The Legal Framework
These general notes are written with reference to United Kingdom companies and companies incorporated in
jurisdictions which follow UK law.
i. Company Name
The Registrar has the power to refuse registration of any name that he considers undesirable, confusing, offensive or too similar to that of an existing company. Certain words – such as trust, investment, bank, and insurance – may be regarded as being sensitive and can only be used if the company is specifically licensed to undertake the indicated activity. The criteria for name selection vary from jurisdiction to jurisdiction but broadly follow these guidelines.
ii. Authorised Share Capital
The amount of the authorised capital – the maximum capital available to be issued – can be as high as is desired. In most jurisdictions the fee payable on incorporation increases in line with the authorised capital. Generally, a company would be incorporated with the highest authorised capital for which the minimum registration fees apply.
iii. Issued Share Capital
The issued share capital – the capital actually taken up by shareholders – may be paid, partly paid or issued for a consideration other than cash. When shares have been wholly paid, the shareholder has no further liability to the company. If the shareholder does not pay for his shares or pays only in part then he can be called upon to pay the balance outstanding at any time and would always be subject to a “call” if the company cannot otherwise pay its debts.
If nominee or trustee shareholders hold shares, they would normally be fully paid up so as to avoid liability for the professional shareholders.
iv. Registered Office and other Domiciliary Requirements
All companies must have a registered office within the country of incorporation, but this does not have to be the place where the company carries on business or keeps its books of account. Many jurisdictions require all companies to appoint a resident agent to receive official notices and legal papers. Some also require companies to have a locally resident company secretary or director.
v. Company Secretary
It is usually the responsibility of the Company Secretary to make sure that a company is in good standing and make the necessary returns to the Registrar and government. This requires a thorough knowledge of local company law and practice, so it is strongly recommended that a locally based professional be appointed, even if there is no strict legal requirement to do so.
vi. Memorandum of Association
Historically the objects of the company would be set out in the Memorandum of Association. As companies were not permitted to undertake activities that were not authorised by their Memoranda, normal practice was to draft extremely wide powers for a company, with care being taken to ensure that all the proposed and future activities of the company were fully set out. In most jurisdictions nowadays this “ultra vires” rule has been abolished so companies may undertake any lawful business that is not specifically proscribed or licensable. The Memoranda of companies incorporated in these jurisdictions may simply state that the objects are unlimited.
vii. Articles of Association
The Articles of Association (often called “Bye-Laws”) represent a contract between the shareholders and the company. They provide detailed rules for the management of the company’s affairs and for the conduct of its business.
viii. Shareholders, Directors and Secretaries
Shareholders are the legal owners of the company but responsibility for the day-to-day management of the company rests with its directors and, to a limited extent, with the company secretary. The shareholders would normally retain the power to remove a director from office and elect a replacement but should not interfere with the management of the company and do not have power to do so. In private companies it is quite common for the shareholders to also act as the directors of the company.
In jurisdictions that require for a public record of the details of the shareholders to be maintained, the shareholders of record will frequently be nominees or trustees who will hold the shares on behalf of the beneficial owner, thereby preserving their anonymity.
As mentioned earlier, Sovereign frequently provides directors who reside and meet offshore to prevent a company being considered as resident in the high tax country where the owners reside. Such directors will carefully consider and will generally carry out the wishes of the ultimate owner. But they should not blindly follow his or her directions (or those of any other third party) because this would mean that the control and management rests with the instructing party rather than with the directors. In this case, the company could then be considered as tax resident wherever the instructing party resides. If the tax status of the company is not to be prejudiced, it must be clearly demonstrated that the directors exercise independent mind and management.
Clients may naturally be nervous about giving over control of “their business” to a third party, so it is vital that such control is given only to organisations of the highest integrity and experience. Sovereign meets these criteria. We employ professionally qualified staff, hold appropriate government licences and have successfully managed many thousands of companies. The importance of these factors and this track record cannot be overstated.
ix. Registered or Bearer Shares?
Bearer shares are shares that are transferred simply by delivery without the need for registration of any change of ownership. They are therefore “anonymous” in practice. In response to international demands for increased transparency and “know your customer” procedures, most reputable IFCs have now either prohibited bearer shares or require them to be “immobilised” by being lodged with a licensed practitioner (usually locally) to the order of a specified beneficial owner. Additionally, most banks are no longer happy to open accounts for companies that issue bearer shares. In short, bearer shares are no longer an option that will be of any appeal to most clients because they will not increase confidentiality but will increase costs. We therefore strongly recommend the issue of registered shares only.