Business Organization
Sole Trader
A client wanting to operate a business for profit Might select from a number of different trading entities. Each has different legal characteristics and is subject to different rules and regulations. The simplest and the commonest form of business structure is a sole trader. This generally source or relatively small enterprise, sort it in an independent software developer, hairdresser, or a small shop. It is headed by a single individual, and it differs from company in that the ownership and management is usually vested in the same person, who is personally responsible for all the tips of the business and may thus risk becoming bankrupt. Finances are confidential and formalities are few, aside from Value Added Tax or Vat regulations.
Partnerships
A common form of structure for certain kinds of business, for example accountants, solicitors, and architects, is a partnership. This needs to have at least two members and normally a maximum of 20. There is an exemption on size for some types of firms, such as solicitors in accountants. All the partners may be jointly severally liable for all the debts of the business. The relationship between the partners is usually drafted in the Partnership Agreement. This can set out the duration of the partnership, his name and business, How profits, losses and running costs are to be shared, how much capital each partner is to contribute, what rules will apply to the capital, what grounds will lead to a partner being expelled from the company, what's restrictions are imposed on partners, and so on. It is also possible to have a limited liability partnership or LLP, which has a legal identity separate from its members. In this sense it resembles a limited company. It is possible for all the partners except one, known as the general partner, to be a limited partner. A sleeping partner may have a share in the business but does not work in it. An individual is therefore able to invest capital in an LLP without risking any further liability. LLPs must be registered with the Register of Companies.
Limited companies
a private limited company (Ltd) is a separate legal entity which can sue and be sued in its own right. The company is identified by its registered number, which will remain the same irrespective of any changes of name. A business can start life as a limited company, and this may be particularly appropriate where high risk projects are involved. In some instances, directors will be asked to guarantee the obligation of a company, for example by giving security over personal assets to guarantee company borrowing. This is particularly common in the case of new companies who are not able to demonstrate a history of profitable trading. Public Limited Company or PLC is differentiated from a private limited company in that the shares can be sold to the general public via the stock market rase share capital. Is mandatory for PLC to have at least two shareholders, two directors and a professionally qualified company secretary. The minimum authorized share capital is £50,000 end 25% must be paid up. Before the company can trade or borrow money, our trading certificate has to be obtained from the Register of Companies.
Question
What information would you want from a client wanting to start up a small profit-making business? What advice would you offer your client?
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Formation of a company
Incorporation
The regulations for incorporation, that is, forming a company, are set out in the Companies Act 1985. There are a number of steps to be followed in this procedure. We offer this service to clients, is to accountants and other private sector formation, a registration, agents. Firstly, it is necessary to choose a name for the company which is legally acceptable. The name to be registered is not necessarily the same as the trading name. The application for registration will be rejected if the name can't be distinguished easily from a company which already exists as a registered company. The use of certain words, For example British, international, and European may require prior approval before they can be used in a company name. Form 10, which gives the names of the directors and company secretary and form 12, is submitted to the Registrar of Companies at Companies House in the respective jurisdiction. On completion of registration, the new company will be given a company number, also known as or registered number, Which remains constant throughout its life, and Companies House will issue a certificate of incorporation. In fact, it is possible to begin trading as a company by purchasing a shelf company, Which is already registered, and having its shares transferred. This is a route to then by clients where speed is of prerequisite.
All company must have an office in the jurisdiction at which it can be served with any legal process. Statutory books, or official company registers, must also be kept there and be available for inspection. Details of any registered company can be found free of charge at Companies House:
· it's registered office,
· Company number,
· accounting reference date,
· date of this financial year end, and
· history of previous names
Memorandum and Articles of Association
When a company is incorporated, it must adopt memorandum and articles of Association, also known as the Mem and Arts. The memorandum sets out the company's object, or purposes and important to ensure that these properly reflect the company's intention, For example the ability to mortgage company property for the purpose of raising finance. The articles set out the relationship between the company and its shareholders. The requirements for directors and shareholders’ meetings are also set out here, as are restrictions on share transfer and allotment of new shares, and regulations concerning directors’ powers and duties. Most companies are limited companies with the liability of members limited to the nominal value of the shares they hold or less company, the amount they guarantee to contribute to the company's liability on liquidation - leave the company's closed and its assets sold. A company must have a steady number of shares issued to properly identified shareholders. Any company will have a maximum amount of share capital which can be issued, known as the authorized share capital. A company need not issue all its authorized share capital.
Question
What procedures are necessary to form a limited company in a jurisdiction you are familiar with?
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Extra bits
From the Company Act 2063 (2003)
The Memorandum of Association of a company shall state the following matters:
· The name of company,
· The address of the registered office of the company,
· The objectives of the company,
· The acts to be carried out to accomplish the objectives of the company,
· The figure of the authorized capital of the company and the figure of the share capital to be issued by the company for time being and the figure of undertaken to be paid by the promoter of the company,
· Types of shares of the company, the rights, and powers inherent in such shares, value of each share and number of shares of different types,
· Restrictions, if any, in the purchase or transfer of shares,
· Number of shares which the promoters have undertaken to subscribe for the time being,
· Terms of payments of share amounts,
· Statements that the liability of shareholders shall be limited,
· The maximum number of shareholders in case of a private company,
· Other necessary matters.
Articles of association
A company shall frame the articles of association in order to attain the objectives set forth in its memorandum of association and carry out its activities in a well–managed manner. The articles of association shall state the following matters:
· Procedures for convening the general meeting of the company and notice to be given for such meeting,
· Proceedings of general meeting,
· Number of directors, provision of alternate director, if any, and tenure of directors
· Provisions relating to the minutes of decisions of the general meeting and the board of directors, and duplicate copies and inspection thereof,
· If a person has to subscribe shares to become a director of a company, minimum number of shares,
· In the case of a public company, qualifications, and number of independent directors,
· Where any professional persons, other than shareholders are to be appointed as directors, provisions relating to the number, tenure, qualifications, and procedures of appointment of such persons,
· Powers and duties of the board of directors and the managing director,
· Authority of directors and delegation of authority,
· Quorum for a meeting of the board of directors, notice of meeting and proceedings of meeting,
· Lien on shares,
· Different classes of shares and the rights, powers and restrictions attached to such shares,
· Provisions relating to calls on shares and forfeiture of shares,
· Provisions relating to the transfer of shares,
· Matters on alteration in share capital,
· Matters on buying back of shares by the company, if the company is to buy back its shares,
· Appointment of a company secretary,
· Provisions relating to remuneration, allowances, and facilities of directors,
· Use of the company’s seal in its transactions, if it is to be so used,
· Accounts, books of accounts and audit of the company,
· Provisions on powers to raise loans or debentures,
· Amalgamation of the company,
· Such matters, if any, as required by the prevailing law to be mentioned in the articles of association of a company carrying on any specific business,
· Such other necessary matters as required to be mentioned in the articles of association.
Incorporation of Company
Any person desirous of undertaking any enterprise with profit motive may, either singly or jointly with others, incorporate a company for the attainment of one or more objectives set forth in the memorandum of association.
There shall be a minimum of seven promoters for the incorporation of a public company
The number of shareholders
The number of shareholders of a private company shall not exceed fifty.
Subject to the proviso to Sub-section (2) of section 3, the number of shareholders of a public company shall be seven in minimum and a maximum of any number.
Notwithstanding anything contained in Sub-section (1), any employee who has purchased a share of a company under scheme of selling shares to employees or any employee who has already purchased a share under such scheme but is not in service of the company for the time being shall not be counted as a shareholder.
Memorandum of Association (MOA)
Memorandum of Association is the constitution of the company. It contains fundamental rules governing the powers of the company in its external operations.
A MOA is a document which sets out the constitution of a company and as such it is really the foundation on which the structure of the company is based. It defines its relationship with the outside world and the scope of its objectives. Its purpose is to enable shareholders, creditors and those who deal with the company to know what its permitted range of enterprise is. MOA is important:
i. As a constitution and fundamental document
ii. Needs at the time of incorporation of company
iii. Must fulfill requirements as prescribed in the company law
iv. Sets out the matters concerning name and address, objectives, economic activities and types and nature of shares and capital of the company etc.
v. Must set out six major clauses: name clause, place of business situated, objective clause, liability clause, capital clause, association, and subscription clause.
Articles of Association (AOA)
AOA is another important document needs at the time of incorporation of a company. It is also known as articles of incorporation, a document which regulates the way in which a company’s internal affairs are managed. AOA is the regulation of company, which is to be followed in each step of performance of function by the officials.
Raising capital by share sale
How companies raise capital
Our company limited by sears may raise capital by borrowing money and through the sale of shares. How a company’s balance sheet - a statement of the financial position of the company at a specific time, for example at the end of the financial year - shows all the company is capitalized or financed, by providing details of debt and share funding. Capital refers to the liability of the company to the people who have provided it with finance from a long-term basis. A company is obliged to maintain its share capital in order to protect its creditors, and phones may only be taken from the capital following complex procedural rules. The Articles of Association provide the power to issue shares. The memorandum sets out the nominal capital - the total of the face value, printed on each share, of all of the shares which the company is allowed to issue. When new shares are created by the company they are issued, oh allotted to shareholders - that is, they are allocated among applicants who subscribe for shares. A shareholder is a member of the company and holds a share certificate.
Share value
All shares have a nominal value, generally of £1, also known as the par value. This value is set out in the capital the laws of the memorandum. Shares can be issued at a premium -for a sum greater than their nominal value - but they cannot be issued at a discount -less than nominal value. Contracts for the sale of shares may provide for deferred payment, that is, part may be left outstanding until the company makes a call for, oh requests, the unpaid amount. The market value of a share depends upon the profitability of the company and the sum of its assets. The legal nature of a share for the shareholder will depend upon the contractual rights attached to the share, which is a chose in action - a personal right which can be enforced or claimed as if it were property.
Rights or attaching to shares
Our company may issue different classes of shares, which have different rights attached to them. The usual rights include:
· A right to dividend, that is, a share in the profits. A company may only declare a dividend if it has made a profit.
· A right to vote on resolutions, for example proposals on matters relating to the approval of directors’ contracts, at the company’s annual general meeting (AGM) - A meeting of all the shareholders with the directors
· A right to repayment of the investment in the event that the company is wound up or closed
Other rights are given as a matter of law by the companies Act 1985. These rights are generally only given to shareholders with voting rights company meetings. The act provides that shares must be offered to shareholders in proportion to their existing shareholding on terms at least as favourable as those offered to potential new shareholders. This is the right of pre -emption. Members of the company have 21 days in which to exercise the right. It does not apply if shares are issued for a non -cash consideration, that is, the price, not necessarily money, paid in exchange for the shares.
Question
What rights do shareholders have in a legal jurisdiction you are familiar with?
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Debt Financing: Secured Lending
Granting security
A: I see that the banks facility letter makes the loan conditional open the grand of a debenture to include a floating charge over all the companies assets, so, Anything of value belonging to the company there is also a first legal charge over the property which is like a mortgage. I suppose that is not surprising given that there is a shortfall, you know, a gap, between the purchase price of the property and the total of the loan. Have you had a valuation yet?
B: A survey has been done - we are waiting for the report. I actually suspect that the valuation will be slightly higher than the exit price because the seller’s in financial difficulty and wants a quick sale.
A: well, we will see what the values come out at. If it is really close to £300,000, I think we should try to persuade the bank that they will have etiquette security without a floating charge over all the assets. As I recall, the company has a pretty high value with you existing machinery already. It may be that the bank will agree to go with that which is limited to a charge over the freehold - that it's your absolute right to hold the property or land without paying rent - And a fixed charge over the machinery. Now, the company hasn't granted security before. Are you familiar with the concept of charges?
B: not very.
A: well, if the debenture is granted at the same time as completion - that is the final stage in the sale of the property - it will include a mortgage over the freehold property. This is effectively on transfer of the title to the property to the bank and mortgagee, subject, of course, to an obligation to transfer it back on repayment of the loan. The fixed charge will be over other property interest and will usually include shares, good wills, book debts, and machinery. This means that in the event of default, the charged assets can be appropriated buy the charge holder, who is a secured creditor, to be sold in order to recover the sum secured.
The terms of a charge
The terms of the mortgage and fixed charge will usually contain insurance obligation and restriction on the company's ability to deal with start assets without the banks consent. For instance, if the adjacent unit is surplus to your requirements and you decide to let it to a tenant, as the lessor you will need to obtain the bank's consent. This will usually involve them approving the form of lease. Assets which are of more transient nature, such as stock, can’t be secured by a fixed charge, so a floating charge can be used. While a floating charge is in place a company can still deal with the assets without the consent of the charge holder. A floating charge is sometimes described as being like a large cup; it hangs inverted above the assets and doesn’t affect the chargor unless the charge crystallizes. At this point, it descends upon the assets and becomes a fixed charge. Usually, a bank gives notice of crystallization. I imagine the debenture will contain a negative pledge, which is a type of undertaking. It means that you won’t be able to create any other interest in the charged property, including those subjects to the floating charge, without consent.
Things to remember
Meaning of ‘charge’
· ‘Charge’ means making available property is a security for the payment of debts i. e. Simply it is a creation of a security in favour of a creditor
· A charge is created by a company so that it can obtain loans and at the same time the lender of money acquires sufficient security of recovery of such loan in house to the right of the company to use such acids remains unrestricted.
· A company can create charge on all assets except its books of accounts in reserve capital
· A charge shall cover mortgage, hypothecation, and pledge.
Types of charge
Fixed or specific charge
· It is created on some identifiable or specific property of the company
· it is created on fixed assets like land, building, plant and machinery etc.
Floating charge
· It is created on a class of assets present as well as future
· it is created on such assets which are always circulating like stock, debtors etc.
Crystallization of floating charge
· floating charges allow business owners to access capital secured with dynamic or circulating assets. The assets backing the floating charge are short-term current assets, usually consumed by a company within one year. The floating charge is secured by the current assets while allowing the company to use those assets to run its business operations.
· Example: if inventory is used as collateral for a loan, the company can still sell, restock, and change the value and quantity of its inventory. In other words, the value of the inventory changes overtime or floats in value and quantity.
· Crystallization means that the right of the company to deal in the assets, which are subject to floating charge, comes to an end. Crystallization is the process by which a floating charge converts into a fixed charge. If a company fails to repay the loan or goes enters liquidation, the floating charge becomes crystallized or frozen into a fixed charge. With a fixed charge, the assets become fixed by the lender so the company cannot use the assets or sell them.
· Floating charges become fixed charges and are thus considered secured debt. These fixed charges will always be repaid before unsecured debt in the liquidation proceedings.
· Crystallization can also happen if a company ends operation or if the borrower and lender go to court and the court appoints a receiver. Once crystallized, the now fixed rate security cannot be sold, and lender may take position of it.
Question
What type of guarantees are offered as security for loans in your legal system? How can investors discover whether a company has charges over its assets?
Company directors and company secretaries
Company directors
There are no mandatory qualifications to become a director of a private or public limited company, although the following persons are disqualified and are not allowed to hold the position:
· An undischarged bankrupt, who has not been released by the court from his debts, unless leave, or permission, is obtained from the court.
· A person disqualified by a court from acting as a company director. If leave is given by a court, it must be For the person to be appointed as a director for a specific company,
· in Scotland, a person under the age of 16,
· anyone over the age of 70 in the case of a PLC. This aids requirement may be waived, or ignored, in the case of a candidate named by a general meeting of the company.
Although incorporation limits liability, directors retain personal responsibility to ensure the company complies with the filing of documents at Companies House on time, as required by the Companies Act. Failure to do so is a criminal offence and may result in the imposition of a fine together with a criminal record. Persistent failure to fulfill these duties may lead to disqualification from holding the office of director in the future. The directors must ensure that:
· accounts for limited companies are delivered to the register of companies within the requisite, Normally within 10 months of the accounting reference date in the case of a private limited company or within seven months in the case of a PLC, although the requisite period Maybe amended by legislation. The defaulting company may be charged a late filing penalty in addition to any other fine imposed by a court.
· annual returns are submitted as specified by the Act. In the event that these are not submitted, and the Registrar believes that the company is no longer operating, he may strike it off the register and dissolve it. Any assets of the company at that point may become the property of the crown.
· notice of change of directors or the details is provided to the Registrar.
· notice of any change to the registered office is provided to the registrar. If this is not done, start to 30 notices may be validly served on the registered office.
Qualifications and duties of a company secretary
Company Secretaries
The qualifications required to be a company secretary are set out in the Companies Act 1985. As a company officer, the company secretary may be criminally liable for a default committed by the company, for example failure to file the company's annual return with the Companies House in time. An employment contract will usually specify the remit of their duties, that is, the areas of responsibility, Which normally include:
· maintaining the statutory registers, for example the register of members.
· filing the statutory forms, for example modifying changes among the directors.
· serving members and auditors with notice of meetings.
· supplying a copy of the accounts to every member of the company.
· keeping minutes of directors meetings and general meetings
Question
What legal restrictions are there on the appointment of company directors in a jurisdiction you are familiar with? Are there too many or not enough?
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Insolvency and winding up
Insolvency describes the financial state of our company when its debts or liabilities exceed its assets and available cash. As soon as ads or company is insolvent, it must take an action to resolve the situation. This may include renegotiating debt, realizing assets to discharge debt, or even borrowing more money and increasing the liabilities. There is a wealth of legislation that imposes obligations on company officers in relation to the interest of creditors. There are secured creditors, whose lending is protected by security over the company's assets, for example banks, and there are unsecured creditors, often suppliers, who may initiate action to achieve repayment. There are also preferential creditors, such as the company's own employees, for example in cases where wages haven't been paid, and occupational pension schemes. The options available to an insolvent company will be affected by the position taken by its creditors, and the various parties may seek legal advice.
Question
What happens if insolvency proceedings are instituted against a company in a legal jurisdiction, you are familiar with?
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Alternative Dispute Resolution (ADR)
Alternative dispute resolution, often abbreviated to ADR, is well established in a number of jurisdictions, including the USA Canada and Australia. Over recent years, we have seen the emergence of mediation organizations and dispute resolvers, some on the Internet. In the UK, ADR is positively promoted for use in a wide range of civil disputes, including small claims, family matters, construction or building contracts, and complex international commercial disputes. It is generally proposed as a cost-effective alternative to the litigation process end entered into on a voluntary basis by disputants, or because of contractual provisions, that is, the conditions of a contract. Many commercial agreements now include dispute resolution clauses in which the contracting parties agree the method to be used if a dispute occurs during the life of the contract. However, parties may also be referred to ADR by the court during the course of litigation. A Civil Procedure rule requires the UK civil courts, as part of the case management process, encourage and facilitate parties to use earlier procedure if appropriate. A National Mediation Helpline has also been set up to provide advice by telephone or online.
ADR procedures
ADR refers to a number of different procedures used to reach a settlement. Some frequently used methods are:
· Arbitration: this is a more formal and binding process where the dispute is resolved by the arbitrator nominated by both parties
· Mediation: possibly the most popular process. An independent party, normally with appropriate expertise in the area of contention or dispute, is appointed by the parties to act as a mediator. The mediation process begins with an all-parties discussion; following this the respective parties separate to discuss the issues and, with the assistance of the mediator, seek to negotiate a settlement. If the statement is reached, it can become a legally binding contract.
· Med – Arb: The dispute is initially submitted to the mediation but if mediated settlement cannot be reached, then the matter is referred to arbitration.
· Adjudication: the method most commonly used in construction disputes. A quick decision is made by the adjudicator end or time period is specified during which either party may give notice to refer the matter to arbitration or litigation. The adjudicators decision is binding upon the parties and must be followed, unless and until a later decision is made by an arbitrator or the court.
A question for practice
What experience have you had of ADR? Is it supported in a jurisdiction you are familiar with? How? What are the advantages and disadvantages of online mediation?
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Beyond the textbook
What is arbitration?
Arbitration is one of the popular methods of Alternative Dispute Resolution (ADR) in business law. ADR basically is an alternative to a formal court hearing system where commercial disputes are settled outside the court procedure by the impartial judicator called arbitrator. It is collective term for the ways by which parties can settle disputes with the help of third parties out of the court such as arbitration conciliation, mediation, negotiation, etc.
‘Arbitration’ means settlement of a dispute by referring to a third party and abiding by its decision. And the agreement between two parties to submit a dispute to arbitration in a written form is an arbitration agreement.
The definition of arbitration agreement has been provided by the Section 2(a) of Arbitration Act 2055 that, “agreement means a written agreement reached between the parties for settlement by arbitration of any dispute which has arisen, or which may arise in the future in respect of a defined legal relationship whether contractual or not.”
Who is an Arbitrator?
An arbitrator is a person appointed by mutual consent of the concerning parties to settle a controversial issue between them. The person is appointed to adjudicate the differences regarding the agreement between two or more parties. The arbitrators are chosen by the consent of the disputing parties.
Arbitration Act 2055 defines “An ‘Arbitrator’ or ‘Arbitral Tribunal’. The Arbitrator is appointed for the settlement of a dispute and the term includes a panel of arbitrators. Such a person or a group of persons appointed in tribunal constituted the settlement of disputes in a judicial manner. Such a person is known as an arbitrator.
Duties of Arbitrator
· To act judicially
· Not to resort to any misconduct
· To disclose material facts
· Not to act as an advocate or an agent
· To discharge all the functions of personality
· To use all the reasonable dispatches
· to be present at every meeting of the arbitrators
· to give equal opportunity
· not to cross jurisdictions
· to decide all the matters referred
· to inform the parties of an award and to provide the copies
Mediation
Mediation is very old system of dispute resolution. It is as older as the legal system. Pyangtumang of Kirat Period, Panchali of Malla period and Panchayat of Malla period used to settle disputes through compromise. No 34 of Court Procedure of Muluki Ain 1910 had the provision of compromise for the settlement of disputes with the help of local gentlemen.
No 182 of the Chapter on Court Procedure has provided for settlement of a dispute through compromise. However, those provisions were related to the compromise initiated by the parties themselves. Court initiated mediation system got recognition in Nepal from the decade of 2060 B.S. Rule 32 A of the District Court Rules 53A of the Appellate Court Rules and Rule 65A if the Supreme Court Rules provided for court-initiated mediation. The Mediation Act 2068 and Mediation Rules 2070 are comprehensive legal provision providing for court-initiated mediation in Nepal. Those legal provisions came into force from Baishakh 1, 2071 B.S.
The process of mediation
the parties may prescribe the procedure of mediation. The parties also agreed to settle the dispute through rules made by an agency engaged in mediation service. If the court had ordered the following special procedure at the time of making order for settlement of dispute through mediation such procedures shall be followed. In other cases, an appropriate procedure can be followed by the mediator. However, the procedure should include the following things, among other things, in the procedure:
1. providing opportunity to the parties to produce own claim and reply by the parties before the mediator
2. to hold separate or joint meetings with the parties.
3. to seek any information or evidence or document from the parties.
4. To provide access to the relevant information to the parties
5. to seek alternative grounds for mediation from parties for resolving the dispute.
Corporation Tax
Corporation Tax is the tax payable on a company’s income, e.g., from investment in shares or gains, e.g., from the sale of assets at the statutory rate. In this context ‘company’ is used to refer to the following, in addition to the more conventional meaning of the word:
1. Members’ clubs, societies and associations who might have trading activities or income from non-members, for example, amateur sports club
2. trade associations, for example the Association of British Travel Agents (ABTA), the regulatory body for British travel agents
3. Housing association – in the UK, independent, not for profit bodies that provide low cost ‘social housing’ for people in housing need.
4. Groups of individuals carrying on a business, for example cooperatives, but not partnerships
All companies resident in the UK are subject to Corporation Tax on their profits in an accounting period. A non - UK incorporated company may also be subject to Corporation Tax if it managed and controlled from within the UK.
Although Companies House notifies the Inland Revenue – the UK tax authority of the formation of a company on competition, it is still the responsibility of the company to inform the Revenue of its existence and liability to pay tax. This must be done within 12 months of the end of the company’s accounting period. An accounting period starts when a company first becomes chargeable to Corporation Tax or when the previous accounting period ends. It cannot exceed 12 months for the purpose of tax. The normal due date for the payment of tax is no later than nine months plus one day after the end of the accounting period, although large companies – that is, those with annual profits in excess of stipulated amount – are obliged to pay their tax early by Quarterly Instalment Payments.
Word combinations with ‘tax’
Avoidance: trying to minimize the tax to be paid, for example by using tax loopholes (gaps in the law)
Benefits: advantages
Bill: demand for money owned in taxes
Chargeable: tax that may be levied on profits
Due: tax that has to be paid by a required date
Efficiency: ways of reducing taxes owned
Evasion: illegally trying to not pay tax
Exemption: a principle permitting freedom from payment of tax. For example, non-profit making organizations may claim tax exemption.
Point: date at which a tax begins to be applied
Relief: help, allowing a company (for individual) not to pay on part of their income
Tax Return: form issued by the taxation authorities for declaration of income and allowances, also known as a declaration.
Question
How is a corporation’s taxable income assessed in a jurisdiction you are familiar with? What tax benefits are available to corporations?
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Mergers and acquisitions
A merger or takeover occurs when one company has acquired the majority, or even the entirety, of the shares of the target company. Statutory schemes of arrangement of companies are contained within the Companies Act. In the conventional non-statutory situation, the acquiring company, or offeror, usually makes an offer to acquire the shares of the company, the offeree, and gives the shareholders a fixed time within which to accept the offer. The offer is made subject to the condition that it will be only be effective in the event that a specified percentage of the shareholders accept the offer. The price offered for the shares is usually more than would ordinarily be obtained at that point in time for those shares on the stock market. This constitutes the takeover bid. Of course, if the board of directors doesn’t recommend the offer to its shareholders, it is regarded as a hostile takeover.
The freedom of companies to merge in this way is controlled by various statutes, European Community (EC) competition authorities and the courts, which regulate anti-competitive concentrations of market power. If a merger is permitted, clearance is given by the regulatory authorities.
Dealing disclosure requirements
The conduct of takeovers is controlled by rules set by the City Code on Takeovers and Mergers. The Code is administered by the Panel of Takeovers and Mergers, an independent body which draws its members from major financial and business institutions. UK registered and resident public companies have to abide by the Code. Disciplinary action may result from certain breaches of the Code, for example failing to disclose dealings in relevant securities of the offeree company. The guiding principles behind the Code are that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover, and that shareholders of the same class are afforded equivalent treatment by an offeror.
Question
How are shareholders’ interests protected during takeovers in a jurisdiction you are familiar with? In your opinion, are takeovers adequately regulated, over regulated or under regulated?
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