Share Capital Part 1
TOPIC 4 SHARE CAPITAL 4.1 Share Capital and Types of share capital • What is share capital? – it is the amount of money or assets contributed to the company by its members when they subscribe for shares in the company. • The money/assets contributed thereafter belongs to the company. • In return, the member is issued with shares in the company. • S18 refers to company’s power to issue shares . • S18(1) makes it compulsory for companies to have a capital clause in the MOA stating the amount of capital the company proposes to register and its division into fixed amounts. – known as ‘authorised capital’. • S62(1) stipulates that the authorised capital of a company may be increased by amending its articles. • Classification of share capital: i. Nominal or authorised capital: -‐ Refers to maximum amount of capital which a company is authorised to raise by issuing its shares. -‐ It imposes a ceiling on number of shares that can be issued by company. -‐ Sch 2 clause 3 provides that the registration fee of a proposed company depends on the amount of authorised capital registered. -‐ If the company issue shares in excess of its authorised share capital, those shares are treated void. -‐ Nevertheless, the law allows the company to alter its authorised capital by various way – increasing, consolidating, converting, subdividing or cancelling its share share capital: S62. ii. Issued capital: -‐ It refers to that part of a company ‘s authorised capital that has been issued to the members. -‐ A share is said to be issued and forms part of the issued capital of a company if the name of the shareholder has been registered in the register of members in respect of those shares – requirement of register of members: S158 iii. Unissued capital: -‐ It refers to that part of the authorised capital that has not been issued. It is the balance of authorised capital a company may issue as share capital. iv. Paid up capital: -‐ The shareholders to whom the shares are issued are not necessarily required to pay for them either in whole or in part at the time of allotment – shares may be issued partly paid or due and payable (called and paid). v. Called up capital: -‐ If the company has issued ‘partly paid’ shares or ‘due and payable shares’ when it need funds, it can make a call on the shares. -‐ The shareholders are bound to pay the amount specified in the call. -‐ Thus, called up capital is defined as that part of the aggregate amount of calls made on the shares whether or not those calls have been paid together with any share capital paid up and any shares issued to be paid by instalments on fixed dates : See Table A, Art 13 and Art 17 vi. Uncalled capital: -‐ When shares are issued as partly paid up, the remainder of the issued capital which is not called at any time is the uncalled capital. vii. Reserve capital: -‐ A limited company may have a special resolution determining that any portion of its share capital which has not been already called up shall not be capable of being called up except in the event and for the purposes of the company being wound up. -‐ This portion is known as ‘reserve capital’ or reserve liability. viii. Capital reserve: -‐ It is the fund set aside by the company’s directors to replace the fixed working assets of the company and are not available for distribution as dividends. -‐ The profit on the sale of a fixed asset would be transferred to the capital reserve. -‐ It is used to write-‐off capital losses incurred, to write off the cost of a new issue of shares and loan capital and to pay up unissued shares to be issued to members of the company as fully paid shares. 4.2 Shares and Types of shares • What is a share? – A share in a limited company is a claim against the company to which the rights set out in the CA and the company’s MNA attach. • See S4. • Generally, those rights will be: i. Distribution rights: rights to receive dividends during the company’s life and, depending on the terms of issue of the particular share, rights to repayment of the principal and to share in any surplus assets of the company on a winding up. ii. Control rights: rights to exercise some control over the management of the company’s affairs – right of vote of decisions affecting the company. • The legal nature of a share : S98 -‐ movable property transferable in accordance with the terms of the articles of the company. • Stocks and shares are goods within the meaning of S2 of SOGA 1957. • Case: Borland’s Trustee v Steel Bros & Co Ltd (1901) 1 Ch 279 A share was described as interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place and interest in the second. • A share is considered as personal property shareholder. • • • • • • The primary record of legal title to share in company is in the register of member : S16(6). Share certificate is the prima facie evidence of the title to the share to facilitate a member’s share dealings – refer Kelapa Sawit (Teluk Anson) v Yeoh Kim Leng [1991]. Applicants for membership may be unable to enforce the statutory contract until they are registered as members. Stock is a collection of shares expressed in units of money. Fully paid shares may be converted into stock : Table A, Art 36 – 39 It can be transferred subject to directors’s power to fix minimum amount: Table A Art 37 Classification of shares: i. Ordinary shares: -‐ It has the following rights: v The right to share equally in any dividends (if declared) with all other ordinary shareholders, after all other claimants (creditors) have been paid. v The right to vote at GM v The right to be repaid their capital (or pro rate of it) on a winding up after all other claimants have been repaid; and v The right to share pro rate in any surplus assets on a winding up. ii. Preference shares: -‐ S4 : it is share by which does not entitle the holder to the right to vote at GM 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. -‐ S66(1): company which issues preference shares or converts already issued shares into preference shares must set out in the MNA the rights attaching to such shares with respect to repayment of capital, participation in surplus assets, cumulative or non-‐cumulative dividends, voting and priority of payments of capital and dividend in relation to other shares or other classes of preference shares. -‐ It has following rights: v The right to receive a fixed dividend provided there are profits available for distribution and a dividend is declared by the company, the dividend may be cumulative or non-‐ cumulative v The right to be repaid the principal on a winding up in priority to ordinary shareholders v No voting right unless dividends are in arrears, except on resolutions to reduce the company’s capital or to wind up the company, or at class meetings on matters affecting their class rights: S148(2) v No right to share in surplus assets on a winding up. It is possible to confer this right to a preference shareholder. -‐ Types of preference share: a. Cumulative preference shares § The holder carries forward their entitlement to a distribution from one year to the next if no dividend is declared in particular year. b. Non-‐cumulative shares § The holders are only entitled to the specified rate of dividend out of the profit of the current year where the dividend is declared and paid. § Thus, the holder lose their entitlement to any dividend that is not declared or paid in the relevant year. c. Participating preference shares § The holder of such shares are entitled to participate in the profits beyond the fixed dividends, by way of an additional fluctuating dividend if the company is successful. § Preference shares are deemed to be non-‐participating unless expressly stated. d. Redeemable preference shares § The company is allowed to issue such share if authorised by the AOA: S61. § It allows for repayment of the principal at a particular time or on the occurrence of a particular event prior to winding up of the company. § Hence, redeemable preference shares represent an exception to the general principle-‐ companies cannot repay share capital prior to winding up. § Under S61, preference shares can be redeemed by the company at a fixed time in the future or at the option of the company subject to the terms of the issue. § The funds for the redemption must be: o Out of profits available for dividends, or o From the proceeds of a new issue of shares made for the purpose of the redemption o The share can only be redeemed if it is fully paid up: S61(3) o See S61(5) o See S61(7) o See 61 and S61(2) e. Convertible preference § They carry a right to a preferred. Fixed dividend for a particular term and then allow for or require conversion to ordinary shares at the end of the term. § Usually, the conversion to ordinary shares will reflect in some way the value of ordinary shares at the time of the conversion. 4.1 & 4.2 Types Of Share Capital & Shares SHARE CAPITAL Share Capital Share What is share? Classification What is share Classification -‐S4 capital -‐S98 -‐S18 -‐S2 SOGA 1957 (1) -‐S62 -‐S16 -‐Borland case -‐Kelapa Sawit case -‐Table A Art 36 -‐ 39 Nominal/ Paid-‐up Issued capital authorized capital capital -‐S158 -‐Sch 2 Clause 3 Ordinary Preference -‐S62 -‐S4 -‐S66 (1) Unissued Called-‐up Capital Reserve Uncalled capital capital reserve capital capital Cummulative Non-‐ cummulative Participating Redeemable Convertible g
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