Chapter 12

Share Capital

Members • A member of the company is a person who has agreed to

become a member and whose name has been entered in to the register of members.

• Subscriber shares• Subscriber of the memorandum are deemed to have agreed

to become the members of the company. As soon as the company is formed their names should be entered in the register of members.

• Other person may acquire share :1) By applying and being allotted shares 2) By presenting the company for registration a transfer of

shares to them3) By applying as persona l representative (Deceased member

or bankrupt member)

Ceasing to be a member 1) He transfer all his shares to another person and

transferred is registered 2) The member dies 3) The shares of bankrupt member are registered in

the name of his trustees.4) A member who is minor repudiates his shares 5) The trustee of bankrupt member disclaims his

shares6) The company forfeits or accepts the surrender of

shares7) The company sell them in exercise of lien8) The company is dissolved and cease to exist

Share

• A share has been defined as ‘the interest of the shareholder in the company measured by a sum of money, for the purposes of liability in the first place(To pay for shares) and of interest in the second(Voting right , dividend right), but also consisting of a series of mutual covenants entered into by all the shareholders.

• Key point in the definition are :• The share must be paid for (Liability)• Voting rights , dividend rights (Interest)

Types of share• Ordinary shares• The nominal value of the shares held represents the

maximum liability of a shareholder in a limited liability company.

• However, the actual liability of a shareholder is the amount remaining unpaid on any shares held. This difference arises in the following circumstances. When companies issue shares they may not require the full nominal value of the shares to be paid at once. This allows the company the possibility of raising further capital from its members as It becomes necessary in the future. The amount already paid to the company is referred to as called-up capital.

Types of share• Ordinary shares• Any uncalled capital represents the amount of

potential liability. If the shares are fully paid up then the shareholder has no further liability towards meeting the company’s debts.

• In regard to return, shares enjoy an advantage of other securities. If the company is profitable, not only will they enjoy dividend payments but the market value of their shares will go up. On the other hand if the company does not do well, they may well not receive any payment and the value of their shares will diminish.

Types of sharePreference shares• Preference shares represent a more secure form of investment

than the ordinary share. • The reason for this is that preference shares receive a fixed

rate of dividend before any payment is made to the ordinary shareholders and usually they enjoy priority over ordinary shares with regard to repayment of capital. The actual rights enjoyed by the preference will be stated in the company’s articles of association. Dividend rights in relation to preference shares are usually cumulative, which means that a failure to pay the dividend in one year has to be made good in subsequent years. Although, as with ordinary shares, the holders of preference shares are members of the company, their voting rights are restricted to any period when their dividends are in arrears.

Difference between Ordinary and Preference shares Ordinary shareholder Preference

shareholder

Voting rights full None or restricted by articles

Dividend rights Not fixed Paid after preference dividend

Fixed Dividend, also CumulativePriority over other

Surplus on winding up Entitled to Surplus AssetsPaid after Preference nominal value

Prior return on nominal value, Cannot participate in Surplus Assets

Preference shares 1) The right is merely to receive the dividend at the specified rate

before any other dividend may be paid or declared. It is not a right to compel the company to pay the dividend. The company can decline to pay the dividend if it decides to transfer available profits to reserves instead of using profits to pay preference dividend.

2) The right to receive preference dividend is deemed to be cumulative unless the contrary is stated.

3) If a company which has arrears of unpaid cumulative preference dividend goes into the liquidation , the preference shareholder cease to be entitled to the arrears unless:

a) A dividend has been declared though not yet paid when liquidation commences.

b) The articles expressly provides that in the liquidation arrears are to be paid in priority to return of capital to member.

4) Holders of preference shares have no entitlement to participate in the additional dividend over and above the specified rate.

Redeemable shares

• Redeemable shares , which are shares issued on terms that they may be bought back by the company either at a future specific date or at shareholders or company options.

Treasury shares • Treasury shares are created when a public listed

company whose shares are listed on the stock exchange , AIM or other regulated market legitimately purchases its own shares out of distributable profits. Up to 10% of its shares can be held by the company in treasury which means the company can reissue them with out the usual formalities. They can only be sold for cash and the company can not exercise the voting rights that are attached to them.

Terminology • Issued share capital • Share Capital Actually been issued, released or

Sold by Company.• Called up (Unpaid Share Capital which have been

Called for from Shareholders but Not Yet Paid)• Paid up • Shareholders have actually Paid on the Shares

Issued.• Uncalled• Unpaid Share Capital Not yet been Called from

from Shareholders- therefore remains Unpaid

Terminology • Statutory pre-emption rights• Issued to Existing Shareholders first• Usually offered at Discount to Current Market Value• Statutory Pre-Emption rights only apply where Ordinary

Shares are issued for cash.• Bonus issue• No New Funds raised• Issued to Existing Shareholders Only• Issued using some of the Company's Non-distributable

Reserves to issue Fully Paid shares to Existing S/Hs in proportion to their existing Shareholding

• Rights issue• Raise New Funds

Pre emption rights • Pre-emption rights refer to the rights of existing

shareholders to be offered any new issue of shares before those shares can be offered to non shareholders.

• The purpose of pre-emption rights is to ensure that existing shareholders have an opportunity to maintain their interest in their company by preventing their percentage holding being reduced by the issue of shares to new members. There is, of course, no compulsion on the part of the shareholder to take the shares if they do not wish to.

Pre emption rights • A company cannot offer new shares for cash unless

the existing shareholders have been offered the chance to buy the shares in proportion to their existing holding.

• Section 565 specifically exempts pre-emption rights where non-cash consideration is involved.

• As it is not always cost effective to offer new shares to all existing members, pre-emption rights can be waived by provision in the articles of association or by a special resolution of shareholders.

Right issue • A rights issue is the procedure through which a

company raises new capital by offering new shares to its existing members.

• As the shares are offered to the existing shareholders in proportion to their existing holding, it can be seen as respecting and giving effect to the shareholders’ pre-emption rights.

• As the purpose is to raise new capital for the company, either because it is in difficulty, or needs the additional capital to expand its business, the shareholders who are offered the new shares are required to pay for them.

Right issue • However, as an inducement to engage in the deal, it is

usual for the new shares to be offered at a discount to the current market value of the existing shares. It is essential to note that the discount is not on the nominal value of the shares, which is required by the rules of company law to be fully-paid as companies cannot issue shares at a discount.

• Once again there is no compulsion to participate in the rights issue and often the rights to participate in the allotment of new shares are usually tradable securities in themselves. Consequently shareholders who do not want to buy the new shares themselves may sell the rights to a third party.

Bonus issue • A bonus issue of shares, sometimes referred to as a scrip issue

or more accurately a capitalisation issue, is similar to a rights issue in that existing members receive new shares in proportion to their existing holdings, but it differs in one essential point:

• the individuals who receive the new shares usually do not have to pay anything for them; they are received free.

• However,• as already pointed out in (b) above, it is a strict rule of company

law that shares must be paid for and cannot be issued at a discount. This apparent anomaly is explained by the fact that the shares are paid for, but they are paid for by the company itself, rather than the members. It is perfectly possible for the company to issue partly paid-up bonus share, in which case the recipients may have to make some contribution in the future.

Bonus issue • In effect what the issue of bonus shares amounts to

is a capitalisation of the company’s reserves, some of which could have been distributed to the members in some other way such as dividends. This is not the case with all reserves as some non-distributable ones, such as the share premium account and the capital redemption reserve, may be used to fund the bonus issue. Bonus issues must never be funded from a company’s ordinary capital.

Class rights • Class rights are the rights attached to the particular

types of shares by the company constitution.1) Dividend 2) Return of capital 3) Voting4) Right to remove or appoint director • Shares which have different rights from others are

grouped together with other shares carrying identical rights to form a class

Variation of class rights • The holder of issued shares have vested rights

which can only be varied by using a strict procedure. The standard procedures is by special resolution passed by at least three quarter of the vote cast at the separate class meeting by written consent.

• Not a variation of class rights 1) To issue shares to new members2) To subdivide the shares of another class 3) To return the capita to preference shareholders 4) To create a new class of preference shareholders

To issues shares of same class to allottees who are not already member of that class• White vs Bristol aeroplane co ltd• Fact :• Company made a Bonus issue of new ordinary and

preference shares to ONLY ordinary shareholders.• The existing Pref-Shareholders objected on the basis

that this reduced their proportion of the class of Pref-shares.

• Held :• Bonus issue is not a variation of class rights since the

existing Pref-shareholders had the same number of shares as before.

To subdivide shares of another class with the incidental effect of increasing the voting strength of that another

class

• Greenhalgh Vs Arderne cinemas ltd• Fact :• Company had 2 classes or Ordinary Shares, 50p and 10p, …

every share carrying 1 vote. Resolution was passed to subdivide each 50p share into 5 shares of 10p thereby multiplying the votes of that class by 5.

• Held :• Subdivision of shares is not a Variation of class rights.• Right of the Original 10p shares had not been varied since they

still had one vote per share as before.• It was the rights of 50p which was initially compromised and

not of 10p shares holders

To return capital to the holder of preference shares

• House of fracer plc vs ACGE investments ltd• A company registered in Scotland passed a special resolution at an EGM,

attended by ordinary shareholders only, reducing its capital by paying off the whole preference share capital of the company. Its petition to the Court of Session for confirmation of reduction of the capital was opposed by the holders of certain preference shares on the ground, inter alia, that the failure of the company to hold a class meeting of preference shareholders was in breach of the requirement to that effect in art 12 of the company's articles of association wherever the special rights attached to a class of shares where 'modified, commuted, affected or dealt with'. The Court of Session confirmed the reduction in capital.The preference shareholders appealed.

• Reports that the British House of Lords has decided that where a company pays off and cancels cumulative preference shares in a capital reduction, there is no need for a class meeting of the preference shareholders to approve the measure

To create and issue a new class of preference shares with priority over existing class of

ordinary shares

• Re john smith's tadcaster brewery co ltd

Issuing shares

• Authority• Issue at discount• Issue at premium• Paying for shares – public companies

Authority • Allotment of Shares• Shares are allocated to a person under Contract of

Allotment.• Once Allotted, holder is entered in the register of members

and become member of the company.• Authority• Director needs authority in order to allot shares.• Authority is given by :• the Articles, or• Passing an Ordinary Resolution.• The Authority must state :• the Maximum number of Shares to be allotted• the expiry date for the authority (Max 5 Yrs)

Public company allotment of shares • Public offer• Where the member of the public subscribe for

shares directly to the company. • Offer for sale • An offer to members of the public to apply for

shares based on information in a prospectus.• Placing • Where shares are offered In a small number of large

blocks to person or institutions who have previously agreed to purchase the shares at predetermined price

Shares issued at discount• It is a long established rule that companies are not

permitted to issue shares for a consideration that is less than the nominal value of the shares together with any premium due. The strictness of this rule may be seen in Ooregum Gold Mining Co of India v Roper (1892).

• In that case the shares in the company, although nominally £1, were trading at 12·5p. In an honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p already paid (note the purchasers of the shares were actually paying twice the market value of the ordinary shares). When, however, the company subsequently went into insolvent liquidation, the holders of the new shares were required to pay a further 75p.

Shares issued at discount• If a company does enter into a contract to issue shares at a

discount it will not be able to enforce this against the proposed allottee. However, anyone who takes shares without paying the full value, plus any premium due, is liable to pay the amount of the discount as unpaid share capital, together with interest at 5% . Also any subsequent holder of such a share, who was aware of the original underpayment, will be liable to make good the shortfall.

• The reason for such rigour in relation to preventing the issue of shares at a discount is the protection of the company’s creditors. Shareholders were seen to enjoy the benefit of limited liability but that privilege was only extended to them on the basis that they fully subscribed to the company’s capital. That capital being seen as a creditor fund against which they could claim in the event of a dispute.

Shares issued at discount

• In private companies it is possible to avoid the strict effect of this rule by exchanging shares for property that is overvalued . In public companies all such non-cash consideration has to be valued.

• It should also be noted that the above only applies to shares. Debentures may be issued at a discount. This is the case even where they are convertible into shares, as long as they do not carry an immediate right to conversion.

Issuing shares at premium

• It is possible, and not at all uncommon, for a company to require prospective subscribers to pay more than the nominal value of the shares they subscribe for.

• This is especially the case when the market value of the existing shares are trading at above the nominal value. In such circumstances the shares are said to be issued at a premium, the premium being the value received over and above the nominal value of the shares. Section 610 CA 2006 provides that any such premium received must be placed in a share premium account. The premium obtained is regarded as equivalent to capital and, as such, there are limitations on how the fund can be used.

Issuing shares at premium

• Section 610 provides that the share premium account can be used for the following limited purposes:

1) To write off the expenses, commission or discount incurred in any issue of the shares in question;

2) To pay up bonus shares to be allotted as fully paid to members.

• Share premium account to be used to finance the payment due for any premium due on the redemption of redeemable shares.

• Applying the rules relating to capital maintenance, it follows that what the share premium account cannot be used for is to pay dividends to the shareholders.

Issuing shares at premium

• The rules relating to share premiums apply whether the issue is for cash or otherwise and so a share premium account can arise where shares are issued in exchange for property which is worth more than the par value of the shares.

Paying for the shares (Private companies)

• May Issue shares for Non-Cash Consideration• Court will Interfere with the Valuation only if :• There is a Fraud, or• The Consideration is Past

Paying for the shares (Public companies)• S584 (Subscribers to the Memorandum must pay cash for

their subscription Shares)• S585 (Payment for shares must NOT be in the form of Work

or Services.)• S586 (Shares CANNOT be allotted until at least One-Quarter

of their Nominal Value and the Whole of any Premium have been Paid.)

• S587 (NON-CASH Consideration must be received within 5 yrs.)

• S593• NON-CASH Consideration must be independently valued and

reported on by a person Qualified to be the company's Authors

Question

• Explain the meaning of the following:• (a) paid-up capital; (3 marks)• (b) the issue of shares at a premium; (3 marks)• (c) the prohibition on the issue of shares at a

discount. (4 marks)• (Total: 10 marks)

Question

• Worthwhile plc has issued share capital of $100,000 divided into 60,000 ordinary $1 shares and 40,000 $1 10% non-participating preference shares. The preference shares carry a right to both preferential payment of dividend and repayment of capital on a winding up. The directors wish to make a new issue of 30,000 ordinary shares and 20,000 preference shares on the same terms as the existing shares.

• Required:• Advise Beatrice, the managing director, on the procedures

to be followed before the directors can allot the new share issue.

Answer

• The directors may only allot new shares if either they are authorized by the company in general meeting or by the company’s articles: S551 CA06. Authority to allot must include the maximum number of shares to be allotted and must be dated. Authority to allot cannot last more than five years, but may be renewed. Authority to allot may be general or may relate to a specific issue.

Question

• Alfred has recently inherited a number of preference shares in the company for which you are the company secretary. At the last annual general meeting it was decided by special resolution to increase the voting power of ordinary shareholders by giving each ordinary share an extra vote.

• Required:• Explain to Alfred:• (a) What is the procedure for the alteration of class rights

when there is no reference to variation in the articles of association? (3 marks)

• (b) Whether he can take steps to reverse the decision to increase the powers of the ordinary shareholders? (7 marks)

Answer • The procedure for altering class rights is set out in s.630 CA 2006.

The precise procedure depends upon whether there is a pre-established procedure for altering the rights.

• (i) Where the articles set out a procedure for varying class rights, then that procedure should be followed.

• (ii) If there is no specified procedure within the Articles of Association then, under s.630 CA 2006, variation needs a special resolution or written consent from the holders of 75% in nominal value of the shares of that class.

• Any alteration of class rights is subject to challenge in the courts. To raise such a challenge any objectors must:

• • hold no less than 15% of the issued shares in the class in question • • not have voted in favor of the alteration; and• • apply to the court within 21 days of the consent being given to the

alteration• The court has the power to either confirm the alteration or to cancel it

as unfairly prejudicial.

Answer • In Greenhalgh v Arderne Cinemas (1946) it was held that the

subdivision of 50 pence shares which had previously carried one vote each, into five 10 pence shares which each carried one vote, did not vary the rights of another class of shares. Note that, although strictly speaking such an alteration did not affect the rights held by the other shares, it did alter their real voting power. Also in House of Fraser plc v ACGE Investments Ltd (1987) it was held that the return of all the capital held in the form of preference shares amounted to a total extinction of their rights. It could not therefore be seen as a variation of those rights and the procedure now contained in s.630 CA 2006 did not have to be followed.

• Alfred’s problem in this situation is that the variation has been to the ordinary shares and not preference shares. So Alfred has not participated in the shareholder’s meeting to alter the voting rights. Unless there were provisions in the articles for alteration to be approved by general meeting, Alfred will have no recourse to the company’s internal organization