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Reflection on Company Law

Throughout this module I have interacted with new concepts and literature on company law including the incorporation process and its effects. In particular, incorporation results in the formation of different business vessels including private limited companies. Notably, Salmon v Salmon, a popular case is this module provides the background to some of the merits of incorporating a private limited company. For investors, this type of company limits their liability for the debts of the company to the amount of unpaid share. Therefore, a private limited company is a capital raising vehicle that facilitates investment while at the same time minimising the risks attendant to entrepreneurship. A creditor will prefer a private limited company because of its legal personality that allows them to sue it for their debts or to assert their rights against it. On the other hand, private limited companies can be disadvantageous to investors who have a limited role in the company since it is the directors that are its agents. The transfer of shares in a private limited company is restricted and no public offer may be made inviting members of the public to subscribe to its shares. It may be devastating for creditors of a private company that is insolvent because they may not go after the shareholders personally for the debt where the assets are insufficient. Overall, I have learnt that private limited companies fits the needs of both creditors and investors in as much as it disadvantages them.

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One of the most important cases in this module is the Salmon v Quin & Axten Ltd. The case addresses the issue of outsider’s rights as envisioned in section 33 of Companies Act 2006. This case is one among many cases that suggest members can enforce outsider rights as long as they sue in their capacity as a member. The holding in this case is as controversial as section


  1. [1896] UKHL 1
  2. Davies Paul L., Sarah Worthington, and Eva Micheler. Gower and Davies' principles of modern company law. (Sweet & Maxwell, 2012)
  3. [1909] AC 442
  4. 14 of Companies Act 1985 was and as section 33 still is under the Companies Act 2006. Since the court’s decision in 1909, there has been a litany of cases and scholars with similar pronouncements and opinions on the issue of outsider rights. In Hickman v Kent, the authority is that it is only members acting on in their capacity as members who can sue to enforce their rights under the articles but not outsiders. In the above case a director who was also a member could not enforce his rights as a director under the articles. In a later case of Eley v Positive Government Security Asurance Co, the court advanced the position that outsiders cannot enforce their rights contained in the articles. Looking at all the Salmon decision in comparison with the later ones, it appears that there is yet to be a decision that has overruled or challenged the position of outsiders in companies. Therefore, it would seem that the Salmon case is the authority on the enforcement of outsider rights in accordance with the Companies Act.

    Analysing the course materials on pre-emptive rights of shareholders, I realize that the Companies Act affords protection to minority shareholders in different ways. In essence, pre-emptive rights give the shareholder the right to buy additional shares in any future issue before they are sold to members of the public. Further, shareholders have the right of first refusal on the issue of shares. After looking at different seminars in this module I now realise that this right protects minority shareholders from dilution of their shareholding. It follows that minority members have the right to first refusal which can act as a measure regulating the transfer of shares. In cases where there is need to purchase all the shares of a company, and the majority has acquiesced with the deal, the minority can exercise their pre-emptive rights to block the said purchase and limit the transferability of their shares. However, I have come to learn through my readings that there are other tools that can be used to overcome the obstacle


  5. [1915] 1 Ch 881
  6. [1976] 1 Ex D 88
  • Van der Linde, Kathleen. Pre-Emptive Rights in Respect of Share Issues-Misnomer or Mistake. (2008) (S. Afr. Mercantile LJ 2 510.
  • of pre-emptive rights. Apart from waiver of the right by shareholders, the Companies Act provides for squeeze and drag along rights out of minority. Although some private companies may have articles that provide for compulsory transfer of shares, the Companies Act has fundamentally protected minority shareholders in a company. Therefore, Ian Macneil’s view of pre-emptive rights is in my opinion wrong because the Act provides for mechanisms which a minority members can maintain control of his shareholding. But as is the case, there is always an exception to the general rule and the above right is not absolute.

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    Bibliography

    Table of Cases

    Hickman v Kent [1915] 1 Ch 881

    Hickman to Salmon v Quin & Axten Ltd [1909] A.C 442

    Eley v Positive Government Security Assurance Co. [1976] 1 Ex D 88

    Salomon v A Salomon & Co Ltd [1896] UKHL 1

    Table of Statutes

    Companies Act 1985

    Companies Act 2006

    Journals

    Van der Linde K. Pre-Emptive Rights in Respect of Share Issues-Misnomer or Mistake. (2008) S. Afr. Mercantile LJ. 20,510.

    Books

    Davies PL, Worthington S, and Micheler E. Gower and Davies' principles of modern company law. (Sweet & Maxwell 2012)

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