#7389 - Share Capital - Corporations Law

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 rights attached to some shares in a class are varied, varies the rights of other shares in the class 246C(2)

           3. Where company with one class of shares issues new shares and the rights attaching to the new class of shares are not the same and the rights are provided for in the CC or notice with ASIC 246C(5)

           4. If the company issues new preference shares that rank equally with existing preference shares, taken to vary rights attaching to existing preference shares 246C(6)

              1. Applies to the Bristol case: a new issue of preference shares to ordinary shareholder was held to not affect the rights of existing preference shareholders

                 1. This provision would deem it to be a legal alteration of his rights and reverse the court’s decision.

              2. Exception:

                 1. If when W was issued with preference shares, there was a condition hat further shares in the same class as his could be issued at the company’s discretion then he cannot complain as he knows in advance that his rights may be varied and he has agreed to this (agreement)

         • Common law approach (where deeming provisions do not apply) Variation of a class right is defined strictly. It is only a change of the legal rights of the shares that applies, not the value of the shares (through a dilution) Greenhalgh v Ardene Cinemas

           1. At CL there is a distinction between variations to class rights and changes which are merely variations in the enjoyment of class rights White v Bristol

              1. Look at the legal rights before the CC is altered and compare with legal rights after. X must show legal rights have changed in some way Bristol

           2. Factors:

              1. Must be varied in a legal sense, not a business or practical sense Ardene Cinemas

              2. a dilution of voting power only affects the practical enjoyment of voting rights Bristole

              3. Devaluation of a class of shares will not constitute alteration of the class

              4. However, Bristol, was decided long before Cumbrian, which showed a greater judicial willingness to interpret the class rights provisions to maximise protection they offer to members of the class.

      3. If there is a class, it is entrenched and cannot be altered without following the correct process to attain the classes’ approval

         • Is there a process specified in the CC?

           1. It must be followed 246B(1)

         • If there is NO process specified in the CC: the Corporations Act applies

           1. 246B(2)Can be varied via a special resolution of the company; WITH

              1. 246B(2)(c) A Special resolution of members of the class AND

              2. 246B(2)(d) Written consent of 75% of the votes of the affected class

      4. Right to set aside the change if the class is not unanimous

         • Even if class rights variation procedure is followed, members with at least 10% of votes in that class can apply to the court to have the variation/cancellation of their rights 246D(1)(a) or modification to the CC to allow rights to be varied or cancelled 246D(1)(b) set aside, on the basis of unfair prejudice to them 246D(1)

           1. Must be made within 1 month of the variation, cancellation or modification s246D(2)

           2. Courts will consider whether to set aside change if unfair prejudice to applicants 246D(5)

           3. If, after an order, the company does not comply, this constitutes a breach of 140(1)(a) contract between the company and its members

   7. Maintenance of Capital/ Reduction in Share Capital: The modern maintenance of capital doctrine is reflected in CH 2J which allows for:

      • Reduction of share capital 256B

        1. A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction

           1. is fair and reasonable to the company’s shareholders as a whole; and

              1. Court will look...