F4​​

-​​
Capital​​and​​the​​
Financing​​
of​​
Companies
Capital​​Maintenance​​
and​​
Dividend​​
Law

KEY​​
APPROACH​​
TO​​
CLASSIFICATION​​
OF​​
SHARES:
 
 
Types​​of​​maintenance:

1) Debt - company’s capital raised by loans whether through long-term or short-term loans. Key characteristics
are:

- Loan​​has​​interest​​
rate​​
attached​​
to​​it;
- Payment​​is​​made​​
in​​regular​​instalments;
- Loan​​has​​fixed​​date​​
for​​
final​​
payment;
- Holders​​are​​creditors,​​
not​​members.

2) Equity - capital raised by selling shares or by keeping profits earned for the purpose of expanding the
business.

3) Share​​capital​​​
-​​capital​​
raised​​by​​issuing​​
shares​​in​​return​​for​​cash.​​Key​​characteristics:

- Amount​​raised​​
can​​change;
- Holders​​=​​Shareholders.

Companies can create different classes of shares by setting out those classes and the rights attached to them in
the​​company’s​​articles.

If only one class is specified it is automatically viewed as ordinary shares and will have equal rights. Shares of
different​​classes​​may​​have​​
equal​​rights,​​but​​
different​​voting/dividend/capital​​rights.

Reasons​​for​​creating​​different​​classes​​
of​​
shares:

a) Attracting​​a​​particular​​
kind​​
of​​
investor;
b) Restricting​​rights​​attached​​
to​​
shares.

There is no legal definition of shares classes. Same name shares will have different rights in different
companies.
CLASSES​​
OF​​
SHARES:

​​​​​​
CHANGING​​
CLASS​​
RIGHTS:

- Statutory​​protection​​
is​​given​​
to​​holders​​
of​​a​​class​​of​​shares​​against​​the​​rights​​on​​their​​shares​​being​​
altered;
- Minority​​class​​or​​non-voting​​
shares​​would​​
otherwise​​be​​vulnerable.

Class​​rights​​varied​​only​​in​​accordance​​
with​​articles​​or​​(Companies​​Act​​2006​​s.630):

a) Holders​​of​​¾​​in​​nominal​​value​​
of​​issued​​shares​​of​​that​​class​​consent​​in​​writing​​to​​the​​variation;
b) A special resolution (75%) is passed at separate general meeting of holders of that class to sanction
variation.

Other​​considerations​​
when​​
changing​​
class​​rights:

- No​​statutory​​procedure​​for​​
converting​​
shares​​from​​one​​class​​to​​another;
- Can​​be​​done​​with​​consent​​of​​
shareholders​​affected;
- Safest​​course​​is​​to​​
pass​​
a​​
resolution.

ISSUING​​
AND​​
PAYMENT​​
OF​​
SHARES:

Key​​considerations:

- Companies​​Act​​
2006​​s.9​​
requires​​
companies​​to​​submit​​statement​​of​​capital​​and​​initial​​shareholdings;
- S.10​​requires​​
nominal​​
value​​of​​
those​​shares​​to​​be​​stated;
- This​​sets​​out​​the​​
initial​​registration​​
of​​the​​
company​​and​​nominal​​value​​of​​the​​shares;
- Once issued, market value of shares may diverge from that nominal value, but nominal value remains fixed
unless​​altered​​
through​​
a​​strictly​​
regulated​​
procedure;
- A company may require prospective subscribers to pay more than nominal value of the shares they
subscribe​​for​​(issuance​​at​​premium);
- S.610​​provides​​that​​any​​
such​​
premium​​received​​must​​be​​placed​​in​​a​​share​​premium​​account.

Share​​premium​​limitations:

a) Premium​​obtained​​regarded​​
as​​capital;
b) Cannot​​be​​used​​
to​​
pay​​dividends;
c) Can​​be​​used​​for:
- To​​write​​off​​the​​expenses/commission/discount​​incurred​​in​​issue​​of​​the​​shares​​in​​question;
- To​​pay​​up​​bonus​​
shares​​
to​​
be​​
allotted​​as​​fully​​paid​​to​​members;
- S.687 allows for the share premium account to be used to finance the payment due for any premium due on
the​​redemption​​of​​redeemable​​shares.
Companies are not permitted to issue shares for a consideration that is ​less than nominal value of the shares
together​​with​​any​​premium​(Companies​​
​​ Act​​2006​​s.80):

1) If​​company​​does​​issue​​shares​​at​​
discount​​
it​​will​​not​​be​​able​​to​​enforce​​this​​against​​the​​allottee;
2) Anyone who takes shares without paying full value, plus any premium due, is liable to pay the amount of the
discount​​as​​unpaid​​share​​capital,​​together​​with​​interest​​at​​5%;
3) Subsequent​​holder​​who​​
is​​aware​​
of​​
this​​
underpayment​​will​​be​​liable​​to​​make​​good​​the​​shortfall.

Reason​​for​​such​​protection​​
is​​to​​
protect​​
creditors.

Further​​considerations:

a) In​​private​​companies​​it​​
is​​possible​​
to​​avoid​​this​​rule​​by​​selling​​shares​​for​​property​​that​​is​​overvalued;
b) In​​public​​companies​​
all​​
such​​
non-cash​​
considerations​​have​​to​​be​​valued;
c) Debentures​​can​​
be​​issued​​at​​
a​​discount​​(even​​when​​convertible​​into​​shares).

RIGHTS​​
ISSUE​​
AND​​
BONUS​​
ISSUE:

Rights​​issue Bonus​​issue

- Offered​​
to​​existing​​
shareholders​​to - Shares​​of​​stock​​to​​current​​shareholders
purchase​​
additional​​shares​​
directly; based​​upon​​the​​numbers​​already​​owned;
- Proportional​​to​​
existing​​
holdings; - Increases​​the​​total​​number​​of​​shares;
- Must​​be​​
purchased​​
in​​a​​fixed​​time​​period; - It​​does​​not​​change​​the​​value​​of​​the​​company.
- Subscription​​price​​
may​​be​​purchased​​at​​a
discount​​
to​​
current​​market​​price;
- Rights​​are​​
transferrable.