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Capital

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Rosemary Craig BA LLB LLM PGCHEP. Public Subscription. Only public companies can raise capital by public ... Pre-emption Rights. Companies Act 1985 Ss. ... – PowerPoint PPT presentation

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Title: Capital


1
Capital Financing of Companies (Part 3)
  • Raising of share capital
  • Capital maintenance
  • Rosemary Craig BA LLB LLM PGCHEP

2
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.

3
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.

4
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.

5
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

6
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.

7
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.

8
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.

9
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.

10
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.

11
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.

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.

13
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.

14
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.

15
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.

16
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.

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.

18
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.

19
  • The End
  • I hope you have enjoyed this lecture
  • Any questions?
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