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Chapter 10

Companies (1): Characteristics and formation

This is the first of two chapters which consider the law relating to companies. This chapter

considers the characteristics of companies and the way in which companies are formed. The

following chapter considers the rights of shareholders, how companies are managed and

how they are wound up. The shareholders in a company are known as the members of the

company.

There are around 2.5 million registered companies in the UK. The law regards each of

these as a legal person, with its own legal rights and obligations. All companies are now

governed by the Companies Act 2006 which has replaced earlier Companies Acts. However,

many sections of the 2006 Act are identical to sections of earlier Companies Acts. Therefore,

in many areas of company law cases decided under the earlier Acts still apply to the 2006 Act.

Act Registration under the Companies

The Companies Act 2006 was introduced to improve the UK’s competitiveness in the

twenty-first century. It aims to do this by providing a sound, flexible framework for UK

company law.

The 2006 Act has four main objectives:

n To enhance shareholder engagement and to foster a long-term approach to investment.

n To adopt a ‘Think Small First’ approach and ensure that companies are better regulated.

n To make it easier to create and run a company.

n To provide flexibility for the future.

Enhancing shareholder engagement and fostering a long-term

investment fostering a long-term approach to

As we shall see, the directors of a company are elected by the shareholders (the members)

to run the company. One of the main objectives of the 2006 Act is to create a good under-

standing between directors and shareholders. The Act aims to ensure that their roles are

clearly defined and that they should find it easy to communicate with each other.

The Act encourages companies to communicate with shareholders electronically. It is

hoped that this will not only save money but encourage more shareholders to be involved

in a dialogue with the company. The Act also intends to make directors more accountable

to their companies. To achieve this aim, it has introduced a new ‘derivative claim’ which

allows members to sue, on the company’s behalf, if the directors breach their duties.