Capital

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Capital Financing of Companies (Part 3)

• Raising of share capital
• Capital maintenance
• Rosemary Craig BA LLB LLM PGCHEP

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Public Subscription

• Only public companies can raise capital by
  public subscription. This can be done by
• Direct invitations to the public (offers for
  subscription)
• Offers for sale
• Public Company placings and under-writing
• Regulation of public subscription
• Financial Services Act 1986. Secretary of
  State has delegated regulation of issues of
  securities which are to be dealt on the stock
  market to the Stock Exchange.
• Regulation remains with secretary of State for
  securities not dealt with on stock market.

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Issue of Shares

• Authorised share capital is the value of the
  shares to be issued.
• S. 121 CA 1985 Authorised share capital can be
  increased by ordinary resolution.
• Issue of shares occurs at the stage when the
  allottee receives a letter of allotment/ share
  certificate from company.
• Directors require members authority to allot
  shares. This is given by ordinary resolution, or
  in articles of the company. S. 80 CA 1985
• Authority to allot given for maximum amount of
  relevant securities, and time period must not
  exceed 5 years.
• A company can revoke, vary or renew this
  authority in a general meeting.

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Pre-emption Rights

• Companies Act 1985 Ss. 89 96. A company is
  obliged to offer equity securities first to
  holders of similar shares.
• Rights issue Existing shareholders receive the
  offer of new shares by right of, and in ratio to,
  existing shareholdings.
• Offer must be in writing provide 21 days for
  acceptance of offer.
• Offers must be made first to those members
  specified in the memorandum and articles.
• Equity shares are basically ordinary shares
  whenever issued for cash can be allotted to
  non-members on the same terms as members.

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Issue for an Improper Purpose

• Shares must be issued for a proper purpose. Main
  reason usually is if company is in need of
  further finance.
• It is notable that the courts have not determined
  that issue of shares to raise capital is the only
  proper purpose.
• Improper purpose if issued
• To defeat a take- over bid Hogg v Cramphorn
  Ltd 1967
• To facilitate a take- over bid Howard Smith v
  Ampol Petroleum Ltd 1974
• To prevent removal of directors Piercy v S
  Mills Co 1910
• To secure the passing of a special resolution
  Punt v Symons Co 1903
• To deprive a shareholder of his special
  voting weight Clemens v Clemens Bros Ltd and
  Another 1976 (Majority rule undermined) Bamford
  v Bamford 1970

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Issue of Shares - Payment

• S. 101 CA 1985 a share must not be allotted
  unless at least ¼ of nominal value the whole of
  any premium is paid up. Instalments can be made
  at fixed dates, or calls by the company. A
  reserve capital can be created.
• Forfeiture/ surrender of shares for failure to
  pay are possible if articles dictate.
• Shares can be issued at a discount on their
  market value, usually done to encourage takeup,
  especially in case of rights issues to existing
  members.
• Directors have fiduciary duty to do this in
  companys best interests.
• Issue of shares at a discount on the nominal
  value.

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Issues of Shares at a Premium

• A company is always free to issue shares at a
  premium.
• Premium is to be credited to a share premium
  account.
• Share premium account can be used to pay up bonus
  shares to be issued as fully paid members in
  writing off preliminary expenses/ expenses,
  commission, discount incurred in the issue of
  shares/ debentures in paying the premium on
  redemption of shares.
• Shareholders who pay a premium for shares are not
  entitled to the premium in companys hands,
  neither are they entitled to extra sums if they
  subscribed for shares at a price above nominal
  value of share.
• Merger relief s. 131 132 CA 1985.

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Payment for Shares

• Normally paid for in cash.
• Payment in kind is possible if the company agrees
  to it but it must be at least equal to the
  nominal value of the shares.
• Private company substantial freedom to
  determine if value of what is received is
  adequate. Re Wagg 1897 Hong Kong China Gas Co
  v Glen 1914
• Public company may not issue subscribers shares
  other than for cash, allot shares which include
  an undertaking which may be performed more than 5
  years after allotment accept in payment
  performance of services must not allot shares
  for non-cash consideration unless consideration
  has been independently valued.

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Bonus Rights of Issue

• Bonus Issue often called a capitalisation/
  script issue.
• The articles give power to the company to apply
  its reserves to paying up unissued shares and to
  allot these shares as a bonus issue to members.
• Rights issue an allotment of additional shares
  made to existing members.
• Members who do not wish to subscribe for
  additional shares can sell their rights to others
  and obtain the value of option.
• Application for shares allotment of shares.
• Return of allotment.

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Capital Maintenance

• General principle of company law is that capital
  must be maintained. Essentially this exists to
  protect creditors.
• Aim of the law is to ensure that the financial
  standing of the company bears some relation to
  the nominal value of its share capital. A number
  of mechanisms exist to prevent capital going out
  of a company
• S. 144 CA 1985 Acquisition by a company of its
  own shares is unlawful unless statutory
  exemptions apply (s. 135 s. 159, s. 162)
• S. 151 General prohibition on financial
  assistance for company to purchase its own
  shares.
• S. 263 264 A company is not permitted to make
  distributions other than out of distributable
  profits.

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Increase Decrease of Capital

• Increase of capital increase of authorised
  share capital/ actual issue of shares.
• Capital clause must be altered, if allowed under
  articles by way of an ordinary resolution S. 121
  CA 1985.
• Under s. 121 CA 1985, a company may consolidate
  or divide shares, or convert its shares into
  stock vice versa. Unissued shares can also be
  cancelled.
• A company can reduce its share capital by passing
  a special resolution, if it has the power to do
  so in the articles, and obtaining court approval.
  S.135 CA 1985.

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• Three ways to reduce capital
• (1) extinguishing/ limiting liability on partly
  paid shares
• (2) cancelling paid up share capital
• (3) paying off part off paid up share capital.
• Procedure for reduction is governed by s. Ss 135
  138 CA 1985.
• Serious loss of capital.

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Redeemable Shares

• Ss. 159 160 CA 1985 governs redeemable shares.
  These are issued with a redemption date, and on
  that date the company must buy them back.
• Useful when the company needs a short term
  injection of capital.
• Can only be redeemed if fully paid up. Payment
  for redemption must be contained in terms of
  redemption.
• Shares can be redeemed out of distributable
  profits, the proceeds of a new issue of shares,
  or a private company's capital.
• Redeemable shares which are redeemed cannot be
  reissued. They are cancelled. This will reduce
  the companys share capital by the nominal amount
  of shares but does not alter the authorised share
  capital.

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Purchase of Own Shares

• A company is allowed to purchase shares if
  authorised by its articles. This can be done out
  of the profits, or the proceeds of an issue of
  new shares.
• A company cannot purchase ordinary shares if only
  redeemable shares are left.
• S. 166 CA 1985 Market purchase made on stock
  exchange can only be made by a public company.
• S. 164 CA 1985 Offmarket purchase Any other
  purchase, e.g. any purchase not made under
  recognised investment exchange procedure.
  Purchase can be made by both public private
  companies.

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Permissible Capital Payment Private Companies

• S. 171 A private company can redeem/ purchase
  its own shares out of capital. The purpose of
  these rules is to prevent a company going into
  insolvency.
• A number of conditions must be adhered to
• Authority must be contained in the articles
• Capital can only be used to top up
  distributable profits
• Capital redemption reserve must be created
  where amount of permissible capital payment is
  less than the nominal amount of redeemed or
  purchased shares
• Statutory declaration of directors must be
  made supported by auditors report
• Payment has to be approved by special
  resolution.
• S. 176 A member who opposed resolution a
  creditor can apply to the court for cancellation
  of resolution within 5 weeks.
• S. 175 A notice must be placed in Gazette
  every creditor informed.

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Financial Assistance

• The Companies Act 1985 (UK) regulates the
  maintenance and reduction of share capital and
  other capital accounts. A companys share capital
  must not be reduced subject to certain
  exemptions, ensuring capital is maintained to
  meet creditor liabilities.
• The acquisition of its own shares by a company
  normally is unlawful
• Financial assistance to enable a company to do so
  is unlawful.
• Section 151 of the Companies Act prohibits such
  financial assistance, whether direct or indirect.
  
• Financial assistance is widely defined in section
  152 of the Companies Act
• It covers gifts, guarantees, indemnities,
  releases or waivers of rights or obligations,
  loans and any other situation which may result in
  the company incurring a liability in connection
  with the acquisition of its shares in the company.

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• Ignoring the legislation renders every officer of
  the company, directors and secretary liable to a
  fine up to 5,000 in the Magistrates Court. The
  fine is unlimited in the Crown Court,
  imprisonment for up to six months in a
  Magistrates Court and two years in a Crown
  Court.
• There are also civil remedies.
• By breaching Section 151, a director is in breach
  of their fiduciary duties to the company
  rendering them personally liable to account to
  the company for its loss.
• The shareholders may also have the right to sue
  by means of a derivative action normally a
  shareholder cannot sue in their own name to
  remedy a wrong done to the company. In these
  cases though they are entitled to do so.
• The shareholder must show that the wrong would be
  unremedied if the shareholder were not allowed to
  sue. The shareholder may also have a personal
  action against the company and may obtain
  injunctive relief on the grounds that any action
  in breach of Section 151 would be both ultra
  vires and unlawful.

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Distribution of Profits

• A limited liability company may not return
  capital to members. This is to protect creditors
  so they will be paid before capital is returned
  to members.
• Company may only make a distribution out of
  profits available for the purpose, not capital.
  S. 263 CA1985.
• Profits available for distribution are
  accumulated, realised profits so far as not
  previously utilised less the accumulated realised
  losses, so far as not previously written off.
• Dividend may not be paid unless net assets are at
  least equal to aggregate amount of its called- up
  share capital undistributable reserves.
• Consequences of making an unlawful distribution.
• A dividend is due when it is declared. Scott v
  Scott 1943.

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• The End
• I hope you have enjoyed this lecture
• Any questions?