UCO3622 Company Law II Trimester 2, 2014/2015

Shares Capital – Part I

1. Introduction

 Most common type of source of finance.

 Company issues and allots shares to a shareholder in return for capital (money or assets).

1.1 Meaning and Nature of Shares

 Meaning of “share”: s 4 Companies Act 1965 (“CA”)

See: Borland’s Trustee v Steel Bros & Co Ltd [1901] 1Ch 279

 Nature of shares: s 98 CA.

2. Capital Structure (Classification of Capital)

 Authorised / Nominal / Registered Capital

 Issued Capital
 Paid up Capital
 Called up Capital
 Reserve Capital

2.1 Variation of Authorised Capital: s 62 CA.

2.1.1 Increasing Authorised Capital: s 62(1)(a) CA

 A company cannot issue shares in excess to its authorised share capital:

Bank of Hindustan, China & Japan Ltd v Alison (1871) LR 6 CP 222.

 If need to issue shares in excess of its existing authorised share capital, company must first
increase its authorised share capital in accordance with s 62 CA.
See s 62(1)(a), (4), (5) and art 40(a) of Table A.

2.1.2 Consolidation: s 62(1)(b) CA

 Number of shares will be reduced but capital remains unchanged

(each unit of share is of larger value now)

2.1.3. Conversion into stock: s 62(1)(c) CA

2.1.4. Subdivision: s 62(1)(d) CA

 Number of shares will be increased but capital remains unchanged

(each unit of share is of smaller value now)

2.1.5. Cancel shares which have not been taken: s 62(1)(e) CA

3. Issues and Allotment of Shares

Contractual rules: offer and acceptance

 invitation to the public – by company.
 Offer – by the public - usually fill in a form
 Acceptance - by the company

 Meaning of “Allotment”
 Meaning of “Issue”

Prepared by: Crystal Kuek 1

UCO3622 Company Law II Trimester 2, 2014/2015

Case: Commonweath Homes & Investment Co Ltd v Smith (1937) 59 CLR 443 (per Dixon J)
Raja Khairulzaman Shah Bin Raja Aziddin v Zaman Indah Sdn Bhd [1979] 2 MLJ 181

3.1. Consideration for shares

(a) cash
(b) Non-cash consideration

See: Re Wragg Ltd [1897] 1 Ch 796.

Malaysia: Allotment for consideration other than cash is valid

– implied from s 54(2)(b) CA and Form 25.

3.2. Difference between fully paid up and partly paid up shares

 Fully paid up shares

 Partly paid shares

3.3. What happens if shareholders fail to pay upon calls?

(a) Forfeiture on non-payment of calls

 Power to make calls is usually conferred on directors. See: Table A, art 13.
See Table A, art 16-17, 28-32

 Call = a debt due from the shareholder to the company

 if default in payment, liable for interest ≤ 8% p.a.
 steps to recover: forfeit and auction.
 director to issue a notice to errant shareholders requiring payment.
 notice shall name at least 14 days after service of notice. If shareholder fails to pay at or before the
time appointed, shares will be liable to be forfeited.
 directors are allowed to forfeit unpaid shares.
 forfeited shares may be sold or otherwise disposed of .
 person whose shares are forfeited remains liable to the company for the amount unpaid on the
shares, together with interest.

(b) Lien on Shares

Table A, art 9-12

 Right of company to hold shares of members as security for repayment of a debt owing by
members to company.
 company may sell the shares in the manner provided under the articles if a sum in respect of which
the lien exists is presently payable, or until expiration of a specified time in a notice served on
shareholder or the legal representative (in the case of death of bankruptcy).

3.4. Power to issue shares

 s 132D(1) CA: Rests with members of general meeting.

 s 132D(6) CA: Effect of contravention of s 132D CA.
 s 132D(7) CA: Liability of director who knowingly contravenes s 132D CA.

Prepared by: Crystal Kuek 2

UCO3622 Company Law II Trimester 2, 2014/2015

3.5. Issue of Shares at a discount

 An issue for a value less than the par value of the shares.
 Prohibited because it constitutes a reduction of share capital.

3.5.1. Implication for shareholders

 Shareholder continues to remain liable to pay its full nominal value to the company:
Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125.

3.5.2. Exceptions to the rule against issuing and allotting shares at a discount

 S 58 CA - covers the legitimate practice of paying underwriting commission.

 S 59 CA.

3.6. Issue and Allotment of Shares at a Premium

 When a company receives an amount that is in excess of the nominal / par value of the shares
issued and allotted.

3.6.1. Share premium account

 Where a company issues shares at a premium (whether in cash or in the form of other valuable
consideration), CA requires that “a sum equal to the aggregate amount or value of the premium on
those shares” must be transferred to “share premium account”.

 Share premium account is treated as paid up share capital of the company for the purpose of share
capital reduction: s 60(2) CA.

 How a company can apply its share premium account: ss 60(3) CA; 67A(3) CA.

 Premium cannot be returned to shareholders otherwise than in the manner prescribed by ss 60(3)
and 64 CA.

3.7 Validation of Shares improperly issued

 S 63 CA empowers the court to validate an improper issue or allotment of shares if it thinks that it is
just and equitable to make such an order.

 Application may be made by the company, a shareholder or creditor of the company.

Millheim v Barewa Oil and Mining NL [1971] WAR 65

Re Swan Brewery Co Ltd (No.2) (1976) 3 ACLR 168
Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng & Ors
[1991] 1 MLJ 301; [1991] 1 CLJ (Rep) 194

4. Classes of Shares

 General rule: all shares having same par value enjoy same rights irrespective of the amounts paid.

 Shares with different rights - different classes of shares.

 Rights attached to shares may differ in regard to:

(a) entitlement to dividends
(b) priority in relation to payment of dividend
(c) voting right

Prepared by: Crystal Kuek 3

UCO3622 Company Law II Trimester 2, 2014/2015

(d) priority in repayment of capital on winding up

(e) right to participate in a distribution of surplus assets upon winding up

 Most common types of different classes of shares in Malaysia:

(a) Ordinary/equity shares
(b) preference shares

4.1. Ordinary/ Equity Shares.

 Common characteristics of ordinary shares:-

- not entitle to fixed/cumulative dividends
- no priority in payment of dividends
- right to participate in meeting and voting
- right to be repaid their capital on a winding up after all other claimants have been repaid
- right to share pro rata in any surplus assets on a winding up

4.2. Preference shares

 S 4 CA
 Common characteristics:-
- normally has fixed and cumulative dividend
- priority to a return of capital on a winding up
- non-participating as to surplus both while the company is a going concern and on a winding up.
- not entitle to attend and vote at general meeting
- Exception: restricted rights may be specified in company’s article: s 148(2) CA.

4.2.1. Right of preference shareholders to be set out in the company’s constitution: s 66 CA

 s 66(1) CA
 Contravention of s 66(1) CA – Offence: s 66(2) CA.

5. Class rights

 Particular rights annexed to certain shares.

 Classification of class rights was broadened in an unorthodoxed way in:
Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing
Co Ltd [1987] Ch 1, [1986] 2 All ER 816
 Significance or value of a right being classified as a “class right” - in general, it cannot be varied
without the consent of the class.

5.1. Variation of Class Rights

5.1.1. Common law position

 When does variation of class rights occur?

 Distinction between variation of class rights and variation in the enjoyment of class rights.
 Test: whether after the amendment of the articles/passing of resolution, shareholders in question
have the rights they had before the amendment/passing of resolution - If still have same rights, no
variation of class rights

Case: Greenhalgh v Arderne Cinemas Ltd and Others [1946] 1 All ER 512
White v Bristol Aeroplane Co [1953] Ch 65; [1953] 1 All ER 40

5.1.2. Variation of class rights in accordance with CA

 s 65(6) CA

Prepared by: Crystal Kuek 4

UCO3622 Company Law II Trimester 2, 2014/2015

 Table A, art 5 - adopted the approach taken by CA in s 65(6) CA.

 s 65(6)CA and Table A, art 5 take a different approach to the common law.
 s 65(7) CA.

5.2. Protection against non observance of class rights

 Contract basis:
s 66 CA
s 33(1) CA
s 181 CA

 Entrenching class right by inserting class rights in the memorandum: s 21 (1B) CA.
s 21(1A) and s 21(1B) CA: If class rights are contained in the memorandum of association, they
cannot be varied.

 Protection afforded by articles.

- Where the articles of a company authorise the creation of different classes of shares, it is usual for
the articles to provide for the variation of the class rights to be in accordance to the procedure
prescribed by the company’s articles and not otherwise:

Crumpton v Morrine Hall Pty Ltd (1987) 5 ACLC 451

 Variation or modification of rights clause in the company’s articles.

If a company adopts Table A as its articles, the required procedure to vary class rights is set out in
Table A, art 4:

(a) convene separate class shareholders meeting. Meeting is to be attended by shareholders of

that class of shares whose rights are to be varied
(b) shareholders of 3 /4 of the issued shares of the class whose rights are to be varied must give
their consent in writing or pass a special resolution consenting to the proposed variation of
class rights.

 Statutory protection against variation of rights: s 65 CA

- Application to High Court to cancel the variation or abrogation by holders of not less than 10% in
the aggregate of the issued shares of that class which was affected by the variation or abrogation.

Further reading:
nd
Shanti Rachagan et al, Concise Principles of Company Law in Malaysia (2 edn Lexis Nexis, Petaling
Jaya 2010), Chap 8.

Prepared by: Crystal Kuek 5