LL.

M Programme – Faculty of Law 2023/24

University of Colombo
Company Law - Raising of Capital & Shares
09 September 2023 (online)

Prof Shanthi Segarajasingham

LL.B(Hons), M.Phil, Ph.D
Attorney-at-Law, ASTHE
 Raising of Capital (Fund Raising)
Fundraising in companies refers to the process of
raising capital or funds to support the operations,
growth, or specific initiatives of a business.
Companies often need additional funds to expand
their operations, develop new products, enter new
markets, or cover operational expenses. There are
various methods and sources for fundraising in
companies.
This lesson will cover only issues within company
law regime

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 Methods of raising capital
Without large scale issue
• Internal financing
• Lease, mortgage, hire
purchase and other
private arrangements
• Private placement of
shares
• In certain occasions -
Rights issue, Open offer
or Bonus issue
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Large scale issues
• Rights issue
• Open offer
• Debenture issue
• Placing
• Public issue of shares
known as IPO (Initial
Public Offer)
 How it differs in Private & Public
companies
– Private - – Public -
• Prohibited from offering • Equity funding
shares to the public – S… • Ss.50-52
• Private arrangements • Large PLCs/MNCs/TNCs -
• Pre-emption - embodied go for public issue
in the Articles of most • Medium – other modes
companies that are less cumbersome
• Since these are ‘closed’
companies, it is possible
to maintain
confidentiality

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 Marketable Securities
• What are marketable securities?
• What is the market for securities?
• [difference between primary and secondary
market to be understood]
• Primary offer – the modes
– Offer for subscription/sale
– Placing
– Introduction [Direct invitation by the offeror]
– IPO or flotation
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 Introduction
• In an introduction, a company joins the markets without
raising any capital. In general, a company can do this if over
25% of its shares are already in public hands and there is a
fair spread of shareholders. An introduction involves no
underwriting fees and little requirement for advertising.
However, the opportunities for boosting a company’s
profile and visibility by using this mode are limited.
• It is the quickest and cheapest means of listing, as there is
no offer to the public and minimum formalities are
required.
• It will be apparent that the introduction is a method of
obtaining a listing, and not a method of issue, because no
additional shares are issued.

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 Offer for sale & Placing
Offer for sale
• Involvement of issuing
house or merchant bank
which subscribes and then
invite the public to purchase
at a higher price
• May be by way of tender
• This is used to reduce and
reverse the concentration of
share ownership, making it
more scattered and
dispersed in the hands of
many shareholders
Placing
• Here too involvement of IH exist
• Generally for small scale
• Private arrangement between IH
and institutional investors
• A placing usually involves offering
company’s shares to a selected
base of institutional investors.
This allows to raise capital with
lower costs and greater freedom,
and it gives a company more
discretion to choose its investors.
The result, however, is a narrower
shareholder base, and as such
there may be lower liquidity in
the shares once the company has
been admitted to market.

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 As per CSE ….
• (1) Offer for Subscription is an invitation to
the public to subscribe for new securities to
be issued by a company.
• (2) Offer for Sale is an invitation to the public
to subscribe for securities already in issue.
• (3) Introduction is the direct listing of
securities on the CSE without the need for an
Initial Public Offering

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 Direct listing
• Its going public, but not actual fund raising
• Practiced in the US
• A direct listing is a way for companies to go public
with less red tape than a traditional initial public
offering. Instead of creating new shares and
having a bank underwrite them, as in a traditional
IPO, a direct listing lets management, employees
and private investors sell their existing shares on
the public market.
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 Slack vs. Pirani [2020 - US]
• On June 20, 2019, tech company Slack went public through a direct listing,
which, unlike an initial public offering (IPO), does not involve the company
issuing new shares and instead involves only filing a registration statement
to allow existing shareholders to sell their shares on the exchange. Shares
made available by a direct listing are sold directly to the public and not
through a bank.
• Fiyyaz Pirani purchased 30,000 Slack shares at $38.50 per share on the day
it went public and went on to purchase another 220,000 over several
months. Subsequently, the share price dropped below $25. On September
19, 2019, Pirani brought a class action lawsuit against Slack, alleging that
Slack’s registration statement was inaccurate and misleading because it
did not disclose information about its service disruptions and how it
compensated customers for those disruptions.
• The district court held that Pirani had standing to sue Slack even though
he could not prove that his shares were issued under the registration
statement he said was inaccurate. On appeal, a panel of the U.S. Court of
Appeals for the Ninth Circuit affirmed over one dissenting vote.

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 Public issue of shares (IPO)
• IPO is one type of public offering. Not all public
offerings are IPOs. An IPO occurs only when a
company offers its shares (not other securities)
for the first time for public ownership and
trading, an act making it a public company.
• When an issue / offer of securities is made to
new investors for becoming part of shareholders'
family of the issuer, it is called a public issue.
• It is an ‘invitation to treat’ under the Contract
Law
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 Why go for public offer?
• Best known way for large fund raising
• Issuer company can tap wide range of investors
• Image building and publicity
• Opportunity for public participation
• Expansion of capital/business & Enhancement of
shareholder value
• Economic development for company/State
• Private reasons (power struggle)
• Greater Transferability.
• Better liquidity of securities.
• More employment
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 Disadvantages in IPO
• Expensive for issuer companies
• Time consuming
• More accountability
• Public participation do not work in reality
• Historic information of issuer co. may not be available
• Running the co. business & running an IPO is different –
need to manage both simultaneously
• Stringent legal formalities initially and continuously as well.
• Transparency requirements and public disclosure of
information may lead to lack of privacy.
• Subsequent speculative attacks.

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 Risks
• Risky investment for public @ macro & micro
levels due to –
– unpredictable nature
– Non availability of thorough analysis of securities
before investment
– systemic or non-systemic irregularities
– business, liquidity, market and country levels

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 Relevant Concepts
• Capital
• Consideration
• Disclosure
• Investor protection (not shareholder protection)
• Transparency v. Confidentiality
• Liquidity
• Regulatory regime
• Certain Economic Law concepts
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 Disclosure
• Statutory & regulatory disclosure
requirements with regard to IPO
• Continuous disclosure requirements
• Satisfying the requirements of 3 regulators -
– Registrar of Companies
– Stock Exchange
– Securities & Exchange Commission

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 Other related issues
• Shareholders will find their shares getting diluted
by a later IPOs – pros and cons
• Involvement of
– Underwriters
– Bankers
– Lawyers
– Intermediaries
• Treatment of different types of investors such as
individuals (local/foreign) & institutional
(local/foreign) investors
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 Control over IPO
Should States have control at all?
• To the affirmative…….
– Concept of Investor Protection & the connected
phenomena of accountability, transparency, accurate
and timely disclosure
– State should be responsible when large sum of public
funds are involved
– To attract foreign portfolio investment
– Modern trend due to globalization where
international standards are coming to play that
recognize State intervention, though different States
have their control at different levels

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Regulation of public offers of securities
in Sri Lanka
The repealed SEC Act 1987
• Requirement of approval under
s.29A - ‘…no listed company
……shall make any issue of
securities unless such issue has
been approved by the SEC’
• What were included under the
phrase, ‘issue of securities ‘ ?
• Did the approval requirement
guarantee accuracy?
• S.53 – SEC’s power of formulating
rules inter alia ….with regard to
issue of securities
Securities & Exchange Commission of
Sri Lanka Act No. 19 of 2021
• S.80 - A listed public company or
any public company which has
applied to obtain a listing in an
exchange shall not make a public
offer of securities either directly
or through a third party by way of
a prospectus or a similar
document or otherwise for the
purposes of solicitation of funds
from the public unless approved
by the Commission or a person
authorised by the Commission:

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 S.81 – SEC Act 2021
(1) A listed public company shall obtain the approval of the Commission or
any person authorised by the Commission to grant approval in respect of–
(a) any new issue or offer for sale of securities to the public, whether such
issues or offers for sale are by way of a public offer or otherwise;
(b) private placement of securities;
(c) rights issues of securities;
(d) bonus issues of securities; or
(e) schemes of arrangements, schemes of reconstruction, take over schemes,
share option schemes and acquisition of assets by way of issues of securities.
(2) A listed foreign entity seeking a listing on an exchange licensed by the
Commission shall apply to the Commission or any person authorised by the
Commission for approval to make a public offer of securities.
(3) The board of directors of every listed public company and listed foreign
entity shall ensure that the company or the entity shall comply with the rules
and requirements of the exchange in which it is listed at all times so long as the
company or the entity remains listed on the exchange.

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 s.82 & 83 SEC Act 2021
S.82(1) The prospectus or similar document prepared by a person making an offer to the public
shall comply with the requirements specified in the Companies Act, No. 7 of 2007, and any other
requirements specified by the Commission and the rules of an exchange.
(2) A person making an issue of securities to the public shall lodge a copy of the prospectus or a
similar document with the Commission or with any person authorised by the Commission for that
purpose prior to registration of the prospectus as required under the Companies Act, No. 7 of 2007
(3) The Commission may examine any prospectus or similar document when a person makes a
public offer of securities for the purpose of solicitation of funds from the public.

S.83 empowers the SEC to issue stop order when the prospectus
- does not comply with or is not prepared in accordance with the provisions of this Act
or
- contains a statement or information that is false or misleading or from which there is
a material omission; or
- contravened any provision of this Act, regulations, rules or directives made
thereunder or has not complied with the requirements imposed under this Act

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 Regulatory regime of RoC
• Disclosure document known as PROSPECTUS
• Ss 36 – 44 of CA 2007 [not subjected to changes
in 2007]
• Requirement of registration of prospectus - s.40
• What is prospectus? – the definition s.529
• Has the RoC got powers to refuse registration?
• Can the prospectus be in an electronic form?
• Shortcomings? – s.37

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 Prospectus continued…….
• Contents - Requirements under Part I - Fourth
Schedule
• S.3 Listing Rules
• Why the prospectus should bear a date?
• Exceptions under proviso to s.37(3)
• Criminal sanction under s.37(4)
• Defences to the issuer of prospectus –
s.37(5)(a)-(c)
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Government Stock & Other Securities Investment Co v.
Christopher [1956] 1 AER 490

• A circular was used as an offer to acquire

shares in two existing companies in
exchange for shares that were to be
issued by another company. It was held
that the circular was not a prospectus
because it neither involved in an offer for
the purchase of shares nor invited
subscription for shares.
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SECTION 3 – Listing Rules of CSE
CONTENTS OF PROSPECTUS / INTRODUCTORY DOCUMENT
GENERAL
This Section sets out the basic requirements for the contents of a prospectus,
which should be complied with in addition to the requirements of the
Companies Act and any other applicable law.
The requirements of this Section are not exhaustive. Additional information that
are not required by the Rules may be included at the discretion of the Entity
according to the particular nature of the business of the issuer and of the
Securities for which Listing is sought.
The Exchange reserves the absolute right to require disclosure of any
additional information as it considers appropriate in any particular case. If the
Exchange requires such information, it shall inform the applicant in writing of
the additional information required.
In the event of a listing of Securities by way of an Offer for Subscription, Offer
for Sale or Introduction on the Empower Board in the Alternate Market
Segment, the applicant
Entity shall produce the Prospectus and Introductory Document (as applicable)
in soft copy form and host such document on the websites of the Entity, the
sponsor and the Exchange.
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 Liability – Common Law
• Who is liable?
• The origin of liability and the subsequent case law
development
• Liability for misstatement & omission
– Derry v. Peek [1889]
– Hedley Byrne & Co. v. Heller & Partners [1964]
• Essential elements that are looked for to impose
liability
– Inducement
– Material false statement

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 Remedies
• Damages
• Rescission
– Limitations such as reasonable time & certain acts
of the allottee
• City of Edinburgh Brewery Co. Ltd v. Gibson’s
Trustees [1869]
• Re Pacaya Rubber & Produce Co.Ltd [1914]
• Coles v. White City (Manchester) Greyhound
Assn Ltd
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• City of Edinburgh Brewery Co. Ltd. v. Gibson’s Trustee - A prospectus
stated that a large number of gentlemen in the trade and others
have become shareholders. When the register of members was
made up, there were 55 shareholders of whom 10 or12 were
connected with the trade. It was held that there was not a
sufficiently material misrepresentation to warrant a rescission of
the contract of allotment.
• Re Pacaya Rubber and Produce Co ltd. - A company issued a
prospectus inviting subscriptions for the purpose of buying a rubber
estate in Peru. The prospectus contained extracts from the report
of an expert on the spot. The report was false. It was held that the
accuracy of the report was prima facie the basis of the contract and
if the company did not intend to contract on that basis, it should
have disassociated itself from the report in clear terms and warned
that it did not vouch for the accuracy of the report.
• Court allowed rescission of the contract. The right to rescission is
lost if:
– a) After discovering the misrepresentation, the alottee does an act
which shows that he wants to retain the shares e.g. attends and votes
at general meeting or receives dividends or attempts to sell the shares.
– b) The alottee fails to act within a reasonable time of discovering the
truth
– c) Restitution is impossible e.g. he has sold the shares
– d) The company goes into liquidation
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• COLES v WHITE CITY (MANCHESTER)
GREYHOUND ASSOCIATION LTD - the
prospectus stated that the land to be
acquired by the company was "eminently
suitable" for greyhound racing. No
mention was made of the fact that
approval of the local council was required
in order to build public stands and
kennels. This was held by the Court of
Appeal to be a ground for rescission by
the plaintiff.

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 Liability - statutory
• Statutory civil liability – s.41
• Statutory criminal liability – s.42
• Loopholes in the provisions
• The burden of the petitioner
• Defence – s.41(2), bottom part of
s.42
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 Case Law development
• Caparo Industries plc v. Dickman [1990]
• Al-Nakib Investments Ltd v. Longcroft [1990]
• Possfund Custodian Trustees Ltd. v. Diamond
[1996]
• Royscot Trust v. Rogerson [1991]
• Smith New Court Securities Ltd v. Scrimgeour
[1996]
• Thomas Witter Ltd v. TBP Industries Ltd [1996]
• Govt of Zanzibar v. British Aerospace Ltd [2000]

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 Caparo Industries Plc v Dickman
• A firm of accountants appealed against a decision of the CA in which it was decided that the
accountants owed a duty of care to the appellant shareholders when producing an audit report
required by statute. The claim was for negligent misstatement. Caparo had bought shares in the
company of which the report was about as part of a takeover. The appellant had relied upon the
results of the report. However, it was later found that the results of the report had misrepresented
the profits of the firm, in turn causing a loss for Caparo.
• HL reversed the decision of the CA and held that no duty of care had arisen in relation to existing or
potential shareholders. The only duty of care the auditor`s owed was to the governance of the firm.
It was found that three factors had to exist for there to be a duty of care which where: Proximity,
Knowledge of who the report would have been communicated to and for what purposes it would
have been used. Lord Bridge commented that cases where duty of care did arise was illustrated in
Smith v Eric S Bush. The case holds the principle that it is reasonable to impose a duty of care for
valuers of a property to those those purchasing a family home as this was commonplace. Finally,
there had to be knowledge that the shareholders or investors would rely on the report in regards to
the transaction.
• Furthermore, the judges noted that audit reports of plc`s are regularly carried out which differs
from reports carried out for specific purposes and for an identified audience. Thus, the accountants
owed no duty to the entire public who might or might not place reliance on the report when
making financial decisions.
• Moreover, appointing liability would open the floodgates to society as JEB Fasteners Ltd v Marks
Bloom & Co distinguished. Thusly, limitations have to be set when pure economic loss occurs in the
absence of contractual agreements between parties. It is also noted that the judgement accepts
that there are circumstances where an auditor will owe a duty of care in respect of reports
produced. These are conditional that at the time the report is prepared that is known by the
auditors that the results are for a specific class for a specific purpose. This is acknowledged in
Morgan Crucible v Hill Samuel and Law Society v KPMG .

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https://www.ukessays.com/essays/law/duty-of-
care.php
Post Caparo cases are inconsistent with the purpose of the Capro test, thus
demonstrating that Caparo is not good authority for defining duties. In Al-
Nakib Investments (Jersey) Ltd r v. Longcroft the court endorsed the view that
no liability could lie because the prospectus was to encourage subscription,
rather than a ‘particular transaction’ for which the defendants were aware
reliance would be placed on it. Therefore, there was no foreseeability. This,
however, is an unrealistic line to draw. The directors would no doubt owe a
duty of care to persons who subscribe for shares offered by that prospectus
they created for such purpose. The plaintiff is a member of the ‘identifiable’
class. Proximity is evident as the defendant knew it would be likely that the
statement would be communicated in connection with a particular
transaction. Additionally, it was likely that the plaintiff would rely on the
statement to decide whether or not to enter on that transaction, establishing
foreseeability. Therefore, in establishing that there was no duty of care from
the Caparo threefold test, it is a perversion of Caparo’s ultimate goal: to avoid
“liability in an indeterminate amount for an indeterminate time to an
indeterminate class.

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 Zanzibar v British Aerospace (Lancaster House Ltd)
[2000] 1 WLR 2333 not in the context of company law
The complainants, the Government of Zanzibar, wanted to purchase an executive jet
from the British Aerospace (Lancaster House Ltd). In order to do this, they entered
into a lease agreement with a finance company, who subsequently bought the plane.
However, the plane in question that was purchased was faulty and despite repairs, it
continued to be defective. Due to this, the complainants stopping paying their
instalments for the plane that they had agreed with the finance company. In response
to this, the finance company took back the plane they owned and sold it on.
The complainants argued that representations of the plane said that it was without
any defects, as well as being reliable and ready to use. They brought a claim against
the defendants to rescind their contract under section 2(1) of the Misrepresentation
Act 1967 or receive damages under section 2(2) of the Misrepresentation Act 1967.
The issue in this case was whether the contract could be rescinded or if damages
could be awarded.
It was held that due to clause 23 in the sale agreement between the parties, the
contract could not actually be rescinded. This had stated the buyer could not rely on
representations made by the seller. In addition, the plane had already been sold. This
also meant that damages could not be awarded, as this was a substitute for rescission,
which was barred in this case.

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 Criminal liability
• Traditional burden of proof
• Difference between criminal & civil ?
• R. v. Kylsant [1932] 1 KB 442 - Lord Kylsant was convicted
under s.84 of the Larceny Act 1861 (the predecessor to s.19
of the Theft Act 1968) for making a statement which he
knew to be false in material particular. In this case the
prospectus stated that the company had paid dividends for
15 years for the 17 years of its existence. Though it was
true, it was not revealed that the company had suffered
trading losses for the previous 7 years and was able to pay
dividends (out of a hidden reserve) because items of non-
recurring nature were taken into account. It was held to be
factually misleading.

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 Comparative law
• Is the SEC Act 2021 free from defects?
• On a comparison, it is the latest among most
jurisdictions
• How about the laws in
– UK,
– India,
– Malaysia,
– Australia?

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 - S. 80 FSMA 2000 - General duty of
disclosure in listing particulars.
General duty of disclosure in listing particulars.
• (1)Listing particulars submitted to the FCA under section 79 must contain all such information as investors
and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose
of making an informed assessment of—
– (a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the
securities; and (b) the rights attaching to the securities.
• (2) That information is required in addition to any information required by—
– (a)listing rules, or (b)the FCA, as a condition of the admission of the securities to the official list.
• (3) Subsection (1) applies only to information—
– (a) within the knowledge of any person responsible for the listing particulars; or
– (b) which it would be reasonable for him to obtain by making enquiries.
• (4) In determining what information subsection (1) requires to be included in listing particulars, regard must
be had (in particular) to— (a) the nature of the securities and their issuer; (b) the nature of the persons likely
to consider acquiring them; (c) the fact that certain matters may reasonably be expected to be within the
knowledge of professional advisers of a kind which persons likely to acquire the securities may reasonably be
expected to consult; and (d) any information available to investors or their professional advisers as a result of
requirements imposed on the issuer of the securities by a recognised investment exchange, by listing rules or
by or under any other enactment.
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 Australia – CL 2001
• Alternate disclosure documents
– Prospectus;
– Offer Information Statement (OIS);
– Profile Statement; and
– Short Form Prospectus.

S.710 of the CL - A prospectus for a body's securities must contain all

the information that investors and their professional advisers would
reasonably require to make an informed assessment of the matters set out in
the table below. The prospectus must contain this information:
(a) only to the extent to which it is reasonable for investors and their
professional advisers to expect to find the information in the prospectus; and
(b) only if a person whose knowledge is relevant (see subsection (3)):
(i) actually knows the information; or
(ii) in the circumstances ought reasonably to have obtained the
information by making enquiries.

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 Malaysia – CMSA 2007
General duty of disclosure in prospectus
236. (1) For the purpose of determining whether a prospectus contains
any statement or information which is false or misleading or from
which there is a material omission under subsection 246(1) or
248(1), regard shall be had to whether the prospectus contains all
such information that investors and their professional advisers
would reasonably require, and reasonably expect to find in the
prospectus, for the purpose of making an informed assessment of–
(a) the assets and liabilities, financial position, profits and losses and
prospects of the issuer and, in the case of a unit trust scheme or
prescribed investment scheme, of the scheme;
(b) the rights attaching to the securities; and
(c) the merits of investing in the securities and the extent of the risk
involved in doing so.

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 Companies Act 2013 of India
• S.30. Where an advertisement of any
prospectus of a company is published in any
manner, it shall be necessary to specify
therein the contents of its memorandum as
regards the objects, the liability of members
and the amount of share capital of the
company, and the names of the signatories to
the memorandum and the number of shares
subscribed for by them, and its capital
structure.
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 Reading
• http://www.investopedia.com/articles/financi
al-theory/11/how-an-ipo-is-valued.asp
• Viraj Dayaratne PC, ‘A Brief Overview of the
New Securities and Exchange Commission Act’
• S. Segarajasingham, ‘Beauty Pageant of Companies:
A Comparative Study Of Public Issue of Shares
Focusing Sri Lankan Law’,
https://grdspublishing.org/index.php/people/article/
view/1059
• https://indiankanoon.org/doc/127298/

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SHARES

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Holders of Shares & the concept of LL
• Shareholders
– safeguarded under the umbrella of LL
– not affected by corporate insolvency
– need not take active role in business (Passive
investment )
• Capital maintenance rule play and
– Sh.hs &
– creditors expect safety of share capital
 Liabilities of sh.hs
• On unpaid amount when calls are made
• To repay distribution if ST not satisfied
• Contractual, tort, liability for breach of
fiduciary duty or committing wrong
• S.87
 Legal Nature
• The origin
– Joint Stock Corporation Act (UK – 1844)
Share [s.49]-
• is an intangible personal property
• is an interest of a shareholder in a company
• can be measured by a sum of money
• gives membership in a company to its holder
• brings in rights –
– 1) during the life
– 2) at winding up
 Issue of shares
• Power of the board to issue
– by A
– by ord. reso.
– [S.549-551 CA 2006 – UK]
• Return of allotment
• Terms ‘issue’ & ‘allot’ to be understood
Mosley v. Koffyfontin Mine Ltd [1911] 1 Ch 73
held that the 3 step order is creation, issue
and allotment
 ‘SHARE’ (equity stake)
• A definition for shares in Borland Trustees v. Steel
Brothers [1901]
• No legal or equitable interest in the assets of the
company- Short v. Treasury Commissioners [1948] 1 QB 122.
Isthe word ‘share’ a misnomer?
• Shareholders do not share property rights of the
company in common, but they share certain other rights
in common
• Chose in action - Colonial Bank v. Whinney [1930]
Ch.D 261, Torkington v. Magee [1902]2 KB 427
 Nature of shares contd…
• An alternate to other investments (such as
investment in bank etc.
• Contractual binding to the Articles of the
respective company
• Certain basic rights irrespective of the type of
share
• Shares are freely transferable
 Nature of shares contd…
• Contractual binding
• Registration of shares will give statutory entitlements
• Can a company refuse to register share/s ?
– Re Smith & Fawcett Ltd
– Tett v. Pheonix Property & Investment Co. Ltd
– Duke of Sutherland v British Dominion Land Settlement
Corpn [1926] Ch 746.
– Re Coalport China Co [1895] 2 Ch 404;
– See: Robert R. Pennington, Pennington’s Company Law, 7th
edn, 1995), page 1002.
– S.76 CA 2007 SL; S.771 CA 2006 UK
 Types of shares
• Ordinary shares
• Preference shares
• Deferred shares
• Employees shares
• Golden shares
 Power to issue types
• Act
• Articles
– Original
– Amended
❖Reasons to go for different types
❖Alteration of sh.h rights
❖Prior to 2007
❖Under the present Act
 Ordinary shares
• Dividend vary depending on profitability
• Residual claimant
• Return of capital not fixed. May be
– Greater than original investment or
– none
– Over the time difficult to ascertain capital gain
• Can be referred as default shares in the sense that the
rights enjoyed by the ordinary shares are those which
attach to all shares unless contrary provision is made
– When the shares are issued
– By subsequent variation of rights
 Default rule
• Birch v. Cropper [1889] 14 AC 525 HL
Surplus is distributable equally amongst ordinary sh.hs
• Re Driffield Gas Light Co. [1898] 1 Ch 451
Amount for dividend means nominal amount
• Oakbank Oil Co v. Crum [1882] 8 AC 65 HL
Dividend distribution is based on the nominal value of shares
• Wood v. Odessa Waterworks Co [1889] 42 Ch D 636
Dividend should be paid in cash unless A provides otherwise
• Bond v. Barrow Haematite Steel Co [1902] 1 Ch 353
O.sh.h has no absolute right to dividend which will become entitled
only when it is declared.
• Potel v. IRC [1971] 2 AER 504 – the case outlined the terms for
entitlement for sh.h dividend
 Ordinary shares contd….
With voting rights Non-voting
• Very common • Issued to raise capital
• Main mode in the while retaining control
capital raising process with the existing
• Ready market in the board/membership
secondary trading when • Authorities will have to
compared to other ensure that investors
shares are not misled
 Deferred shares
• Founders shares
• Originated when promoters were allotted
(take for themselves) shares without any
payment of money
• Rights on profits after fixed dividends are paid
• Considered as an inducement for investors
depending on who the deferred shareholders
are
• Not a common feature in modern companies
 Preference shares
• Certain priorities over the other shares
• Issue of p/s to be authorised by the Articles
• Preferential rights are decided according to the Articles
and/or terms of issue
• Usual right – preference in the payment of dividends, if
declared
• Several types within p/s –
1) Cumulative & non-cumulative
2) Participating & non-participating
3) Redeemable & non-redeemable
4) 1st, 2nd, & 3rd ranking
See SS.66 – 69 – Redemption of Shares
 If preferential rights are not
specified..?
• Prima facie, the following rules apply:
• (i) While the company is a going concern:
– Where preferential right is specific, it is cumulative
– Non-participative in surplus assets at winding-up
– Carry voting rights especially when-
* preference dividends are in arrears
* rights of the p/s are varied
 (ii) When the company is being
wound-up
• Entitlement for the arrears of cumulative
dividends
*not payable out of assets unless dividend has
been declared
* If payable out of assets, it can be only after
the settlement of company debts
. No priority in the repayment of capital
 Employees shares
• Common during privatization
• Generally rights are that of ordinary shares
• It is believed that employees productivity will
increase when they become part of the
business
• In reality this type is not a successful one
• An alternate in the former regime, the peoples
companies, were done away with
 Golden shares
• No definition
• Special rights and may include veto power
• 139(2) Proviso
• 144 (8)

S.Segarajasingham
 Benefits of being a shareholder
• Monetary benefits of capital gain and dividend
• Participation in company affairs including
election of directors
• Membership in certain companies considered
prestigious
• Knowledge advancement
• Contributor to the national economy
 Disadvantages of being a shareholder
• Capital loss during the life time of a company if the
selection is bad
• If the company goes for insolvent winding up – no return of
capital
• When the shareholder belongs to the minority…
• Not suitable for short term investors
• In theory, there is ready return when shares are sold. But
people are reluctant to test it
• Restrictions in share transfer in private companies such as
‘pre-emptive’
• Known only in main cities and still many consider it as
‘gambling
• Thank you