Business operation in the UK

Business operation in the UK. These are the highlights if you want to know the essential of business operation in the UK. This entry was drafted by McCarthy Denning. Link to e-IURE Network to know more.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case McCarthy Denning is an excellent option in the United Kingdom.

• Business operation in the UK: Types of Business Structure

The first question to be considered by anyone wishing to establish a business operation in the UK is the type of structure to be used.

Although the corporate structure is the one which is most widely used in the UK, there are a variety of other structures available to overseas entities seeking to establish a presence in the UK including setting up a branch or place of business of an overseas company, a partnership, joint venture or a limited liability partnership.

Overseas companies can register as a branch or as a place of business in the UK.  A branch is part of an overseas limited company organised to conduct business through local representatives in the UK.  A place of business is for companies who cannot register as a branch. Because they are from within the UK, they are not limited companies or their activities in the UK are not sufficient to define it as a branch (for example if the activity is simply a representative office).

• Business operation in the UK: Types of Companies

There are different types of corporate structure, which can be used under UK law.  The most common structure used is a private company limited by shares.  Companies can be either public, which means that they can offer their shares or other securities for public subscription, or private, which means that they are not allowed to offer their shares or other securities to the public.  A private company bears the suffix “Limited” or “Ltd” and a public company bears the suffix “PLC”.  Other types of corporate structure can be established such as companies limited by guarantee or unlimited companies, but these are not common for trading entities.

Public companies are generally subject to stricter regulations under the Companies Acts and, if they are quoted, they will also be subject to the regulations and codes of practice applicable to the relevant trading market.

The formation of a company in the UK is easy and a corporate vehicle structured to the relevant needs can be obtained very quickly with an expedited “same day” service available.  There are no requirements for local shareholders or directors and no minimum capital rules apply (only applicable to a private company).  Certain documents, for example the company’s constitutional documents, must be filed with the Registrar of Companies to form a company.

A company is required to file its memorandum of association with the Registrar of Companies on applying for registration. The memorandum of association need only state that the initial subscribers wish to form a company under the 2006 Act in which they agree to become members of the company and each take at least one share.

The articles of association contain the regulations relating to the internal management of the company covering matters such as the holding of meetings of directors and shareholders, transfer of shares and changes to share capital, appointment and removal of directors and the powers of directors.  There is a standard or model form of articles of association, known as the Model Articles, which many UK private companies follow to some extent.   The Model Articles will automatically apply to any company limited by shares that do not adopt their own articles of association on incorporation.

No government or other permission is required to establish a company, although there is some regulation of the use of certain business and trading names.  Once registered, the name of a company can be changed by special resolution (75% majority) of the shareholders. Care must be taken to check that the desired name is available for use by the company.

Under the 2006 Act, any person can object to a company’s registered name on the grounds that it is the same as, or similar to, a name in which the objector has goodwill. Objections to the registration of company names must be lodged with the Companies Names Adjudicator.

• Business operation in the UK: Liability of Shareholders

Every company having a share capital, whether public or private, must have at least one shareholder. There are no rules relating to the residency of shareholders.

In the case of both private and public companies, the liability of the shareholders or members is limited to the amount unpaid on the shares held by them.  The company and its shareholders are regarded for company law purposes as separate legal persons.

• Business operation in the UK: Share Capital

Authorised Share Capital

A company’s authorised share capital is the total number of issued and unissued shares in the capital of the company.  An increase in a company’s authorised share capital requires shareholder approval by ordinary resolution (a simple majority).

There is no longer a requirement for a company to have an authorised share capital.   If a company wishes to restrict the number of shares it can allot, it will need to amend its articles of association by special resolution (75% majority) to include suitable provisions to the extent the articles do not already contain any such restriction.

Issued Share Capital

The shares which are allotted and issued to shareholders will determine the company’s issued share capital.  In order to allot and issue shares, the company’s directors must be authorised, by the articles of association or by shareholder resolution, to issue the relevant shares and also specifically authorised to issue shares where the directors wish to issue shares for cash otherwise in proportion to existing shareholdings. Directors of private companies incorporated under the 2006 Act with only one class of share will automatically be free to allot shares without the prior authorisation from the members, subject to any express restriction on this power contained in the company’s articles. A company incorporated under the Companies Act 1985 will first need to pass an ordinary resolution in order to give the directors the power to allot shares as set out above. These allotments are still subject to any rights of pre-emption in favour of existing shareholders, although, as before, these may be disapplied by the company’s articles or by special resolution (75% majority).

Shares must be issued for not less than their nominal value, although shares can be issued as partly paid and the directors can call up the unpaid amount at any time.

• Business operation in the UK: Minimum Shareholdings

Private Companies

There are no minimum requirements for the authorised and issued share capital for private limited companies and the most typical formation is for a company to have an authorised share capital of at least £100 divided into shares of £1.  However, it is possible to establish companies with shares of different denominations and in currencies other than sterling.

Public Companies

Before a public company can carry on business, it must have a minimum share capital of £50,000 of which 25% of the shares must be paid up.

• Share Capital Rights

The rights and restrictions attaching to the shares are set out in the company’s articles of association.  Most companies issue only one class of shares, known as ordinary shares. The rights and restrictions can be changed only by shareholder resolution (75% majority) and, where appropriate, a resolution of the holders of any affected class of shares.  Preferred or preference shares would be expected to carry rights (eg to receive dividends, return on capital, etc) ahead of the ordinary shareholders and deferred shares would be expected to carry rights behind those of the ordinary shareholders.  In the case of a quoted public company, it would be usual for the shares to be freely transferable and this would be a requirement of the UK markets.  However, this is without prejudice to agreements restricting transfer, eg by way of a lock-up or by complying with the requirements of overseas securities laws.

Shares in UK companies are generally held in certificated form, although there is an electronic system known as CREST through which shares in quoted companies are generally traded in uncertificated (non-paper) form.  When shares are issued or transferred, details of the shareholder are registered in the company’s statutory books and a share certificate issued or a CREST account is credited, as applicable.

• Shareholder Meetings

Most powers needed to run the company are vested in the directors by the articles of association, although it is possible to include specific provisions in the articles of association or in a shareholders’ agreement requiring shareholder approval in relation to certain specified matters.

The Companies Acts set out those matters which require shareholder approval.  In the case of a private company with few shareholders or which is a wholly-owned subsidiary, shareholder approval can be obtained by written resolution of the shareholders, or otherwise by the shareholders in a general meeting.  The written resolution procedure is not available to public companies.

Shareholder meetings require a prior period of notice to shareholders of not less than 14 days except in the case of a private company’s annual general meeting where 21 days notice is required.   When not less than 90% of the shareholders of a private company agree, however, these notice requirements can be dispensed and the meeting (including the annual general meeting) may be held on short notice.

A public company can only dispense the requirement for a notice period in respect of a general meeting if 95% of the shareholders agree and for an annual general meeting, if all the shareholders agree. A general meeting on short notice is not permitted for a public limited company that is trading on a regulated market.

Matters reserved to the shareholders by the Companies Acts include authorisations in relation to share capital issues, certain categories of related party transactions, amendments to the company’s constitutional documents and the decision to liquidate the company.  A private company seeking to reduce its share capital will generally be able to do so using one of two procedures available to it designed to protect the creditors of the company.  The first, and perhaps the simplest, procedure is a reduction of capital by means of a special resolution (75% majority) of the shareholders supported by a solvency statement.   The second and more onerous procedure in terms of time and cost requires shareholder approval as well as the sanction of the court.   Public companies seeking to reduce their share capital are restricted to using the court approved procedure.

A public company must hold a general meeting of its shareholders, known as the annual general meeting, each year at which it is usual to present the accounts, appoint auditors, deal with dividends and elect any directors who have been appointed since the last annual general meeting. Private companies are not required to hold an annual general meeting subject to any express provision to the contrary set out in the articles.

• Business operation in the UK: Directors and Officers

Appointment and Removal

A company may, if its articles of association permit, have only one director who must be a natural person, and be at least 16 years old.

The rights to appoint directors will be contained in the company’s articles of association.   Any person proposing to act must indicate his or her consent to act and provide specified information to the Registrar of Companies.  It is usual for the shareholders to have the right to appoint directors and for the directors to be able to fill any vacancy on the board subject to the right of the shareholders to confirm the appointment at the next annual general meeting.  Similarly, the articles of association would set out the circumstances in which a director can be removed from office and there is also a statutory right, subject to compliance with certain procedures, for shareholders, by simple majority, to remove any director from office regardless of any agreement to the contrary in place with the director.

It should be noted that the office of director is quite separate as a matter of English law from the director’s position, (in the case of executive directors), as an employee and accordingly, the removal from office of a director is without prejudice to the director’s rights under his or her contract of employment.

Directors’ Duties

Part 10 of the 2006 Act sets out the general duties of directors which are owed to the company.   There are seven statutory duties which are based on and replace the previous common law and equitable principles relating to directors’ duties.   The various statutory requirements and restrictions placed on the powers of directors must be considered in the light of any proposed activity of the company. The effect of these duties is that the directors can be held personally liable if they are deemed to have failed in promoting the success of the company.

It should also be noted that in certain circumstances, directors may become liable to creditors in an insolvent liquidation and that directors will be personally liable for the information about the company contained in any prospectus issued for the purposes of a fund-raising.

Subject to the rules relating to conflicts of interest, as further described below, there is no general legal requirement for a company to have a proportion of independent directors on its board nor is there a requirement for companies to have a supervisory board.  However, quoted companies will be expected to comply with best practice in relation to corporate governance, which includes the requirement for independent directors.

Similarly, there are no specific rules on the level of directors’ remuneration in private companies and this will usually be a matter for negotiation.  In some circumstances, such as payments proposed to be made to a director for loss of office, shareholder approval will be required.  In the case of fully listed (quoted) companies, shareholders must approve on an advisory basis, a remuneration report, which sets out, amongst other things, all payments and other benefits made to directors.

Conflicts of Interest

Directors have a statutory duty to avoid situations in which their interests can or do conflict, or may possibly conflict, with those of the company.  Matters that give rise to an actual or potential conflict may be authorised by the board subject to the board having all necessary powers to authorise such conflicts.  For private companies incorporated on or after 1 October 2008, the power to authorise is subject to anything in the company’s articles of association invalidating such authorisation.  Private companies incorporated prior to 1 October 2008, must pass an ordinary resolution (simple majority) expressly providing the board with the power to authorise conflicts.  For a public company, the directors may only authorise a conflict of interest if permitted to do so by the company’s articles of association.

Secretary

A public company must appoint a company secretary.  The company secretary does not need to be a natural person. The company secretary is principally an administrative function and the appointed secretary should be familiar with the filing and other requirements of the Registrar of Companies.  Accordingly, it would be usual for the secretary to be based in the UK.

There is no requirement for a private company to have a company secretary. If a private company chooses not to have a secretary, anything which is required or authorised to be done by the secretary can be validly done by a director or any person authorised by a director.

• Business operation in the UK: Confirmation Statement

Companies must complete a confirmation statement each year, which gives details of its share capital, shareholders, location of the statutory books, registered office, directors and secretary. It is now also necessary to maintain a register of persons with significant control and influence over the company and to file this information with the Registrar of Companies.  Persons with significant control and influence include various categories, but broadly speaking are usually persons who hold more than 25% of the shares or voting rights or have the right to appoint or remove directors but would also include persons who exercise significant control or influence, either directly or through an intermediate organisation.

• Business operation in the UK: Registered Office

A company needs to file details of its registered office in England and Wales with the Registrar of Companies and any official notifications will be sent to that address.  Subject to certain exceptions, the full name of the company must appear at its registered office and business premises.  Any change to the registered office can be made by simple board resolution and must be notified to the Registrar of Companies.

• Business operation in the UK: Company’s Notepaper

All business stationery must show the company’s full name and number and registered office.  The names of the directors need not be included, but if the name of any director appears then so must the names of all the other directors.

• Business operation in the UK: Accounts and Auditors

Subject to exemptions for small companies, every company must appoint a firm of auditors to audit and report on its accounts for each financial period.  Companies are also required to file accounts and a directors’ report with the Registrar of Companies, and these documents must comply with the requirements of the 2006 Act and show a fair view of the financial position of the company.

The 2006 Act lays down detailed rules as to the form and content of accounts and time limits for their delivery to the Registrar of Companies.

• Business operation in the UK: Other Filings

Companies must also notify the Registrar of Companies whenever there is a change of share capital, directors and officers and whenever the company creates a charge over any part of its assets.  In the case of a charge, the required information must be filed within 21 days of its creation to ensure its security in the event of liquidation.

The 2006 Act creates an offence where a person knowingly or recklessly causes to be delivered to the Registrar of Companies a document that is false or misleading and is liable for up to two years imprisonment or a fine.

• Business operation in the UK: Statutory Books

Every UK company must maintain a statutory register giving details of its shareholders, persons with significant control or influence, directors, secretary, any issues and transfers of shares as well as charge-holders.  There should also be a minute book containing minutes of all meetings of directors and shareholders.

A company can now keep its statutory books at an address other than its registered office. This is known as a single alternative inspection location (SAIL). The location must be in the same part of the UK as the company’s registered office and notification of the SAIL must be given to the Registrar of Companies.

• Business operation in the UK: Methods of Raising Finance

The appropriate method of raising finance will depend on the nature, size and stature of the company.  Funds can be raised by way of seed, venture or crowd funding, private equity, a stock exchange listing or loan finance, and within these broad categories there are a variety of options.