize the directors to issue shares
 Statutory pre-emtion rights of existing shareholders:
o Pre-emption rights are the rights of existing shareholders to be offered new
equity shares first, in proportion to their existing equity share holdings
(S560-5777)

→Purpose: preserve each shareholder’s proportionate interest in the equitable

share capital of the company

→ The offer must open for acceptance for at least 21 days (S562.5)

o Notes:

1. Statutory pre-emption rights apply only to the issue of ordinary

shares. Depends on the resolution (see hand-outs)
2. Statutory pre-emption rights also do not apply to a variety of
circumstances (see hand-outs)

Issue price (giá phát hành 542):

  Nominal value (”par” value): the fixed monetary value attached to the share when
it is issued → is the minimum amount for which a share can be issued

→ is also the minimum amount for which a share can be issued

→ it is prohibited to issue shares below the “par” value (can’t be discounted

S.580)

o All shares must have a fixed nominal value (S.542)

 Premium:
o Shares can be issued at a price higher than nominal value → the share
premium
o E.g: a share with a nominal value of 1 pound is issued at 1.20 pounds, the
share premium is 20 pence
o S610
 Completing the issue of shares:
o A shareholder does not have legal title to shares and those shares have not
been issued unless and until his name appears in relation to those shares in
the register of members
o An allotment of new shares must be registered within 2 months of the date
of the allotment (S554)
o A company must complete share certificates in relation to allotted shares
within two months of the allotment (S769), this obligation does not apply to
uncertificated dematerialized shares (shares offered and purchased online)

b)Reduction of the share capital:

 A company cannot reduce share capital except in one of the ways listed in C10 of
the CA 2006

II- Capital maintenance and distribution:

 “Capital maintenance” is a principle or doctrine with 2 components:

o A limited company having a share capital may not reduce its share capital
except as authorized by law
o Distribution of a company’s assets to its members, whether in cash or
otherwise, may only be made out of profits available for the purpose

2)Reduction of share capiral:

a)Acquisition of own shares (thu hồi vốn):

 2 forms:
 o Repurchase
o Redemption of shares, except in accordance with Part 18 (Ca2006) (S.658)
o S658: a company is not permitted to acquire its own shares (repurchase of
shares or redemption of shares), except in accordance with Part 18 - CA
2006)
 Redeemable shares (S684-689): provided rules for the issue and redemption of
redeemable shares (hoàn lại cổ phần có tính năng hoàn lại)
o The terms for redemption of shares must be met. These terms are
determined by the AOA or by Directors (if being authorized)
o All redeemable shares must be fully paid-up shares (S686)
o The terms/price of redeemable shares can be agreed on by shareholders and
company (but must be stated in the shares certificate/AOA). The nominal
value is the minimum amount

→ Redeemable shares must then be cancelled, the company must reduce its issued
SC by the nominal value of the cancelled shares (S.688)

 Repurchase of shares (S694-701):

o Share cannot be repurchase unless fully paid
o The repurchase shares must be cancelled, and the company must reduce its
issued share capital by the nominal value of the cancelled shares
o
Repurchase Redemption
The
Can be much higher > nominal value Maybe just = nominal value
price
The company can decide to buy back When the terms and conditions happen, the
or not, the terms will be discussed company will just carry out
The buyer and the seller need to The shares will have been issued as
agree to the terms and conditions of redeemable shares, so that the terms and
repurchase at the time of the conditions of the re-acquisition will be
repurchase known from the outset

E.g: The total asset will - 20 pounds, but the share capital only - 10 pounds

b)Distribution:

 S830: A company may only make a distribution out of profits (to any of its
members) available for the purpose
 Additional requirement (for public companies): S.831 Net asset restriction
 A public company can only make a distribution up to the amount by which its net
assets exceed the aggregate of its called-up SC + undistributable reserves, then the
profits must be kept in the assets of the company and can’t be distributed
 Undistributable reserves: S831.4
  Additional limit on distribution by public companies:
o Net asset test: S831 states that a public company may only make a
distribution up to the amount by which its net assets (giá trị tài sản
ròng/chưa trừ các nghĩa vụ trả nợ) exceed the aggregate of its called up
share capital and undistributable reserves (tài sản không phân chia)

Preparation (home):

 The creditor expects to be paid interest on any sum it lends to the company and to
be paid back that sum at the point, or various points, in the future at which it
becomes due and repayable.
 If a company has a negligible share capital, virtually the entire risk of the company
making trading losses lies with the creditor. Every £1 the company loses in trading
is £1 it cannot pay back to the lender.
 If, however, a company has substantial share capital, the risk of the company
making trading losses lies with the shareholders up to the amount of the share
capital. Every £1 the company loses, up to the amount of the share capital, is a loss
borne by the shareholders.
 the company cannot pay money to shareholders, whether in the form of dividends
or otherwise. ?because it has no profits available for the purpose (it has made a
loss)
 share capital can protect a creditor from losing money due to a company
experiencing trading losses
 In reality, a financial creditor will seek to secure any sum lent to the company.
Taking security offers far greater protection.

→ but it’s not considered important.

Instead of paying the dividend to the shareholders in cash, a resolution was passed to give
them debenture bonds. Dividends can be paid out in cash, by check or electronic transfer,
or in stock, with the company distributing more shares to the investor.
C4: Corporate Governance

I- Overview:

 Report of the Cadbury committee on the financial aspects of corporate governance

1992: “Corporate governance is the system (complicated things) by which
companies are directed and controlled”
 3 types of powers:
o Sovereign (shareholders)
o Executive (BoD)
o Supervisory (Board of Supervisors)

1)Definition:

 “Corporate governance” reflects how 3 types of powers interact with each other

The UK corporate governance framework (khung pháp lý: actually legal framework)

 Guidance decree, Securities Law,

 Corporate governance:
o Includes legislation, codes and voluntary practices
o Voluntary practices is the UK corporate governance code sets out good
governance principles and practices → applies to listed companies on the
“comply and explain” basis → not a mandatory application so the company
can choose to apply or not, if not then have to provided explanations for the
non-application

⇒ build trust for investors about good transparent management

o Report of the Cadbury committee on the financial aspects of corporate

governance 1992: “Corporate governance is the system by which
companies are directed and controlled
o OECD Principles of Corporate Governance 2004: “Corporate governance
involves a set of relationship between a company’s management, its board,
its shareholders and other stakeholders. Corporate governance also provides
the structure through which the objectives of the company are set and the
means of attaining those objectives and monitoring performance are
determined

2)Different system of CG:

  Sovereign (Tối cao): Held by shareholders → Holders are owners of the 3 powers.
However, because the number of shareholders are enormous, they can’t exercise
together so they separate the powers to BOD and SD
 Executive: defines the strategy and implements the operational decision that guide
the company. Exercised by Directors and BoD
 Supervisory: ensures that the exercised of executive power is compatible with the
corporate’s benefits and the company’s permanence
 The one-tier system (UK, US, Australia)/mô hình quản trị một tảng: The
single body exercises both the executive and the supervisory powers at the same
time - “BoD” or sometimes “management board” in the various national laws.
o Executive members are responsible for day-to-day management of the
company while the non-executive members have the power to supervise
management by the board members
o Executive members - executive and non-executive members - supervise
management.

→ supervisors know the situation in the BoD, can vote → make influence over the
management of the company. The best system for corporate governance

→ risk: non-executive members must be independent directors, if not then no one

really exercises the supervisory effectively

 The two-tier system: Separate the executive power from the supervisor Power by
stipulating that they be exercised by 2 different bodies: a management body and
supervisory body

→ Supervisors don;’ really know the situation in the BoD, they’re not members,
they can’t vote

o non-executive members/independent directors: K2D155 LDN (the list is

not good, a loophole)
 The mixed system (VN): offers companies a choice between the one-tier system
and the two-tier system

The UK system:

 The key organs of governance of a company are the board of directors and the
shareholders:
o As a governing organ of the company, the shareholders are often referred to
as the “shareholders in general meeting”.
o The BoD is principal organ of management

II- Shareholder’s meeting:

1)Power of Shareholders:

 The role of shareholders in the governance of any company is established by:

o The article of association (AOA);
o Statute law (CA2006)
o Cases recognizing the power of the shareholders in certain circumstances
(case law)
 Statutory powers of shareholders: Hand-outs
 Default powers of shareholders: Management power will revert to the shareholders
in circumstances where the board is unable to act (Barron v Potter [1914] 1 Ch
895)
 How shareholders exercised their powers: By taking decision (in the form of
resolution)

2)Meetings: (S301-361)

 Shareholder meetings, also called company meetings, are an important part of

shareholder decision-making

a)Quorum: (Điều kiện tiến hành cuộc họp)

 The minimum number of people necessary at a meeting (S318):

o In the case of a company has only one member, one qualifying person
present at a meeting is quorum
o Apart from the above circumstance, and unless the articles require a higher
number, two shareholders present at a meeting are a quorum

⇒ compare to VN: stricter than VN (UK bắt buộc phải 2 người, VN chỉ cần 1
người nếu người đó có trên 50% tổng số phiếu biểu quyết

b)Types of meetings:

 Annual general meetings (AGM): Every public company must hold an annual
general meeting (AGM) within 6 months of the end of its financial year and if the
company fails to do so, a criminal offense is committed by every director and the
company secretary (S336)
 General meeting:
o Calls of directors (S302)
o Request of holders of at least 5% of the voting rights (S303, 304) → the
directors have to call a general meeting within 21 days of such request or
hold the meeting within 28 days of the request: Request & Call (Has these 2
steps: This meeting is valid)
 o If the directors fail to call, the shareholders who made the request may call
a meeting and hold it within 3 months of the request (S305)
o Notice of general meetings: All shareholders and directors are entitled to
receive notice of every general meeting unless the articles provide
otherwise (S310). A notice must state the general nature of the business to
be dealt with as well as the time, date and place of the meeting (S311)

3)Resolutions (Nghị quyết):

 Public companies: Resolutions of the shareholders of the public company must be

passed at shareholders’ meetings held and conducted in accordance with the Act
(phải thông qua bằng cuộc họp chứ không phải văn bản)
 Private companies: Shareholders pass resolutions either at shareholders’ meetings
or by written resolutions (S288.1)

a)Proportion of votes needed to pass resolutions: (Tỷ lệ phiếu biểu quyết cần thiết
thông qua nghị quyết)

 The 2 basic types of resolutions passed by shareholders are ordinary resolutions

and special resolutions:
o Ordinary resolutions must be passed by not less than a simple majority 50%
+ 1 vote (S282)
o Special resolutions must be passed by not less than 75% (S283)

b)Unanimous informal decisions can be effective (Những nghị quyết được thông qua
không tuân theo quy định của pháp luật nhưng với tỷ lệ tuyệt đối):

 A resolution that is UNANIMOUSLY passed by shareholders still has

effectiveness without the need for compliance with formal procedures (the
“duomatic principle)

<aside> 💡 Check the content of the resolution is legal if want to apply this principle

</aside>

[Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA); Euro Brokers Holdings Ltd v
Monecor (London) Ltd [2003] BCLC 506 (CA)]

c)Voting methods:

 Vote on a shows of hand; Poll vote: Used at shareholders’ meetings

  Written resolution vote: used for written resolutions and available to private
companies only

c1)Vote on a show of hands:

 Is based on shareholders in attendance at a meeting raising their hands to indicate

support for, or opposition to, a resolution put to the meeting
 Don’t care about the votes, only care about the ppl who raise their hands

c2)Poll vote: (used at shareholders’ meetings)

 is not based on the number of shareholders who vote but on the voting rights of
the shareholders who vote
 care about the shareholdings - tỷ lệ sở hữu

c3)Written resolution vote:

 is based on the voting rights of all shareholders eligible to vote

 Written resolution can only be used by private companies and even private
companies cannot use the written resolution procedure to remove a director or to
remove an auditor before expiry of his term of office (S188, 288.2) → must be
decided at meeting
 Exercises:

6 shareholders:

o A: 400 ordinary shares

o B: 400 ordinary shares
o C: 100 ordinary shares
o D: 100 ordinary shares
o E: 200 ordinary shares
o F: 300 preference shares (carry no votes)
o At the meeting: E is absent >> Special resolution: A, B approve; C, D:
disaprove

⇒ Vote on a show of hands: Can’t be passed, because only 50% of shareholders

approve.

⇒ Poll vote: Can be passed. The total number of votes: 1000, A B approved = 800
(80%).

⇒ Written resolution vote: No meeting, resolution is sent to all 5 shareholders.

ABC approved (900/1200 votes - 75%) → can be passed.
d)Proxies and corporate representatives:

 Proxy (người đại diện cá nhân theo uỷ quyền - optional): a person appointed by a
shareholder to vote at a general meeting. The proxy can speak at the meeting and
vote on the show of hands and on the poll. The proxy need not be a shareholder of
the company (S324)
 Corporate representative (a must) (người đại diện công ty theo uỷ quyền -
mandantory): is an individual who represent a company X at any meeting of a
company of which company X is a shareholder → The representative has the full
rights of the corporate shareholder he or she represent (S323)

III- Board of Directors:

1)Board powers and decision-making:

a)Powers of the board:

 The BoD is a body distinct from the individual directors. The board collectively
is an organ of government of the company, entrusted by the the articles with the
responsibility to manage the company and to exercise all the powers of the
company.
 Each individual is not allowed to exercise the power of the Board
 The articles of the company (requirement of shareholder approval before certain
powers of the company may be exercised) can limit the powers of the BoD

b)Board decision-making:

 The AOA is responsible for regulating the rules for how the board to take the
decision (>< VN: interferes a lot)
 Statue law does not regulate board decision making. Establishing the rules for how
the board of directors is to take decision is an important part of the articles of both
private and public companies

2)Definition and classification directors:

 The details of directors are recorded by the company in the register of directors
(S162 CA2006) and their appointment is notified to the registrar of companies
(S167)
 S250(1) of the CA 2006: “Director included any person occupying the position of
director by whatever name called)
o whatever name called: a person who is not officially appointed as director,
but he is actually performing the rights and duty → still considered as
director (without the title)
a)Classification of directors:

 De Jure Directors: appointed in accordance with the articles of association who

has agreed
 De Facto Directors: person who has not been legally appointed to be director or
whose appointment has terminated, but openly (tất cả managers và kể cả thành
viên khác biết rõ và chấp nhận the fact that A exercised the director) occupy and
assume the position of director, despite a lack of authority and right to act
o Smithton Ltd v Naggar [2014] EWCA Civ 939
 Shadow directors: (S251) means a person in accordance with whose directions or
instructions the directors of the company are accustomed to act (except where that
person gives advice in a professional capacity like a solicitor or accountant
(S251.2)
o Trade and Industry v Deverell [2000] 2 WLR 907

Both de facto and shadow directors owe the general duties of directors set out in Part 10
of the CA 2006 (vẫn phải chịu trách nhiệm như de jure trước pháp luật) - to prevent them
from abusing their power for personal interest and causing damages

b)Executive and non-executive directors:

 Independent directors: sometimes can be non-executive directors (>< non-

executive directors can (should) be independent directors). Can only be
independent directors if they can satisfy the standard of independence (UK
Corporate Governance Code)

3)Appointing and removing directors:

a)Composition of the board:

 a private company must have at least 1 director and public company must have a
minimum of 2 directors (S154 CA2006) but no statutory maximum number of
directors is set for either private or public companies.
 A person will be not permitted to act as a director if he falls into one of these
categories
o a person who has not attained the age of 16 (S157 CA);
o a bankrupt person (Company Directors Disqualification Act (CDDA) 1986,
S11);
o persons subject to a dis qualified order, or an undertaking in lieu thereof,
under the CDDA 1986
 Additional requirements (given by the UK Corporate Governance Code):
 o Have 3 committees in their board: a nomination, remuneration (salary,
rewards), audit committee (supervising financial statements, should be
independent director - Uỷ ban kiểm toán)

b)Appointing directors:

 The CA 2006 is silent on how directors are to be appointed → Rules regarding

appointment of directors are normally set out in the articles
 In general directors are appointed or removed by a resolution passed by a majority
of shareholders present and voting at a shareholders’ meeting

c)Removal of directors:

 S168.1 CA 2006: “A company may, by ordinary resolution at a meeting, remove a

director before the expiration of his office, notwithstanding anything in any
agreement between it and him”

→ the written resolution procedure can’t be used to remove a director (even in private
companies)

d)Remuneration:

(fee - thù lao, salary, rewards and other financial benefits) of directors

 Nature relationship: principals (shareholders) -agent/trustees (directors). Because

the directors run the company for the benefits of shareholders and they must be
loyal to the company
 Theoretically, directors are not entitles to be paid for their services to the company
as directors because the office of the director that was historically aligned in law
with that of a trustee who is not entitled to payment → directors won’t receive fees
 If either the articles permit payment or the shareholders approve payment, the
company can pay its directors and the sums paid are sometime called directors’
fees but are also called remuneration
 Remuneration served as a motivation for directors

e)Company secretary (Chief Administrative Officer):

 A private company is not required to have a company secretary (S.270). A public

company must have a company secretary (S.271)
 The functions of the company secretary are not defined in the Act. They are
administrative rather than of a business nature
 Functions: See hand-outs
o Have a good knowledge of the company → To provide advice
 o To schedule meetings (mainly meetings of the BoD)
o To assure documents is consistent with the requirement of law

IV- Directors’ duties: (3-4 points in final exam)

Directors duties can be classified into:

 Management duties:
o Duty to act within powers (S171)
o Duty to promote the success (S172)
o Duty to exercise independent judgment (S173)
o Duty to exercise reasonable care, skill and diligence (S174)
 Conflict-of-interest duties:
o Duty to avoid conflicts of interest (S175)
o Duty not to accept benefits from third parties (S176)
o Duties to declare interest in transactions (S177)

1)General Management Duties:

a)Duty to act within powers (S171):

 A director of a company must:

o act in accordance with the company’s constitution, and
o only exercise powers for the purposes for which they are conferred
 Exercise:
o Company A’s articles: loans in excess of 200,00 to be approved in advance
by the shareholders. Without shareholder approval, the directors
unanimously resolved to enter into a loan with a third-party for 500,000

⇒ it is clear that the BoD has violated the AOA → acting without powers

o Company A Ltd’s articles: the board has the power to issue new shares
o Company A is at the edge of being taken over by Company B who controls
50% of Company A’s shares. The director of Company A have decided to
issue new shares, which makes Company B unable to complete its
acquisition

⇒ A is preventing B from taking the company → improper purpose of issuing new

shares (it should be for the purpose of raising the company’s capital), the powers
have been exercised for wrongful purpose→ breach the duty to act within powers.

 How to determine whether or not there has been a breach of this duty:
o Ascertain the nature of the power;
 o Define the limits within which it may be exercised;
o Examine the substantial purpose purpose for which it was exercised;
o Reach a conclusion whether the exercise was proper or not.
o [Howard Smith v Ampol Petroleum Ltd [1974] AC 821 (PC)]

b)Duty to promote the success of the company (S172):

 A director must act in the way he considers in good faith would be most likely to
promote the success of the company for the benefit of the shareholders → Courts
consider the beliefs of the director (hard to define)
 Exercise: The BOD of company A decided to let the company enter into a contract
with a business partner. Later, the contract turned out to be a failure and resulted
as a financial loss to Company A
o May not have breached the duty if at the time the BOD made the decision,
they believed that it would be a success
o To prove it, the court need to examine: if there is any statistics, documents,
the evaluation they have taken in order to make decision
 Courts have introduced an objective dimension test into consideration of whether
or not the duty has been breached
o Evidence that the director did not stop to consider the interests of the
company
o If no intelligent and honest person in the position of the director could in
the circumstances have reasonably believed he was acting in the interests of
the company, the courts will find that the duty has been breached

Việc vi phạm duty to act within powers không dẫn đến việc breach duty to promote the
success of the company

c)Duty to exercised independent judgment (S173):

 (1) A director of a company must exercise independent judgment

 (2) This duty is not infringed by his acting:
1. in accordance with an agreement entered into by the company that restricts
the future exercise of discretion by its directors, or
2. in a way authorized by the company’s constitution

Directors seeking consultation from solicitors advisers → the decisive factor: whether or
not the BoD carries out the evaluation; the decision really promotes the success of the
company; the consultation is worth following and suitable for the situation of the
company.

d)Duty to exercise reasonable care, skill and diligence (S174):

  S174:

“(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a
reasonably diligent person with—

1. The general knowledge, skill and experience that may reasonably be

expected of a person carrying out the functions carried out by the director in
relation to the company, and
2. the general knowledge, skill and experience that the director has”
 Exercise: Mr.A is a director of Company A Ltd (a real estate company). Mr. A
made a decision on purchasing a building. Later on, it turned out that Company A
has purchased the building that did not worth the price.

o To become a real estate director:

 Significant professional experience in real estate development and
sales
 Educational qualifications: a bachelor’s degree and a master’s
degree in real estate, engineering, business, or finance; a licensed
real estate broker
 A number of years of work experience in business administration or
finance
 Other professional qualification and desired skills that each
particular company may require

⇒ Mr A only satisfies only 1 condition (bachelor’s degree) → does not breach the
duty (at the time he made the decision, he is in good faith, it is normal for
someone like him to make a bad decision). Only breach if he has all the
requirements but still makes a wrong decision.

2)Conflict of interest duties:

 Conflict-of-interest duties are the duties imposed on directors primarily to

discourage them from acting in their own self-interest or the interest of another
person that is not their company
 A breach of conflict of interest duty can also entail a breach of a management duty
⇒ not true in reverse

a)Duty to avoid conflicts of interest (S175):

  A director of a company must avoid a situation in which he has, or can have, a
direct or indirect interest that conflicts, or possibly may conflict, with the interest
of the company.
 The board of directors can authorize conflicts of interest (a director is not liable for
the breach of this duty if the conflict of interest is approved by the board). The
director having the self-interest is not allowed to vote at the meeting of the board.
 Case law:
o Directors who leave or are in the process of leaving the company are still
subject to the duty to avoid conflicts of interest
o [Canadian Aero Service Ltd v O’Mallyn [1973] 40 DLR (3d) 371]
o A director is in breach of this duty if he takes advantage of an opportunity
that the company would otherwise be interested in but cannot or do not
wish to pursue a corporate opportunity)

b)Duty NOT to accept benefits from third parties (S176):

 Directors must not accept benefits from third parties conferred by reason of his
being a director or doing or not doing anything as a director
o Receiving any benefit from a third party is a breach of this duty.
o Third party benefits must be approved by the shareholders if a director
wants to avoid liability (S180.4b)

c)Duty to declare interest in transactions (S177 + S182):

 Duty to declare any interest in proposed transactions (S177) → haven't been

entered into by the company.
 Duty to declare any interest in existing transaction (S182) → have been entered
into by the company.

If a director in any way, directly or indirectly has interest in a proposed/existing

transaction or arrangement with the company, he must declare the nature and extent of
the interest to the other directors at a meeting of the directors → not only apply to
transactions between a director & his company but also apply to all types of transactions
in which the director has related interest.

Director contracting with their own company

 Whenever a director enters into a contract with his company:

o There will always be a conflict of interest, but whether or not there’s a
violation? No, s.173(3), This duty does not apply to a conflict of interest
arising in relation to a transaction or arrangement with the company.
o He must satisfies the 2 conditions:
 Has to declare his interest in the transaction (s.177)
  The contract must be approved by the shareholders and satisfied
other requirements of the AOA → not apply to all contracts, only the
contracts fall within the 4 types of contracts: (i) substantial property
transactions (s.190); (ii) loans & similar agreements to the directors
(s.197); (iii) long-term services contracts (s.188); (iv) payment for
loss of office (s.215).
o Substantial property transactions (s.190): the objects are substantial non-
cash assets.
o An asset is a substantial asset if its value (s.191):
 (a) exceeds 10% of the company's asset value and is more than
£5,000, or

(b) exceeds £100,000

→ approval must be given in advance by a resolution of the shareholders’s

meeting (s.190(1)).

 S.190 also applies to a substantial property transaction b/w the company and a
person (listed in s.252, 253) who is connected with a director.
 A director enters into a contract with his company:
o Does the director violate the duty to avoid conflicts of interest (S175) ⇒
S175.3 This duty does not apply to a conflict of interest arising in relation
to a transaction or arrangement with the company
o Conditions for a contract between a director and his company:

1. Duty to declare interest in proposed transactions (S177)

2. Contracts that must be approved by shareholders: Other
requirements under the company’s articles of association
1. (1) Substantial property transaction (S190)
2. (2) Loans and similar arrangements to directors (S197)
3. (3) Long-term service contracts (S188)
4. (4) Payment for loss of office (S215)

 Substantial property transaction (S190):

o The object of these transactions: substantial non-cash asset (S190)
o An asset is a substantial asset if its value: (191)
 exceeds 10% of the company’s asset value and is more than 5000
pounds
 exceeds 100000 pounds
o Notes: S190 also applies to a substantial property transaction between the
company and a person who is connected with a director. (the person in
S252, S253)