Chapter 12 Share Capital

  • View

  • Download

Embed Size (px)


Chapter 12 Share Capital

Text of Chapter 12 Share Capital

Chapter 12

Chapter 12Share 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 sharesSubscriber 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 :By applying and being allotted shares By presenting the company for registration a transfer of shares to themBy applying as persona l representative (Deceased member or bankrupt member)

Ceasing to be a member He transfer all his shares to another person and transferred is registered The member dies The shares of bankrupt member are registered in the name of his trustees.A member who is minor repudiates his shares The trustee of bankrupt member disclaims his sharesThe company forfeits or accepts the surrender of sharesThe company sell them in exercise of lienThe company is dissolved and cease to existShare 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 shareOrdinary sharesThe 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 shareOrdinary sharesAny 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 companys 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 sharesPreference 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 companys 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 fullNone or restricted by articles

Dividend rights Not fixed Paid after preference dividend Fixed Dividend, also CumulativePriority over otherSurplus on winding up Entitled to Surplus AssetsPaid after Preference nominal valuePrior return on nominal value, Cannot participate in Surplus Assets

Preference shares 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.The right to receive preference dividend is deemed to be cumulative unless the contrary is stated.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 dividend has been declared though not yet paid when liquidation commences.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.UncalledUnpaid Share Capital Not yet been Called from from Shareholders- therefore remains UnpaidTerminology Statutory pre-emption rightsIssued to Existing Shareholders firstUsually offered at Discount to Current Market ValueStatutory Pre-Emption rights only apply where Ordinary Shares are issued for cash.Bonus issueNo New Funds raisedIssued to Existing Shareholders OnlyIssued using some of the Company's Non-distributable Reserves to issue Fully Paid shares to Existing S/Hs in proportion to their existing ShareholdingRights issueRaise 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 companys 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 companys ordinary capital.Class rights Class rights are the rights attached to the particular types of shares by the company constitution.Dividend Return of capital VotingRight to remove or appoint director Shares which have different rights from others are grouped toge