Decision-making processes within private limited companies in England and Wales - Essay Example

? Company law Decision-making processes within private limited companies in England and Wales Introduction A private limited company is a legal entity with its own assets, liabilities, profits and losses, but the owners are restricted from selling their shares to the public (Duzer, 2009). The company submits annual accounts to Companies House. Private limited companies either are limited by shares, or are limited by guarantee whereby the liability is limited to the amount of that each member agrees to contribute to the assets of the company in case of winding up (Duzer 2009). According to Section 14 of the companies Act 1985, the registered memorandum of association and articles of association bind members and the company and are assumed to have been signed and sealed by each member thus all members must observe the provisions of the covenant (Grier, Griffin and Capper, 1998). In the case of Wood v. Odessa Waterworks (1889), the judge clarified that the articles of association not only constitute a contract between the shareholders and the company but also a contract between each individual shareholders (Bretagne, 2005). Companies Act 2006 made significant changes to the old Companies Act 1985 especially on the proceedings and governance of Private limited companies. Table A of the Companies Act 1985 was replaced with Model Articles of Association for the private limited companies and public limited companies that are contained in Companies Act 2006 (Griffin, 2006). The model articles took effect on 1 October 2009 thus making it possible to take advantage of benefits offered by Companies Act 2006. For instance, private limited companies incorporated before 1 October 2009 can continue with their previous articles of association or amend the articles in order to exclude the requirement of having to hold annual general meetings and employing a company secretary (Birds, 2010). Another significant change brought about in the decision-making of private limited companies in England and Wales is the removal of the previous statutory ‘cap’ on the authorized share capital (Lacy, 2002). In the current law, the issued share capital is the authorized share capital of the company. The new law has created separate sets of model articles for public and private companies limited by shares and set model articles for the companies limited by guarantee (Clayton, 2008). The private limited companies are no longer required to have a company secretary. However, the companies can decide to appoint a secretary and his authority should be equivalent to that of a secretary of a public limited company (Hannigan, 2012). Such appointment must be notified to registrar of companies and records filed in the company’s register of secretaries. According to the previous law that was in force recently, Company Act 1985 required the directors to appoint the secretary, determine the remuneration and remove the secretary from office (Davies, 2010). The current law has simplified the decision-making process through removing the previous statutory requirement of holding an annual general meeting (Kershaw, 2012). The current law makes it possible to make decisions through written resolutions. In the previous 1985 Act, private limited companies were required to hold annual general meetings (AGMs), but the current law gives the members the flexibility to determine whether to hold AGMs or or make critical decisions through written resolutions (Grier, 2009). However, members that hold 10 percent of the voting rights can go ahead and request for an annual general meeting (AGM). Under the previous law, the written resolutions required unanimous consent of all members unlike the current law provides that normal rule for ordinary and special resolutions will apply to written resolutions and a simple or 75 percent majority will be sufficient to pass the written resolutions. Part 13 of Resolutions and Meetings in companies Act 2006 sets a statutory minimum period of notice of general meetings to 14 days, but companies can provide for a longer notice period in their articles of association (Sheikh, 2013). At the same time, no business can be transacted without enough quorum at the AGM except the appointment of Chairman. Under the current law, members have a reserve power to direct the directors on what to do or what not to do. Although members delegate the running of the company to directors, such directors are not compelled to comply with directions that are unlawful or contrary to the general duties of the directors (Kosmin and Roberts, 2009). Another milestone made by the current law on decision-making in private limited companies is the simplification of capital maintenance provisions such as removal of the prohibitions on financial assistance for the private limited companies that desire to purchase their own shares (Smith, 1999). These deregulatory measures aim at ensuring simpler mechanism for capital reductions and facilitating faster decision-making in the company (Sheikh, 2013). The companies need not go to courts since the capital can be reduced through members’ special resolutions and solvency statements of the directors (Dine & Koutsias, 2007). Accordingly, the directors have been empowered to allot shares as they deem fit, but must observe the pre-emption rights and ensure that the company will at long last have one class of shares after the share allotment (Ferran, 2008). In the previous law, shareholders’ approval was mandatory before the allotment of the shares by the directors (James, 2003). According to Companies Act 20006, private limited companies can make resolutions by either majority of the members agreeing with the resolution or vote at the meeting of the members (Degenhardt, 2010). At the general meeting, the directors are required to make necessary arrangements in order to enable members to vote or speak at the meeting (Dine & Koutsias, 2007). At the general meetings, resolutions can be decided by a show of hands unless the articles require a poll. The current law allows for resolutions to be communicated electronically and a minimum holders of 5 percent of the voting rights can request the director to circulate the written resolutions to other members (Hannigan, 2012). At the same time, it is now difficult to remove an auditor or director from office through use of resolutions before the expiry of term of office. For private limited companies, the appointment of company secretary is no longer mandatory unlike the previous legislation where such appointment was mandatory (Dine & Koutsias, 2013). The companies are longer required to hold annual general meetings (AGMs), but they can provide for AGMs in their articles of association if the members so wish (The National Archives, 2008). Accordingly, the 2006 Act abolished the requirement for uniformity in shareholder’s written resolutions (Sealy & Worthington, 2008). In this case, a simple majority of eligible shares in required passing ordinary resolutions while 75 percent of the eligible shares are required to pass special resolutions by the company. Private companies limited by shares can convene short notice meetings if holders of 90 percent of the nominal value of shares with the right to vote approve such short meeting (The National Archives, 2008). Private companies can reduce their share capital without a court order and the period of filing accounts is currently 9 months down from the previous 10 months. Conclusion Companies Act 2006 simplifies decision-making in private limited companies through eradicating the need to hold annual general meetings and have a company secretary. The current laws embrace the use of electronic communications in communicating with members and passing company resolutions. Members can make decisions through written resolutions and there are greater rights for nominee shareholders. Accordingly, the members can convene short notice and directors are empowered to distribute company resolutions electronically. It is no longer a requirement for unanimous consent to pass written resolutions since a simple majority or 75 percent of the voting rights will pass such resolutions. Reference list: Birds, J. 2010. Annotated companies legislation. Oxford: Oxford University Press. Bretagne, G. 2005. 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