Class 7: Share Capital,

Transactions and Meetings

Read Ch 11 and 12 of Australian
Corporate Law 6th ed, 2018)
 Share capital, transactions and
meetings
On completion of this topic in Class 7 you should be
able to:
1. Identify the main types/classes of shares
2. Discuss the differences between ordinary and preference
shares
3. Discuss the differences between various types of preference
shares
4. Discuss the protection offered against improper variation of
class rights
5. Understand the concept of par value and maintenance of capital
rule and its relevance in contemporary company law (impact of
1998 reforms)
6. Understand the manner in which share capital transactions can
be entered into and the consequences of breach
7. Discuss the law on shareholder meetings
 Main sources of co finance
• Share capital (made up of money or assets
contributed to co by members)
• Debt finance (money lent to co in return for
interest and repayment of principal; overdraft;
promissory notes; debentures etc)
• Trade finance (where co has received goods in
advance of paying for them; or received
payment in advance of delivering goods)
• Retained earnings (from previous periods that
have not been distributed to members; together
with trade finance, an important source of
working capital for many co’s)

TABL 2741 Class 7 (AH) 3

 Factors influencing choice
• Ratio of debt to equity (gearing ratio)
• Relative costs of debt and equity
• Implications (tax; control; repayment etc)
arising from differences between share
capital and debt finance

TABL 2741 Class 7 (AH) 4

 Features of equity (shares):
• Co pays distribution (dividends) only if
recommended by directors;
• No expectation of repayment of principal
to shareholders during co’s life;
• Shareholders entitled to repayment of
principle during winding up only after all
other claims been satisfied; entitled to
share in surplus assets on a winding up;
• Shareholders have voting/control rights
(ordinary shares)

TABL 2741 Class 7 (AH) 5

 Features of debt:
• Co must pay interest at agreed rates
(irrespective of profits generated); required to
repay principal;
• Lender has priority over shareholders for
repayment of principal on winding up;
• Lender has no right to share in surplus assets
on winding up
• Lender is not a member of the co (no
membership rights, such as voting);
• Loan capital provided is for short/finite term
• Interest paid for debt finance generally tax
deductible for the co
TABL 2741 Class 7 (AH) 6
 Overview: Shares
– Nature of shares
– Rules relating to shares
– Classes of shares
– Variation of class rights
– Share capital transactions

TABL 2741 Class 7 (AH) 7

 Nature of shares
• Shares are personal property of an
intangible nature (chose in action).
• Member’s main rights are:
(i) distribution rights: (dividend;
repayment of principal and to share in
any surplus assets on winding up)
and (ii) control rights: (over
management)
Co’s rights: enforce contract
Read Ch 11 of Australian Corporate Law 6th
ed, 2018) at pp 335-316
TABL 2741 Class 7 (AH) 8
 Members’ liability to contribute share capital
• Full consideration for issue of shares may
be paid upon application (fully paid
shares); some or all of the consideration
may be payable in future (as in partly paid
shares), enforceable by calls made by
directors during the life of co: s 254M(1).
• See Brisconnections Case Study on the
liabilities flowing from partly-paid securities -
Read Ch 11 Australian Corporate Law 6th ed,
2018) at pp 356-358.

TABL 2741 Class 7 (AH) 9

 Brisconnections
• Doubts about the business model in
Brisconnections caused the company’s
securities to sink to the lowest possible
price on the ASX to $0.001.
• At this “cheap” price, many retail investors
bought up thousands of units
• Their financial problems arose from the
fact that each of these securities were
partly paid installment securities

TABL 2741 Class 7 (AH) 10

 Brisconnections
• Many unsophisticated retail investors bought
securities issued at a total price of $3 with only
$1 being paid on issue, [and two $1 installments
to be made in the future].
• investors, in effect, were buying a debt of $2 per
security [as there were still 2 remaining
installments due to be paid].
• investors were buying into a debt of several
hundred thousand dollars and faced bankruptcy
if they could not pay the installments when due.
• Some rescued: Macquarie Bank (as a joint
under-writer) offered to buy the units held by
small retail investors who held 50,000 units or
less.
TABL 2741 Class 7 (AH) 11
 Issue of shares for non-cash consideration
• Where shares are issued for non-cash
consideration, the agreed value of the
consideration is the capital represented by
those shares.
• When will the value which the co has
placed upon the non-cash consideration
for its shares be reviewed?
• Question discussed in Re Wragg Ltd
[1897] 1 Ch 796

TABL 2741 Class 7 (AH) 12

 Re Wragg Ltd held:
‘unless the agreement pursuant to which
shares were to be paid for in property or
services could be impeached for fraud, the
value of the property or services could not
be inquired into … the value at which the
co is content to accept the property must
be treated as its value as between itself
and the shareholder whose liability is
discharged …’

TABL 2741 Class 7 (AH) 13

 Types of shares
s 254B CA allows for different types of
shares (for ex, ordinary and preference
shares)
Typically, rights differ i.r.o:
– entitlement to dividends
– priority i.r.o payment of dividends
– voting rights
– priority in repayment of capital on winding up
– right to share in surplus assets on winding up
TABL 2741 Class 7 (AH) 14
 Types of shares

➢Ordinary shares make up most of a co’s

capital.
➢Ordinary shareholders usually enjoy full voting
rights.
➢Ordinary shareholders receive their dividends
(if declared) before deferred shareholders but
after preference shareholders.
➢Preference shares entitle the holder to some
preferential rights, such payment of dividends
ahead of ordinary shareholders.
➢Preference shareholders have limited voting
rights
TABL 2741 Class 7 (AH) 15
 Types of preference shares
Several types:
• cumulative preference shares;
• non-cumulative preference shares;
• participating preference shares and
• redeemable preference shares – note s
254(k)
• Read Ch 11 of Australian Corporate
Law 6th ed, 2018) at pp 338-339
TABL 2741 Class 7 (AH) 16
 Types of preference shares
Preference shares has characteristics of both debt
(fixed dividend) and equity (potential appreciation)
Several types:
• cumulative preference shares – investor entitled to
claim forgone dividends in the future;
• non-cumulative preference shares – investor does not
claim any of forgone dividends in the future;

• participating preference shares - right to receive

normally specified rate as well as extra dividend based
on predetermined condition (such as dividend received
by ordinary shareholders exceeds a specified per share
amount).

TABL 2741 Class 7 (AH) 17

• redeemable preference shares –
either at the co’s option or that of
the holder, at a fixed time or on the
happening of a certain event: s
254A(3);
• Note sources of redemption in 254(k) for creditor
protection.

TABL 2741 Class 7 (AH) 18

 Variation of class rights
CA protects rights attaching to shares (s
246B). Co must follow procedure spelt in its
constitution. If it lacks a constitution or if it’s
silent, then must follow procedure in s 246B(2):
➢ a special resolution by the co; and
➢ a special resolution passed a meeting of the holders
of the affected class; or
➢ The written consent of members with at least 75% of
the votes of the affected class is required.

TABL 2741 Class 7 (AH) 19

 Remedies for non-compliance
• affected members can apply for a statutory
junction under s 1324 to enforce compliance;
• if some members of a class disagree with a
variation, s 246D allows court application for
cancellation or modification. Court application
must be made by members with at least 10% of
the votes of the relevant class;
• a single member of the affected class can rely
on the oppression remedy under s 232 if the
variation is oppressive.
TABL 2741 Class 7 (AH) 20
 Par value: position post 1/7/98
CLRA 1998 has abolished the concept of par
value shares (s 254C).
Concept of par value abolished because it:
➢ mislead some investors and creditors by creating
confusion as to the true value of the shares, especially
when par value is different to market value.
➢ resulted in complex accounting procedures.
➢ has less commercial significance today. Creditors are
more interested in the company’s cash flow and ability
to pay debts than in the par value of a company’s
issued capital.
TABL 2741 Class 7 (AH) 21
 Consequences of abolition
• the concept of authorised share capital has been
abolished
• the concept of issuing shares at a premium or
discount has been abolished
• Co’s may issue shares at any value that it chooses
• All consideration received for the shares forms part
of the company’s share capital
• The issued capital of a company is of greater
significance to creditors.

TABL 2741 Class 7 (AH) 22

 Capital maintenance doctrine
Exists for creditor protection - recognized by Lord
Herschell in Trevor v Whitworth (1887) 12 App Cas 409:

“ The capital may, no doubt, be diminished by expenditure

upon and reasonably incidental to all the objects specified.
A part of that may be lost in carrying on the business
operations authorised. Of this all persons trusting in the
company are aware and take the risk. But I think they
have a right to rely, and were intended by the
legislature to have a right to rely, on the capital
remaining undiminished by any expenditure outside
these limits or by the return of any part of it to
shareholders.”
Read Ch 11 of Australian Corporate Law 6h ed, 2018) at pp 340-
342 TABL 2741 Class 7 (AH) 23
 Share capital transactions
CLRA 1998 has relaxed statutory
restrictions on share capital
transactions
• but still provides for creditor
protection through insolvent trading
provisions under s 588G.
Read Ch 11 of Australian Corporate Law 6th
ed, 2018) at pp 342-351.

TABL 2741 Class 7 (AH) 24

 Permitted share capital
transactions
– Self-acquisitions
– Share capital reductions
– Share buy-backs
– Financial assistance

TABL 2741 Class 7 (AH) 25

Share capital transactions: Modern
Approach

Restrictions on share capital

transactions and the impact of the
doctrine on maintenance of capital have
been relaxed (under reforms in CLRA
1998).
Creditor protection now linked to s
588G.
TABL 2741 Class 7 (AH) 26
 Reduction of Capital
A reduction of capital may occur, for
example, when the company:
➢ extinguishes or reduces uncalled
capital;
➢ cancels paid-up capital that is lost or
not represented by available assets; or
➢ pays off capital that is in excess of its
needs.
TABL 2741 Class 7 (AH) 27
 Reduction of capital
Section 256B(1) imposes 3 pre-requisites
for a reduction of capital - can be
reduced if it is:
➢ fair and reasonable to the shareholders as a
whole (consideration of price is relevant); and
➢ does not materially prejudice the co’s ability to
pay its creditors; and
➢ is approved by shareholders (the need for an
ordinary or special resolution is dependent on
the type of reduction which may be either an
equal reduction or a selective reduction).
TABL 2741 Class 7 (AH) 28
 Exceptions
Shareholder approval for capital reduction is
not required when, for example:
➢ Undertaken by unlimited companies: [s258A];
➢ The co redeems redeemable preference
shares out of the proceeds of a new issue of
shares made for this purpose: [s258E(1)]; and
➢ The co cancels any paid-up share capital that
is lost or is not represented by available
assets: [s258F].

TABL 2741 Class 7 (AH) 29

Consequences of non-compliance
• It does not affect the validity of the reduction, nor
is the company guilty of an offence [s256D(2)].
• Any person involved in a co’s breach may be liable
under the civil penalty provisions [found in
Pt.9.4B].
• ASIC, creditor or any other person affected by the
contravention may apply for a statutory injunction
under s 1324 to restrain an unlawful reduction of
capital.
• If co becomes insolvent as result of reduction in
capital, directors at risk of liability to compensate
co for insolvent trading [s588G].
TABL 2741 Class 7 (AH) 30
 Share buy-backs
Reasons?
5 types of buy-backs permitted
under the CA: Ch 2J
➢ equal access schemes;
➢ selective buy-backs;
➢ on market buy backs;
➢ employee share schemes and
➢ minimum holding buy-backs.
TABL 2741 Class 7 (AH) 31
• As a general rule, a co may buy back up to 10 per cent
of their shares within a 12-month period (known as the
‘10/12 rule’).

• These shares are then cancelled.

Consequences of breach

– Subject to civil penalty provisions

– Directors face personal liability for insolvent trading

should the company become insolvent after the buy-
back activity [s588G]

– Subject to s 1324 (statutory injunction) restraint

TABL 2741 Class 7 (AH) 32

 Financial assistance
S 260A: Companies are only allowed
to financially assist a person to
acquire shares in the company if:
➢ It does not materially prejudice the
interests of the co, shareholders or co’s
ability to pay creditors; or
➢ The assistance is approved by
shareholders under s 260B; or
➢ The assistance is exempted under s 260C

TABL 2741 Class 7 (AH) 33

Meaning of financial assistance
Includes the company
• Making a loan
• Making a gift
• Giving security over the co’s assets; and
• Releasing a debt owed to the co

TABL 2741 Class 7 (AH) 34

Consequences of non-compliance
•Breach of s 260A does not make the
company guilty of an offence.
•Any person involved in the breach is
subject to a civil penalty offence (s 260D).
•Risk of personal liability for directors should
co become insolvent thereafter and
continues to trade: s 588G
•Subject to s 1324 (statutory injunction)
restraint
TABL 2741 Class 7 (AH) 35
 Members Meetings

Read Ch 12 of Australian Corporate Law 6th

ed, 2018) at pp 371 – 382.
 Members Meetings
• How do members make decisions?
• Types of meetings
• Procedure (notice; quorum; resolution)
• Role of Chairperson
• Remedies for procedural defects

TABL 2741 Class 7 (AH) 37

 Types of Co Meetings
• Annual General Meeting (AGM)
– Compulsory for public co’s: s 250N(2); must be held
within 5 months after end of co’s financial reporting
year (or 18 months after its registration).
• Extraordinary Members Meeting (EGM)
– Can be called urgently by members (written request
to directors) holding at least 5% of the votes: s 249D -
if called by members for a proper purpose and
directors do not do so within 21 days, members can
hold the meeting at company’s expense: s 249E
Members General Meeting at Request
– Can be requested in writing to directors by members
holding at least 5% of the votes: s 249 F. If members
hold the meeting themselves, they must pay the
expenses of calling and holding the meeting.

TABL 2741 Class 7 (AH) 38

 Purpose of AGM: s 250R
Held to consider:
• Co’s annual reports (financial report; directors
report; auditors report);
• Election of directors;
• Appointment of auditors; and
• Auditor’s remuneration
Also provides chance for members to ask
questions on co’s performance. Chair must give
reasonable opportunity for members to ask
questions: s 250S.
TABL 2741 Class 7 (AH) 39
 Company Meetings
– Notice of meetings
– Proceedings at meetings
• Quorum
• Chairing the meeting
• Voting
• Proxies
– Resolutions
– Minutes
– Irregularities

TABL 2741 Class 7 (AH) 40

 Notice: requirements
• Written notice must be give to each member
entitled to vote; can be given personally, by post,
fax or email
• How much notice? For listed co’s, minimum
notice period of 28 days: s 249HA
• S 249L states all notices must set out:
– Place, date and time of meeting
– General nature of the meeting’s business (agenda)
– Text of special resolution; and
– Details on how to appoint a proxy

TABL 2741 Class 7 (AH) 41

 Quorum: requirements
• Is the minimum number of people who
must attend meeting for it to be valid;
• Quorum is fixed in co’s internal rules; if the
replaceable rule in s 249T applies, then at
least 2 persons are required;
• If there is no quorum, chairperson can
adjourn (stop) the meeting and start again
at a later date.

TABL 2741 Class 7 (AH) 42

 Voting and proxies
• Voting can be done in 1 of 2 ways - normally by a show
of hands or by a poll;
• A formal poll (is an actual count of all votes cast) can be
requested: s 250J;
• Poll may be demanded by chairperson or by at least 5
members entitled to vote, or by members with 5% of the
votes: s 250L.
• If a member cannot attend the meeting, they may
appoint other person to represent them and to vote their
shares – known as a proxy;
• Members in a public co have a right to appoint a proxy
(doesn’t have to be a member): s 249X
• In proprietary co’s, the right to appoint depends on the
replaceable rule; s 249X allows for such appointment
• Proxies have the same rights at members at a meeting
(can speak, vote and join in the demand for a poll)

TABL 2741 Class 7 (AH) 43

 Resolutions
• 3 types:
(1) Ordinary resolution – requires a simple
majority (more than 50% of the votes cast)
(2) Special resolution – requires a majority
of at least 75% of the votes cast; required
under CA for:
– Variation of class rights [s 246B];
– Changing co’s constitution [s 136];
– Changing co’s name or type [ss 157; 162];
– Resolution to wind up the co [ss 461; 491]

TABL 2741 Class 7 (AH) 44

 Resolutions
(3) Signed resolution – can be passed by
members in proprietary co’s without the
need to hold a formal meeting by
circulating the proposed resolution and
having it signed by each member: s 249A.
• A co with only one member may pass a
resolution by signing a written copy: s
249B.

TABL 2741 Class 7 (AH) 45

 Doctrine of unanimous consent
• Members of a co are bound by decisions
on which they all agree – even when the
formalities requires for a general meeting
are not complied with.
• Means that a decision reached informally
(but unanimously) by all the members will
be treated as a binding and effective
decision.
• Need evidence/proof of intent [not easy];
• Most likely to arise in closely held Pty co
TABL 2741 Class 7 (AH) 46
 Minutes
• Are records of the meeting and verifies
what business was discussed
• All co’s must keep minutes as a record of
the meeting
• Minutes of a meeting must be entered into
a minute book within 1 month, and can be
signed by the Chairperson at the next
meeting: s 251A
• See James Hardie litigation for significance of minutes:
ASIC v Macdonald (No 11) 2009; Hellicar v ASIC (2012)

TABL 2741 Class 7 (AH) 47

 Chairperson
• Controls the progress of the meeting and keeps
order (exercises procedural control);
• Invites questions from members and decides
who is to speak and for how long;
• Counts votes and declares resolutions (whether
carried/passed or not);
• Declares the meeting closed;
• Chair must give reasonable opportunity for
members to ask questions: s 250S.
• Normally elected as chair by other directors

TABL 2741 Class 7 (AH) 48

 Procedural defects: s 1322
• For eg, defect in the notice or failure to get a
quorum;
• Section 1322 gives court discretion to validate
such meetings which has a defect in procedure;
• Thus, a defective meeting with procedural
irregularity may be cured under s 1322 if caused
honestly [ie. ‘innocent error’];
• Courts take pragmatic/broad approach to
remedial power under s 1322(4): Weinstock v
Beck [2013] HCA 14
Note: Court will not, however, validate defective
meeting if it causes substantial injustice to any
person: s 1322(6)
TABL 2741 Class 7 (AH) 49
 FUTURE OF THE AGM
• Unlike past, in modern technological world, together with
introduction of continuous disclosure laws for public co,
AGM today is now only but one of the means of
informing and engaging with shareholders.
• On one view, AGM no longer serves the purpose for
which originally designed – ie. for shareholders to
interact and discuss issues through a physical meeting
at a designated location. Some view the AGM, in modern
times, as just a compliance exercise.
• Others still view the AGM as the primary forum for
engagement with co’s, despite declining attendance
numbers.

TABL 2741 Class 7 (AH) 50

 FUTURE OF THE AGM
• To ensure AGM remains responsive to needs of shareholders and
stakeholders in the co and continues to serve its intended purpose,
in 2011 the Government asked Corporations and Markets Advisory
Committee (CAMAC) to assess the role of the AGM
• CAMAC tasked with informing the Government on:
– The future of AGM’s in Australia
– The risks and opportunities presented by advancements in
technology, in the context of maintaining the ongoing relevance
and efficacy of the AGM
– The challenges posted to the structure of the AGM by
globalisation
• (CAMAC), 2012, The AGM and Shareholder Engagement
Discussion Paper, www.camac.gov.au
• CAMAC called for public submissions [No Report; CAMAC
abolished]

TABL 2741 Class 7 (AH) 51