Chapter 6

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 An application for shares can be withdrawn at any time before acceptance.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,--£5, £1 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