company law share capital 1

Topic 4 - Shares Capital I

4.1 - Introduction

Most common type of source of finance.

Company limited by shares issues and allots

shares to a shareholder in return for capital

(money or assets)

How public company acquire public funding by

offering or inviting public to subscribe to its

securities = shares !

> Share / equity Capital

Meaning of Shares s 4 - share in the share capital of a corporation and

includes stock except where a distinction between

stock and shares is expressed or implied;

Borland’s Trustee v Steel Bros & Co Ltd

“a share is the interest of a shareholder in the

company measured by a sum of money, for the

purpose of 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 in accordance with s.33. The

contract contained in the articles of association is

one of the original incidents of the share”

* s.33 - MA and AA binds the company and members

Nature of shares: s 98 CA

The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles, and shall not be of the nature of immovable property.

- a movable property

- choses in action; ownership of shares confers rights

on the shareholders which are enforceable by law.

- They may be bought & sold, bequeathed and given

as security.

Nelfi Amiera MizanFOL, MMU 2016

4.2 - Capital Structure (Types of Capital)

i. Authorised / Nominal / Registered Capital

Sec. 18(1) (c) CA - requires companies to state,

in their MOA, the amount of their authorized or

nominal capital.

> It represents the maximum value of shares that the

company can issue / total amount of capital which

the company is allowed to issue.

> share capital that company proposes to be

registered and its division into shares of fixed

amount

> Company cannot allot shares in excess of the

company’s authorised share capital

Bank of Hindustan, China & Japan Ltd v Alison

Any allotment of shares in excess of the company’s

share capital is void

ii. Issued Capital Represents the nominal value of share capital

which has been issued to its members

> The nominal capital which has actually been

allotted and issued to the shareholders.

Company is not bound to allot all its capital at

once.

A share is issued only if the name of shareholder has

been registered in the register of members in

respect of those shares.

iii. Paid up Capital The amount actually paid to a company for

shares allotted / issued to a shareholder.

If a shareholder makes a full payment of the

purchase price of the share, the amount

received is referred to as fully paid up capital.

If the company permits the shareholder to make

only partial payment of the total purchase price,

such shares are referred to as partly paid up

shares, with remaining balance recorded in the

same company’s account as an amount that the

company may call upon in the future (uncalled

capital)


iv. Called up Capital The total amount called up by the company on

the shares allotted.

Company is entitled to make a call at a later time

for some / all of the balance owing on the share.

v. Reserve/ Uncalled Capital Company may issue shares that are partly paid

Amount unpaid = reserve capital / uncalled

capital

The capital where a company has not yet called

for payment of full nominal value.

Conclusion: A company may issue shares up to the

limit of its authorised share capital. Where shares

are issued, they are allotted to the holders who

become members after their names are entered in

the register of members.

* The capital clause; the capital that is authorised by

the MOA

Variation of Authorised Capital: s 62 CA

How to issue shares in excess of its existing

authorised share capital?

a. Increasing Authorised Capital: s 62(1)(a) CA

- If need to issue shares in excess of its existing

authorised share capital, company must first increase

its authorised share capital in accordance with s 62

CA.

s 62(1)(a) - A company if so authorized by its articles may in general meeting alter the conditions of its memorandum in any one or more of the following ways:

(a) increase its share capital by the creation of new shares of such amount as it thinks expedient;

S62 (4) - Where a company has increased its share capital beyond the registered capital, it shall within fourteen days after the passing of the resolution authorizing the increase lodge with the Registrar notice of the increase.(CCM)

S62(5) - If any company fails to comply with subsection (4) the company and every officer of the company who is in default shall be guilty of an offence against this Act. Penalty: One thousand ringgit. Default penalty.

art 40(a) - The company may from time to time by ordinary resolution— (a) increase the share capital by such sum to be divided into shares of such amount as the resolution shall prescribe;


b. Consolidation: s 62(1)(b) CA

(b) consolidate and divide all or any of its share capital

into shares of larger amount than its existing shares;

- Number of shares will be reduced but capital

remains unchanged.

- (each unit of share is of larger value now)

c. Conversion into stock: s 62(1)(c) CA

(c) convert all or any of its paid-up shares into stock and

reconvert that stock into paid-up shares of any

denomination;

d. Subdivision: s 62(1)(d) CA

(d) subdivide its shares or any of them into shares of smaller amount than is fixed by the memorandum, so however that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; or

- Number of shares will be increased but capital

remains unchanged.

- (each unit of share is of smaller value now)

e. Cancel shares which have not been taken:

s 62(1)(e) CA

(e) cancel shares which at the date of the passing of the resolution in that behalf have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled

Reduction does not result in the company

contravening the rule that a company limited by

shares is prohibited from returning any part of

its paid up share capital to its SH. This is because

shares cancelled have not been issued and thus

the interest of creditors are not affected

S 62(2) - A cancellation of shares under this

section shall not be deemed to be a reduction of

share capital within the meaning of this Act.


4.3. Issues and Allotment of Shares

Contractual rules: offer and acceptance

Invitation to the public – by company.

Offer – by the public - usually fill in a form

Acceptance - by the company when through its

directors, decides to allot shares and sends the

applicant a notice of allotment

Meaning of “Allotment” AND “Issue”

An allotment of shares is the process in which a

person is given the right to be included in the

register of members within a specific company.

An issuance of shares is when the person is

actually issued the shares in which they are

deemed entitled to.

Commonweath Homes & Investment Co Ltd v Smith

(per Dixon J)

But an ‘allotment’ of shares really bears a double

aspect. In the formation of a contract of membership

it may be the acceptance of the offer constituted by

the application or the making or authorization of an

offer or counter-offer accepted by the subsequent

assent of the allottee. But it is also the

appropriation of a given number of shares to the

allottee. Shares are personal property. Allotment,

entry in the share register and the sealing and

delivery of share certificates are matters of fact

which constitute the issue of shares, considered as a

form of property.


Raja Khairulzaman Shah Bin Raja Aziddin v Zaman

Indah Sdn Bhd

it was said that an “allotment” was the

appropriation to a person of a certain number of

shares, but not necessarily create the status of

membership even when the contract to take the

shares is complete.

Consideration of Shares1. Cash and non-cash consideration

Most cases, consideration a company receives

when it issues shares is CASH.

However, it is common also for companies to

issue shares for a consideration OTHER THAN

CASH

Re Wragg Ltd

Consideration in a form other than cash is permitted

Malaysia: Allotment for consideration other than

cash is valid

– implied from s 54(2)(b) CA and Form 25.

(2) The particulars mentioned in paragraph (1)(d) need not be included in the return where a company to which subsection 166(1) applies has allotted shares—(b) for a consideration other than cash and the number of persons to whom the shares have been allotted exceeds five hundred

2. Nominal/par value of shares

Shares issued must have a nominal or par value

Meaning: Fixed amount s.18(1)(c)

Ooregum Gold Mining Co v Roper

Company must receive money worth equal to the

nominal or par value of the shares allotted


3. Fully paid and partly paid shares

Ooregum Gold Mining Co of India Ltd v Roper

Shares held by SH will only be deemed to be fully

paid up when a company receives payment that is

equivalent to the nominal or par value

As the co did not receive a payment that is

equivalent to the par value of shares, those

shares shall be deemed to be partly paid up

shares

Co’s AA usually provide the co with enforceable

rights against a SH who holds partly paid up

shars in a co.

What happens if shareholders fail to pay upon calls?

(a) Forfeiture on non-payment of calls

Power to make calls is usually conferred on

directors.

Table A, art 13 - The directors may from time to time

make calls upon the members in respect of any

money unpaid on their shares..

Table A, art 16-17 -

16. If a sum called in respect of a share is not paid before

or on the day appointed for payment thereof, the person

from whom the sum is due shall pay interest..rate not

exceeding 8 per cent per annum...

17. ... forfeiture, or otherwise shall apply as if the sum

had become payable by virtue of a call duly made and

notified.

Table A, art 28-32

* Call = a debt due from the shareholder to the

company

if default in payment, liable for interest ≤8% p.a.


steps to recover: forfeit and auction.

- director to issue a notice to errant shareholders

requiring payment.

- notice shall name at least 14 days after service

of notice. If shareholder fails to pay at or before the

time appointed, shares will be liable to be forfeited.

- directors are allowed to forfeit unpaid shares.

- forfeited shares may be sold or otherwise

disposed of

- person whose shares are forfeited remains

liable to the company for the amount unpaid on the

shares, together with interest.

(b) Lien on Shares

Table A, art 9-12

Right of company to hold shares of members as

security for repayment of a debt owing by

members to company.

> Company may sell the shares in the manner

provided under the articles if a sum in respect of

which the lien exists is presently payable, or until

expiration of a specified time in a notice served on

shareholder or the legal representative (in the case

of death of bankruptcy).


Power to issue shares s 132D(1) CA: Rests with members of general

meeting

(1) Notwithstanding anything in a company's memorandum or articles, the directors shall not, without the prior approval of the company in general meeting, exercise any power of the company to issue shares.

s 132D(6) CA: Effect of contravention of s 132D

CA.

(6) Any issue of shares made by a company in

contravention of this section shall be void and

consideration given for the shares shall be recoverable

accordingly.

s 132D(7) CA: Liability of director who knowingly

contravenes s 132D CA.

(7) Any director who knowingly contravenes, or permits or

authorizes the contravention of, this section with respect

to any issue of shares shall be liable to compensate the company and the person to whom the shares were issued for any loss, damages or costs which the

company or that person may have sustained or incurred

thereby; but no proceedings to recover any such loss,

damages or costs shall be commenced, notwithstanding

the provisions of the Limitation Act 1953, after the

expiration of three years from the date of the issue.

Issue of Shares at a discount

Ooregum Gold Mining v Roper

Co issues and allots shares to SH as being fully paid

up when in fact the company has only received an

amount less than the nominal or par value = issue

and allotment of shares at a discount

Prohibition:

1. Contrary to s.18(1)(c) and s.214(1)(d)

Ooregum’s case: every member who takes shares

liable to contribute their full nominal value

2. Encourage discrimination

Directors choose to issue shares at discount to some

of the SH

3. Infringe the rights of SH who pays the full

amount

In case of surplus during winding up, not fair for the

one who paid at discount to gain as much as the one

who paid full

4. Contravene s.67(1)

Prohibits company from giving financial assistance


Implication for shareholders

o Shareholder continues to remain liable to pay its

full nominal value to the company,

Ooregum Gold Mining Co of India Ltd v Roper

Shareholder continues to remain liable to pay its full

nominal value to the company

Implication for company’s officers

o s.67(1) > not company but the company’s officer

who is liable and committed offence under s.67(3)

o Ct may order officer to pay compensation to

company or any person for loss - s.67(4)

Exceptions to the rule against issuing and allotting

shares at a discount

S 58 CA - covers the legitimate practice of paying

underwriting commission.

S 59 - authorised by ordinary resolutions

S 59 CA. - (1) Subject to this section a company may issue shares at a discount of a class already issued if—

(a) the issue of the shares at a discount is authorized by resolution passed in general meeting of the company, and is confirmed by order of the Court;

(b) the resolution specifies the maximum rate of discount at which the shares are to be issued;

(c) at the date of the issue not less than one year has elapsed since the date on which the company was entitled to commence business; and

(d) the shares are issued within one month after the date on which the issue is confirmed by order of the Court or within such extended time as the Court allows.


Issue and Allotment of Shares at a Premium

When a company receives an amount that is in

excess of the nominal / par value of the shares

issued and allotted.

Share premium account

Henry Head & Co Ltd v Ropner Holdings Ltd

Where a company issues shares at a premium

(whether in cash or in the form of other valuable

consideration), CA requires that “a sum equal to the

aggregate amount or value of the premium on those

shares” must be transferred to “share premium

account”.

Share premium account is treated as paid up

share capital of the company for the purpose of

share capital reduction: s 60(2) CA.

S. 60(4) - Does not have to create a premium

account if company issues shares in

consideration for the acquisition of at least 90%

of the equity shares

How a company can apply its share premium

account: ss 60(3) CA; 67A(3) CA.

- Premium cannot be returned to shareholders

otherwise than in the manner prescribed by ss 60(3)

and 64 CA.


Validation of Shares improperly issued

- S 63 CA empowers the court to validate an

improper issue or allotment of shares if it thinks that

it is just and equitable to make such an order.

- Application may be made by the company, a

shareholder or creditor of the company.

Millheim v Barewa Oil and Mining NL

Re Swan Brewery Co Ltd (No.2)

Kelapa Sawit (Teluk Anson) Sdn Bhd v

Yeoh Kim Leng

Application was made to validate shares that had

been issued by persons who were not the company

directors

SC held: Ct should refuse to exercise to validate the

shares issued. Because the person who is not

directors issues and not the company. No such

validation needed.


4.4 Classes of Shares

General rule: all shares having same par value

enjoy same rights irrespective of the amounts paid.

Shares with different rights - different classes of

shares.

Shares issued carry different rights

Table A, art 2- Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares but subject to the Act, shares in the company may be issued by the directors and any such share may be issued with such preferred, deferred, or other special rights or such restrictions, whether in regard to dividend, voting, return of capital, or otherwise, as the directors, subject to any ordinary resolution of the company, determine.

Rights attached to shares may differ in regard to:

(a) entitlement to dividends

(b) priority in relation to payment of dividend

(c) voting right

(d) priority in repayment of capital on winding up

(e) right to participate in a distribution of surplus

assets upon winding up

Most common types of different classes of

shares in Malaysia:

(a) Ordinary/equity shares

(b) preference shares

Ordinary/ Equity Shares Sec. 4 - "equity share" means any share which is not

a preference share

Common characteristics of ordinary shares:-

not entitle to fixed/cumulative dividends

no priority in payment of dividends

right to participate in meeting and voting

right to be repaid their capital on a winding up

after all other claimants have been repaid

right to share pro rata in any surplus assets on a

winding up

* Pro Rata - proportional

Fixed dividends or cumulative dividends

(increased dividends)

Dividends only to be paid to the ordinary SHs

after preference SH have been paid

General rights to participate beyond a specified

amount in any distribution whether by way of

dividend, or redemption, in a winding up or

otherwise (may vote)


Preference shares S 4 CA - "preference share" means a share by

whatever name called, which does not entitle the holder thereof to the right to vote at a general meeting or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise

Common characteristics:-

normally has fixed and cumulative dividend

priority to a return of capital on a winding up

non-participating as to surplus both while the

company is a going concern and on a winding

up.

not entitle to attend and vote at general meeting

Exception: restricted rights may be specified in

company’s article: s 148(2) CA

(2) Notwithstanding subsection (1), the articles may provide that the right of holders of preference shares to attend and vote at a general meeting of the company may be suspended upon such conditions as may be specified:

Provided that any preference shares issued after the commencement of this Act shall carry the right to attend any general meeting and in a poll thereat to at least one vote for each ringgit or part of a ringgit that is paid up on each share—

(a) during such period as the preferential dividend or any part thereof remains in arrear and unpaid, such period starting from a date not more than twelve months, or such lesser period as the articles may provide, after the due date of the dividend;

(b) upon any resolution which varies the rights attached to such shares; or

(c) upon any resolution for the winding up of the company.

Right of preference shareholders to be set out in

the company’s constitution: s 66 CA

s 66(1) CA - No company shall allot any preference

shares or convert any issued shares into preference

shares unless there is set out in its memorandum or

articles the rights of the holders of those shares with

respect to repayment of capital, participation in

surplus assets and profits, cumulative or non-

cumulative dividends, voting, and priority of payment

of capital and dividend in relation to other shares or

other classes of preference shares

Contravention of s 66(1) CA – Offence: s 66(2) CA

If default is made in complying with this section the

company and every officer of the company who is in

default shall be guilty of an offence against this Act.

Penalty: Two thousand ringgit.


4.5 Class rights

Definition: Particular rights annexed to certain

shares.

Classification of class rights was broadened in an

unorthodoxed way in:

Cumbrian Newspapers Group Ltd v Cumberland and

Westmorland Herald Newspaper and Printing Co

Ltd

Although the claimant’s rights were not rights

annexed to particular shares in the way that, for

instance, preference dividend rights would be clearly

annexed to preference shares, they were

nevertheless conferred on the claimant in its

capacity as a member of the defendant company,

though were not attached to any particular share or

shares.

Significance or value of a right being classified as

a “class right” - in general, it cannot be varied

without the consent of the class.

Variation of Class Rights The Act and Table A has provisions that are

designed to protect class rights from being

varied or abrogated

Common law position

When does variation of class rights occur?

- when the strict legal rights attached to a class of

shares are varied and not when the economic value

attached to that class shares is effected

Distinction between variation of class rights and

variation in the enjoyment of class rights.

Test: whether after the amendment of the

articles/passing of resolution, shareholders in

question have the rights they had before the

amendment/passing of resolution - If still have

same rights, no variation of class rights.


Greenhalgh v Arderne Cinemas Ltd

Instead of Greenhalgh finding himself in a position of

control, he finds himself in a position where the

control has gone, and to that extent his rights are

affected as a matter of business. As a matter of law, I

am quite unable to hold that, as a result of the

transaction, the rights are varied; they remain what

they always were – a right to have one vote per

share pari passu with the ordinary shares for the

time being issued which include the new 2s ordinary

shares resulting from subdivision.

White v Bristol Aeroplane Co

Variation of class rights in accordance with CA

S. 65(6) CA - (6) The issue by a company of preference shares ranking pari passu with existing preference shares issued by the company shall be deemed to be a variation of the rights attached to those existing preference shares unless the issue of the first-mentioned shares was authorized by the terms of issue of the existing preference shares or by the articles of the company in force at the time the existing preference shares were issued.

Table A, art 5 - adopted the approach taken by CA in s 65(6) CA. - The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking equally therewith.

s 65(6)CA and Table A, art 5 take a different

approach to the common law.

s 65(7) CA. -Any alteration to the modification of rights clause shall also be deemed to be a variation of class rights.


Protection against non observance of class rights

Contract basis:

s 66 CA : rights of holders pref shares to be

set out in MOA / AOA

s 33(1) CA : effect of MOA & AOA : binding

s 181 CA : remedy in cases of oppression

Entrenching class right by inserting class rights in

the memorandum: s 21 (1B) CA.

- s 21(1A) and s 21(1B) CA: If class rights are

contained in the memorandum of association, they

cannot be varied.

Protection afforded by articles.Where the articles of a company authorise the

creation of different classes of shares, it is usual for

the articles to provide for the variation of the class

rights to be in accordance to the procedure

prescribed by the company’s articles and not

otherwise.

Crumpton v Morrine Hall Pty Ltd

Where the articles of a company authorise the

creation of different classes of shares, it is usual for

the articles to provide for the variation of the class

rights to be in accordance to the procedure

prescribed by the company’s articles and not

otherwise.


Variation or modification of rights clause in the company’s

articles.

- If a company adopts Table A as its articles, the

required procedure to vary class rights is set out in

Table A, art 4:

(a) convene separate class shareholders meeting.

Meeting is to be attended by shareholders of that

class of shares whose rights are to be varied.

(b) shareholders of 3 /4 of the issued shares of the

class whose rights are to be varied must give their

consent in writing or pass a special resolution

consenting to the proposed variation of class rights.

Statutory protection against variation of rights: s 65

CA

- Application to High Court to cancel the variation or

abrogation by holders of not less than 10% in the

aggregate of the issued shares of that class which

was affected by the variation or abrogation.


company law share capital 1

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