Introduction to BA

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This topic is within Business Associations.

Contents

Required Reading

Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC, pp. [2.05]-[2.65]; [2.70]-[2-105]; [3.10]-[3-140].

The Corporations Act 2001 (Cth), ss 45A, 112-114; 117-121.

Introduction

A corporation is an organisational structure that facilitates the raising of finance for business activity from those who have capital for investment but do not wish to manage that business. It is also used to limit the personal liability of those individual investors.

  • The company is owned by its ‘members’ (or ‘shareholders’) who invest money into the company but do not actually manage it. The management is done by the directors.
  • A company (a ‘body corporate’) has the same legal rights as a natural person. When this idea is hard to maintain (ie, when an actual physical body is required, such as when a signature is needed), the company can be represented by an agent.

History of the company

[1]

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Australian Structures of Corporate Regulation

[2] Companies throughout Australia are now governed by a national scheme, the Corporations Act 2001 (Cth).

Incorporation

Choice of Form of Business Associations

[3]

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The Process of Incorporation

[4] Companies are formed through registration with ASIC under the Corporations Act. The process is as follows:

  1. Lodge an application with ASIC (s 117).
    • The application must comply with the requirements set in s 117 (details in subsection (2), include a copy of the constitution if there is one, be in the prescribed form and include the application fee).
  2. ASIC registers company and issues a certificate (s 118)
    • The company comes into existence the day it is registered (s 119), and all consenting members, directors and secretaries assume their roles (s 120)

Practical alternatives and formalities

The incorporation of a company may take several weeks - a constitution will need to be settled, proposed name reserved, application lodged with ASIC etc.

  • The consequence of this is that a widespread practice has developed, particularly in small business, of using 'shelf companies' that are incorporated in advance of need, and activated when instructions are received to form a company

Under the Act, a company may ratify a contract made on its behalf or for its benefit prior to its registration within an agreed or reasonable time.

    • Ratification can be express or implied.
    • If, however, the company is not registered or does not ratify the contract, the person making the contract for the company is personally liable for damages. Orders may also be made against company where it has received benefits under the pre-registration contract but has not ratified it: s 131
    • The professing agent may not be indemnified by company from obligations under contract: s 132
    • Certain post-incorporation formalities need to be completed before company can commence its activities

Share Capital

[5] Share capital is a device to allocate certain risks, rights and functions among participants in the business venture, namely the risk of loss, the distribution of profits and control of the venture.

  • In those companies that do not have share capital, these functions are allocated by other means
  • In all companies whose members have 'limited liability' (explained below) there is the further function of fixing the minimum contribution by members to the liabilities of their company

Share capital is the amount which members of the company agree to contribute permanently to the company in their capacity as members (ie, how much money they put into the company). Share capital includes not only the initial contribution but other accumulations made during the life of the company without contribution by members, such as through the issue of bonus shares.

  • All companies (bar the company 'limited by guarantee') have share capital.
  • Holders of share capital are both the ultimate risk-bearers of company and residuary claimants upon enterprise:
    • On the winding-up of the company (its liquidation), holders of share capital are the lowest ranked claimants upon assets of companies - the creditors will have their debts repaid in full first.
  • During the life of the company, share capital may not be returned to its holders and holders may not be released from obligation they have undertaken to contribute to it without formal approval.

A share thus symbolises a proportionate interest in the net worth of the business or undertaking of the company. It confers an interest through a bundle of rights to participate in financial distributions made by the company and in group decision making.

  • Described as a 'chose in action' as shareholders do not have any legal or equitable interest in assets of the company.
  • The power to issue shares in a company is usually vested in the directors and occurs through a two-step process of applying for shares, leading to contract of allotment, followed by the issue of shares upon completion of contract and entering members name in share register
  • Issued share capital = aggregate value of shares that company has issued to its members.
  • Paid up share capital = amount that has actually been paid, or credited as being paid, by shareholders in respect of shares issued to company members.
  • Unpaid or uncalled share capital = issued capital which has not yet actually been paid to company.
  • Partly paid shares = shares issued to original shareholders
  • Fully paid shares = shares issued to additional shareholders.
  • The nature of outstanding obligation of each member of company to contribute to debts of company will vary depending on whether company is limited by shares or is unlimited (see below).

Rights Attached to Shares

Shares themselves are a form of property, more valuable due to their transferability and liquidity (if listed company). Shares usually confer the rights to vote, transfer control and sue derivatively.

The rights are generally of two broad natures:

  • Participation in financial distribution: entitlement to receive dividends paid from time to time out of current profits and upon winding up of company entitled to their proportion of holdings once creditors repaid and then entitled to share of surplus
  • Governance of company: generally include provisions concerning:
    • Right to receive notice of meeting of members.
    • Right to attend, speak at and demand poll at shareholder meeting.
    • Right to elect and remove directors.
    • Right to vote (sometimes by proxy) at shareholder meetings on matters within competence of that corporate organ to determine.
      • In stock exchange listed companies, voting rights are generally ‘one share, one vote’. In proprietary companies, differential voting rights are more common.

Types of Companies

[6] Companies are divided into two broad categories: private (proprietary) and public companies (ss 112-114). They are then further classified as follows:

  1. Private companies:
    1. Limited by shares
    2. Unlimited
  2. Public companies:
    1. Limited by shares
    2. Unlimited
    3. Limited by guarantee
    4. No Liability

The type of the company dictates the kind of personal liability which shareholders incur for the company' debts.

Companies Limited by Shares

Companies limited by shares may be either private or public. Private companies limited by shares comprise 98.5% of all companies in Australia. The principle of liability regulating it (limited liability) is that the liability of its members is limited to the amount (if any) unpaid on shares respectively held by them.

  • This means that a member who has fully paid for his shares can incur no further liability - he is insulated from the company' liability.
  • Members who have only partly paid for their shares are only liable for the amount they owe for the shares, nothing more.
  • This obligation may be enforced during the life of the company, and subject to terms upon which shares were issued, by calls made by directors (s 254M(1)), or in winding up, by its liquidator (s 516)
  • If the calls not paid within specified time, the share may be forfeited under provisions in company’s constitution.

Companies Limited by Guarantee

In these companies, share capital is not issued and rather, members undertake to contribute to the company an amount of money if it is wound-up.[7]


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End

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References

Textbook refers to Redmond, Paul Corporations and Financial Markets Law 6th ed, 2013, LBC.

  1. Textbook, [2.05]-[2.65]
  2. Textbook, [2.70]-[2.105]
  3. Textbook, [3.10]-[3.60]
  4. Textbook, [3.65]-[3.75]
  5. Textbook. [3.85]-[3.105].
  6. Textbook. [3.80].
  7. Corporations Act 2001 (Cth), s 9.
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