COMPANIES LIMITED BY SHARES The Companies (Consolidation) Act, 19o8 (replacing the Com panies Act, 1862) was intended to constitute a comprehensive code of law applicable to joint stock companies for the whole of the United Kingdom. Recognizing the mischief of trading con cerns being carried on by large and fluctuating bodies the Act begins by declaring that no company, association or partnership, consisting of more than 20 persons, or ten in the case of banking, shall be formed f or the purpose of carrying on any business which has for its object the acquisition of gain by the company, asso ciation or partnership or the members thereof, unless it is regis tered as a company under the Act, or is formed, in pursuance of some other Act of parliament or of letters patent, or is a company engaged in working mines within and subject to the jurisdiction of the Stannaries. Broadly speaking, the meaning of the Act is that all commercial undertakings, as distinguished from literary or charitable associations, shall be registered. "Business" has a more extensive signification than "trade." Having thus cleared tRe ground the Act goes on to provide in what manner a company may be formed under the Act. The machinery is simple, and is described as follows:— Any seven or more persons, or where the company will be a private company (see infra) any two or more persons, associated for any law ful purpose may, by subscribing their names to a memorandum of asso ciation and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company with or without limited liability. It is not necessary that the subscribers should be traders, nor will the fact that six of the subscribers are mere dummies, clerks or nominees of the seventh affect the validity of the company.
No subscriber of the memorandum may take less than one share, and each subscriber must write opposite his name the number of shares he takes.
These five matters the legislature has deemed of such intrinsic importance that it has required them to be set out in the com pany's Memorandum of Association. They are the essential conditions of incorporation, and- as such they must not only be stated, but the policy of the legislature has made them with certain exceptions unalterable.
The most important of these conditions is the third, and its importance consists in this, that the objects defined in the memorandum circumscribe the sphere of the company's activities. This principle, which is one of public policy and convenience, and is known as the "ultra vires doctrine," carries with it im portant consequences, because every act done or contract made by a company ultra vires, i.e., in excess of its powers, is absolutely null and void. The policy, too, is a sound one. Shareholders contribute their money on the faith that it is to be employed in prosecuting certain objects, and it would be a violation of good faith if the company, i.e., the majority of shareholders, were to be allowed to divert it to something quite different. So strict is the rule that not even the consent of every individual shareholder can give validity to an ultra vires act.
The articles usually contain a complete code for the govern ment of the company, dealing with the company's shares, the issue of certificates, the company's lien on its shares, the making of calls, the transfer, transmission and forfeiture of shares, their conversion into stock, the issue of share warrants, alteration of capital, general meetings and the voting thereat, directors and their qualification, powers, duties, election and proceedings, man aging directors, dividends and reserve fund, capitalization of profits by the issue of bonus shares, accounts, audit and notices. They can be altered by special resolution.
The stamps and fees payable on registering a company with a capital of f i ,000 are about L7 ; f i o,000 about £34; f i oo,000 about £280.
The rights attached to preference shares are sometimes set out in the memorandum, but if this is done, they cannot be altered without the sanction of the court, unless a power of alteration is reserved in the memorandum. The usual practice is, accord ingly, either to set out the rights in the articles, when they can be altered by special resolution, or else to set them out in the memorandum, reserving a power of alteration. If this power were to be abused so as to amount to a fraud by the ordinary shareholders on a minority of preference shareholders, the court would interfere by injunction. If the preference rights are set out in the memorandum without power of alteration, they can be altered as part of a scheme of arrangement, involving a resolu tion passed by a majority in number representing three-fourths in value of the preference shareholders present at the meeting, and the sanction of the court. Preference shares with rights set out in the memorandum can also be consolidated with other shares as part of a reorganization by special resolution, sanc tioned by resolution of the preference shareholders, passed by an absolute majority in number and three-fourths in amount of the preference shareholders, whether present or not present at the meeting, confirmed by order of the court. But a limited corn pany cannot reduce its capital, either by direct or indirect means, without the sanction of the court. The inviolability of the capital is a condition of incorporation—the price of the privilege of trading with limited liability and by no subterfuge will a com pany be allowed to evade this cardinal rule of policy, either by paying dividends out of capital, or buying its own shares, or returning money to shareholders. But the prohibition against reduction means that the capital must not be reduced by the voluntary act of the company, not that a company's capital must he kept intact. It is embarked in the company's business, and it must run the risks of such business. If part of it is lost, there is no obligation to replace it and to cease paying dividends until such lost capital is repaid. The company may in such a case write off the lost capital and go on trading with the reduced amount. But for this purpose the sanction of the court must be obtained.
Preference Shares.—A company may issue preference shares even if there is no mention of them in the memorandum of asso ciation; the preference given may be as to dividends only, or as to dividends and capital. The dividend, again, may be pay able out of the year's profits only, or it may be cumulative, that is, a deficiency in one year is to be made good out of the profits of subsequent years. Prima facie, a preferential dividend is cumu lative. Preference shareholders have the right to inspect balance sheets.
Founders' Shares—which originated with private companies— are shares which usually take the whole or a portion of the profits after payment of a dividend of 7 or io% to the ordinary share holders. They are much less in favour than they used to be.
When a company is promoted for acquiring property—to work a mine or patent, for instance, or carry on a going business—the usual course is for the promoter to frame a draft agreement for the sale of the property to the company or to a trustee on its behalf. The memorandum and articles of the intended company are then prepared, and an article is inserted authorizing or requir ing the directors to adopt the draft agreement for sale. In pursuance of this authority the directors at the first meeting after incorporation take the draft agreement into consideration; and if they approve, adopt it. Where they do so in the exercise of an honest and independent judgment, no exception can be taken to the transaction ; but where the directors are nominees of the promoter, perhaps qualified by him and acting in his inter est, the situation is open to grave abuse. Indeed the fastening of an onerous or improvident contract on a company at its start, by interested promoters acting in collusion with the directors, has been the principal cause of the scandals associated with company promotion. See also COMPANY PROMOTING.
Even when a company has got what under the name of the "minimum subscription" the directors deem enough capital for its enterprise, it cannot commence business or make any bind ing contract or exercise any borrowing powers until it has ob tained a certificate entitling it to commence business. To obtain this the company must have allotted shares to the amount of not less than the minimum subscription, every director must have paid up his shares in the same proportion as the other members of the company, and a statutory declaration, made by the sec retary of the company or one of the directors, must have been filed with the registrar of companies, that these conditions have been complied with.
The first directors are often appointed by the articles ; their consent to act must be filed with the registrar of companies. Directors other than the first are elected at the annual general meeting, a certain proportion—usually one-third—retiring under the articles by rotation each year, their places being filled by election. A share qualification is nearly always required, on the well-recognized principle that a stake in the undertaking is the best guarantee of fidelity to the company's interests. A director once appointed cannot be removed during his term of office by the shareholders, unless there is a special provision for that pur pose in the articles; but a company may remove a director if the articles—as is usually the case—authorize removal. The authority and powers of directors are prima facie those necessary for carry ing on the ordinary business of the company, but the more im portant of such powers are usually defined in the articles. For instance, it is commonly prescribed how and when the directors may make calls, to what amount they may borrow, how they may invest the company's funds, in what circumstances they may forfeit shares, or veto transfers, in what manner they shall con duct their proceedings, and what shall constitute a quorum of the board; whenever, indeed, specific directions are desirable they may properly be given by the articles. But, superadded to and supplementing these specific powers, there is usually inserted in the articles a general power of management ; the powers, whether general or specific, thus conferred upon directors are in the nature of a trust, and the directors must exercise them with a single eye to the benefit of the company. For instance, in allotting shares they must consult the interests of the company, not favour their friends. So in forfeiting shares they must not use the power collusively for the purpose of relieving the share holder from liability. To do so is an abuse of the power and a fraud on the other shareholders.
Directors not Trustees.—It would give a very erroneous idea of the position and functions of directors to speak of them —as is sometimes done—as trustees, except in a modified sense. They are "commercial men managing a trading concern for the benefit of themselves and the other shareholders." They have to carry on the company's business, to extend and consolidate it, and to do this they must have a free hand and a large discre tion to deal with the exigencies of the commercial situation. This large discretion the law allows them, so long as they keep within the limits set by the company's memorandum and articles. They are not to be held liable for mere errors of judgment, still less for being defrauded ; all that the law requires of them is that they should be faithful to their duties as agents—"diligent and honest," to use the words of Sir George Jessel, formerly master of the rolls. A director is not bound to attend all meetings of the board. He must not sign cheques without informing himself of the purpose for which they are given. On the same principle, directors must not delegate their duties to others unless expressly authorized to do so, as where the articles empower the board to appoint a committee, or individual directors to appoint substitutes. Directors may, it is true, employ skilled persons, such as engineers, solicitors, valuers or accountants, to assist them, but they must still exercise their judgment as business men on the materials before them. Then in the matter of honesty, a director must not accept a present in cash or shares or in any other form what ever from the company's vendor, nor must he make any profit in the matter of his agency without the knowledge and consent of his principal, the company. He must not, in other words, put himself in a position in which his duty to the company and his own interest conflict or even may conflict. This rule of ten comes into play in the case of contracts between a company and a director. There is nothing in itself invalid in such a contract, but the onus is on the director, if he would keep such a contract, to show that the company assented to his making a profit out of the contract, and for that purpose he must show that he made full and fair disclosure to the company of the nature and extent of his interest under the contract. It is for this reason that when a com pany's vendor is also a director he does not join the board until his co-directors have exercised an independent judgment on the propriety of the purchase.
Misfeasance.—A director must also bear in mind—what is a fundamental principle of company management—that the funds of the company are entrusted to the directors for the objects of the company ,as defined by the company's memorandum of association and authorized by the general law, and that they must not be diverted from those objects or applied to purposes which are outside the objects of the company (ultra vires), or outside the powers of management given to the directors. This does not abridge the large discretion allowed to directors in carrying on the business of the company. The funds embarked in a trading company are intended to be employed for the acqui sition of gain, and risk, greater or less according to circum stances, is necessarily incidental to such employment ; but it is quite another matter when directors pay dividends out of capital, or return capital to the shareholders, or spend money of the company in "rigging" the market, or in buying the company's shares, or paying commission for underwriting the shares of the company, except to the extent authorized by the articles and Companies Acts. Directors who in these or any other ways misapply the funds of the company are guilty of "misfeasance" (breach of trust), and all who join in the misapplication are jointly and severally liable to replace the sums so misapplied. The remedy of the company for misfeasance, if the company is a going concern, is by action against the delinquent directors; but where a company is being wound up, the legislature has pro vided a summary mode of proceeding, by which the liquidator, or any creditor or contributory of the company, may take out what is known as a misfeasance summons, to compel the delinquent director or officer to repay the misapplied moneys or make corn pensation. The court is, however, given a discretionary power to relieve a director from liability if he has acted honestly and reasonably and ought fairly to be excused.
In managing the company's affairs directors must meet to gether and act as a body, for the company is entitled to their collective wisdom in council assembled. Board meetings are held at such intervals as the directors think expedient. Notice of the meeting must be given to all directors who are within reach, but the notice need not specify the particular business to be trans acted. The articles usually fix, or give the directors power to fix, what number shall constitute a quorum for a board meeting. They also empower the directors to elect a chairman of the board. The directors exercise their powers by a resolution of the board, which is recorded in the directors' minute-book. The articles usually provide for the payment of a certain sum to each director for his services during the year. When this is the case, it is an authority to the directors to pay themselves the amount of such remuneration. The remuneration, unless otherwise expressly provided, covers all expenses incidental to the directors' duties. A director, for instance, cannot claim to be paid in addition to his fixed remuneration his travelling expenses for attending board meetings.
Directors are liable criminally for falsification of the com pany's books, and for this or any other criminal offence the court in winding up may direct a prosecution ; but the court will not as a rule interfere with the discretion of directors honestly exercised in the management of the company's affairs. The direc tors have prima facie the confidence of the shareholders, and it is not for the court to say that such confidence is misplaced. If shareholders are dissatisfied with the management, the remedy is in their own hands—they can call a meeting and elect a new board.
Companies registered since the 22nd November 1916 must in all trade catalogues, trade circulars, showcards and business let ters sent to any part of His Majesty's dominions mention the present Christian names or initials, the present surnames, any former Christian names and surnames, and the nationality, if not British, and, if the nationality is not the nationality of origin, the nationality of origin of all the directors. The annual summary sent to the registrar of companies by all companies whenever registered must contain somewhat similar particulars.
When a company is wound up, the directors' powers of manage ment come to an end. Their agency is superseded in favour of that of the liquidator.
Meetings.—Although the Companies Acts treat the directors of a company as the persons in whom the management of its affairs is vested, they also contemplate the ultimate controlling power as residing in the shareholders. A controlling power of this kind can only assert itself through general meetings; and that it may have proper opportunities of doing so, every company is required to hold a general meeting, called the statutory meeting, within three months from the date at which it is entitled to com mence business. This meeting acquired new significance under the Companies Act of i 90o and marks an important stage in the history of a company. Seven days before it takes place the directors are required to send to the members a certified report informing them of the general state of the company's affairs—the number of shares allotted, cash received for them, an abstract of receipts and payments, the amount of preliminary expenses, the particulars of any contract to be submitted to the meeting, etc. Furnished with this report the members come to the meeting in a position to discuss and exercise an intelligent judgment upon the state and prospects of the company. Besides the statutory meeting a company must hold one general meeting at least in every calendar year, and not more than fif teen months after the holding of the last preceding general meeting. This annual general meeting is usually called the ordinary general meeting. Other meetings are extraordinary general meetings. Notices convening a meeting must inform the shareholders of the particular busi ness to be transacted ; otherwise any resolutions passed at the meeting will be invalid. Voting is regulated by the articles. Gen erally a vote is given to a shareholder for every share held by him, but sometimes a scale is adopted, for instance, one vote for every share up to ten, with an additional vote for every five shares beyond the first ten 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 pref erence shareholders are given no vote at all, or are only allowed to vote in certain events, e.g., if their dividends are unpaid, or on certain matters, e.g., winding up, reduction of capital or matters directly affecting their rights. The articles usually contain pro visions regulating the demand for a poll ; this may be demanded on an extraordinary or special resolution by three persons, unless the articles require a demand by a greater number of persons, but they cannot require a demand by more than five.
Though every share carries with it the liability to pay the full amount in cash or its equivalent, the liability is only to pay when and if the directors call for it. A call must fix the time and place for payment.
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 certifi cate is usually accompanied by a blank transfer—that is, a trans fer 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, if the loan is not paid, to fill in the blank with his name and get himself registered as the owner.
A company is debarred from borrowing unless it is expressly or impliedly authorized to do so by its memorandum of associa tion. In the case of a trading company borrowing is impliedly authorized as a necessary incident of carrying on the company's business, but a non-trading company, for instance a company formed to promote art, science, religion or charity, has no implied borrowing power. A company established for the conveyance of passengers and luggage by omnibuses, a company formed to buy and run vessels between England and Australia, and a company whose objects included discounting approved commercial bills, have all been held to be trading companies with an incidental power of borrowing as such to a reasonable amount. A building society, on the other hand, has no inherent power of borrowing (though a limited statutory power was conferred on such societies by the Building Societies Act, 1874). Public companies formed to carry out some undertaking of public utility, such as docks, water works, gas works, etc., have only limited powers of borrow ing. It has been found, however, that an implied power of bor rowing, even when it attaches, is too inconvenient to be relied on in practice, and an ex-press power is always now inserted in the memorandum. This power is in most general terms. It is left to the articles to define the amount to be borrowed, the nature of the security, and the conditions, if any, such as the sanction of a general meeting, on which the power is to be exercised. A com pany cannot exercise any borrowing power until it has become entitled to commence business. (See supra.) A person who is proposing to lend money to a company must be careful to see (I) that the memorandum authorizes borrowing, and (2) that the borrowing limit in the articles is not being exceeded, for if it should turn out that the borrowing was in excess of the com pany's powers and ultra vires, the company cannot be bound, and the borrower's only remedy is against the directors for breach of warranty of authority, or to be surrogated to the rights of any creditors who may have been paid out of the borrowed moneys.
A company proposing to borrow usually issues a prospectus, similar to the ordinary share prospectus, stating the amount of the issue, the dates for payment, the particulars of the property comprised in the security, the terms as to redemption, and so on, and inviting the public to subscribe. Underwriting is also resorted to, as in the case of shares, to ensure that the issue is taken up. There is no objection to a company issuing debentures or deben ture stock at a discount, as there is to its issuing its shares at a discount. The directors must borrow on the best terms the corn pany's credit will enable it to obtain. A prospectus inviting sub scriptions for debentures or debenture stock must be filed and contain the same particulars as a prospectus offering shares, and it comes within s. 84 of the Consolidation Act. Further, persons who are parties to,it have the onus cast upon them, should the prospectus contain any misstatements, of showing that, at the time they issued the prospectus, they had reasonable grounds to believe, and did in fact believe, that the statements in question were true ; otherwise they will be liable to pay compensation to any person injured by the misstatements.
Debentures.—Etymologically, "debenture" is merely the Latin word debentur, the first word in a document in common use by the Crown in early times admitting indebtedness to its servants or soldiers. This was the germ of a security which has now, with the expansion of joint stock company enterprise, grown into an instrument of considerable complexity.
Debentures may be classified in various ways. From the point of view of the security they are either (r) debentures (simply) ; (2) mortgage debentures; (3) debenture bonds. In (r) the se curity is a floating charge : in (2) there is also a floating charge, but the property forming the principal part of the security is specifically mortgaged by the company to trustees under a trust deed for the benefit of the debenture-holders: in (3) there is no security proper, only the covenant for payment by the company. For purposes of title and transfer, debentures are either "regis tered" or "to bearer." For purposes of payment they are either "terminable" or "perpetual." The Floating Debenture.—The form of debenture chiefly in use is that secured by a floating charge. By it the company covenants to pay to the holder thereof the sum secured by the debenture on a specified day, or at such earlier date as the principal moneys become due under the provisions of the security, and in the meantime to pay interest on the principal moneys until payment, or until the security becomes enforceable under the conditions; and the company further charges its undertaking and all its property, with the payment of the amount secured by the debenture; uncalled capital, if included, must be expressly men tioned, because the word "property" by itself will not cover it. This is the body of the instrument ; on its back is endorsed a series of conditions, constituting the terms on which the deben ture is issued. Thus the debenture-holders are to rank parr passu with one another against the security; the debenture is to be transferable free from equities between the company and the holder; the charge is to be a floating charge, and the debenture holders' moneys are to become immediately repayable and the charges enforceable in certain events : for instance, if the interest is in arrear for (say) two or three months, or in the event of winding-up. Other events indicative of insolvency are sometimes added in which payment is to be accelerated. The conditions also provide for the mode and form of transfer of the debenture, the death or bankruptcy of the holder, the place of payment, etc.
The most characteristic feature of the security—the floating charge—grew naturally out of a charge on a company's under taking as a going concern. Such a charge could only be made practicable by leaving the company free to deal with and dispose of its property in the ordinary course of its business—to sell, mortgage, lease and exchange it as if no charge existed; and this is how the security works. The debenture-holders give the di rectors an implied licence to deal with and dispose of the property comprised in the security until the happening of any of the events upon which the debenture-holders' money becomes, under the debenture conditions, immediately repayable. Pending this the charge is dormant. The licence extends, however, only to dealings in the ordinary course of business. Payment by a corn pany of its just debts is always in the ordinary course of business, but satisfaction by execution levied in invitum is not. The lender has a security covering the whole assets for the time being, and can intervene at any moment by obtaining a receiver, if his security is imperilled, even though none of the events in which the principal moneys are made payable have happened. If any of them has happened, for instance default in payment of interest, or a resolution to wind up, the payment of the principal moneys is accelerated, and a debenture-holder can at once commence an action to obtain payment and to realize his security.
Often a proviso is inserted in the conditions endorsed on the debenture, that the company is not to create any mortgage or charge ranking in priority to or parr passu with that contained in the debentures. A floating charge created by a company within three months of winding up is invalid, except to the amount of the cash paid and interest at 5%, unless the company is shown to have been solvent at the time.
Debenture Stock.—Debenture stock bears the same relation to debentures that stock does to shares. "Debenture stock," as Lord Lindley states (Companies, 5th ed., i95), "is merely bor rowed capital consolidated into one mass for the sake of con venience. Instead of each lender having a separate bond or mortgage, he has a certificate entitling him to a certain sum, being a portion of one large loan." This sum is not uniform, as in the case of debentures, but variable, and is usually made trans ferable in sums of any amount not involving a fraction of Li. One debenture-stockholder, for instance, may hold L20 of the stock, another L20,000. Debenture stock created by companies under the Companies Acts, unlike that created by statutory com panies governed by the Companies Clauses Acts, is created by a contract between the company and the trustees of a debenture stock trust deed, which is analogous in its provisions to the trust deed above described used to secure debentures. By such deed the company covenants with the trustees, as representing the debenture-stockholders, to pay the amount of the stock, and creates a legal mortgage of specific property, and charges its other assets by way of floating charge, in favour of the trustees, with all requisite powers and provisions for enabling them to enforce the security on default in payment of interest or on the happening of certain specified events evidencing insolvency. The company further covenants to enter the names of the stockholders in a register, and to issue certificates for the amount of their re spective holdings. These certificates have, like debentures, the conditions of the security endorsed on their back.
Redemption.—A company generally reserves a right of re deeming the security before the date fixed for repayment ; and accordingly a power for that purpose is commonly inserted in the conditions and trust deed, if there is one. But as debenture or debenture-stockholders, who have got a satisfactory security, do not wish to be paid off, the right of redemption is often qualified so as not to arise till (say) five years after issue, and a premium is made payable by way of bonus. Sometimes the number of debentures or the amount of stock to be redeemed each year is limited. The selection is made by drawings held in the presence of the directors, or, if there is a trust deed, of the trustees. A sinking fund is often provided for, and this is especially suitable where the security is of a wasting character such as leaseholds, mining property or a patent. Such a fund is formed by the com pany setting apart a certain sum each year out of the profits of the company after payment of interest on the debentures. Re deemed debentures and debenture stock may in certain cases be reissued.
Registration of Mortgages and Charges.—A company is bound to keep a register of mortgages and charges, which is open to the inspection of creditors and members of the company. Mort gages and charges of certain specified classes must also be regis tered within twenty-one days from their creation with the registrar of companies. Otherwise they are void—so far as they are securi ties—against the liquidator and any creditor of the company, but the holders retain the rights of unsecured creditors. An extension of the time for registering may be granted by the court.
Debenture Scrip.—Debentures and debenture stock are usually made payable by instalments, for example io% on application, on allotment and the remainder at intervals of a few months. Until these payments are complete the securities are not issued, but to enable the subscriber to deal with his security pending com pletion the company issues to him an interim scrip certificate acknowledging his title and exchangeable on payment of the re maining instalments for debentures or debenture stock certificates.
Remedies.—When debenture-holders' security becomes en forceable there are a variety of remedies open to them. These fall into two classes—(i) remedies available without the aid of the court ; (2) remedies available only with the aid of the court.
I. If there is a trust deed, the trustees may appoint a receiver of the property comprised in the security, and they may also sell under the powers contained in the deed, or under the Law of Prop erty Act, 1925. Sometimes, where there is no trust deed, similar powers—to appoint a receiver and to sell—are inserted in the conditions endorsed on the debentures.
2. The remedies with the aid of the court are—(a) an action by one or more debenture holders on behalf of all for a receiver and to realize the security; (b) an originating summons for sale or other relief ; (c) an action for foreclosure where the security is deficient (all the debenture-holders must be parties to this pro ceeding) ; (d) a winding-up petition. Of these modes of proceed ing, the first is by far the most common and convenient. Immedi ately on the issue of the writ in the action the plaintiff applies for the appointment of a receiver to protect the security, or if the security comprises a going business, a receiver and manager. In due course the action comes on for judgment, when the court directs accounts and inquiries as to what is due to the holders of the debentures and what property is comprised in the security, and gives leave to apply for a sale. If the company has gone into liquidation, leave must be obtained to commence or continue the action, but such leave in the case of debenture-holders is ex debito justitiae. The administration of a company's assets in such actions by debenture-holders (debenture-holders' liquidations, as they are called) has encroached very much on the ordinary administration of winding up, and great hardship is often inflicted by the floating security on the company's unsecured creditors, who find that everything belonging to the company, uncalled capital included, has been pledged to the debenture-holders. No doubt such credi tors might have inspected the company's register of mortgages and charges, but it is not always practicable to do this.
Auditors.—By the Consolidation Act strict provisions are made for the appointment and remuneration of auditors by a corn pany, and their rights and duties are defined.
Private Companies.—The "private company" may be likened to an incorporated partnership. To be a private company the articles must restrict the right to transfer shares, limit the num ber of members, and prohibit any invitation to the public to sub scribe for shares, debentures or debenture stock of the company. A private company need not consist of more than two members, and enjoys many advantages as regards commencement of busi ness, freedom from the obligation to issue a statement in lieu of prospectus and to make certain returns to the registrar of corn panies and other matters.
Individual traders and trading firms have become alive to the advantages offered by incorporation; for it gives them the pro tection of limited liability, prevents dislocation of a business by the death, bankruptcy or lunacy of any of its members, enables a trader to distribute among the members of his family interests in his business on his decease through the medium of shares and facilitates borrowing on debentures or debenture stock; and with a view to secure these advantages thousands of traders have con verted their businesses into limited companies. To so large an extent has this been done that private companies now form about 90% of the companies registered.
Although a private company does not appeal to the public to subscribe its capital, in the main features of its constitution it dif fers little from a public one. It is only in one or two particulars that special provisions are requisite. It is generally desired for instance: (I) to keep all the shares among the members—the partners or the family—and not to let them get into outside hands; 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 pur chase it at a fair value; that a member desirous of transferring his shares shall give notice to the company which 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 the fair value. So in regard to the management it is common to provide that the owners of the business shall be entitled to hold office as directors for a term of years or for life, provided 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 often given very extensive powers and are described as "governing" or "permanent" or "life" directors. This union of in terest and management in the same persons gives a private corn pany 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 Com panies Acts, but it is occasionally used for the purpose of com mitting 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.