Business Law and Practice Flashcards

What is the effect of a company's 'veil of incorporation'?

Answer: The company is a separate legal entity distinct from its shareholders

Following Salomon v Salomon [1897], incorporation creates a distinct legal personality, separating the company's rights and liabilities from those of its members.

In a share purchase, which party typically bears the risk of pre-completion liabilities of the target company?

Answer: The buyer, because they acquire the shares and everything attached to them

In a share purchase, the buyer takes the company with all its history — including unknown historic liabilities — so warranties and indemnities are critical protections.

What is the purpose of a 'disclosure letter' in a share purchase transaction?

Answer: To qualify the seller's warranties by disclosing known exceptions

The disclosure letter allows the seller to qualify the warranties given in the SPA by disclosing specific facts that would otherwise constitute a warranty breach.

Which tax is payable on a transfer of shares in a UK company?

Answer: Stamp Duty at 0.5%

Stamp Duty (not SDLT) is charged at 0.5% on the consideration for a transfer of shares, rounded up to the nearest £5.

Under the Companies Act 2006, what is the general rule on financial assistance by a private company for the acquisition of its own shares?

Answer: Financial assistance is no longer prohibited for private companies following the CA 2006

The CA 2006 abolished the prohibition on financial assistance for private companies, removing the need for the old 'whitewash' procedure.

What is a 'pre-emption right' in a company context?

Answer: The right of existing shareholders to be offered new shares before they are issued to outsiders

Statutory pre-emption rights under s.561 CA 2006 require companies to offer new ordinary shares to existing shareholders on a pro-rata basis before issuing to third parties.