WEEK 1

COMPANY LAW midterm (lecture 1-11)

19/06/2020 Corporate Law Case Brief - In Re:

Stanley (1906) 1 Ch. 131 - Notes For Free
notesforfree.com/2018/01/24/corporate-law-
case-brief-re-stanley-1906-1-ch-131/ 2/2
company, municipal,
commercial or otherwise,”
merely because it carries on its
business
abroad.
The word ‘company’ has no
strictly technical meaning. It
involves two ideas–namely,
rst
that the association is of
persons so-numerous as not to
be aptly described as a rm;
and
secondly, that the consent of
all the other members is not
required to the transfer of a.
member’s interest.The words
“corporation or company” here
means, an incorporated body
or an unincorporated body
which is “municipal,
commercial or otherwise,” and
which is of
such a kind as not to be what is
commonly called “a rm.”
Therefore, that the trustees are
at liberty to invest in the
stocks, funds and securities
(not
payable to bearer) of any
corporation or company,
notwithstanding the fact that it
is not
formed or registered in the
United Kingdom.
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C O R P O R AT E L A W , L A W S C
HOOL NOTES
CASE LAW
Tennant v Stanley

1. A Company is an association of persons so numerous that it cannot aptly

describe a firm.
2. The consent of all other members of a company is not required to the
transfer of a members interest.
3. “Corporation/Company” mean an unincorporated/incorporated body
which is “municipal, commercial/ otherwise” and not commonly called a
firm.
 4. Therefore, the trustees are at a liberty to invest in stocks, funds and
securities notwithstanding the fact that it is not registered in UK.

STATUES

Section 3 of the Limited Liability Partnership (mutual rights and duties of

partners)

(1) Legal entity separate from partners

(2) Perpetual succession
(3) Change in partners should not affect rights/liabilities of the limited
liability partnership

Section 7 of LLP

(1) 2 designated partners

(2) One should be resident of India (“resident” = 182 days atleast in India)

READING

What is Corporate Law?

HENRY HANSMANN and REINIER KRAAKMAN

1. Five characteristics of a business corporation- legal personality, limited

liability, transferable shares, delegated management under a board
structure, and investor ownership.
Advantages

2. ‘closely held’ to refer to corporations whose shares— unlike those of

‘publicly held’ corporations—do not trade freely in impersonal markets,
either because the shares are held by a small number of persons or
because they are subject to restrictions that limit their transferability.)
3. a principal function of corporate law is to provide business enterprises
with a legal form that possesses these five core attributes
4. three principal conflicts within the corporation: those between managers
and shareholders, those among shareholders, and those between
shareholders and the corporation’s other constituencies, including
creditors and employees. Owners and managers. And owners who posses
majority and those who do not = ‘agency problems.’
5. But these characteristics also gener- ate tensions and tradeoffs that lend a
distinctively corporate character to the agency problems that corporate
law must address.
6. Much of what we say here also applies to firms that are governed by
special statutes—such as those for limited liability companies 10 or
business trusts11— that omit one or more of the core characteristics from
their default regime
7. The core element of legal personality (as we use the term here) is what
the civil law refers to as ‘separate patrimony.’ This is the ability of the
firm to own assets that are distinct from the property of other persons,
such as the firm’s investors, and that the firm is free not only to use and
sell but—most importantly—pledge to creditors. Elsewhere we have
termed this asset-pledging effect of legal person- ality ‘affirmative asset
partitioning’ to emphasize that it involves shielding the assets of the
entity—the corporation—from the creditors of the entity’s managers and
owners.15
8. The first is a priority rule that grants to creditors of the firm, as security
for the firm’s debts, a claim on the firm’s assets that is prior to the claims
of the personal creditors of the firm’s owners. This rule is shared by all
modern legal forms for enterprise organization, including partnerships.
The consequence of this priority rule is that a firm’s assets are
automatically pledged as security for all contractual liabilities entered
into by the firm. Its obvious advantage is to increase the credibility of the
firm’s contractual commitments.
9. The second rule—a rule of ‘liquidation protection’—provides that the
individ- ual owners of the corporation (the shareholders) cannot withdraw
their share of firm assets at will, thus forcing partial or complete
liquidation of the firm, nor can the personal creditors of an individual
owner foreclose on the owner’s share of firm assets. This liquidation
protection rule serves to protect the going concern value of the firm
against destruction either by individual shareholders or their creditors. In
contrast to the priority rule just mentioned, it is not found in some other
standard legal forms for enterprise organization, such as the partnership.
Legal entities, such as the business corporation, that are characterized by
both these rules—priority for business creditors and liquidation protection
—can therefore be thought of as having ‘strong form’ legal personality,
as opposed to the ‘weak form’ legal personality found in partnerships,
which are characterized only by the priority rule and not by liquidation
protection.
10.Thus, legal personality and limited liability together set up a default
regime whereby a shareholder’s personal assets are pledged as security to
 his personal creditors, while corporation assets are reserved for
corporation creditors.
11.Fully transferable shares do not necessarily mean freely tradable shares.
Even if shares are transferable, they may not be tradable without
restriction in public markets, but rather just transferable among limited
groups of individuals or with the approval of the current shareholders or
of the corporation
12.The limited partnership and the common- law private trust, for example,
typically invest full control rights in a general partner or trustee who
cannot be displaced without cause. By contrast, corporate law typically
vests principal authority over corporate affairs in a board of directors or
similar committee organ that is periodically elected, exclusively or
primarily, by the firms’ shareholders.
13.a separately-constituted board can also provide a check on opportunistic
behavior by controlling share- holders—either toward their fellow
shareholders or toward other parties who deal with the firm, such as
creditors or employees—by providing a convenient target of personal
liability for decisions made by the firm.
14.Third, the board of a corporation is elected—at least in substantial part—
by the firm’s shareholders. The obvious utility of this approach is to help
assure that the board remains responsive to the interests of the firm’s
owners, who bear the costs and benefits of the firm’s decisions and whose
interests, unlike those of other corporate constituencies, are not strongly
protected by contract. This requirement of an elected board distinguishes
the corporate form from other legal forms, such as nonprofit corporations
or business trusts
15.Fourth, the board ordinarily has multiple members.
16.There are two key elements in the ownership of a firm, as we use the term
‘ownership’ here: the right to control the firm, and the right to receive the
firm’s net earnings
17.One is that, among the various participants in the firm, investors are often
the most difficult to protect simply by contractual means.27 Another is
that investors of capital have (or can be induced to have) peculiarly
homogeneous interests among themselves, hence minimizing the
potential for costly conflict among those who share governance of the
firm.28
18.Specialization to investor ownership is yet another respect in which the
law of business corporations differs from the law of partnership. The
partnership form typically does not presume that ownership is tied to
contribution of capital, and though it is often used in that fashion, it is
also commonly used to assign ownership of the firm in whole or in part to
contributors of labor or of other factors of production—as in the
 prototypical two-person partnership in which one partner supplies labor
and the other capital. As a consequence, the business corporation is less
flexible than the partnership in terms of assigning ownership.

Important notes

Share = section 2(84) = share includes stock (it’s the share in the capital of a
company)

Equity = earn dividends + vote in AGMS, shares the profits and bears the losses
incurred by the company. Number of votes per share = interest. Regarded as
real owners. First initial subscribers of the company. (first subscribers of the
company)
Could be promoters sometimes

Preference shareholder = no voting rights, earn fixed dividends, get paid before
the creditors of the company on winding up. These shareholders appoint their
directors (not all shareholders become directors) under section 149(1).
Responsibility of directors = section 166,

3+ = public company
2 people= private company
1= one person company
Directors inside a company + independent director from outside the company. A
sole proprietorship = are not registered and personal assets of person are used.
company and person are not separate legal entities. When private company goes
public = IPO

MOA of a company = a constitution of a company

Prospectus= first image of the company (which invites investors)
In an opc or one person company = a director can be nominated

Limited by shares

1. Company recieves contribution from members = capital of a company

Limited liability by guarantee

1. Membership and shareholding of profits are not related to each other

 2. (21) “company limited by guarantee” means a company having the liability of its members
limited by the memorandum to such amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being wound up; members have no
holdings in the company. No profits No holding and no responsibility.
3. Winding up = a token amount given by someone (the amount is only
limited to that token amount)
4. Social welfare objective = it increases the credibility amongst donors and
government authorities.

Partnership act, 1932 registered under partnership act

Eg:- Anjali, Poonam & sisters.

Messrs = usually partnership and converted to a company

Salomon v Salomon (1897)

Salomon was a sole proprietorship. He decided to formally register himself as a

one person company.

The company was evaluated at 39k pounds = 20k (shares)< 10k (debentures)
and 9k = in cash. Floating charge= all assets of the company which are not
tangible.

This company issued 20,007 shares and he owned 20,001. It means that Salmon
is taking up majority. Conflict = majority v minority.

Company became bankrupt and was left with no money. 70,000 = creditors
(unsecured)

The court of appeals held that this was contrary to the companies act = they
thought it seemed as though the company acted like an agent for Salmon rather
than the company. Concept of corporate veil = when company is being misused.
The question was = why did he pledge his assets

As the company was re-incorporated, the same people might end up becoming
shareholder. What has changed is the form. The moment a company is
established as a limited liability company, the liability of the person reduced.
Doctrine of separate corporate personality = that the rights and
obligations are distinct from its shareholders.

The kandoli tea estate case

8 gentlemen were the only shareholders. They made it a registered company =

kandoli tea company and remained as the only 8 shareholders of the company.
Conveyance = moving from one hand to another = mere handing over. Amount
of consideration has been paid and a limited liability is also present.

The court held = it’s a bonified conveyance

Lee v Lee’s Air Fanning Limited

The principle of salmon v salmon was applied. Lee was an employee and
compensation was played. Corporate veil = that makes the company a separate
legal entity

Section 2(87) defines subsidiary = control over board of directors.

Just because someone has more shares does not mean they have a
higher voting interest.

Merchandise v british transport commissioner = sham case =

establishing a subsidiary company to obtain licenses = the transfer
of the licenses to the parent company was rejected (malefide)

Dishaw manwekjee AIR 1972 Bom 371

State of UP v Renusagar Power

Renusagar has been supplying electricity. This step was taken for acquiring a
high amount of electricity. Hindalco was getting 250 mgw out of which 200 was
coming from 200. One is a hydro power plant and one is running for electricity
and existing for two different purposes. Renusagar was only created to provide
power to Hindalco. Renusagar cannot sell power to anyone but Hindalco. “own
source of generation” – three factors – renusagar was a wholly owned
subsidiary of hindalco, the former was under the complete control and even
with day to day affirs control was over the manager of the company.

Corporate veil = one of purposes = to evade public/state policy.

Daimler v Continental Tyre and Rubber

Continental Tyre Company = (first world war between England and Germany).
German company in England = It supplies (“trading with the enemy”) = public
policy issue
Contemporary example = Ukraine vs Russia

Macaura v Northern Assurance Company

Shareholder/creditor had no insurance interest. The appellant claimed to lifet the

corporate veil. The claimant is also the shareholder = Macaura. He is the sole
shareholder. The arbitrator said that since everything is owned by one single
person that is why he has no insurable interest. His risks cannot be calculated.
He is not paid because his interest is not quantifiable. He is bearing all the risk =
not quantifiable.

State of Rajasthan v Gotan Limestone Khanji Udyog

Newly formed pvt ltd. Intent = avoiding. Transfer of mining rights. Partnership
was converted to an LLP. Which is now transacting with ano company.
“substance over form”. Intent = concealment. Transfer of mining lease without
government approval. Public policy was circumvented. There was no direct or
indirect consideration.

Members are not determined by their shareholding patterns.

Members are shareholders and guarantors regardless of when they
join a company
Subscribers = when the company is being setup (subscribers
pledges in the MOA and takes up shareholding)

- A member might not be a shareholder

 - Members at the beg of a company are subscribers
- MOA (rights and obligations) public document. With the req
of a member, the MOA is to be sent to him within 7 days.
the proposed name is vague or an abbreviated name such as ‘ABC limited’ or ‘23K limited’ or ‘DJMO’
Ltd: abbreviated name based on the name of the promoters will not be allowed. For example:- BMCD
Limited representing first alphabet of the name of the promoter like Bharat, Mahesh, Chandan and David:

Read more at: https://taxguru.in/company-law/companies-act-2013companies-incorporation-rules-2014-

related-formation-companies.html
Copyright © Taxguru.in

It was amended in 2016 where the name of a promoters was not considered
undesirable.

Names of a company:

Two alphabets together in the same chronology or phonetically similar to an

already existing company will not be allowed.

If you have an interesting name = make it a trademark and don’t register under
companies act.

Usha Beltron limited case = (registered office)

Section 2 (69) defines a promoter (who undertake the necessary steps to get a
company going)

Accountants and secretaries = not promoters

A company can have no promoters like HDFC, ITC, L&T, ICICI Bank, IDFC,
Care.

OBJECT clause

MOA is changed because = change of name

Private
Change of registered office

Similar name company = application under section 13 = special resolution +

advertisement + registrar has to approve
(9) = objection needs to be informed to registrar within 30 days of special
resolution

Lakshamanaswami Mudaliar v LLC

Life insurance business

Has a status of an insuance
Knowledge in insuranjce

No discernable connection

Has to be something incidental or naturally conducive

Doctrine of constructive notice

The person dealing with company is presumed to have read the public document
by paying a fee. Every person dealing with a company is said to have read this.

Doctrine of indoor management = protects outsiders from irregularities within

companies

Turquands rule

All internal management and procedures within the company as in the AOA
required by the corporate constitution have been followed.

Shareholders Agreement

Between shareholders (can be with respect of some shareholders) it protects the

shareholders investment in the company. It doesn’t have any third party
involvement. It is a contract btw some or all the shareholders in the company.
Its prupose is to confer rights and confer obligations over shareholders. This is.
Private contract vs AOA is a public document. A newer SHA amends the older
SHA.

World phone india v WPI Group USA

WPI = 43% of WPIPL

Pankaj patel = 12.5% of WPIPL and Vivek Dhir = 43% of ES

Pankaj was supposed to transfer shares An equal amount was supoosed to got to
WPI and Vivek

A joint venture agreement is a type of an SHA.

The meeting and resolution were bad in law

Is there a substantial difference or is it a subsidiary meaning.

Reliance industries case.

If it’s a substantial change, the AOA needs to be amended.

MOU binds the people and not the company = separate corporate identity

Shares

Linked to limited liability =

Shares and debentures – movable property and transferable as provided by the

AOA

Share certificate = slot is provided

Prima facie evidence of the title of the person to such shares.

ISSUES

Issue of share at par =

Shares at a discount = employees = to increase goodwill amongst the employees

Shares at a premium = shares are issued at a higher price (over the face value)

Liability = face value of the share = not the discounted or premium at which
you bought it.
Share Capital

Equity = ownership = having voting or differential rights. = 1. A say in the

company with regards to how it functions2. Ownership

Equity share capital and preference share capital

Preference shareholders = preference with regards to dividends and winding up

Amount is calculated at a fixed rate and fixed amount.

Section 54 = sweat equity

1. Issued after special resolution has been passed

2. In accordance with any rules as may be prescribed
Rights become one and the same as a an equity shareholder

Holders shall rank pari pasu or on a similar footing with the other equity
shareholder.

Sweat equity = never given in a form of money = nature of IPR = to the

directors or employees of the company at a discount or consideration in
amounts other than cash = anyone who has had added value to the company
might get a share in the company through sweat equity shares. They are issued
at a reduced price or for considerations other than cash.

Share based employee benefits and sweat equity regulation 2021 (SEBI)

Only 2 type of shares can be sold at a discounted rate

1. Sweat equity shares

2. Under section 53

IGP = list startups

Innovation growth platform

Limit for sweat equity shares = 15% and there is a limit of a 50% of paid up
capital

ESOP (pre-determined price at a future date)

Sec 62 (1) (b) = ESOP is an option and not a share. (director or promoters
holding less than 10% of equity)

Permanent employee
Employee of subsidiary in India or abroad

Option gets converted to share

Option gets converted to stock

After having the right for two years or sitting with it for two years = can be
converted into a share

After the right has been with you for a certain period of time = and turned into
shares.

Strike price = value at which it has been given to me.

Cliff period means = everything will be available post the cliff period. The
period after which the options will be vested.

Cliff period = vesting period (both are the same)

when the value of shares drop employees may stop dropping their options or
surrender them.

Voting Rights

Equity shareholders have voting rights

Differential voting rights = not proportionate = for dividends and voting

Preferential shareholders = have voting rights on things which concern them

like winding up or dividends

Equity shareholders can have normal voting rights and could also have
differential voting rights = with regards to voting, dividens and others

DVR trade at a discount = fewer voting rights

Equity shares has a larger voting proportion

Hostile takeover = third parties

Redeemable shares (preference shares)

Call price while issuing shares

In the case of redemption there was a particular value that was agreed upon

After the redemption period the are taken back by the company on this call price

Primary market = internal (dealing within themselves)

With the Initial Public Offer takes place they deal in the secondary market with
third parties

The higher is put out in the market the lower the EPS

Stock price = Earnings per share

Concept of supply and demand

If your lowering the number the share the higher the price and lower the EPS

Another reason the company redeems shares is for majority shareholding

They redeemable if they are = fully paid and paid out of profits

The redeemable share is very secure for a shareholders as it comes out of the
profits of the company

Call price = fixed

They are always paid out of Capital redemption reserve account

Redemption is on fully paid shares

If company is in losses = 3/4th value of the share can be returned and make a
further issue

If none of the above works there is an option to converting the preference into
equity through a special resolution if it present under AOA and MOA.
Benefit = change your profit and loss account
To change the shareholding pattern and start paying back the shares

Any debt in the company = borrowed capital

Rights of shareholders – voting rights and right to receive dividends as per the
AOA

Shares are issued at

Face value (at par)

Premium (plus 2)
Discount 9 (-1)

Initial Public Offer = unlisted company = getting IPO is the first step

Why a Further Public Offer =

Listed company = listed on the stock exchange = issuing shares in the market

Unlisted company needs to take the first step towards issuing shares in the
market = IPO

Both pvt and public have to make a prospectus

Sundaram finance v Gandtrust Finanace

1. Forge + Sundaram + grandtrust

2. Grandtrust = complainant
3. Forge and Sundaram and is criminal conspiracy
4. Representation made = 50,000 shares for ten rs each
5. Possibility if shares being sold for rs 25 per share
6. And a checque of 8 lakhs being issued
7. Based on representation complainant purschased the shares
8. They made two agreements supplementary and sponsorship
9. An amendment made to sponsorship agreement = giving them wide
gambit of powers and happened in secret from investors and grandtrust

Represent warranties =
 10.Agreement between forge and Sundaram = without giving notice to
investors of grandtrust
11.IPO = has a fixed date
12.The agreement gave a wide ambit of powers to the sonsors
13.The complainant said he has been mislead

Fraud and deceit

Hpw to ans the hypo

1. Sponsoship arragemnet: clandestine

2. Great power given to Sundaram finance
3. Unprecendented power given to s and f
4. Warranty = something a company is swearing by and if company
doenst come through = civil remedy

Section 56 and 58 = refuse a transfer

Takeover code

SEBI

Substantial acquisition of shares

Majority vs minority = governanace and regulatory strategies

Regulatpry strategies = a body will deal with it = SEBI
Governances and regulatory

M&A
Ministry of corporate affairs
Compeitition commission of India (s4 and 5 = abuse of dominant position)
MRTP was replaced by competition act = in our purview = takeover code
SEBI

Takeover regulations of 1992 to 1994

PN bhagqati was interfereing
The subtsnatial acquisition of shares and takeovers 1997
Takeover regulations advisory committee 1997
Securities and exchange board of india (substantial acquisition of shares and
takeover) regulations 2011
TAKEOVER CODE

Hostile takeover
- How it is announced
- How it is recieved

Acquirer (regulation 2) = any person who directly or indirectly agrees to acquire

humself or person acting in concert (more ppl) with him = shares or voting
rights in or control over a target company.

Acquisition = directly or indirectly acquiring or agreeing to acquire shares or

vitingrights or control over a target company

Target company = listed on the stock exchange

Can only be interefered by SEBI

Body corporate under central legislations

Applicability of target company is listed under stock exchange

Control = 2 (E) right of appointing majority directors, policy decisions, done

individually or by other people, right of appointing majority directors
Should be able to have an impact on policy decision

- To check out shareholding patterns AOA and SHA

- Other voting agreements
- No independent volition (target company) means there is control

- Provided: just because a director someone has control merely by virture

of being a directly as all directors are not majority shareholders

Acquiring something over the mandate attracts the takeover code

Subtsnatial acquisition = individual shareholder or someone in concert

In terms of shares or voting rights

Regulation 3 (1)

After 25% initial trigger

Creeping acquisition = 5% limit every finanacial year = wont trigger sebi
regulation and they can go upto 75% ( minimum public shares is 25% shares)

= all these create an open offer

Its announced because some ppl may be asked to leave
And also as the internal management is being restructured
Public needs to know to make infomed decidions with regards to investing in
their shares

Voluntary open offer (regulation 6)

Once its publically announced for 6 months no subsequent offer can be made

Competing offers = bid.

Stock splits and bonus issue = excluded

Reducing capital (s 66)

Buy back and reduction of shares

Struggling to pay dividends

Dilution
Case of M&A = asserting control
Increasing EPS

Application to NCLT = special resolution = tribunal = (1) extinguish liability or

(2) cancel any paid up share capital (3) the MOA has to be altered

Application can be made by company limited by shares or guarantee

Unlimited company will not have reducing shares =

Authorized capital – issued capital – paid up share capital

(i) Extinguishing liability

(ii) Company has tanked: reduce share capital
(iii) Excess or oversubscribed shares : Pay off the paid up share capital
(altering MOA: capital clause)
Authorized capital

paid up share capital will always be lesser than the authorized capital

oversubscription and excess are different

reduction of shares

1. ROC
2. Central Government
3. SEBI

(above will be apart of the ans)

Creditor has said yes = auditor S133

Section 67

Restrictions on purchase of company

Unless authorized no one can buy back shares

Buy back = without approval of NCLT

LIC Vs escorts

Chandrakant khare vs shantaram kale (delay of meeting)

Madhusoodan vs kerela kaunmudi