Problem Questions and Answers on Company Law - Free Essay Example

Sample details Pages: 12 Words: 3628 Downloads: 9 Date added: 2017/06/26 Category Law Essay Type Essay any type Level High school Tags: Act Essay Did you like this example? Coursework 1 Adam, Belle, Claire and Dennis have decided to set up a new company which is private, limited by shares. Section 1 Incorporation Documentation Memorandum of Association (MoA) Under the Companies Act 1985[1] the Memorandum of Association[2] sets out a companys constitution and objectives. Its also forms the basis of a companys existence, by regulating external affairs (ss 2-6, CA85)[3]. The MoA was significantly simplified later by the Companies Act 2006[4]. Now, it requires the names of the first subscribers. Also under s 8 (1)(b)[5] it states that the first subscribers must be allotted with at least one share and automatically become members of the company. The new act merely evidences the subscribers` intention to form a new company and thus upon registration, the members need to authenticate it[6]. IN01 Form Don’t waste time! Our writers will create an original "Problem Questions and Answers on Company Law" essay for you Create order Along with the MoA, an application for registration and a statement of compliance must be delivered to the Companies House; referred to as the IN01 Form. The CA85 replaced various requirements of the MoA with the Application for Registration[7] (s. 9, CA06)[8], as well as speeding the manual process of the MoA`s content (ss 2 and 10, CA85)[9]. The information required is included in s 9(2), s 9(4), s 9(5) and 9(6) of CA06[10], and briefly this includes the company`s details such as the name, place of registered office, shares, capital, proposed officers and a copy of the company`s AoA. All these need to be delivered to the relevant registrar with the required fee[11]. Part 1 The company is identified by its name and serial number, hence they both need to be unique. As this is a private company, limited by shares, the correct suffix must be placed at the end; Limited or Ltd (s 59 (1), CA06)[12]. The name on the index can be checked by the WebCheck[13]. ABCD Limited is not available as it is already on the registrar. s 66(1), CA06[14] clearly states that a company cannot be registered by the same name as another company in the index of company names(s 1099)[15]. Friends Ltd is free in the registrar. However, it is not advised to use this name as a company FOURFRIENDS LTD is in the registrars index. Technically, you can use 4 Friends Ltd but under s 67(1), CA06[16], the Secretary of State[17] may judge that this will be passed off as a similar name. In that case, the company will have to change its name within 12 months of registration (s 68(2), CA06)[18], unless FOURFRIENDS LTD has given consent for the proposed name to be used. Adam Company Limited is available on the registrar, but in the index a company under the name ADAM COMPANY PUBLIC LIMITED COMPANY is registered. Thus, as stated in Part 1 C. II, this is a matter of the SoS to decide upon. A Thru D Ltd is available on the registrar. Belle Co Ltd is already on the index and thus it cannot be used. See Part 1 C. I. The Red Cross Federation Limited cannot be used. To begin with, this will be interpreted as a misleading name (s 76(1), CA06)[19], as the company has nothing to do with the non-profit Red Cross organisation. In addition, even if the name is not interpreted as misleading, then under the Geneva Conventions Act 1957[20] it cannot be used under any circumstances. s 6(3)[21] Clearly prohibits anyone to use wording that is associated with the Red Cross Organisation[22]. Registered office (s 9 (2)(b), CA06[23]) A company requires a registered office at all times because this is where all communications and notices will be addressed[24]. In addition, under s 86, CA06[25] the registered office is the address stated available for inspection for any register, index or other document; and, that all documents by said company have the address mentioned[26]. A company that is registered in à ¢Ã¢â€š ¬Ã…“England and Walesà ¢Ã¢â€š ¬Ã‚  cannot have a registered office in Scotland or Northern Ireland. Ità ¢Ã¢â€š ¬Ã¢â€ž ¢s a different jurisdiction and upon registration they will have to state in what jurisdiction the company will be; A5 of the IN01 form (s 15 (2)(e), CA06)[27]. If a registered office is required in Scotland or in Northern Ireland, then a new company will have to be formed under the specific jurisdiction[28]. Articles of Association The Articles of Association[29] are the rules of a company and govern its internal affairs. In other words this is the constitution of the company (s 18, CA06[30]). In addition, it forms a statutory contract between its members and the company (s 33[31]). The first Option available on A7 of the IN01 form is to obtain model articles, also known as à ¢Ã¢â€š ¬Ã…“off the shelfà ¢Ã¢â€š ¬Ã‚  (The Companies (Model Articles) Regulations 2008[32]). Option 2 again has to do with à ¢Ã¢â€š ¬Ã…“off the shelfà ¢Ã¢â€š ¬Ã‚  articles but, you can add and/or amend provisions. The additional and/or amended provisions must be attached to the IN01 form. As opposed to Options 1 and 2, Option 3 is entirely new articles. For instance, all the provisions are drafted from scratch, known as bespoke articles; a copy of the bespoke must be submitted with the IN01 form[33]. As they want to amend certain articles, it is advised to use Option 2 and tick the first box (Private limited by shares) Section A8 of the IN01 form refers to entrenched articles. Entrenched articles are specified provisions which may be amended if conditions are met. However, they are more restrictive than those which only require a special resolution. Entrenchment may be made by the articles on formation or an amendment which is agreed by all the members of the company. However, the court can still order a company to alter its articles, even though they are entrenched (ss 22, 23, 24, CA06[34]). Part 2 Proposed Officers A Private company under s 270(1), CA06[35] does not require a company secretary. This however, was not the case before 1st of October 2009, when the CA06 came into force. Under s 283, CA85[36], every company was required to have a secretary. The functions of a companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s secretary are not defined in the acts. However, a better understanding is made in the case of Re Maidstone Buildings Provisions Ltd[37]. The judgment held that à ¢Ã¢â€š ¬Ã…“A secretary is not concerned in the management of the company. Equally, I think he is not concerned in carrying on the business of the company à ¢Ã¢â€š ¬Ã‚ ¦ a person who holds the office of secretary may in some other capacity be concerned in the management of the company`s business[38].à ¢Ã¢â€š ¬Ã‚  A corporate secretary ensures the integrity of the governance framework, and for the efficient administration, for example, ensuring compliance with statutory and regulatory requirements and implementing decisions made by the board. The corporate secretary is not necessarily a human being. As a company secretary is not defined in the act, then for now they might not need a corporate secretary. Yes, everyone can be a director as s 154, CA06[39] states that a private company must have at least one director. Hence, it is possible to have 4 directors. A corporate director is a natural person acting as a director of the company. From the 1st of October 2010 all companies are required to have at least one natural director (s 155, CA06[40]) and his details must be stated in E1 of the IN01 form The à ¢Ã¢â€š ¬Ã…“Usual Residential Address[41]à ¢Ã¢â€š ¬Ã‚  it the usual home address of the natural person acting as the director and will not be available to the public record. Whereas, the à ¢Ã¢â€š ¬Ã…“Service Addressà ¢Ã¢â€š ¬Ã‚  can be used to receive communications by third parties. The à ¢Ã¢â€š ¬Ã…“Service Addressà ¢Ã¢â€š ¬Ã‚  can technically be the same as the à ¢Ã¢â€š ¬Ã…“URAà ¢Ã¢â€š ¬Ã‚ . However, as the à ¢Ã¢â€š ¬Ã…“Service Addressà ¢Ã¢â€š ¬Ã‚  is publicly recorded, it is advised to use a different à ¢Ã¢â€š ¬Ã…“URAà ¢Ã¢â€š ¬Ã‚  so that the information is disclosed from the public. This has replaced the old system where only officers at serious risk could have their residential addresses kept off the public record; and with the old system the registered office could be the same as the à ¢Ã¢â€š ¬Ã…“URAà ¢Ã¢â€š ¬Ã‚ [42]. The necessary information is given in sections D1-D5 of the IN01 Form and it is in accordance with s 165, CA06[43]. Part 3 Statement of Capital As soon as the Companies Act 1985 was in force, a company was required to have a nominal value of shares. This is a fixed amount prescribed by members (s 542, CA06)[44]; in our case, the nominal value is  £1. The Shares can never be issued at a discount (ss 552 and 580, CA06)[45], in other words, lower than their nominal value. The case of Ooregum Gold Mining Co v Roper [1892][46] illustrates this point when it refers to a à ¢Ã¢â€š ¬Ã…“Fixed amountà ¢Ã¢â€š ¬Ã‚  for nominal value. On the other hand, the share premium is the amount received over and above the face value of the shares (anything over  £1) (s 610, CA06)[47]. Generally speaking there are no restrictions on who holds shares, but the company which cannot be a member of itself (Trevor v Whitworth (1887)[48]. However, there are some exceptions stated in s 659, CA06[49]: Treasury shares (s 724, CA06)[50]. Shares may be acquired for the purpose of capital maintenance. Ordinary shares are used to describe the shares of a company with only one class of shares. In the CA06 they are known as à ¢Ã¢â€š ¬Ã…“equity sharesà ¢Ã¢â€š ¬Ã‚ . They are the simplest form of shares and generally carry one vote per share, but have no dividend rights attached to them (s 560)[51]. In contrast, Preference shares give the holder preferential rights, usually in dividends and/or return of capital when winding up the company. Preference shares are not defined in the Act, however, they are eligible to receive automatic à ¢Ã¢â€š ¬Ã…“Fixed preferential cumulative dividendà ¢Ã¢â€š ¬Ã‚ . In other words, shareholders with Preference shares are entitled of any dividends that have been omitted in the past, and if more dividends are left then common shareholders receive those rights[52]. The statement of capital must be completed in F1-F5 of the IN01 form. H. Initial Shareholdings. When filling in section F5 all they need to be aware of is who has ownership of the company. The ownership is determined by the percentage of issued share capital that each shareholder owns. Parts 4 and 5 I. They do not need to complete both parts as part 4 is just for companies limited by guarantee (Charities). However, Part 5 needs to be completed by all companies (Statement of compliance). Final Page J. The fee owed to the companies house for registering depends if it is submitted electronically or by paper and if you need the same-day incorporation service. Below is a breakdown of the fees[53]: Electronic (Software) Same-day:  £30 Normal:  £13 Electronic (Web incorporation Service Normal:  £15 Paper Same-day:  £100 Normal:  £40 *Fees are subject to periodic change. You should always check the Companies House for current fees[54]. Articles of Association K. Tweaking the Articles Yes, referring back to E. II., our clients have chosen to use model articles with certain amendments of provisions. It is permissible to delete the reference to Article 8[55] in 7(1)[56] and Article 8 as long as they attach a copy of the changes before submission. However, Deleting Article 8 might interfere with Article 15[57] in the future. Thus, it is not advised to delete Article 8. Yes, they can change it but ità ¢Ã¢â€š ¬Ã¢â€ž ¢s irrelevant because Article 11(2)[58] states that à ¢Ã¢â€š ¬Ã…“it must never be less than twoà ¢Ã¢â€š ¬Ã‚ . Therefore, this already meets their requirements. Yes, they will have to amend/remove Article 17(1)(a)[59]. Article 26(5) of the model articles ensures that the directors have the authority to refuse anyone to register the transfer of a share. And, under Article 27(2)(a)[60], they may choose to become holder of these shares or have them transferred to another person. The default is two qualifying persons at a meeting (s 318 (2), CA06)[61]. In the scenario that they want to set the quorum at 3, then they will have to add that provision to article 38 of the model articles and again ensure that they attach the copy before registration. The directors have the authority if they decide to use a company seal or not (Article 49 (1))[62]. In that case, there is no need to remove this provision. L. After registration the company still has the power to amend any of its AoA (s 21, CA06[63]), which can be done under a special resolution (must be a resolution by the members passed by 75%) (s 283[64]). However, there are some limitations. For example, a clause limiting the company from amending is invalid as seen in the case of Punt v Symonds Co Ltd[65]. The alterations must be à ¢Ã¢â€š ¬Ã…“for the benefit of the company and the members as a wholeà ¢Ã¢â€š ¬Ã‚ [66]. Allen v Gold Reefs Of West Of Africa Ltd[67], in which it was held that alterations could not be inferred with the court unless the amendments were bona fide for the goodwill of the company, illustrates this point. Any amendments of the articles must again be sent to the registrar (s 26(1), CA06) and published (ss 1077/1078, CA06[68]). M. They should include a clause in the AoA about Erin. However, will she be bound by it? Case law suggests that she wonà ¢Ã¢â€š ¬Ã¢â€ž ¢t be bound it. The test is provided in H ickman v Kent or Romney Marsh Sheep-Breeders Association[69], and it stated that à ¢Ã¢â€š ¬Ã…“an outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between himself and the company to enforce those rightsà ¢Ã¢â€š ¬Ã‚ [70]. As Erin is Adam`s daughter, she might argue that she is not an outsider. However, in the eyes of the law she is not a member and thus an outsider. She might gain some third party rights under s 6(2) of Contracts (Rights of Third Parties) Act 1999[71] but, this act does not apply to statutory contracts. The only scenario where Erin has rights, is if she creates a separate contract with the company outside the articles. Section 2 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Pre-incorporation Business N. Yes, s 51, CA06[72] allows for pre-incorporation contracts to be entered into. Prior to incorporation, the company does not yet exist, and an attempt to act on behalf of the company before the birth certificate[73] has no legal effect as the company may never be formed. A promoter needs to be assigned in order for the company to enter pre-incorporation contracts. The term à ¢Ã¢â€š ¬Ã…“promoterà ¢Ã¢â€š ¬Ã‚  is defined by Lord Cockburn CJ as à ¢Ã¢â€š ¬Ã…“one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purposeà ¢Ã¢â€š ¬Ã‚ [74]. When signing contracts à ¢Ã¢â€š ¬Ã…“for and behalf ofà ¢Ã¢â€š ¬Ã‚  the company, the person authorizing it (promoter) will be usually held liable as seen in the case of Kelner v Baxter (1866-87)[75]. Promoters may exclude liability and still ensure that the contract is valid through two procedures. The first requires an express term in the pre-incorporated contract to exclude personal liability which may be done under the relevant section[76]. This option terminates the promoterà ¢Ã¢â€š ¬Ã¢â€ž ¢s personal liability once the company is incorporated. As confirmed in Phonogram Ltd v Lane [1982], where the words à ¢Ã¢â€š ¬Ã…“subject to any agreement to the contraryà ¢Ã¢â€š ¬Ã‚  [77] were analyzed, and interpreted as à ¢Ã¢â€š ¬Ã…“unless otherwise agreedà ¢Ã¢â€š ¬Ã‚ [78]. Hence an exclusion of personal liability must be given[79] .However the promoter must never sign a contract in the name of the company prior to incorporation. As Goddard CJ stated in the case of Newborne v Sensolid Ltd (1954): à ¢Ã¢â€š ¬Ã…“as the company was not in existence when the contract was signed there was never a contractà ¢Ã¢â€š ¬Ã‚  [80]. The Second Procedure is called à ¢Ã¢â€š ¬Ã…“Novationà ¢Ã¢â€š ¬Ã‚ . The newly formed company must create a new contract with the same previous terms. Ratification is not enough as it is now a different contract with the incorporated company instead of the promoter[81]. Section 3 à ¢Ã¢â€š ¬Ã¢â‚¬Å" The Corporate Entity O. It is important to remind ourselves, that this is a company private limited by shares. With that noted, the idea that their personal assets will be protected stems from the landmark case of Salomon v Salomon Co [1897][82]. The main principle of Salomon derives from the wording à ¢Ã¢â€š ¬Ã…“separate Legal Entityà ¢Ã¢â€š ¬Ã‚ . To form a better understanding, à ¢Ã¢â€š ¬Ã…“separate legal entityà ¢Ã¢â€š ¬Ã‚  means that the company acts as a juristic person in the eyes of the law thus, the individuals involved in the company are not personally liable if something should go wrong[83]. The company as its own legal person is liable for all its debts, not the owners. Therefore, only the company can be sued and not the members; risk only arises to the members if assets were purchased illegally. However, there are exceptions to this principle and this aspect is one of the most ambiguous areas in company law. This is where a court decides to ignore the à ¢Ã¢â€š ¬Ã…“separate legal personalityà ¢Ã¢â€š ¬Ã‚ ; and it was created by the landmark case through the wording à ¢Ã¢â€š ¬Ã…“the veil of incorporationà ¢Ã¢â€š ¬Ã‚ . There is no general principle on how a judge might decide to lift the corporate veil[84]. However, the corporate veil might be lifted where there is clear abuse of the corporate form. This was illustrated in the case of Jones v Lipman [1962][85] where an unlawful refusal to sell a house was made due to the sham transfer of the house to a company controlled by Lipman[86]. Thus abysmal circumstances might lead to personal liability if decided so by the judges. Bibliography Primary sources Cases Allen v Gold Reefs Of West Of Africa Ltd [1900] 1 Ch 656 Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 88a Jones v Lipman[1962] 1 ALL 442 (ER) Kelner v Baxter[1866-87] 2 LR 174 (CP) Newborne v Sensolid (Great Britain) Ltd[1954] 1 QB 45 Ooregum Gold Mining Co v Roper [1892] AC 125 Phonogram Ltd v Lane[1982] QB 938 Punt v Symonds Co Ltd [1903] 2 Ch 506 Re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085 Re Northumberland Avenue Hotel Co Ltd[1886] 38 ChD 156 Salomon v Salomon Co [1897] 22 AC Supplies Ltd v Jerry Creighton Ltd[1951] 1 KB 42 Trevor v Whitworth (1887) 12 App Cas 409 Legislation Companies (Model Articles) Regulations 2008/3229 Companies Act 1985 Companies Act 2006 Contracts (Rights of Third Parties) Act 1999 Geneva Conventions Act 1957 The Companies (Model Articles) Regulations 2008 Secondary Sources Books Alexis Mavrikakis, Helen Watson, Christopher Morris and Nick Hancock,CLP Legal Practice Guides: Business and Company Legislation(College of Law Publishing, UK 2014/15) Alexis Mavrikakis, Helen Watson, Christopher Morris and Nick Hancock,CLP Legal Practice Guides: Business and Company Legislation(College of Law Publishing, UK 2012/13) Boyle and Birds,Company Law(8th, Jprdan Publishing Limited, Bristol 2011) Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 74-77 L.S. Sealy,Cases And Materials In Company Law(Cambridge University Press, Cambridge 1971) Sealy and Worthingtons,Cases And Materials In Company Law(10th, Oxford, UK 2013 Susan McLaughlin,Unlocking Company Law(2nd, Routledge, Oxon 2013) Journals A Daehnert, The minimum capital requirement an anachronism under conservation: Part 1 [2009] Comp. Law G Scanlan, The Company Names Adjudicator A New Regime New Principles [2007] Comp. Law, 172 S Ottolengthi, From Peeping behind the Corporate Veil, to Ignoring It Completely [1990] Modern Law Review Tan Cheng-Han, Veil piercing a fresh start [2015] Journal of Business Law Dictionaries Woodley, M. G,Osborns concise law dictionary.(11th, Mick Woodley, London : Sweet Maxwell/Thomson Reuters 2009) Websites www.companieshouse.gov.uk Ben Pettet, Promoters and pre-incorporation contracts (Oxy.com 2013) https://law.oxy.co/promoters-and-pre-incorporation-contracts-91620/ accessed [1] CA85 [2] MoA [3] Companies Act 1985 s 2-6 [4] CA06 [5] Companies Act 2006 s 8(1)(b) [6] Woodley, M. G,Osborns concise law dictionary.(11th, Mick Woodley, London : Sweet Maxwell/Thomson Reuters 2009 ) 42 [7] IN01 Form [8] Companies Act 2006 s 9 [9] Companies Act 2006 s 2,10 [10] Companies Act 2006 s 9(2), 9(4), 9(5) and 9(6) [11] Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 74-77 [12] Companies Act 2006 s 59(1) [13] https://wck2.companieshouse.gov.uk/ (WebCheck) [14] Companies Act 2006 s 66(1) [15] Companies Act 2006 s 1099 [16] Companies Act 2006 s 67(1) [17] SoS [18] Companies Act 2006 s 68(2) [19] Companies Act 2006 s 76(1) [20] Geneva Conventions Act 1957 [21] Geneva Conventions Act 1957 s 6(3) [22] G Scanlan, The Company Names Adjudicator A New Regime New Principles [2007] Comp. Law, 172 [23] Companies Act 2006 s 9(2)(b) [24] Supplies Ltd v Jerry Creighton Ltd[1951] 1 KB 42 [25] Companies Act 2006 s 86 [26] Charles Wil d and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 98 [27] Companies Act 2006 s 15(2)(e) [28] Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 97 [29] AoA [30] Companies Act 2006 s 18 [31] Companies Act 2006 s 33 [32] The Companies (Model Articles) Regulations 2008 [33] Alexis Mavrikakis, Helen Watson, Christopher Morris and Nick Hancock,CLP Legal Practice Guides: Business and Company Legislation(College of Law Publishing, UK 2014/15) 59 [34] Companies Act 2006 s 22,23 and 24 [35] Companies Act 2006 s 270(1) [36] Companies Act 1985 s 283 [37] Re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085 [38] Susan McLaughlin,Unlocking Company Law(2nd, Routledge, Oxon 2013) 235-236 [39] Companies Act 2006 s 154 [40] Companies Act 2006 s 155 [41] URA [42] Alexis Mavrikakis, Helen Watson, Christopher Morris and Nick Hancock,CLP Legal Practice Guides: Business and Company Legislation(College of Law Publis hing, UK 2012/13) 125-126 [43] Companies Act 2006 s 165 [44] Companies Act 2006 s 542 [45] Companies Act 2006 s 552 and 580 [46] Ooregum Gold Mining Co v Roper [1892] AC 125 [47] Companies Act 2006 s 610 [48] Trevor v Whitworth (1887) 12 App Cas 409 [49] Companies Act 2006 s 659 [50] Companies Act 2006 s 724 [51] Companies Act 2006 s 560 [52] Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 157-60 [53] Companies Act 2006 s 1063 [54] https://www.companieshouse.gov.uk/toolsToHelp/ourPrices.shtml [55] Companies (Model Articles) Regulations 2008/3229 Article 8 [56] Companies (Model Articles) Regulations 2008/3229 Article 7(1) [57] Companies (Model Articles) Regulations 2008/3229 Article 15 [58] Companies (Model Articles) Regulations 2008/3229 Article 11(2) [59] Companies (Model Articles) Regulations 2008/3229 Article 17(1)(a) [60] Companies (Model Articles) Regulations 2008/3229 Article 27(2)(a) [61] Companies Act 2006 s 318(2) [62] Com panies (Model Articles) Regulations 2008/3229 Article 49(1) [63] Companies Act 2006 s 21 [64] Companies Act 2006 s 283 [65] Punt v Symonds Co Ltd [1903] 2 Ch 506 [66] Boyle and Birds,Company Law(8th, Jprdan Publishing Limited, Bristol 2011) 123-130 [67] Allen v Gold Reefs Of West Of Africa Ltd [1900] 1 Ch 656 [68] Companies Act 2006 ss 1077/1078 [69] Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 88a [70] Sealy and Worthingtons,Cases And Materials In Company Law(10th, Oxford, UK 2013) 254 [71] Contracts (Rights of Third Parties) Act 1999 s 6(2) [72] Companies Act 2006 s 51 [73] s 15, Companies Act 2006 [74] L.S. Sealy,Cases And Materials In Company Law(Cambridge University Press, Cambridge 1971) 19 [75] Kelner v Baxter[1866-87] 2 LR 174 (CP) [76] s 51, Companies Act 2006 [77] Phonogram Ltd v Lane[1982] QB 938 [78] Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 71 [79] S 51, Companies Act 2006 [80] Newborne v Sensolid (Great Britain) Ltd[1954] 1 QB 45 [81] Re Northumberland Avenue Hotel Co Ltd[1886] 38 ChD 156 [82] Salomon v Salomon Co [1897] 22 AC [83] Susan McLaughlin,Unlocking Company Law(2nd, Routledge, Oxon 2013) 64-68 [84] S Ottolengthi, From Peeping behind the Corporate Veil, to Ignoring It Completely [1990] Modern Law Review 338-350, 338 [85] Jones v Lipman[1962] 1 ALL 442 (ER) [86] Charles Wild and Stuart Weinstein,Company Law(16th, Pearson Education Limited, Edinburgh gate 2013) 35-48

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string(27) " earns you on average \$5\." Case Analysis: Netflix. com, Inc k JAVK Consulting Company 6/14/2011 600 Civic Center Dr Detroit, MI 48226 Dear Mr. Hastings, Our company JAVK Consulting has examined the Netflix customer model and looked into the company’s five year financial future. We will write a custom essay sample on Netflix Case Analysis or any similar topic only for you Order Now We have analyzed Netflix with a scope of entering a rocky internet based company marketplace and seeing success in the future. The company currently is pumping lots of money into marketing strategy in order to growth their customer base and is in turn facing financial troubles while they approach their initial public offering stage. As you read through our analysis of Netflix you will find our company’s thought on your financial performance so far, look into a subscriber model and correlated cash flows, and develop an idea of financing solutions to manage growth. While more users are using mainstream technology such as DVD players, video game consoles, laptops, combined along with high-speed internet the creates a growing environment for a consumers wanting entertainment at their joysticks and fingertips. Our aspiration is for Netflix to have a successful run at an IPO if chosen and manage their customer growth along the way for long term success. Thank you for the chance to help your business thrive. We hope you agree with our financial outlook of Netflix and make a decision that catapults your company into financial success. Sincerely, JAVK Consulting Group Problem Statement: Based on Initial discussion and evaluation, we understand that the launch of Initial Public Offering (IPO) is critical and needs to be evaluated if the company should go forward with the offering, as a result of number of internet companies have been forced to withdraw their IPOs due to market down turn. Secondly the need to show positive cash flows within a twelve month horizon in order to have a successful offering. Third to suggest modifications that would improve the company’s projected cash flows given the fact that the revenues were doubling every six months. One of the most critical points of success for Netflix depended on the company’s ability to manage and sustain their triple-digit growth into the foreseeable future. Analysis: Technology is continuously facing rapid change which gives a company such as Netflix an exclusive opportunity for a first mover advantage in a new market. The Netflix product is one that can ship easily and cost effectively or be received directly to internet connections worldwide. The definite increase in internet and console users is creating a consumer demand for entertainment that Netflix can fill. This versatile product paired with emerging technology has led to rapid growth for the Netflix Company. The basic elements of Netflix core products give them an advantage over brick and mortar stores such as Blockbuster as Netflix offers a more personalized movie experience, the same new titles, all along with no time restrictions or late fees. As part of this long term objective Netflix’s goal is to grow its customer base and retain users of free trial software. The goal of the free software is to have a positive acquisition rate of free trial users after a month of free service and retain them into the long run future. After retention, the goal of Netflix is to withhold those customers into the long term future by tailoring the Netflix product in a unique way to each customer. Netflix does this by adapting their website interactions for each customer based off of their viewing history and preferences using a unique personal movie finder service. By offering this personalized service video users can find movies they would enjoy and possibly use the Netflix mail service. Theoretically speaking, Netflix performance to date has been positive (although the company has been incurring loss year over year) considering the high operating expenses for the initial years of a new business is common as most businesses make it or break it in their first 2-3 years which seems to be a normal trend considering this industry where the fixed assets increase year over year and the revenue generated on the fixed assets could drastically diminish based on user preference. Netflix has an extremely high growth rate for their revenues as they are doubling every six months. While revenues are doubling in the last year sales and marketing expenses have gone up more than three times. The main objective now is to make sure that after an initial public offering Netflix will continue to create positive cash flows. We believe that Netflix has chosen the subscriber model to forecast its cash flow requirements because it is the most precise representation of how the company receives cash on a monthly basis. Netflix at its core is in the movie rental industry, the only cash inflows received are from subscribers that pay monthly subscription fees. The basic elements of the subscriber model are monthly subscribers, subscription fees, and movie usage including movies rented and shipping costs. Based on these elements costs and revenues can be narrowed down and correlated to individual aspects of the model and accurate cash flows can be formed in order to predict future profitability. The subscriber model is fitting for Netflix for these reasons as subscribers are essentially their only cash inflows. Exhibit A, illustrates the subscribe model premise. In our analysis, we used the subscriber model to forecast future cash flows. This allows us to see potential revenues month to month based on the initial subscriber rate and percentage, while incorporating the cost to your company for each additional subscriber. We have forecasted potential cash flows as well as revenues for the next five years (Exhibit D Exhibit E). This gives us an idea of where we are going and how we will get there. Currently it costs your company $106. 58(Exhibit B) for the first month of a free trial customer. This cost is offset by paid subscribers and can be considered a marketing expense. Every month each paid subscriber earns you on average $5. You read "Netflix Case Analysis" in category "Essay examples" 82 (Exhibit B) in revenue. Netflix should continue trying to obtain new subscribers since there is a positive cash inflow for those customers after a weighted average is formed. Based on the weighted average of customers who stay with Netflix and those that leave there is a positive NPV based on the retention percentages. There are three basic types of customers for Netflix, one month trail exiting users, six month exiting users, and over five year users. Based off the retention ratios after one month 70% of customers from the free trail stay with Netflix, after that first month 42% of the original 70% stay for six months and 28% stay longer than six months (we have assumed it to be of at least 5 years and above). If a customer leaves after one month of free service your company would suffer a loss of $19. 26 (Exhibit B) given the fact that the initial purchase ($98. 28) of DVD(s) can be reused ($88. 45) for the other new subscribers by purchasing an incremental of 2 DVD(s) which move to the back catalogue as they become obsolete. Netflix can convert and retain those customers for six months they generate $1. 21(Exhibit B) of cash inflow for each customer. If the cash flow from acquiring new subscribers was negative we would advise your company to take an alternate route for generating cash flows. If your company continues with current business, retaining 28% of initial customers at least 5 years and above, the net present value of your corporation will be $65,851,642 (Exhibit E) based on certain assumption listed in Exhibit E. This NPV of your company after 5 years is based on the weighted average NPV percentages that we determined for each of the three customer categories; one month subscribers, six month subscribers and five year subscribers. Over sixty five million as a NPV is a glamorous number to project but it requires your company to retain the current customer retention ratios over the three timeline increments (Exhibit C). If these retention ratios are held strong then we have determined the weighted NPV per subscriber would be $34. 34 (Exhibit C). While this number is far from over sixty five million dollars over the five year time retention span it grows to be exactly that. Conclusion/Recommendation: Based on our analysis we have come up with some solutions to improve your overall cash flows and strengthen the financial health of your company. These solutions are not far from the product that Netflix currently offers so making the changes would not place a large burden on costs. Also, the changes will offer a more customer focused and interactive experience with the Netflix product. Initially your first goal should be to increase the retention rate of potential new trial subscribers. Given that internet users are increasing year over year, we recommend that your company consider online video streaming (video on demand) which will be an out of the box approach. Using the online media streaming can help your company to cut down on sales and advertising cost. Secondly with introduction of online streaming reduce the membership fees to 75% of the current rates which will help you increase customer retention rates. Third, promote revenue sharing which can help increase you marketing base while cutting your expenses. Forth is to promote referral bonus (can vary based on number of referrals provided) which can help you boost your sales through you existing customer base and in return reduce your operational expenses. Lastly to reduce the trial period to 2 weeks (if done by Mail only) and this will result in increase of NPV of Netflix by $25. 8 million (increase of NPV/subscriber from 34. 34 to 44. 10). Netflix is becoming even more personalized and may cut undesired costs such as unnecessary shipping costs. By doing this you will increase your profitability and decrease your cost to acquire a new customer. Another recommendation is to continue to encourage all online subscribers to rate films. This will encourage other subscribers to rent more movies and help with the automatic marquee queue available to online subscribers. By encouraging this interactive use with the Netflix website the company will have an idea of which DVD’s to spend money purchasing and will be able to keep an updated DVD library that meets the growing demand of new subscribers. To conclude, your company should delay the IPO until the economic condition improves and use this additional time to evaluate some of our recommendation to attain positive cash flows which can play in your favor. Appendix: Exhibit A – Subscriber Model Premises| Cost/New DVD| $ 17. 55 | Shipping Cost/DVD| $ 1. 00 | Number of DVD Initial Marque Queue| $ 4. 00 | Number of DVD Shipped /Month| $ 4. 30 | New DVD 1st Month| $ 5. 60 | Number of new DVD(s) subsequent Month| $ 0. 56 | Revenue /Month| $ 19. 95 | Free trial| $ 1. 00 | Discount Rate| 20%| Exhibit B -New Subscriber Model| | Free| Paid| Paid| Paid| Paid| Paid| Paid| Paid| Paid| Paid| Paid| Paid|   | M1| M2| M3| M4| M5| M6| M7| M8| M9| M10| M11| M12| Revenue|   | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | $19. 95 | Cost of DVD/ initial (one time)| $ (98. 28)|   |   |   |   |   |   |   |   |   |   |   | Cost of DVD/ releases|   | $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| $ (9. 83)| Shipping initial DVD’s| $ (4. 0)|   |   |   |   |   |   |   |   |   |   |   | Shipping new DVD’s| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| $ (4. 30)| Net Revenue| $(106. 58)| $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | $ 5. 82 | Exhibit C – Calculat ion of Net Present Value per new subscriber|   | *assumes that if a subscriber stays with Netflix longer than 6 months will stay 5 years| Subscribers | 1 Mon| 6 Mon| 5 Yrs. *|   | Probability| 30%| 42%| 28%|   | Weighted NPV per Subscriber| ($19. 26)| $1. 21 | $141. 46 | $34. 34 |   |   |   |   |   | C1| $ (106. 58)| $ (106. 58)| $ (106. 58)|   | C2| $ 88. 45 | $ 5. 82 | $ 5. 82 |   | C3|   | $ 5. 82 | $ 5. 82 |   | C4|   | $ 5. 82 | $ 5. 82 |   | C5|   | $ 5. 82 | $ 5. 82 |   | C6|   | $ 5. 82 | $ 5. 82 |   | C7|   | $ 88. 45 | $ 5. 82 |   | †¦|   |   | †¦ |   | C8|   |   | $ 5. 82 |   | C60|   |   | $ 5. 82 |   | C61|   |   | $ 88. 45 |   | CF By Month|   |   |   |   | Exhibit D – Projection of new subscribers 2000| |   | Revenue Growth rate 1998 – 1999 | 274%| Existing subscribers| 110,724 | New Subscribers paid status| 303,231 | 30% free| 90,969 | New Subscribers 2000| 394,201 | Exhibit E – Value of Netflix|   | 2000| 2001| 2002| 2003| 2004|   | | | | | |   | NPV per Subscriber| $34. 34 |   |   |   |   |   | Discounted Rate| 20%|   |   |   |   |   | Growth rate per new subscriber|   |   | 49%| 49%| 49%| 49%|   | | | | | |   | Existing subscribers| | 110,724 |   |   |   |   | Value of existing subscribers| | 3,802,273 |   |   |   |   |   | |   |   |   |   |   | New Subscribers| | 394,201 | 587,359 | 875,165 | 1,303,995 | 1,942,953 | Value of new subscribers| | 13,536,829 | 20,169,875 | 30,053,114 | 44,779,140 | 66,720,918 |   | |   |   |   |   |   | Total subscriber value|   | 17,339,102 | 20,169,875 | 30,053,114 | 44,779,140 | 66,720,918 |   | |   |   |   |   |   | Product development| | 7,413,000 | 7,413,000 | 7,413,000 | 7,413,000 | 7,413,000 | General and administrative| | 2,085,000 | 2,085,000 | 2,085,000 | 2,085,000 | 2,085,000 | Total Cost|   | 9,498,000 | 9,498,000 | 9,498,000 | 9,498,000 | 9,498,000 |   | |   |   |   |   |   | Total Subscriber value minus cost|   | 7,841,102 | 10,671,875 | 20,555,114 | 35,281,140 | 57,222,918 | NPV of Netflix|   | 65,851,642 |   |   |   |   | Assumptions:| Existing customers pay 19. 95 per month (same as new customers)| Additional cost projected at the same level as 1999NPV of Netflix only includes cash inflow and outflows and have not considered any liquidation value| How to cite Netflix Case Analysis, Essay examples