All companies are registered under the Companies Act 1993. The Act allows directors more flexibility to manage a company. At the same time, the Act ensures directors are accountable for their actions.
Constitution
Companies do not require a Constitution. If there is no Constitution the Company will simply be governed by the standard provisions of the Act. However there are advantages in adopting a Constitution such as restrictions on share sales, insurance and indemnity for directors and company financing of share purchases.
Directors And Their Duties
The definition of “director” includes those named as directors, those who effectively exercise the powers of directors and those who influence a director. Directors have statutory duties to:
- act in good faith in what they believe, on reasonable grounds, are the best interests of the company;
- exercise powers for a proper purpose;
- not act in a way that contravenes the Act or the Constitution;
- not allow the company’s business to be carried on in a manner likely to create loss to creditors;
- not agree to the company incurring an obligation unless the company can reasonably meet the obligation;
- exercise the care and skill of a reasonable director in the same circumstances;
- disclose any material financial interest or benefit that they (or their relatives) have in any transaction with the company;
- generally not disclose information they hold as a director; *disclose certain details if they buy or sell the company’s shares. Any share purchase by a director must not be at less than fair value. Any share sale by a director must not be at more than fair value.
Insurance
A company can indemnify or insure directors, if its Constitution permits it.
Directors Certificates
Directors are accountable, in that they must certify, in writing, that they have met certain requirements of the Companies Act (for example, regarding share issues, the solvency test and amalgamations). All directors’ certificates must be available for shareholders to inspect.
Shareholders Rights And Remedies
Shareholders rights under the 1993 Companies Act, include:
The Right To Be Bought Out
Dissenting minorities can force a company to buy their shares when they vote against major transactions or certain amendments to the Constitution or the rights attaching to their shares.
The Right To Information
A shareholder may make a written request to the company for information.
The Right To Inspect Records
Specified company documents must be available for inspection.
The Right To Question Management
The board of directors takes responsibility for managing the company but shareholders can question management at shareholders meetings.
The Right To Approve Major Transactions
A company must not enter into a major transaction (as defined in the Act) unless it is approved by a special shareholders’ resolution.
The Right To Sue A Director
A shareholder may bring an action against a director for a breach of duty owed to that shareholder.
The Right To A Remedy For Prejudicial Or Oppressive Conduct
Shareholders have a right to a remedy for prejudicial or oppressive conduct by the company.
The Solvency Test
The solvency test is pivotal to the Act:
- a company must be able to pay its debts as they become due in the normal course of business; and
- the value of the company’s assets must be greater than the value of its liabilities.
When Does The Solvency Test Apply?
It applies when a company:
- buys out a minority shareholder;
- gives financial assistance for the purchase of its own shares;
- redeems or purchases its own shares;
- approves discount schemes for shareholders;
- implements a unanimous shareholder agreement;
- makes distributions to shareholders;
- reduces shareholder liability.
Unanimous Shareholder Agreements
Companies with a small number of shareholders can use the unanimous shareholders approval procedures as a way of avoiding the Act’s strict compliance, which could otherwise be difficult to satisfy.
Other Features
- you can have a one person company with a single shareholder/director;
- companies need not have a secretary;
- shares can be issued more freely. The main restriction is that they must be issued at a fair price;
- company reporting and recording procedures have been tightened with severe penalties for non-compliance.