Title: Capital
1Capital Financing of Companies (Part 3)
- Raising of share capital
- Capital maintenance
- Rosemary Craig BA LLB LLM PGCHEP
2Public 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.
3Issue 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.
4Pre-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.
5Issue 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
6Issue 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.
7Issues 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.
8Payment 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.
9Bonus 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.
10Capital 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.
11Increase 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.
12- 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.
13Redeemable 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.
14Purchase 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.
15Permissible 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.
16Financial 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.
17- 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.
18Distribution 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.
19- The End
- I hope you have enjoyed this lecture
- Any questions?