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Pettet’s Company Law
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“John Lowry and Arad Reisberg rise more than admirably to the task of
assimilating, explaining and analysing this vast corpus of legal material. The
text is pellucidly clear, analytically précis, judicious in its balance in dealing with
the various topics, comprehensive, and always cognisant of the policy issues.”
Professor Dan Prentice, Oxford, UCL and Erskine Chambers
LONGMAN LAW SERIES
John Lowry and Arad Reisberg
Pettet’s Company Law:
Company Law &
Corporate Finance
FOURTH EDITION
Pettet’s Company Law
LONGMAN LAW SERIES
Providing you with the best possible basis for your legal study.
All Longman Law Series titles are available to order from all good
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Longman Law Series titles come with
ISBN: 9781408279281 ISBN: 9781408255520 ISBN: 9781408295731
ISBN: 9781408279328 ISBN: 9781408280799 ISBN: 9781408272831
Your Complete Learning Package
Pettet’s Company Law
Company Law and Corporate
Finance
Fourth Edition
John Lowry
Arad Reisberg
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
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First published 2001
Second edition published 2005
Third edition published 2009
Fourth edition published 2012
© Pearson Education Limited 2001, 2012
The rights of John Lowry and Arad Reisberg to be identified as authors of this Work have been
asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
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All trademarks used herein are the property of their respective owners. The use of any trademark
in this text does not vest in the author or publisher any trademark ownership rights in
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endorsement of this book by such owners.
Contains public sector information licensed under the Open Government Licence (OGL) v1.0.
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Pearson Education is not responsible for the content of third-party internet sites.
ISBN 978-1-4082-7283-1
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Pettet, B. G.
Pettet, Lowry & Reisberg’s company law : company and capital markets law / Ben
Pettet, John Lowry, Arad Reisberg. -- 4th ed.
p. cm.
Rev. ed. of: Pettet’s company law. 3rd ed. 2009.
ISBN 978-1-4082-7283-1 (pbk.)
1. Corporation law--Great Britain. I. Lowry, John P. II. Reisberg, Arad,
1971- III. Title. IV. Title: Pettet, Lowry and Reisberg’s company law. V. Title:
Company law.
KD2079.P48 2012
346.41′066--dc23
2012004180
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12
Typeset in 10/12.5pt Minion by 35
Printed by Ashford Colour Press Ltd., Gosport
In memory of Professor Ben Pettet
and
Professor John Usher
Contents in brief
Preface to the fourth edition xx
Preface to the first edition xxi
Foreword to the third edition xxiii
Acknowledgements xxiv
Table of cases xxv
Table of statutes xl
Table of statutory instruments lvi
Table of European legislation lx
1 Treaties and conventions lx
2 Secondary legislation lx
Part I Foundation and theory 1
1 The nature of company law 3
2 Corporate entity, limited liability and incorporation 32
3 Legal theory and company law 57
Part II The constitution of the company 87
4 Entrenchment of rights 89
5 Organisation of functions and corporate powers 112
6 Relations with third parties: agency and constitutional limitations 127
Part III Corporate governance 139
7 The governance problem and the mechanisms of meetings 141
8 Duties of directors 157
9 Role of self-regulation 207
10 Shareholder litigation: the derivative claim 237
11 Shareholder litigation: winding up on just and equitable grounds
and the unfair prejudice remedy 283
Part IV Corporate finance law 311
12 Techniques of corporate finance 313
13 Raising and maintenance of capital 337
14 Financial assistance for the acquisition of shares 360
Part V Securities regulation 381
15 Policy and theory in securities regulation/capital markets law 383
16 Credit rating agencies and their role in capital markets 416
viii Contents in brief
17 The regulatory machinery of the Financial Services and Markets Act 2000 452
18 The regulation of public offerings of shares 479
19 The regulation of insider dealing and market abuse 507
20 The regulation of takeovers 529
Part VI Insolvency and liquidation 545
21 Insolvency and liquidation procedures 547
22 Disqualification of directors 563
Index 576
Contents in detail
Preface to the fourth edition xx
Preface to the first edition xxi
Foreword to the third edition xxiii
Acknowledgements xxiv
Table of cases xxv
Table of statutes xl
Table of statutory instruments lvi
Table of European legislation lx
1 Treaties and conventions lx
2 Secondary legislation lx
Part I Foundation and theory 1
1 The nature of company law 3
1.1 Preliminary 3
1.2 Rationale, abstract and agenda 4
1.3 Scope of this work 8
1.4 The genesis of company law 9
1.5 The present companies legislation 10
1.6 European community legislation 11
A The harmonisation programme 11
B The company law programme: UK implementation 11
C The EC Commission’s company law action plan 14
1.7 Company law, corporate law or corporations law? 15
1.8 Focus – the main business vehicle 15
A Company limited by shares 15
B Public or private 16
C Small closely-held and dispersed-ownership companies 17
D The Company Law Review and law reform 18
1.9 Other business vehicles 18
A Other types of companies 18
B Other organisations and bodies 20
C Partnerships 21
1.10 Reform mechanisms 23
A Modern company law 23
B The agencies of company law reform 23
C The 1998 review 27
D The Companies Act 2006 30
x Contents in detail
2 Corporate entity, limited liability and incorporation 32
2.1 Corporate entity 32
A The ‘ Salomon’ doctrine 32
B Piercing the corporate veil 33
C Corporate liability for torts and crimes 36
2.2 Limited liability 40
A The meaning of limited liability 40
B The continuing debate about the desirability of
limited liability 41
C Fraudulent trading and wrongful trading 42
2.3 Groups of companies 46
2.4 Incorporation 48
A Formal requirements 48
B Certificate of incorporation 52
C Publicity and the continuing role of the Registrar 52
D Promoters and pre-incorporation contracts 53
E Right of establishment 55
3 Legal theory and company law 57
3.1 The role of theory in company law 57
3.2 The nature and origins of the corporation 58
A The theories 58
B Rationale and application of the theories 59
3.3 Managerialism 60
3.4 Corporate governance 63
A Alignment 63
B The Cadbury Report and self-regulation 64
C Global convergence in corporate governance 64
3.5 Stakeholder company law 67
A Social responsibility 67
B Industrial democracy 69
C Stakeholder company law 70
D The Company Law Review and stakeholders 73
3.6 Law and economics 74
A Efficiency as a moral value 74
B The theory of the firm 76
3.7 Future issues 84
Part II The constitution of the company 87
4 Entrenchment of rights 89
4.1 Entrenchment of expectation versus flexibility 89
4.2 Articles of association 89
A The company’s objects 90
4.3 Shareholder agreements 95
Contents in detail xi
4.4 Changing the constitution and reconstruction 98
A Introduction 98
B Contract 99
C Alteration of articles 99
D Entrenchment provisions in the articles 101
E Variation of class rights 102
F Compromises and arrangements under s. 895 106
G Other methods of reconstruction 110
5 Organisation of functions and corporate powers 112
5.1 Introduction 112
5.2 The institutions of the company: the board and the shareholders 112
5.3 The ultra vires doctrine 114
A Introduction 114
B Reforming the rule: a historical overview 115
C Core provisions of the 2006 reforms: a company’s capacity
and related matters 122
D Pulling it together 125
6 Relations with third parties: agency and constitutional limitations 127
6.1 Contractual relations with third parties 127
6.2 Agency 127
6.3 The Turquand doctrine 130
6.4 The ‘relationship’ between Turquand and agency 131
6.5 Section 40 of the Companies Act 2006 134
Part III Corporate governance 139
7 The governance problem and the mechanisms of meetings 141
7.1 Alignment of managerial and shareholder interests 141
7.2 The role and functioning of the board of directors 142
A Directors as managers and ‘alter ego’ 142
B Appointment and retirement of directors 143
C Proceedings at directors’ meetings 144
D Remuneration of directors 145
7.3 The role and functioning of the shareholders in general meeting 146
A The general meeting as the residual authority of the company 146
B Resolutions at meetings 147
C The shareholders’ general meetings 148
D Convening of meetings and notice 149
E Shareholder independence – meetings and resolutions 150
F Procedure at meetings 151
7.4 Problems with the meeting concept 152
7.5 Meetings in small closely-held companies 154
xii Contents in detail
8 Duties of directors 157
8.1 Introduction 157
8.2 The duties of directors under Part 10 160
A The duty to act within powers 160
B Duty to promote the success of the company 161
C Duty to exercise independent judgment 166
D Duty to exercise reasonable care, skill and diligence 168
E Duty to avoid conflicts of interest 170
F Duty not to accept benefits from third parties 181
G Duty to declare interest in a proposed or existing transaction
or arrangement 181
H Ratification of acts giving rise to liability 183
I Remedies for breach of duty 183
8.3 Relief for directors 184
A Ought fairly to be excused 184
B Exemption and insurance 185
8.4 Duty not to commit an unfair prejudice 185
8.5 Other legal constraints on directors’ powers 186
8.6 Statutory controls affecting directors 186
A Regulating specific conflict-transactions 186
B Controls over issue of shares 190
C Statutory provisions in terrorem 191
8.7 Monitoring of directors 193
A The policy of disclosure of the financial affairs of the company 193
B Accounts and reports 194
C Publicity 198
D Non-statutory reports 199
E The role of the auditors 199
F Company secretary 202
G Government and other agencies 203
8.8 Concluding remarks 205
9 Role of self-regulation 207
9.1 Reliance on self-regulation 207
9.2 Techniques of Cadbury 209
A Different approaches 209
B Structural and functional alterations 209
C Assumptions of responsibility 210
D Enhanced quality of disclosure 210
9.3 The Greenbury Report 211
9.4 The Hampel Report: evolution of the Combined Code 1998 211
9.5 The Higgs Review and the Combined Code 2003 212
9.6 The Combined Code (2006 and June 2008) 213
9.7 The UK Corporate Governance Code (June 2010) 215
A Background 215
B Disclosure of corporate governance arrangements and listing rules 215
C Excerpts and summary of the main provisions 217
Contents in detail xiii
9.8 The UK Stewardship Code (July 2010) 225
A Background 225
B The FRC consultation on the UK Stewardship Code principles 227
C Responses to the FRC consultation on the UK Stewardship
Code principles 228
D The UK Stewardship Code principles and guidance 229
E The scope and application of the UK Stewardship Code 231
F What is not addressed in the UK Stewardship Code 232
G Adherence to the Stewardship Code 232
9.9 The EU corporate governance Green Paper 233
9.10 The ‘profession’ of director? 234
9.11 Conclusions 234
10 Shareholder litigation: the derivative claim 237
10.1 Introduction: shareholder litigation generally 237
10.2 The old common law 238
A Doctrine of Foss v Harbottle 238
B The principle of majority rule 239
C The ‘exceptions’ to Foss v Harbottle 240
D The striking out of derivative actions 242
10.3 Deficiencies in the common law and the approach to reform 247
10.4 The derivative claim under the Companies Act 2006 249
A Introduction 249
B General principles 250
C Scope of application 251
D Procedural requirements 257
E Criteria for the grant of leave 260
10.5 An assessment of Part 11 271
10.6 The new derivative claim procedure in action: shadows of the past? 275
10.7 The future of derivative claims: much ado about nothing? 281
11 Shareholder litigation: winding up on just and equitable grounds
and the unfair prejudice remedy 283
11.1 Introduction 283
11.2 Winding up on just and equitable grounds 284
11.3 Unfair prejudice 285
A The alternative remedy failure 285
B Unfair prejudice 285
Part IV Corporate finance law 311
12 Techniques of corporate finance 313
12.1 Some basic concepts of corporate finance 313
A Assets and capital 313
B The aims of the company 314
C Cash flows and capital raising 314
xiv Contents in detail
12.2 Financing the company 315
A Initial finance 315
B Venture capital financing 316
C Raising capital through debt 317
12.3 The law relating to shares 319
A Definitions of share capital 319
B Authority to issue share capital 321
C Preferential subscription rights 321
D Nature of shares and membership 322
E Classes and types of shares 323
F Transfer of and transactions in shares 326
12.4 The legal nature of debentures (and bonds) 329
A The definition of a debenture and the distinction between a fixed
and a floating charge 329
B Registration requirements for charges 332
13 Raising and maintenance of capital 337
13.1 Introduction 337
13.2 The raising of capital – discounts and premiums 337
A Introduction 337
B Discounts 338
C Premiums 339
13.3 The maintenance of capital 341
A The meaning of the doctrine 341
B The Company Law Review and the reforms of the Companies Act 2006 343
C Statements of capital 345
D Reduction of capital 346
E Company purchase of own shares 351
F Dividends and distributions 355
14 Financial assistance for the acquisition of shares 360
14.1 Background and development of the present law 360
14.2 The modern scope of the prohibitions 364
14.3 Meaning of financial assistance 367
14.4 Principal/larger purpose exceptions 369
14.5 Private company exception 373
14.6 Other exceptions 374
14.7 The consequences of breach 376
A Criminal sanctions 376
B Civil consequences 376
Part V Securities regulation 381
15 Policy and theory in securities regulation/capital markets law 383
15.1 The relationship between traditional company law and
securities regulation 383