ordinary general meeting. Other meetings are extraordinary general
meetings. Notices convening a general meeting must inform the
shareholders of the particular business to be transacted; otherwise any
resolutions passed at the meeting will be invalidated. Voting is
generally regulated by the articles. Sometimes a vote is given to a
shareholder for every share held by him, but more often a scale is
adopted; for instance, one vote is given for every share up to ten, with
an additional vote for every five shares beyond the first ten shares up
to one hundred, and an additional vote for every ten shares beyond the
first hundred. In default of any regulations, every member has one vote
only. Sometimes preference shareholders are given no vote at all. A poll
may be demanded on any special resolution by three persons unless the
articles require five (Companies (Consolidation) Act 1908, s. 69).
Agreement for shares.
A contract to take shares is like any other contract. It is constituted
by offer, acceptance and communication of the acceptance to the offerer.
The offer in the case of shares is usually in the form of an application
in writing to the company, made in response to a prospectus, requesting
the company to allot the applicant a certain number of shares in the
undertaking on the terms of the prospectus, and agreeing to accept the
shares, or any smaller number, which may be allotted to the applicant.
An allottee is under the Companies (Consolidation) Act 1908, s. 86,
entitled to rescind his contract where the allotment is irregular, e.g.
where the minimum subscription has not been obtained. When an
application is accepted the shares are allotted, and a letter of
allotment is posted to the applicant. Allotment is the usual, but not
the only, evidence of acceptance. As soon as the letter of allotment is
posted the contract is complete, even though the letter never reaches
the applicant. An application for shares can be withdrawn at any time
before acceptance. As soon as the contract is complete, it is the duty
of the company to enter the shareholder's name in the register of
members, and to issue to him a certificate under the seal of the
company, evidencing his title to the shares.
Register of members.
The register of members plays an important part in the scheme of the
company system, under the Companies Act 1862. The principle of limited
liability having been once adopted by the legislature, justice required
not only that such limitation of liability should be brought home by
every possible means to persons dealing with the company, but also that
such persons should know as far as possible what was the limited capital
which was the sole fund available to satisfy their claims--what amount
had been called up, what remained uncalled, who were the persons to pay,
and in what amounts. These data might materially assist a person
dealing with the company in determining, whether he would give it credit
or not; in any case they are matters which the public had a right to
know. The legislature, recognizing this, has exacted as a condition of
the privilege of trading with limited liability that the company shall
keep a register with those particulars in it, which shall be accessible
to the public at all reasonable times. In order that this register may
be accurate, and correspond with the true liability of membership for
the time being, the court is empowered under the Companies Act 1862, and
the Companies (Consolidation) Act 1908, s. 32, to rectify it in a
summary way, on application by motion, by ordering the name of a person
to be entered on or removed therefrom. This power can be exercised by
the court, whether the dispute as to membership is one between the
company and an alleged member, or between one alleged member and
another, but the machinery of the section is not meant to be used to try
claims to rescind agreements to take shares. The proper proceeding in
such cases is by action.
Payment for shares.
The same policy of guarding against an abuse of limited liability is
evinced in the Companies Act 1862, which required that shares in the
case of a limited company should be paid for in full. The legislature
has allowed such companies to trade with limited liability, but the
price of the privilege is that the limited capital to which alone the
creditors can look shall at least be a reality. It is therefore _ultra
vires_ for a limited company to issue its shares at a discount; but
there was nothing in the Companies Act 1862 which required that the
shares of a limited company, though they must be paid up in full, must
be paid up in cash. They might be paid "in meal or in malt," and it
accordingly became common for shares to be allotted in payment for
furniture, plate, advertisements or services. The result was that the
consideration was often illusory, shares being issued to be paid for in
some commodity which had no certain criterion of value. To remedy this
evil the legislature enacted in the Companies Act 1867, s. 25, that
every share in any company should be held subject to the payment of the
whole amount thereof in cash, unless otherwise determined by a contract
in writing filed with the registrar of joint stock companies at or
before the issue of the shares. This section not infrequently caused
hardship where shares had been honestly paid for in the equivalent of
cash, but owing to inadvertence no contract had been filed; and it was
repealed by the Companies Act 1900, and the old law restored. In
reverting to the earlier law, and allowing shares to be paid for in any
adequate consideration, the legislature has, however, exacted a
safeguard. It has required the company to file with the registrar of
joint stock companies a return stating, in the case of shares allotted
in whole or in part for a consideration other than cash, the number of
the shares so allotted, and the nature of the consideration--property,
services, &c.--for which they have been allotted.
Though every share carries with it the liability to pay up the full
amount in cash or its equivalent, the liability is only to pay when and
if the directors call for it to be paid up. A call must fix the time and
place for payment, otherwise it is bad.
Rescission of agreement.
When a person takes shares from a company on the faith of a prospectus
containing any false or fraudulent representations of fact material to
the contract, he is entitled to rescind the contract. The company cannot
keep a contract obtained by the misrepresentation or fraud of its
agents. This is an elementary principle of law. The misrepresentation,
for purposes of rescission, need not be fraudulent; it is sufficient
that it is false in fact: fraud or recklessness of assertion will give
the shareholder a further remedy by action of deceit, or under the
Directors' Liability Act 1890 (see _supra_); but, to entitle a
shareholder to rescind, he must show that he took the shares on the
faith or partly on the faith of the false representation: if not, it was
innocuous. A shareholder claiming to rescind must do so promptly. It is
too late to commence proceedings after a winding-up has begun.
Transfer of shares.
The shares or other interest of any member in a company are personal
estate and may be transferred in the manner provided by the regulations
of the company. As Lord Blackburn said, one of the chief objects when
joint stock companies were established was that the shares should be
capable of being easily transferred; but though every shareholder has a
prima facie right to transfer his shares, this right is subject to the
regulations of the company, and the company may and usually does by its
regulations require that a transfer shall receive the approval of the
board of directors before being registered,--the object being to secure
the company against having an insolvent or undesirable shareholder (the
nominee perhaps of a rival company) substituted for a solvent and
acceptable one. This power of the directors to refuse a transfer must
not, however, be exercised arbitrarily or capriciously. If it were, it
would amount to a confiscation of the shares. Directors, for instance,
cannot veto a transfer because they disapprove of the purpose for which
it is being made (e.g. to multiply votes), if there is no objection to
the transferee.
Blank transfers.
It is a common and convenient practice to deposit share or stock
certificates with bankers and others to secure an advance. When this is
done the share or stock certificate is usually accompanied by a blank
transfer--that is, a transfer executed by the shareholder borrower, but
with a blank left for the name of the transferee. The handing over by
the borrower of such blank transfer signed by him is an implied
authority to the banker, or other pledgee, if the loan is not paid, to
fill in the blank with his name and get himself registered as the owner.
Dividends.
A company can only pay dividends out of profits--which have been defined
as the "earnings of a concern after deducting the expenses of earning
them." To pay dividends out of capital is not only _ultra vires_ but
illegal, as constituting a return of capital to shareholders. Before
paying dividends, directors must take reasonable care to secure the
preparation of proper balance-sheets and estimates, and must exercise
their judgment as business men on the balance-sheets and estimates
submitted to them. If they fail to do this, and pay dividends out of
capital, they will not be held excused, unless the court should think
that they ought to be under the new discretion given to the court by ss.
32-34 of the Companies Act 1907 (Companies (Consolidation) Act 1908, s.
279). The onus is on them to show that the dividends have been paid out
of profits. The court as a rule does not interfere with the discretion
of directors in the matter of paying dividends, unless they are doing
something _ultra vires_.
Auditors.
By the Companies (Consolidation) Act 1908, ss. 112, 113, incorporating
provisions of the act of 1900 (ss. 21-23), as amended by the act of 1907
(s. 19), the legislature has made strict provisions for the appointment
and remuneration of auditors by a company, and has defined their rights
and duties. Prior to the act of 1900 audit clauses, except in the case
of banking companies, were left to the articles of association and were
not matter of statutory obligation.
Private companies.
The "private company" may best be described as an incorporated
partnership. The term is statutorily defined--for the first time--by s.
37 of the Companies Act 1907 (s. 121 of the Consolidating Act of 1908).
Individual traders and trading firms have in recent years become much
more alive to the advantages offered by incorporation. They have
discovered that incorporation gives them the protection of limited
liability; that it prevents dislocation of a business by the death,
bankruptcy or lunacy of any of its members; that it enables a trader to
distribute among the members of his family interests in his business on
his decease through the medium of shares; that it facilitates borrowing
on debentures or debenture stock, and with a view to secure these
advantages thousands of traders have converted their businesses into
limited companies. To so large an extent has this been done that private
companies now form one-third of the whole number of companies
registered.
A private company does not appeal to the public to subscribe its
capital, but in the main features of its constitution a private company
differs little from a public one. It is only in one or two particulars
that special provisions are requisite. It is generally desired for
instance: (1) to keep all the shares among the members--the partners or
the family--and not to let them get into the hands of the public; and
(2) to give the principal shareholders, the original partners, a
paramount control over the management. For this purpose it is usual to
provide specially in the articles that no share shall be transferred to
a stranger so long as any member is willing to purchase it at a fair
value; that a member desirous of transferring his shares shall give
notice to the company; that the company shall offer the shares to the
other members; that if within a certain period the company finds a
purchaser the shares shall be transferred to him, and that in case of
dispute the value shall be settled by arbitration or shall be such a sum
as the auditor certifies to be in his opinion the fair value. So in
regard to the management it is common to provide that the owner or
owners of the business shall be entitled to hold office as directors for
a term of years or for life, provided he or they continue to hold a
certain number of shares; or an owner is empowered to authorize his
executors or trustees whilst holding a certain number of shares to
appoint directors. Directors holding office on these special terms are
described as "governing" or "permanent" or "life" directors. This union
of interest and management in the same persons gives a private company
an unquestionable advantage over a public company.
The so-called "one-man company" is merely a variety of the private
company. The fact that a company is formed by one man, with the aid of
six dummy subscribers, is not in itself (as was at one time supposed) a
fraud on the policy of the Companies Act, but it is occasionally used
for the purpose of committing a fraud, as where an insolvent trader
turns himself into a limited company in order to evade bankruptcy; and
it is to an abuse of this kind that the term "one-man company" owes its
opprobrious signification.
_Companies Limited by Guarantee._--The second class of limited companies
are those limited by guarantee, as distinguished from those limited by
shares. In the company limited by guarantee each member agrees, in the
event of a winding-up, to contribute a certain amount to the
assets,--L5, L1 or 10s.--whatever may be the amount of the guarantee.
The peculiarity of this form of company is that the interests of the
members of a guarantee company are not expressed in any terms of nominal
money value like the shares of other companies, a form of constitution
designed, as stated by Lord Thring, the draftsman of the Companies Act
1862, to give a superior elasticity to the company. The property of the
company simply belongs to the company in certain fractional amounts.
This makes it convenient for clubs, syndicates and other associations
which do not require the interest of members to be expressed in terms of
cash.
_Companies not for Gain._--Associations formed to promote commerce, art,
science, religion, charity or any other useful object may, with the
sanction of the Board of Trade, register under the Companies Act 1862,
with limited liability, but without the addition of the word "Limited,"
upon proving to the board that it is the intention of the association to
apply the profits or income of the association in promoting its objects,
and not in payment of dividends to members (C.A. 1867, s. 23). This
licence was made revocable by s. 42 of the Companies Act 1907
(Consolidation Act of 1908, ss. 19, 20). In lieu of the word "Company,"
the association may adopt as part of its name some such title as
chamber, club, college, guild, institute or society. The power given by
this section has proved very useful, and many kinds of associations have
availed themselves of it, such as medical institutes, law societies,
nursing homes, chambers of commerce, clubs, high schools,
archaeological, horticultural and philosophical societies. The guarantee
form (see _supra_) is well adapted for associations of this kind
intended as they usually are to be supported by annual subscriptions. No
such association can hold more than two acres of land without the
licence of the Board of Trade.
_Cost-Book Mining Companies._--These are in substance mining
partnerships. They derive their name from the fact of the partnership
agreement, the expenses and receipts of the mine, the names of the
shareholders, and any transfers of shares being entered in a
"cost-book." The affairs of the company are managed by an agent known as
a "purser," who from time to time makes calls on the members for the
expenses of working. A cost-book company is not bound to register under
the Companies Act 1862, but it may do so.
Winding-up.
Voluntary.
A company once incorporated under the Companies Act 1862 cannot be put
an end to except through the machinery of a winding-up, though the name
of a company which is commercially defunct may be struck off the
register of joint stock companies by the registrar (s. 242 of the
Companies (Consolidation) Act 1908, incorporating s. 7 of the act of
1880, as amended by s. 26 of the act of 1900). Winding-up is of two
kinds: (1) voluntary winding-up, either purely voluntary or carried on
under the supervision of the court; and (2) winding-up by the court. Of
these voluntary winding-up is by far the more common. Of the companies
that come to an end 90% are so wound up; and this is in accordance with
the policy of the legislature, evinced throughout the Companies Acts,
that shareholders should manage their own affairs--winding-up being one
of such affairs. A voluntary winding-up is carried out by the
shareholders passing a special resolution requiring the company to be
wound up voluntarily, or an extraordinary resolution (now defined by s.
182 of the Companies (Consolidation) Act 1908) to the effect that it has
been proved to the shareholders' satisfaction that the company cannot,
by reason of its liabilities, continue its business, and that it is
advisable to wind it up (C.A. 1862, s. 129). The resolution is generally
accompanied by the appointment of a liquidator. In a purely voluntary
winding-up there is a power given by s. 138 for the company or any
contributory to apply to the court in any matter arising in the
winding-up, but seemingly by an oversight of the legislature the same
right was not given to creditors. This was rectified by the Companies