ACCA Class notes compiled by Njihia Kaburu CAPITAL AND THE FINANCING OF COMPANIES 1.

Share capital
a) Examine the different meanings of capital. (a) b) Illustrate the difference between various classes of shares. (a) c) Explain the procedure for altering class rights. (a)

MEMBERS This term denotes a person who has agreed to become a member and whose name has been entered in the register of members. This may occur by: subscription to the memorandum; applying for shares; the presentation to the company of a transfer of shares to the prospective member; applying as a personal representative of a deceased member or a trustee of a bankrupt. Subscriber shares Subscribers to the memorandum are assumed to have agreed to become members and on incorporation, their names should be entered into the members register. Other persons may acquire shares and become members by; o Applying and being allotted shares. o Presenting to the company for registration a transfer of shares to them. o Applying as personal representatives or trustees of a deceased or bankrupt member. Cessation of membership There are eight ways in which one may cease to be a member; By transferring all shares to another & the transfer is registered. Death of a member. Shares of a bankrupt being registered in trustees name. A minor repudiates his shares. Trustee of a bankrupt member disclaims his shares. Company forfeits or accepts the surrender of shares. Company sells the shares in exercise of a lien. Company is dissolved and ceases to exist.

Numbers of members Public companies have minimum requirement of 2 members with private being one member. However for the single member private companies, there are certain rules; The sole member/director must not be the secretary. The register of members must contain a statement that theres only one member and give his address. Articles are automatically amended to provide for quorum of one. All resolutions must be in writing. All contracts between company and sole member must be in writing unless its in the usual course of business or its on the companys usual commercial terms. A written record of all decisions made by the member must be given to the company. SHARE CAPITAL A share is an interest which the shareholder has got in the company which can be measured in terms of money for the purpose of determining his liability to the company in the first place and his interest in the company in the second place i.e. his right to demand dividend. It is a bundle of rights and obligations! (Kaplan) It s a transferable form of property! carrying rights and obligations! by which the interest of a member in the company limited by shares is measured ("pp) #he best definition of the term share is that given by $arwell %. in the case of Borlands Trustee v. Steel [1901] Ch. D 279 stated &a share is the interest of a member in a company measured by a sum of money for the purpose of liability in the first place and of interest in the second and also consisting of a series of mutual covenants entered into by all the shareholders among themselves in accordance with Section '' of the (ompanies Act.) #he contract contained in the Articles of Association is one of the original incidents of a share. A share is therefore not a sum of money

ACCA Class notes compiled by Njihia Kaburu but an abstract interest measured by a sum of money and made up of various rights contained in a contract of membership. Key points of the definition It s a form of personal property! carrying rights and obligations. A share is a transferable property. It gives proportionate entitlement to dividends! votes and any return of capital (interest). *ach share must be paid for +liability . *ach share must be given a face value and should not be sold below that value. It s a form of a bargain (mutual covenants) A shareholder is a member,owner of the company and therefore has voting rights! depending on the class of shares held. Types of Shares a) Preference Shares #hese are those shares whose interest rate is fi-ed! they are given the preference over ordinary shares for the payment of dividend and return of capital at the dissolution of the company. (Kaplan) #hey are shares carrying one or more rights such as fi-ed rate of dividend! or preference claim to any company profits available for distribution. ("pp) .uslim companies however! do not issue preference shares because the fi-ed amount to be paid is considered as ri a which is forbidden under sharia la!. #hey are further classified into the following/ "##u$ulative preferen#e share 0ividend earned or to be paid in one year which is not claimed will be carried forward to the ne-t year automatically. If the dividend was fi-ed at 12 and is not paid in the current year! it s carried forward and paid at 1'2 in the ne-t year. ' %on&a##u$ulative preferen#e shares Are shares on which dividend is fi-ed but will not accumulate. 'edee$a le preferen#e shares Are shares whose dividend is fi-ed but are issued for a specific period of time. 0uring that period! the company can redeem these shares. (rredee$a le preferen#e shares Are shares which once issued cannot be redeemed unless the company is dissolved. )arti#ipative preferen#e shares Are shares where the dividend is fi-ed but once all the shareholders and creditors are paid! they can participate in the residual profit of the company together with the ordinary shareholder. #he dividend of preference shareholders is fi-ed but the following points should be remembered as regards to priority/ 3ayment of dividend is entirely at the discretion of the directors and if the directors decide to transfer the whole profit made by the company to reserve capital! then nobody can 4uestion the decision. 3ayment of dividend to preference shareholders only becomes due once the dividend has been recommended and approved and the date of payment is due. If the dividend was not declared and the company goes into li4uidation! even preference shareholders will not be paid. If it was declared before the company went into li4uidation and was not paid! then the right will not be lost. b) Ordinary shares (equity) *4uity is the residual interest in assets of the company after deducting all its liabilities. issued ordinary share capital plus reserves! statutory or otherwise! which represents investment in the company by the ordinary shareholders. *4uity share capital is however the company s issued share capital less capital which carries preferential rights.

5rdinary shares are shares which entitle the holders to the remaining divisible profits (residual) after prior interests have been satisfied. #hese are the most common types of shares. #he rate of dividend to be paid is not fi-ed! but normally! such shares carry full voting rights which enable the shareholders to attend the meetings! appoint directors and auditors of the company etc. c) Deferred shares #hese are few in number and are issued to the founders of the company. Amount of dividend is not fi-ed and the shareholders are the last people to be paid. #hese people normally are directors of the company and if the company ma6es a huge profit! they may decide to pay themselves dividend at a higher percentage than the rest of the shareholders. Share Capital Terminolo y "uthori*ed share #apital #his refers to the type! class! number and amount of the shares which a company may issue! as empowered by its memorandum of association. Also called nominal share capital or registered share capital. (ssued share #apital #his refers to the type! class! number and amount of the shares held by the shareholders. A company needs not issue all its shares at once! if it retains part of it! its then called unissued share capital. Called up share #apital #he amount which the company has re4uired shareholders to pay on the issued shares! now or in future. )aid up share #apital Amount that shareholders have paid on the shares issued after call7up. CLASS RIGHTS #hese are the special rights attached to each class of shares such as dividend rights! distribution of capital on winding up! voting etc. #hese rights may be allocated to a particular class of shares by the Articles of ?

ACCA Class notes compiled by Njihia Kaburu Association or may be created by a shareholder agreement. Any share with different rights is grouped with other shares carrying identical rights to form a class. Although the (ompanies Act recogni8es the e-istence of class of shareholders! it does not define the term +class the best definition is found in the case of Soverei+n ,ife "ssuran#e Co. v. Dodd -1.92/ 2 0B 172 In that case "owen 9.%. stated as follows: & The !ord Class is va+ue it $ust e #onfined to those persons !hose ri+hts are not dissi$ilar as to $a3e it i$possi le for the$ to #on#ert to+ether !ith a vie! to their #o$$on interest.4 Ho! "an they #e $arie%& ;ariation of class rights is an alteration in the position of shareholders with regard to those rights and duties which they have by virtue of their shares. #hey grant rights to specific groups of shares only. #o ensure that those rights are not amended by a ma<ority vote of other shareholders! the law has established a procedure for alteration of these rights. #he procedure for variation is two7fold/ If the Articles of Association provide an alteration procedure! this must be strictly followed. If no procedures are provided for! variation needs an e-tra7ordinary resolution or written consent of =>2 in nominal value of the class7 Section 1?7 (ompanies Act. Minority prote"tion @nder section 1?? of (A! the holders of 1>2 of the nominal value of that class! who did not consent to the variation! may as6 the court to cancel the variation within '1 days of the passing of the resolution. #he court may confirm or cancel the variation. Aowever! it will only cancel the variation if the petitioner proves it is unfairly pre<udicial. #he courts however will create a distinction between/

o A variation that affects the value! en<oyment or power derived from the rights. o A variation that changes the rights themselves. #he courts will only intervene in the latter case/ 5hite v Bristol "eroplane Co -1912/ "onus issue is not a variation of class rights! even though its effect may be to dilute the voting rights of the e-isting shareholders. 6reenhal+h v "rderne Cine$as ,td -1910/ #he sub7division of shares is not a variation of class rights. ISS'ING( ALLOTING SHARES Allotment) this is the allocati4 on to a person of a certain number of shares under a contract of allotment. 5nce allotted! his details are entered in the members register and the holder becomes a member of the company i.e. he ac4uires an unconditional right to be entered in the register (s=?B). #his happens when the board considers and formally resolves to allot the shares. If directors impose a condition! the shares only become fully allotted on meeting the condition. Issue: this happens at a later stage when the allotee receives a letter of allotment or share certificate issued by the company as evidence of his title. #here are two basic methods of issuing shares/ onus issue In order to capitali8e some reserves! new fully paid shares may be offered to e-isting shareholders in proportion to the shareholdings. #hese don t raise any new funds. Articles usually give powers to directors to apply reserves to paying up unisued shares and allotting them to as bonus shares to members.

ACCA Class notes compiled by Njihia Kaburu It s also called capitali8ation issue or scrip issue. #hey re4uire an ordinary resolution. $urther! sufficient authori8ed capital must be available to ma6e the issue/ if not it must eb increased.

!i"hts issue #his is a right given to a shareholder to subscribe for further shares in the company! usually pro rata to his,her e-isting holding in the company s shares. If a company proposes to allot shares! these new shares are first offered to e-isting shareholders in proportion to the shareholdings. #hey raise new funds. #he offer must be made in writing! specifying a period of not less than '1 days within which to accept. Shares are usually offered at discount to mar6et value and not at discount to nominal value. A*thority to iss*e shares #he directors need authority in order to allot shares. #hese may be given/ "y articles "y passing an ordinary resolution. Signed copy must be sent to registrar in 1> days. #he authority must state/ #he ma-imum number of shares to be allotted. #he e-piry date for the authority (ma- > years). 0irectors may have been given general authority to allot without further reference to a general meeting. Aowever! a general meeting must be called if/ Co authority has been given in advance. Authority is sub<ect to certain conditions. Authority has lapsed, has been used up.

ACCA Class notes compiled by Njihia Kaburu #he directors of a private company with only one class of shares may allot shares of that class without further authority unless prohibited by the articles. S>>E. If the directors have allotted shares without authority! the allotment will be valid but the directors are punishable by fine. Iss*es at Dis"o*nt As a general rule! shares cannot be issued at a discount on their nominal value s>BE. It s only in rights issue where shares are issued at discount but also then! discount from the mar6et price and not their nominal value. If this rule is breached! the issue is still valid! but the allotee must pay7up the discount plus interest. Aowever! the company may issue partly paid up shares! with public having minimum of '>2 set. $urther! the price is to be paid with money or money s worth! including goodwill and 6now7how. #he company may in alternate accept a non7cash consideration! if it s of sufficient value. 0ebentures can however be issued at discount if they don t have the immediate right to convert to shares. Iss*e at premi*m Shares can however be issued at premium i.e. higher price than the nominal value. #his may be paid in the form of cash or some other assets. Section 11E re4uires that such premiums be deposited to a share premium account! which can only be used for/ Friting off e-penses of the issue of those shares. Friting off any commission issued on the sale of those shares. Issuing bonus shares. Pri$ate "ompanies $or these! shares are not issued to the public. Any person wishing to purchase shares applies directly to the company directors! after which they are allotted and issued. #hey may issue shares for non7cash consideration. Aowever! in such cases! independent valuation must be done! and the valuer s report is final. > #he courts will only interfere with the valuation if there is fraud or the consideration is +illusory! past or patently inade4uate . P*#li" "ompanies #here are additional rules in the companies act in respect of issue of shares as follows/ S>BD7 subscribers to the memorandum must pay cash for their subscription shares. S>B>7 payment of shares must not be in the form of wor6 or services. S>B17 shares cannot be allotted until at least one 4uarter of their nominal value and the whole of any premium have been paid. S>B=7 Con7cash consideration must be received within > years. Con7cash consideration must be independently valued and reported on by a person 4ualified to be the company auditor. COMPILED +,) Fran"is N-ihia .a#*r*/ IMIS 0Dip/12 LL/+ 0Hons/12 LL/M 0"ont1/ Le"t*rer2 Osh!al Colle e/