Share Capital Notes

Topic 5: Share Capital, Loan Capital and Dividends

1. Share Capital

   1. Description:

      1. A share is an item of intangible property also known as a “chose in action” and is a proportionate interest in the net worth (A-L) of the business

      2. Ownership of a share gives the shareholder proprietary rights under the CC and the law and the law recognises that ownership of shares is capable of being divided into legal and equitable interests 1070A (however shareholder do not have legal or equitable interest in the assets of the company)

      3. Capital is the total amount of assets available to a business to use in its activities

      4. A company may issues shares for any amount it chooses

   2. A company has the power to issue shares 124(1)(a) which includes the power to issue 245A

      1. Bonus shares 254A(1)(a)

      2. Preference shares 254(1)(b)

      3. Partly paid shares 254A(1)(c)

         • you are liable to pay calls on your shares unless the company is a no liability company 254M

         • a shareholder need not contribute more than the amount unpaid on their shares 516

         • a company may give security over its uncalled capital 124(1)(e)

         • a company’s shareholders may pass a special resolution that has the effect of restricting the company’s right to make calls to situations where the company has become insolvent 254N

   3. Rights that attach to shares

      1. To participate in financial distributions of the company, generally:

         • Entitlement to dividends

         • Right in winding up of company to be repaid proportionate share of capital/receive shares of any surplus assets

      2. to participate in the governance of the company:

         • right to receive notice of meetings

         • right to attend, speak at and demand poll at general meetings

         • right to elect and remove directors

         • right to vote at general meetings

   4. The issue of shares

      1. On registration, a company limited by shares or an unlimited company

         • Must state in its application 117(2)(k)

           1. Number and class of shares each member agrees to take up

           2. The amount (if any) each member agrees to pay for each share

           3. Whether shares are fully paid or the amount unpaid on each shares

      2. After registration, companies have power to issue shares 124(1)(a)

         • Companies may determine the terms on which its shares are issued and the rights that attach to them 254B

         • Must notify ASIC 254X

         • Private offerings are governed by contract law and operate like a contract 254D

      3. Consideration for issue of shares

         • Can be cash or non-cash consideration

         • A company cannot issue shares gratuitously.

         • According to Re White Star Line Ltd , the non-cash considerations must be something which is regarded by the parties to the transaction as fairly representing the value of the shares. It cannot be ‘colourable’ or ‘illusory’.

           1. However if the two people entering into the bargain think it’s fair, the court will not second guess them

         • Companies must notify ASIC of the particulars of any non-cash consideration the receive 254X

   5. Classes of Shares

      1. Shares can be divided into classes. Substance over form is important: even if the company does not use the correct terminology or it is not in the constitution, members will be in the same class when there is a commonality of interest between the shareholders in a particular class Crumpton

      2. Ordinary Shares

         • Right to vote on general business

         • Right to dividend ONLY if directors determine

         • Right to return on investment AFTER preference shareholders are paid back

         • Share of surplus

      3. Preference shares 254(2)

         • Preference shareholders are entitled to a preferential return of investment Beck v Weinstock

         • They receive a fixed dividend paid before ordinary shareholders are paid and usually have preferential rights to receive back capital when the company winds up.

         • Can be participating (where shareholders have the right to receive dividends in addition to their preferential dividend entitlements) or non-participating

         • However they have limited voting rights.

           1. No right to vote on ordinary business matters

           2. However where the Act says that shareholders have a right to vote to change class rights/reduce company’s capital, preference shareholders participate

         • A company can issue preference shares only if the rights attached to the shares with respect to the following are set out in the CC or have otherwise been approved by special resolution:

           1. Repayment of capital

           2. Participation in surplus assets and profits

           3. Cumulative and non-cumulative dividends

           4. Voting

           5. Priority of payment of capital and dividends in relation to other shares

         • Redeemable preference shares 254K

           1. preference shares that are issued on the terms that they are liable to be deemed:

              1. at a fixed time or on the happening of an event

              2. at the company’s option

              3. at the shareholder’s option

           2. They are not a creditor Heesh v Baker and can only be redeemed on the terms which they were issued 254J(1)

           3. Company can only redeem them if 254K

              1. If they are fully paid; and

              2. Out of profits of a new share issue made for the purpose of the redemption

              3. If they don’t do this it will be a reduction of share capital and the requirements must be met

   6. Variation/Alteration of class rights

      1. What is a class right?

         • Right to do things such as voting, receiving dividends, distribution of surplus or winding up

         • A class right refers to Cumbrian

           1. A share that has a particular right attached to it

              1. E.g. preference shares give you rights A B C etc

           2. A right not attached to a particular shares, but based on the nature of the right, must be ‘conferred on a beneficiary in the capacity as a member of the comp’ that must relate to being a shareholder of the company Eley

              1. E.g. the ability to remove a director goes to anyone with 10% of shares (still need their approval)

      2. What is a variation?

         • Examples of variation of class rights (statutory deeming provisions) help to combat the harshness of the common law

           1. Where the company divides existing shareholders into further classes and the rights are not the same. Varies rights of existing class before the division (who before hand formed a separate class) 246C(1)

           2. Where the...

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