Chapter 12 - Share Capital

1
Chapter 12
Share capital
2
What you will learn?

 The different types of capital
 The difference between various classes of

shares, including treasury shares, and the
procedure for altering class rights
 The allotment of shares and the difference

between rights issue and bonus issue of shares
 The effect of issuing shares at either a

discount, or at a premium
3
1. Distinction of capital
CAPITAL
Share capital Loan capital
Issued and Called up

Other long-
allotted and paid up Debentures
term loans
share capital share capital
4
2. Shares
2.1. Overview to shares
A share is the interest of a shareholder in the company
measured by a sum of money, for the purpose of a liability in the
first place, and of interest in the second; but also consisting of a
series of mutual covenants entered into by all the shareholders
inter se.
=> A share is a form of personal property, carrying rights and

obligations. It is, by it nature, transferable.
Some docs indicating special rights & filed at Companies House:

- The articles
- A resolution or agreement regarding creation of a new class
of shares (copies)
- A statement of capital given to the Registrar within 1 month
of allotment, together with the return of allotment
Shares comprises of ordinary shares, preference shares,

redeemable shares and treasury share.
5
2. Shares
2.2. Ordinary shares (equity)
Equity is the residual interest in the assets of the company

after deducting all its liabilities. It comprises issued share
capital, excluding any part that does not carry any right to
participate beyond a specified amount in a distribution.
Equity share capital is a company's issued share capital, less

capital which carries preferential rights.
Ordinary shares are shares which entitle the holders to the

remaining divisible profits (and, in a liquidation, the assets)
after prior interests, such as creditors and prior charge capital,
have been satisfied.
6
2. Shares
2.3. Preference shares
Preference shares are shares carrying one or more rights, such
as a fixed rate of dividend or preferential claim to any company
profits available for distribution.
Notes on priority dividend entitlement:

 The right is merely to receive a dividend at the specified rate
before any other dividend may be paid or declared.
 The right to receive a preference dividend is deemed to be
cumulative unless the contrary is stated.
 If a company which has arrears of unpaid cumulative preference
dividends goes into liquidation, the preference shareholders
cease to be entitled to the arrears unless:
i. A dividend has been declared though not yet paid when
liquidation commences.
ii. The articles(or other terms of issue) expressly provide that,
in a liquidation, arrears are to be paid in priority to return of
capital to members.
 Holders of preference shares have no entitlement to participate
in any additional dividend over and above their specified rate.
Q: Ads & disads of Preference shares?

7
2. Shares
2.4. Redeemable shares and Treasury shares
Redeemable shares Treasury shares
• May be bought back by • Purchased by the

a company either at a company out of cash or
future specific date or at distributable profit
the shareholder's or • Not attached with the
company's option. voting right
8
3. Class rights
Class rights are rights which are attached to particular
Definition
types of shares by the company's constitution.
• Dividends
• Return of capital
Examples
• Voting
• The right to appoint or remove a director
Procedure: strict, by special resolution passed by at

least three-quarters of the votes
Applicable cases: only if it is proposed amounts to a

Variation variation of class rights.
of class
rights Restrictions:
 to issue shares to new members
 to subdivide shares of another class
 to return capital to preference shareholders
 to create a new class of preference shareholders.
9
3. Class rights
White v Bristol Aeroplane Co Ltd 1953

The facts: The company made a bonus issue of new ordinary
and preference shares to the existing ordinary shareholders who
alone were entitled under the articles to participate in bonus
issues. The existing preference shareholders objected. They
stated that reducing their proportion of the class of preference
shares (by issuing the bonus of preference shares) was a
variation of class rights to which they had not consented.
Decision: This was not a variation of class rights since the
existing preference shareholders had the same number of
shares (and votes at a class meeting) as before.
10
3. Class rights
Greenhalgh v Arderne Cinemas Ltd 1946

The facts: The company had two classes of ordinary shares,
50p shares and 10p shares. Every share carried one vote. A
resolution was passed to subdivide each 50p share into five 10p
shares, thus multiplying the votes of that class by five.
Decision: The rights of the original 10p shares had not been
varied since they still had one vote per share as before.
11
3. Class rights
Variation of class rights in special situations
 If the class rights are set by the articles and they provide a
variation procedure, that procedure must be followed for any
variation, even if it is less onerous than the statutory
procedure.
 If class rights are defined otherwise than by the articles and
there is no variation procedure, consent of a three-quarters
majority of the class is both necessary and sufficient.
Note: A dissenting minority holding 15% or more of the issued
shares may apply to the court within 21 days of class consent to
have the variation cancelled as 'unfairly prejudicial'.
12
4. Allotment of shares
4.1. Distinction between allotment & issuance
A share is allotted when the person to whom it

is allotted acquires an unconditional right to be
entered in the register of members as the
Allotment holder of that share. That stage is reached
of share when the board of directors (to whom the
power to allot shares is usually given)
considers the application and formally resolves
to allot the shares.
The issue of shares is not a defined term

but is usually taken to be a later stage at
Issuance of
which the allottee receives a letter of
share
allotment or share certificate issued by the
company.
13
4.2. Public company allotment
Public Where members of the public subscribe for shares

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

sale based on information in a prospectus
A method of raising share capital where shares are

offered in a small number of large 'blocks', to persons or
Placing
institutions who have previously agreed to purchase the
shares at a predetermined price.
14
4.2. Private company allotment
The allotment of shares in a private company is more

straightforward. The rule to remember is that private companies
cannot sell shares to the public. An application must be made to the
directors directly. After that, shares are allotted and issued, and a
return of allotment made to the Registrar, as for a public company.
15
Directors of private companies with one class of
share have the authority to allot shares unless
restricted by the articles.
Directors’
Directors of public companies or private
power
companies with more than one class of share
may not allot shares (except to subscribers to the
memorandum and to employees' share schemes)
without authority from the members.
Pre-emption rights are the rights of existing ordinary

Pre-emption shareholders to be offered new shares issued by
right the company pro rata to their existing holding of that
class of shares.
A rights issue is a right given to a shareholder to

subscribe for further shares in the company, usually
Rights issues
pro rata to their existing holding in the company's
shares.
16
Exclusion of A private company may by its articles permanently
pre-emption exclude these rules so that there is no statutory
rights right of first refusal.
By a special resolution, which may either:

 Be combined with the grant to directors of
Disapplication authority to allot shares; or
of pre-emption  Simply permit an offer of shares to be made
rights for cash to a non-member (without first offering
the shares to members) on a particular
occasion.
A bonus issue is the capitalization of the reserves

of a company by the issue of additional shares to
Bonus issues existing shareholders, in proportion to their
holdings. Such shares are normally fully paid-up
with no cash called for from the shareholders.
17
5. Issuing shares
Price of issuing shares
At a premium √
At nominal value √
At a discount X
Ooregum Gold Mining Co of India v Roper 1892

The facts: Shares in the company, although nominally £1, were
trading at a market price of 12.5p. In an honest attempt to
refinance the company, new £1 preference shares were issued
and credited with 75p already paid, so 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.
18
6. Public issuing shares

Stringent rules
a. The company must, at the time of allotment, receive at least one-

quarter of the nominal value of the shares and the whole of any
premium.
b. Any non-cash consideration accepted must be independently
valued.
c. Non-cash consideration may not be accepted as payment for
shares if an undertaking contained in such consideration is to be,
or may be, performed more than five years after the allotment.
d. An undertaking to do work or perform services is not to be
accepted as consideration. A public company may, however,
allot shares to discharge a debt in respect of services already
rendered.
e. Within two years of receiving its trading certificate, a public
company may not receive a transfer of non-cash assets from a
subscriber to the memorandum, unless its value is less than
10% of the issued nominal share capital and it has been
independently valued and agreed by an ordinary resolution.

Chapter 12 - Share Capital

Uploaded by

Copyright:

Available Formats

Chapter 12 - Share Capital

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 12 - Share Capital

Uploaded by

Copyright:

Available Formats

1

What you will learn?

 The difference between various classes of

 The allotment of shares and the difference

 The effect of issuing shares at either a

Share capital Loan capital

Issued and Called up

=> A share is a form of personal property, carrying rights and

Some docs indicating special rights & filed at Companies House:

Shares comprises of ordinary shares, preference shares,

Equity is the residual interest in the assets of the company

Equity share capital is a company's issued share capital, less

Ordinary shares are shares which entitle the holders to the

Notes on priority dividend entitlement:

Q: Ads & disads of Preference shares?

Redeemable shares Treasury shares

• May be bought back by • Purchased by the

Procedure: strict, by special resolution passed by at

Applicable cases: only if it is proposed amounts to a

White v Bristol Aeroplane Co Ltd 1953

Greenhalgh v Arderne Cinemas Ltd 1946

A share is allotted when the person to whom it

The issue of shares is not a defined term

Public Where members of the public subscribe for shares

Offer for An offer to members of the public to apply for shares,

A method of raising share capital where shares are

The allotment of shares in a private company is more

Pre-emption rights are the rights of existing ordinary

A rights issue is a right given to a shareholder to

By a special resolution, which may either:

A bonus issue is the capitalization of the reserves

Ooregum Gold Mining Co of India v Roper 1892

6. Public issuing shares

a. The company must, at the time of allotment, receive at least one-

You might also like