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Formation Of Public Limited Companies.

1. Introduction to Public Limited Companies

A Public Limited Company (PLC) is a corporate entity:

Incorporated under company law (e.g., Companies Act, 2013 in India; Companies Act 2006 in the UK).

Shares are offered to the public and may be listed on stock exchanges.

Offers limited liability to its shareholders.

Must comply with higher transparency, disclosure, and governance standards than private companies.

Key characteristics of a PLC:

Minimum of seven shareholders (in India)

Minimum paid-up capital as prescribed by law

Ability to issue shares to the public

Statutory compliance including filing annual returns, financial statements, and disclosures to regulatory authorities

2. Legal Framework

India

Governed by the Companies Act, 2013 and rules notified under it

Key provisions for formation:

Section 2(71): Definition of a public company

Section 3: Incorporation of companies

Section 4: Memorandum and Articles of Association (MOA & AOA)

Section 12 & 14: Company name and registration

Section 42 & 62: Public issue of shares

UK

Governed by Companies Act 2006

Minimum requirements:

Minimum share capital of £50,000

At least two directors and a company secretary (for PLCs)

Registration with Companies House

Other Key Requirements

Memorandum of Association (MOA): Defines company’s objectives and scope of activities

Articles of Association (AOA): Rules for internal governance

Prospectus: Required when offering shares to the public

Statutory Registers: Register of members, directors, charges, etc.

3. Procedural Steps for Formation of a Public Limited Company

Obtain Digital Signatures and Director Identification Numbers (DIN)

Name Reservation

Application to the Registrar of Companies (RoC)

Ensure name is unique, not undesirable, and compliant with law

Draft MOA and AOA

MOA defines objectives and liability

AOA outlines internal management rules

Filing Incorporation Documents

Form SPICe (Simplified Proforma for Incorporating Company Electronically)

Filing fees and required declarations

Payment of Minimum Share Capital

Evidence of subscription to minimum capital required by law

Certificate of Incorporation

Issued by the Registrar of Companies

Confers legal existence

Commencement of Business

Section 10A (India): File a declaration confirming subscription of minimum capital before starting business

Public Offer and Listing

Comply with SEBI regulations for public offerings

Prepare prospectus and issue shares

4. Governance Principles

Board of Directors: Must comply with statutory composition requirements

Shareholders’ Rights: Voting, dividends, and participation in general meetings

Disclosure and Reporting: Financial statements, annual returns, and statutory filings

Audit Requirements: Mandatory appointment of statutory auditors

Compliance with Securities Regulations: SEBI guidelines for listed companies

5. Notable Case Laws on Formation and Governance of PLCs

1. Salomon v. Salomon & Co. Ltd. (1897, UK)

Facts: Mr. Salomon incorporated a company and transferred his business to it.

Holding: The company is a separate legal entity, distinct from its shareholders.

Principle: Foundation of limited liability for public and private companies.

2. Citizens United v. Federal Election Commission (2010, U.S.)

Facts: Discussed rights of corporations to engage in activities.

Holding: Reinforced that incorporated entities have certain rights separate from individuals.

Principle: Highlights corporate personality and public company rights.

3. Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1970, India)

Facts: Dispute regarding statutory compliance during formation.

Holding: Compliance with statutory incorporation procedures is mandatory.

Principle: Statutory formalities cannot be ignored for valid company formation.

4. Royal British Bank v. Turquand (1856, UK)

Facts: Directors acted beyond authority in company contracts.

Holding: Introduced the “Indoor Management Rule” protecting outsiders dealing with the company in good faith.

Principle: Governance protection and trust in company formation.

5. Sahara India Real Estate Corporation Ltd. v. SEBI (2012, India)

Facts: Public company failed to comply with SEBI regulations for public offerings.

Holding: Regulatory authorities can take action if public company formation procedures and compliance are violated.

Principle: Compliance with SEBI and statutory regulations is mandatory.

6. Lee v. Lee’s Air Farming Ltd. (1961, UK)

Facts: Single individual held multiple roles in a PLC.

Holding: Courts upheld separate legal personality; individual could be an employee of the company.

Principle: Reinforces the principle of corporate entity distinct from shareholders or directors.

6. Practical Implications

For Promoters:

Ensure full compliance with legal procedures (MOA, AOA, minimum capital, registration).

Avoid legal defects that could invalidate the formation of the company.

For Investors:

Verify incorporation certificate, SEBI compliance, and statutory filings.

Ensure governance structures are in place to safeguard investments.

For Regulators:

Scrutinize statutory filings, prospectus, and public offering compliance.

Enforce penalties for non-compliance with formation or governance requirements.

7. Summary Table of Cases

Conclusion

The formation of public limited companies is a structured process that combines legal incorporation, capital requirements, and regulatory compliance. Case law emphasizes:

Separate corporate personality (Salomon, Lee)

Mandatory compliance with statutory procedures (Tata Engineering, Sahara)

Protection of external parties dealing in good faith (Turquand)

Proper adherence to these principles ensures a valid, legally recognized, and investable public limited company.

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