The shares or other interest of any member in a company are personal estate and may be transferred in the manner provided by the regulations of the company. As Lord Blackburn said, one of the chief objects when joint stock companiesTransfer of shares. were established was that the shares should be capable of being easily transferred; but though every shareholder has a prima facie right to transfer his shares, this right is subject to the regulations of the company, and the company may and usually does by its regulations require that a transfer shall receive the approval of the board of directors before being registered,—the object being to secure the company against having an insolvent or undesirable shareholder (the nominee perhaps of a rival company) substituted for a solvent and acceptable one. This power of the directors to refuse a transfer must not, however, be exercised arbitrarily or capriciously. If it were, it would amount to a confiscation of the shares. Directors, for instance, cannot veto a transfer because they disapprove of the purpose for which it is being made (e.g. to multiply votes), if there is no objection to the transferee.
It is a common and convenient practice to deposit share or stock certificates with bankers and others to secure an advance. When this is done the share or stock certificate is usually accompanied by a blank transfer—that is, a transferBlank transfers. executed by the shareholder borrower, but with a blank left for the name of the transferee. The handing over by the borrower of such blank transfer signed by him is an implied authority to the banker, or other pledgee, if the loan is not paid, to fill in the blank with his name and get himself registered as the owner.
A company can only pay dividends out of profits—which have been defined as the “earnings of a concern after deducting the expenses of earning them.” To pay dividends out of capital is not only ultra vires but illegal, as constitutingDividends. a return of capital to shareholders. Before paying dividends, directors must take reasonable care to secure the preparation of proper balance-sheets and estimates, and must exercise their judgment as business men on the balance-sheets and estimates submitted to them. If they fail to do this, and pay dividends out of capital, they will not be held excused, unless the court should think that they ought to be under the new discretion given to the court by ss. 32-34 of the Companies Act 1907 (Companies (Consolidation) Act 1908, s. 279). The onus is on them to show that the dividends have been paid out of profits. The court as a rule does not interfere with the discretion of directors in the matter of paying dividends, unless they are doing something ultra vires.
By the Companies (Consolidation) Act 1908, ss. 112, 113, incorporating provisions of the act of 1900 (ss. 21-23), as amended by the act of 1907 (s. 19), the legislature has made strict provisions for the appointment and remuneration ofAuditors. auditors by a company, and has defined their rights and duties. Prior to the act of 1900 audit clauses, except in the case of banking companies, were left to the articles of association and were not matter of statutory obligation.
The “private company” may best be described as an incorporated partnership. The term is statutorily defined—for the first time—by s. 37 of the Companies Act 1907 (s. 121 of the Consolidating Act of 1908). Individual traders andPrivate companies. trading firms have in recent years become much more alive to the advantages offered by incorporation. They have discovered that incorporation gives them the protection of limited liability; that it prevents dislocation of a business by the death, bankruptcy or lunacy of any of its members; that it enables a trader to distribute among the members of his family interests in his business on his decease through the medium of shares; that it facilitates borrowing on debentures or debenture stock, and with a view to secure these advantages thousands of traders have converted their businesses into limited companies. To so large an extent has this been done that private companies now form one-third of the whole number of companies registered.
A private company does not appeal to the public to subscribe its capital, but in the main features of its constitution a private company differs little from a public one. It is only in one or two particulars that special provisions are requisite. It is generally desired for instance: (1) to keep all the shares among the members—the partners or the family—and not to let them get into the hands of the public; and (2) to give the principal shareholders, the original partners, a paramount control over the management. For this purpose it is usual to provide specially in the articles that no share shall be transferred to a stranger so long as any member is willing to purchase it at a fair value; that a member desirous of transferring his shares shall give notice to the company; that the company shall offer the shares to the other members; that if within a certain period the company finds a purchaser the shares shall be transferred to him, and that in case of dispute the value shall be settled by arbitration or shall be such a sum as the auditor certifies to be in his opinion the fair value. So in regard to the management it is common to provide that the owner or owners of the business shall be entitled to hold office as directors for a term of years or for life, provided he or they continue to hold a certain number of shares; or an owner is empowered to authorize his executors or trustees whilst holding a certain number of shares to appoint directors. Directors holding office on these special terms are described as “governing” or “permanent” or “life” directors. This union of interest and management in the same persons gives a private company an unquestionable advantage over a public company.
The so-called “one-man company” is merely a variety of the private company. The fact that a company is formed by one man, with the aid of six dummy subscribers, is not in itself (as was at one time supposed) a fraud on the policy of the Companies Act, but it is occasionally used for the purpose of committing a fraud, as where an insolvent trader turns himself into a limited company in order to evade bankruptcy; and it is to an abuse of this kind that the term “one-man company” owes its opprobrious signification.
Companies Limited by Guarantee.—The second class of limited companies are those limited by guarantee, as distinguished from those limited by shares. In the company limited by guarantee each member agrees, in the event of a winding-up, to contribute a certain amount to the assets,—£5, £1 or 10s.—whatever may be the amount of the guarantee. The peculiarity of this form of company is that the interests of the members of a guarantee company are not expressed in any terms of nominal money value like the shares of other companies, a form of constitution designed, as stated by Lord Thring, the draftsman of the Companies Act 1862, to give a superior elasticity to the company. The property of the company simply belongs to the company in certain fractional amounts. This makes it convenient for clubs, syndicates and other associations which do not require the interest of members to be expressed in terms of cash.
Companies not for Gain.—Associations formed to promote commerce, art, science, religion, charity or any other useful object may, with the sanction of the Board of Trade, register under the Companies Act 1862, with limited liability, but without the addition of the word “Limited,” upon proving to the board that it is the intention of the association to apply the profits or income of the association in promoting its objects, and not in payment of dividends to members (C.A. 1867, s. 23). This licence was made revocable by s. 42 of the Companies Act 1907 (Consolidation Act of 1908, ss. 19, 20). In lieu of the word “Company,” the association may adopt as part of its name some such title as chamber, club, college, guild, institute or society. The power given by this section has proved very useful, and many kinds of associations have availed themselves of it, such as medical institutes, law societies, nursing homes, chambers of commerce, clubs, high schools, archaeological, horticultural and philosophical societies. The guarantee form (see supra) is well adapted for associations of this kind intended as they usually are to be supported by annual subscriptions. No such association can hold more than two acres of land without the licence of the Board of Trade.
Cost-Book Mining Companies.—These are in substance mining partnerships. They derive their name from the fact of