Chapter 12

Share Capital

Members
A member of the company is a person who has
agreed to become a member and whose name has
been entered in to the register of members.
Subscriber shares
Subscriber of the memorandum are deemed to have
agreed to become the members of the company. As
soon as the company is formed their names should
be entered in the register of members.
Other person may acquire share :
1) By applying and being allotted shares
2) By presenting the company for registration a
transfer of shares to them
3) By applying as persona l representative (Deceased
member or bankrupt member)

Ceasing to be a member
1) He transfer all his shares to another person
and transferred is registered
2) The member dies
3) The shares of bankrupt member are
registered in the name of his trustees.
4) A member who is minor repudiates his shares
5) The trustee of bankrupt member disclaims
his shares
6) The company forfeits or accepts the
surrender of shares
7) The company sell them in exercise of lien
8) The company is dissolved and cease to exist

Share

A share has been defined as the interest

of the shareholder in the company
measured by a sum of money, for the
purposes of liability in the first place(To
pay for shares) and of interest in the
second(Voting right , dividend right), but
also consisting of a series of mutual
covenants entered into by all the
shareholders.
Key point in the definition are :
The share must be paid for (Liability)
Voting rights , dividend rights (Interest)

Types of share

Ordinary shares
The nominal value of the shares held represents
the maximum liability of a shareholder in a
limited liability company.
However, the actual liability of a shareholder is
the amount remaining unpaid on any shares
held. This difference arises in the following
circumstances. When companies issue shares
they may not require the full nominal value of
the shares to be paid at once. This allows the
company the possibility of raising further capital
from its members as It becomes necessary in
the future. The amount already paid to the
company is referred to as called-up capital.

Types of share

Ordinary shares
Any uncalled capital represents the amount of
potential liability. If the shares are fully paid
up then the shareholder has no further liability
towards meeting the companys debts.
In regard to return, shares enjoy an advantage
of other securities. If the company is
profitable, not only will they enjoy dividend
payments but the market value of their shares
will go up. On the other hand if the company
does not do well, they may well not receive
any payment and the value of their shares will
diminish.

Types of share
Preference shares
Preference shares represent a more secure form of
investment than the ordinary share.
The reason for this is that preference shares receive a
fixed rate of dividend before any payment is made
to the ordinary shareholders and usually they
enjoy priority over ordinary shares with regard to
repayment of capital. The actual rights enjoyed by
the preference will be stated in the companys articles
of association. Dividend rights in relation to preference
shares are usually cumulative, which means that a
failure to pay the dividend in one year has to be made
good in subsequent years. Although, as with ordinary
shares, the holders of preference shares are members
of the company, their voting rights are restricted to any
period when their dividends are in arrears.

Difference between Ordinary and Preference shares

Ordinary
shareholder

Preference
shareholder

Voting rights

full

None or restricted
by articles

Dividend rights

Not fixed
Paid after
preference
dividend
Entitled to Surplus
Assets
Paid after
Preference
nominal value

Fixed Dividend,
also Cumulative
Priority over other

Surplus on
winding up

Prior return on
nominal value,
Cannot participate
in Surplus Assets

Preference shares
1) The right is merely to receive the dividend at the specified
rate before any other dividend may be paid or declared. It is
not a right to compel the company to pay the dividend. The
company can decline to pay the dividend if it decides to
transfer available profits to reserves instead of using profits to
pay preference dividend.
2) The right to receive preference dividend is deemed to be
cumulative unless the contrary is stated.
3) If a company which has arrears of unpaid cumulative
preference dividend goes into the liquidation , the preference
shareholder cease to be entitled to the arrears unless:
a) A dividend has been declared though not yet paid when
liquidation commences.
b) The articles expressly provides that in the liquidation arrears
are to be paid in priority to return of capital to member.
4) Holders of preference shares have no entitlement to
participate in the additional dividend over and above the
specified rate.

Redeemable shares
Redeemable shares , which are
shares issued on terms that they
may be bought back by the company
either at a future specific date or at
shareholders or company options.

Treasury shares

Treasury shares are created when a public

listed company whose shares are listed on
the stock exchange , AIM or other
regulated market legitimately purchases
its own shares out of distributable profits.
Up to 10% of its shares can be held by the
company in treasury which means the
company can reissue them with out the
usual formalities. They can only be sold for
cash and the company can not exercise
the voting rights that are attached to
them.

Terminology

Issued share capital

Share Capital Actually been issued, released or
Sold by Company.
Called up (Unpaid Share Capital which have
been Called for from Shareholders but Not Yet
Paid)
Paid up
Shareholders have actually Paid on the Shares
Issued.
Uncalled
Unpaid Share Capital Not yet been Called from
from Shareholders- therefore remains Unpaid

Terminology

Statutory pre-emption rights

Issued to Existing Shareholders first
Usually offered at Discount to Current Market Value
Statutory Pre-Emption rights only apply where
Ordinary Shares are issued for cash.
Bonus issue
No New Funds raised
Issued to Existing Shareholders Only
Issued using some of the Company's Nondistributable Reserves to issue Fully Paid shares to
Existing S/Hs in proportion to their existing
Shareholding
Rights issue
Raise New Funds

Pre emption rights

Pre-emption rights refer to the rights of
existing shareholders to be offered any new
issue of shares before those shares can be
offered to non shareholders.
The purpose of pre-emption rights is to
ensure that existing shareholders have an
opportunity to maintain their interest in their
company by preventing their percentage
holding being reduced by the issue of shares
to new members. There is, of course, no
compulsion on the part of the shareholder to
take the shares if they do not wish to.

Pre emption rights

A company cannot offer new shares for
cash unless the existing shareholders have
been offered the chance to buy the shares
in proportion to their existing holding.
Section 565 specifically exempts preemption rights where non-cash
consideration is involved.
As it is not always cost effective to offer
new shares to all existing members, preemption rights can be waived by provision
in the articles of association or by a special
resolution of shareholders.

Right issue
A rights issue is the procedure through which
a company raises new capital by offering
new shares to its existing members.
As the shares are offered to the existing
shareholders in proportion to their existing
holding, it can be seen as respecting and
giving effect to the shareholders preemption rights.
As the purpose is to raise new capital for the
company, either because it is in difficulty, or
needs the additional capital to expand its
business, the shareholders who are offered
the new shares are required to pay for them.

Right issue
However, as an inducement to engage in the deal,
it is usual for the new shares to be offered at a
discount to the current market value of the existing
shares. It is essential to note that the discount is
not on the nominal value of the shares, which is
required by the rules of company law to be fullypaid as companies cannot issue shares at a
discount.
Once again there is no compulsion to participate in
the rights issue and often the rights to participate
in the allotment of new shares are usually tradable
securities in themselves. Consequently
shareholders who do not want to buy the new
shares themselves may sell the rights to a third
party.

Bonus issue
A bonus issue of shares, sometimes referred to as a scrip
issue or more accurately a capitalisation issue, is similar
to a rights issue in that existing members receive new
shares in proportion to their existing holdings, but it
differs in one essential point:
the individuals who receive the new shares usually do not
have to pay anything for them; they are received free.
However,
as already pointed out in (b) above, it is a strict rule of
company law that shares must be paid for and cannot be
issued at a discount. This apparent anomaly is explained
by the fact that the shares are paid for, but they are paid
for by the company itself, rather than the members. It is
perfectly possible for the company to issue partly paid-up
bonus share, in which case the recipients may have to
make some contribution in the future.

Bonus issue
In effect what the issue of bonus shares
amounts to is a capitalisation of the
companys reserves, some of which could
have been distributed to the members in
some other way such as dividends. This is
not the case with all reserves as some
non-distributable ones, such as the share
premium account and the capital
redemption reserve, may be used to fund
the bonus issue. Bonus issues must never
be funded from a companys ordinary
capital.

Class rights
Class rights are the rights attached to the
particular types of shares by the company
constitution.
1) Dividend
2) Return of capital
3) Voting
4) Right to remove or appoint director
) Shares which have different rights from
others are grouped together with other
shares carrying identical rights to form a
class

Variation of class rights

The holder of issued shares have vested
rights which can only be varied by using a
strict procedure. The standard procedures
is by special resolution passed by at least
three quarter of the vote cast at the
separate class meeting by written
consent.
Not a variation of class rights
1) To issue shares to new members
2) To subdivide the shares of another class
3) To return the capita to preference

To issues shares of same class to allottees

who are not already member of that class
White vs Bristol aeroplane co ltd
Fact :
Company made a Bonus issue of new ordinary
and preference shares to ONLY ordinary
shareholders.
The existing Pref-Shareholders objected on the
basis that this reduced their proportion of the
class of Pref-shares.
Held :
Bonus issue is not a variation of class rights since
the existing Pref-shareholders had the same
number of shares as before.

To subdivide shares of another class with the

incidental effect of increasing the voting
strength of that another class
Greenhalgh Vs Arderne cinemas ltd
Fact :
Company had 2 classes or Ordinary Shares, 50p and
10p, every share carrying 1 vote. Resolution was
passed to subdivide each 50p share into 5 shares of
10p thereby multiplying the votes of that class by 5.
Held :
Subdivision of shares is not a Variation of class rights.
Right of the Original 10p shares had not been varied
since they still had one vote per share as before.
It was the rights of 50p which was initially
compromised and not of 10p shares holders

To return capital to the holder of

preference
shares
House of fracer plc vs ACGE investments ltd
A company registered in Scotland passed a special resolution at an
EGM, attended by ordinary shareholders only, reducing its capital
by paying off the whole preference share capital of the company.
Its petition to the Court of Session for confirmation of reduction of
the capital was opposed by the holders of certain preference
shares on the ground, inter alia, that the failure of the company to
hold a class meeting of preference shareholders was in breach of
the requirement to that effect in art 12 of the company's articles of
association wherever the special rights attached to a class of
shares where 'modified, commuted, affected or dealt with'. The
Court of Session confirmed the reduction in capital.
The preference shareholders appealed.
Reports that the British House of Lords has decided that where a
company pays off and cancels cumulative preference shares in a
capital reduction, there is no need for a class meeting of the
preference shareholders to approve the measure

To create and issue a new class of

preference shares with priority over
existing class of ordinary shares

Re john smith's tadcaster brewery co

ltd

Issuing shares

Authority
Issue at discount
Issue at premium
Paying for shares public companies

Authority
Allotment of Shares
Shares are allocated to a person under Contract of
Allotment.
Once Allotted, holder is entered in the register of
members and become member of the company.
Authority
Director needs authority in order to allot shares.
Authority is given by :
the Articles, or
Passing an Ordinary Resolution.
The Authority must state :
the Maximum number of Shares to be allotted
the expiry date for the authority (Max 5 Yrs)

Public company allotment of shares

Public offer
Where the member of the public subscribe
for shares directly to the company.
Offer for sale
An offer to members of the public to apply
for shares based on information in a
prospectus.
Placing
Where shares are offered In a small number
of large blocks to person or institutions who
have previously agreed to purchase the
shares at predetermined price

Shares issued at discount

It is a long established rule that companies are not
permitted to issue shares for a consideration that is
less than the nominal value of the shares together with
any premium due. The strictness of this rule may be
seen in Ooregum Gold Mining Co of India v Roper
(1892).
In that case the shares in the company, although
nominally 1, were trading at 125p. In an honest
attempt to refinance the company, new 1 preference
shares were issued and credited with 75p already paid
(note the purchasers of the shares were actually
paying twice the market value of the ordinary shares).
When, however, the company subsequently went into
insolvent liquidation, the holders of the new shares
were required to pay a further 75p.

Shares issued at discount

If a company does enter into a contract to issue shares at
a discount it will not be able to enforce this against the
proposed allottee. However, anyone who takes shares
without paying the full value, plus any premium due, is
liable to pay the amount of the discount as unpaid share
capital, together with interest at 5% . Also any
subsequent holder of such a share, who was aware of the
original underpayment, will be liable to make good the
shortfall.
The reason for such rigour in relation to preventing the
issue of shares at a discount is the protection of the
companys creditors. Shareholders were seen to enjoy
the benefit of limited liability but that privilege was only
extended to them on the basis that they fully subscribed
to the companys capital. That capital being seen as a
creditor fund against which they could claim in the event
of a dispute.

Shares issued at discount

In private companies it is possible to

avoid the strict effect of this rule by
exchanging shares for property that is
overvalued . In public companies all such
non-cash consideration has to be valued.
It should also be noted that the above
only applies to shares. Debentures may
be issued at a discount. This is the case
even where they are convertible into
shares, as long as they do not carry an
immediate right to conversion.

Issuing shares at premium

It is possible, and not at all uncommon, for a
company to require prospective subscribers to pay
more than the nominal value of the shares they
subscribe for.
This is especially the case when the market value
of the existing shares are trading at above the
nominal value. In such circumstances the shares
are said to be issued at a premium, the premium
being the value received over and above the
nominal value of the shares. Section 610 CA 2006
provides that any such premium received must be
placed in a share premium account. The premium
obtained is regarded as equivalent to capital and,
as such, there are limitations on how the fund can
be used.

Issuing shares at premium

Section 610 provides that the share premium
account can be used for the following limited
purposes:
1) To write off the expenses, commission or discount
incurred in any issue of the shares in question;
2) To pay up bonus shares to be allotted as fully paid
to members.
) Share premium account to be used to finance the
payment due for any premium due on the
redemption of redeemable shares.
) Applying the rules relating to capital maintenance,
it follows that what the share premium account
cannot be used for is to pay dividends to the
shareholders.

Issuing shares at premium

The rules relating to share premiums

apply whether the issue is for cash or
otherwise and so a share premium
account can arise where shares are
issued in exchange for property which is
worth more than the par value of the
shares.

Paying for the shares (Private

companies)
May Issue shares for Non-Cash
Consideration
Court will Interfere with the
Valuation only if :
There is a Fraud, or
The Consideration is Past

Paying for the shares (Public companies)

S584 (Subscribers to the Memorandum must pay
cash for their subscription Shares)
S585 (Payment for shares must NOT be in the
form of Work or Services.)
S586 (Shares CANNOT be allotted until at least
One-Quarter of their Nominal Value and the
Whole of any Premium have been Paid.)
S587 (NON-CASH Consideration must be
received within 5 yrs.)
S593
NON-CASH Consideration must be independently
valued and reported on by a person Qualified to
be the company's Authors

Question
Explain the meaning of the following:
(a) paid-up capital; (3 marks)
(b) the issue of shares at a premium;
(3 marks)
(c) the prohibition on the issue of
shares at a discount. (4 marks)
(Total: 10 marks)

Question
Worthwhile plc has issued share capital of $100,000
divided into 60,000 ordinary $1 shares and 40,000
$1 10% non-participating preference shares. The
preference shares carry a right to both preferential
payment of dividend and repayment of capital on a
winding up. The directors wish to make a new issue
of 30,000 ordinary shares and 20,000 preference
shares on the same terms as the existing shares.
Required:
Advise Beatrice, the managing director, on the
procedures to be followed before the directors
can allot the new share issue.

Answer
The directors may only allot new
shares if either they are authorized
by the company in general meeting
or by the companys articles: S551
CA06. Authority to allot must include
the maximum number of shares to
be allotted and must be dated.
Authority to allot cannot last more
than five years, but may be renewed.
Authority to allot may be general or

Question

Alfred has recently inherited a number of preference

shares in the company for which you are the
company secretary. At the last annual general
meeting it was decided by special resolution to
increase the voting power of ordinary shareholders
by giving each ordinary share an extra vote.
Required:
Explain to Alfred:
(a) What is the procedure for the alteration of
class rights when there is no reference to
variation in the articles of association? (3
marks)
(b) Whether he can take steps to reverse the
decision to increase the powers of the ordinary
shareholders? (7 marks)

Answer
The procedure for altering class rights is set out in s.630
CA 2006. The precise procedure depends upon whether there
is a pre-established procedure for altering the rights.
(i)Where the articles set out a procedure for varying
class rights, then that procedure should be followed.
(ii) If there is no specified procedure within the Articles of
Association then, under s.630 CA 2006, variation needs a
special resolution or written consent from the holders of 75%
in nominal value of the shares of that class.
Any alteration of class rights is subject to challenge in the
courts. To raise such a challenge any objectors must:

hold no less than 15% of the issued shares in the class in
question

not have voted in favor of the alteration; and

apply to the court within 21 days of the consent being
given to the alteration
The court has the power to either confirm the alteration or to
cancel it as unfairly prejudicial.

Answer
In Greenhalgh v Arderne Cinemas (1946) it was held that the
subdivision of 50 pence shares which had previously carried
one vote each, into five 10 pence shares which each carried
one vote, did not vary the rights of another class of shares.
Note that, although strictly speaking such an alteration did not
affect the rights held by the other shares, it did alter their real
voting power. Also in House of Fraser plc v ACGE Investments
Ltd (1987) it was held that the return of all the capital held in
the form of preference shares amounted to a total extinction of
their rights. It could not therefore be seen as a variation of
those rights and the procedure now contained in s.630 CA
2006 did not have to be followed.
Alfreds problem in this situation is that the variation has been
to the ordinary shares and not preference shares. So Alfred
has not participated in the shareholders meeting to alter the
voting rights. Unless there were provisions in the articles for
alteration to be approved by general meeting, Alfred will have
no recourse to the companys internal organization