Private Limited Company Shares - Essay Example

? Kent Car Ltd – An Analysis of Case Study Answer to Question (a) So as to exit from a” private limited company”, a shareholder may wish to transfer his share. Unlike the shareholder of a listed company on a stock exchange, the private limited company shareholder cannot easily dispose off his shares. In general, private limited company shares are transferable and however, a shareholder will normally be brazened out with curb on their transfer, as enumerated in the shareholder’s agreement or in the articles of association. Moreover, if there is no restriction on exit clause or, even if the needs arising from the restriction clause are met, it is not certain whether a shareholder of a private limited company will find a buyer for his shares, and, even if they are lucky enough to find a buyer, whether an acceptable price can be secured as there is no liquidity and market for shares of the majority of private limited companies in UK. At the outset, a shareholder of a private limited company may find himself helpless and locked into the company. Under this scenario, a shareholder who is unable to exert control within the company becomes vulnerable. By taking advantage of his weak position, the controllers of the company at the expense of the non-controlling shareholder, may wield enormous power and authority in administering the company. (Vries 2010:1). The Articles of Association of a private limited company will always consist of some restrictions on transfer of shares. Normally, provisions in the Articles or Table A empower the directors of a company some limited rights to turn down transfer of shares in case of partly paid-up shares. As in the case of fully paid-up shares, such a restriction will be of technical nature only. As the operation and the management of the majority of small companies is wholly reliance on the prolonged good relations between the members of the company to such a magnitude that such companies are frequently no more than partnerships but disguised with a corporate form. Hence, it is significant for the directors or members of such companies to place severe restrictions upon the transfer of shares as it will be tantamount to change in ownership. These restrictions will generally assume the form of the granting of pre-emption rights in favour of the present members of the company which is similar to the statutory pre-emption rights applicable to allotment of shares. The general procedure for transfer of shares in a private limited company is that any member who wants to dispose off his shares should give a notice first to the company. Such Notice will automatically make the company as the member’s agent for the purpose of first offering of shares to the present or existing members of the company in the ratio to their present shareholding. This connotes, by the proposed transfer of shares, the equilibrium or balance between the existing members of the company is protected, presuming that the members in question will have the opportunity to source the needed capital to acquire such shares offered. The following points should be kept in mind in case of transfer of shares of private limited companies; Great care should be given to make sure that the needed procedure is carefully adhered to in case of a transfer and if transfer of shares are expected or if the directors of a company receive notice from a member of his intention to transfer of shares and in such event, immediate reference is to be made to the conditions provided in the “AOA” ” (Articles of Association of the company)”. The most common source of the tussle between the member who wishes to dispose off his share and the other members or directors of the company pertains to valuation of shares. Normally, the Articles of Association will contain a provision that in such scenario, the valuation of shares shall have to be made either by an independent expert or by the statutory auditor of the company where it is provided so and in cases where parties could arrive at a fair price or valuation. If the offered shares comprise only minority shareholding, then value of shares have to be done on each share basis to arrive at a fair price. However , if a member with 25% holding wants to dispose of his share, in such cases , he may even get a premium price as such a percentage of share will have special weight to the buyer as he could block any special resolution or to acquire major control over the company. Obviously, a valuation of shares without regard to the number of shareholding will offer great benefits to a minority shareholder. Hence, it is desirable to include the provision in the Articles of Association about the method of share valuation in case if there is a transfer of share in a private limited company. In some cases, it may be relevant to permit some transfers, for instance, to trusts, family members or within a group of companies without activating the usual pre-emptive rights. Further, it is advisable to add relevant provisions that on happenings of some events, then transfer will be deemed to have taken place thereby activating pre-emption rights. A common illustration is that an employee or a director who ceases his association with a private limited company. Such clauses in the Articles would facilitate the existing directors or the company to recover the employee’s or director’s shares but with different valuations. (Brough: 29). It is better to add the following clauses in the Articles of Association: The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal, unless they suspect that the proposed transfer may be fraudulent. It is better to include the following provisions in the Articles of Association of a Private Limited Company to safeguard the existing member’s rights and privileges in case of exit of any one or more number of members of a company. TRANSFER “Any shareholder wanting to dispose off any of his shares must inform in writing to the Board of the company about the figure of equity shares, the name persons to whom shares have to be transferred, its fair value and the Board must offer the same to the other existing members of the company, its nominal value and if the proposal is acknowledged, if any of them or the shares are not so acknowledged, within thirty days from the day the Board received such notice , the shareholders desiring to transfer shall, at any occasion within ninety days later, be at freedom, to sell and convey the equity shares to any individual at the higher price or at the same price either to any other third parties or to the existing members. “ “In case of any disagreement as regards to the fair cost of the equity share so offered, it shall be determined and will be arrived at by an autonomous Valuer whose verdict shall be binding and final.” “Without the previous sanction of the Directors, no transfer of shares shall be made or registered except when the transfer is made by any member of the Company to another member or to a member’s spouse or child or children or his/her heirs and the Directors may decline to give such sanction without assigning any reasons.” “The Directors may decline to record any transfer of shares (a) If there is a lien on the shares in favour of company (b) If the shares are partly paid-up” Fair Value For the purposes of the transfer of shares, the Parties agree that the shares shall be valued by a jointly elected firm of independent Chartered Accountants (who is not the Statutory Auditor of the Company or any of the auditors of the Parties or their affiliates) (hereinafter referred to as the “Valuer”). Such Valuer shall value the shares based on accepted accounting principles, and he shall be an expert in valuing the shares of the Company and not act like an arbitrator. Such valuation shall be binding on the Parties. The cost of such valuation shall be borne by the Parties in equal shares. Answer to Question (b) In UK, private limited companies (PLC) are managed and controlled by the shareholders who are also known as members or by directors who are appointed by members of the company. No external organisations are being involved in the management and control of a PLC. Further, none of its directors or no individuals are accountable for ensuring how the PLC is managed and is being run wholly as per wishes of its shareholders. Moreover, accounts books and annual reports of a private limited company in UK are not accessible to the public thereby guaranteeing the secrecy of the business dealings and transactions. So as to maintain secrecy of the business from the public, a clause as per the following can be inserted in the Articles of Association of a private limited company. “Except as provided authorised by the directors or by an ordinary resolution of the company or by law, no person is permitted to examine any of the company’s other records or accounting documents or records merely by virtue of being a shareholder.” Answer to Question (c) Unanimous decisions The following provisions in the Articles of Association will help to solve the issue to make sure that Amanda and Peter remain as company directors in spite of disagreement between them or the introduction of new shareholders or directors of the company. “In accordance with this article, a decision of the directors is taken when all qualified directors specify to each other by any way that they have an analogue opinion on a matter.” “A resolution in writing can be made where each director should sign the same whether he approves such a resolution or disapprove the same.” “A resolution in writing will be as equivalent to a resolution passed in the board meeting. A resolution in writing signed by each director of the company will be construed as having been passed validly in a board meeting with a valid quorum.” Further, if new members are inducted, they may be issued with shares with varied voting rights or without voting rights like the issue of preference shares. Further, a provision in the Articles to appoint Amanda as Chairman and in the absence of Amanda, Peter will be chairman as chairman will have a casting vote. Answer to Question (d) In normal parlance, a shareholder or a director of a private limited company is not liable for the debts incurred by the company. However, in certain circumstances, a director will be held liable for company debt as detailed below: Where the company has secured loans by giving personal guarantees of directors, then such directors are liable to pay the debt of the company from their private funds. This is in pursuance of the personal guarantee given by the directors to the lender earlier. There can either secured or unsecured personal guarantees. In case, where a personal guarantee is secured, then the land/ property of the concerned director will be at peril of repossession should the director fail to repay the loan in the event of failure by the company. If the director is found guilty of fraudulent trading, wrongful trading or misfeasance in case if the company goes into liquidation or formal insolvency proceedings. If the director is found of guilty of other offences when the company goes into formal insolvency. The director will not be normally held accountable for their own PAYE, when the company is liquidated or dissolved. However, HMRC (Her Majesty Revenue and Customs) can demand the director to repay the amount. This is mainly due to the fact that the director is an employee of the company in a technical sense and HMRC can recoup any arrears in income tax from an employee. Where a company is in liquidation, then the director may be asked to repay the loan he had taken from the company. (www.bdl.org.uk , even though, the directors’ liability is restricted to the capital contributed by him, but in above cases, their liability will be construed as unlimited. (e) Answer be construed n E. The doctrine of indoor management which is also known as the rule in Royal British Bank v Turquand authorises a stranger dealing with a company to presume , in the absence of scenarios placing him on inquiry , that all issues of internal procedures and management have been duly adhered with . Despite the fact that a stranger under the doctrine of constructive management should be aware of the provisions of the company’s Articles and Memorandum of Association of the company and thus of any limitations included in these documents, he was never required to enquire further. Thus, a stranger, who is dealing with a company, can assume that its officers have been duly appointed, that the meetings had been validly called for and conducted and that the resolutions had been approved by the requisite majority. As per section 40 (2) (b) of the Companies Act 2006, now the doctrine of constructive notice has been abolished. In Rolled Steel Products (Holdings) Ltd v British Steel Company, it was held that the doctrine of indoor management was applicable in favour of a person dealing with a company in good faith. Further, in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd , it was held that a director is responsible to a stranger dealing in good faith with the company under the law of agency rather than under the internal management rule . Articles of Association of a company will generally speak about the indemnity of the directors of a company. “An appropriate director of the company may be compensated out of the property of the company against— any other financial burden incurred by that director as an associated company or an official of the company.” In this case, John is the additional member of the Board of Kent Ltd, and he is managing the day-to-day business of the company. His actions made James to believe to consider as if he is the managing director of the company. Applying the doctrine of indoor management, the doctrine of constructive notice and the law of agency, the board of directors is collectively liable for the contracts entered into between John on behalf of the company with strangers like James. Further, under the indemnity of directors’ provision of Articles of Association, the Kent Cars Ltd is liable to James. (Sealy & Worthington2007:136). List of References Brough Gordon H. (2005). Private Limited Companies: Formation and Management. London: Sweet & Maxwell. Sealy L & Worthington Sarah. (2007). Cases and Materials in Company Law. Oxford: Oxford University Press. Vries Paul Pieter. (2010). Exit Rights of Minority Shareholders in a Private Limited Company. London: Kluwer Law International. www.bdl.org.uk . (2010). Dealing with the Debts of Limited Company. [online] available from [12 May 2011]. Read More