Formation and management of companies.

A company is formed upon the issuance of a certificate of incorporation by the appropriate governmental authority. A certificate of incorporation is issued upon the filing of the constitutional documents of the company, together with statutory forms and the payment of a filing fee. The 'constitution' of a company consists of two documents. One, the memorandum of association, states the objects of the company and the details of its authorised capital, otherwise known as the nominal capital. The second document, the articles of association, contains provisions for the internal management of the company, for example, shareholders' annual general meetings, or AGMs, and extraordinary general meetings, the board of directors, corporate contracts and loans.

The management of a company is carried out by its officers, who include a director, manager and/or company secretary. A director is appointed to carry out and control the day-to-day affairs of the company. The structure, procedures and work of the board of directors, which as a body govern the company, are determined by the company's articles of association. A manager is delegated supervisory control of the affairs of the company. A manager's duties to the company are generally more burdensome than those of the employees, who basically owe a duty of confidentiality to the company. Every company must have a company secretary, who cannot also be the sole director of the company. This requirement is not applicable if there is more than one director. A company's auditors are appointed at general meetings. The auditors do not owe a duty to the company as a legal entity, but, rather. to the shareholders. to whom the auditor's report is addressed.

The duties owed by directors to a company can be classified into two groups. The first is a duty of care and the second is a fiduciary duty. The duty of care requires that the directors must exercise the care of an ordinarily prudent and diligent person under the relevant circumstances. The fiduciary duty stems from the position of trust and responsibility entrusted to directors. This duty has many aspects, but, broadly speaking, a director must act in the best interests of the company and not for any collateral purpose. However, the courts are generally reluctant to interfere, provided the relevant act or omission involves no fraud, illegality or conflict of interest.

Finally, a company's state of health is reflected in its accounts, including its balance sheet and profit-and-loss account. Healthy profits might lead to a bonus or capitalisation issue to the shareholders. On the other hand, continuous losses may result in insolvency and the company going into liquidation.

Capitalization issue.

The term capitalisation refers to the act of providing capital for a company through the issuance of various securities. Initially, company capitalisation takes place through the issuance of shares as authorised in the memorandum of association!. The authorised share capital, the maximum amount of share capital that a company can issue, is stated in the memorandum of association, together with the division of the share capital into shares of a certain amount (e.g. 100 shares of £1). The memorandum of association also states the names of the subscribers. The minimum share capital for a public limited company in Great Britain is £50,000. Issued share capital, as opposed to authorised share capital, refers to shares actually held by shareholders. Accordingly, this means that a company may authorise capital in excess of the mandatory minimum share capital but refrain from issuing all of it until a later date - or at all.

The division of share capital usually entails two classes of shares, namely ordinary shares and preference shares. The ordinary shareholder has voting rights, but the payment of dividends is dependent upon the performance of the company. Preference shareholders, on the other hand, receive a fixed dividend irrespective of performance (provided the payment of dividends is legally permitted) before the payment of any dividend to ordinary shareholders, but preference shareholders normally have no voting rights. There is also the possibility of share subdivision, whereby, for example, one ten-pound share is split into ten one-pound shares, usually in order to increase marketability. The reverse process is, appropriately enough, termed share consolidation.

Shares in British companies are subject to pre-emption rights, whereby the company is required to offer newly issued shares first to its existing shareholders, who have the right of 'first refusal'. The shareholders may waive their pre-emption rights by special resolution.

A feature of public companies is that the shares may be freely traded. Shares are normally sold to existing shareholders through a rights issue, unless pre-emption rights have been waived. Even here, though, new shares are not always offered in the first instance to the general public. But rather may be sold to a particular group or individuals (a directed placement).

Share capital is not, of course, the only means of corporate finance. The other is loan capital, typified by debentures. The grant of security for a loan by giving the creditor the right to recover his capital sum from specific assets is termed a fixed charge. Companies may also borrow money secured by the company's assets, such as stock in trade. This arrangement is known as a floating charge.