SHARE CAPITAL TRANSACTIONS
 Trevor v Whitworth: A company is generally prohibited from
returning share capital to shareholders.
 Share capital must be maintained and applied only for
purposes of the company’s business.
DIVIDENDS
 S 254T: Dividends may only be paid out of the company’s
profits.
 EM: Profits must exist at the time fixed for payment of
the dividend (not at the time of declaration).
Definition of profit
 QBE Insurance v ASC: Meaning of “profit” is determined by
courts with close regard to views of the accountancy
profession.
 Distributable profits are:
 Current trading profits;
 Accumulated past years’ profits; and
 Gains in value of fixed assets.
Distinction between fixed & circulating assets
 Ammonia Soda v Chamberlain
 Fixed assets = assets intended to be retained permanently
and used in producing income. (eg. P&E)
 Circulating assets = assets intended to be disposed of
and returned with an increment to the company. (eg.
stock)
 QBE Insurance v ASC: Whether a company’s assets are
classified as fixed or circulating depends on the nature of its The dividend payment must not make the company insolvent (s
business.
 Banks & insurance companies  Investments are
circulating assets.
Current trading profits (profit from circulating assets)
 Trading profit = Trading revenue – trading expenses +
changes in value of circulating assets.
 “Trading revenue” = receipts arising from dealings in the
normal course of business (sale of circulating assets).
 “Trading expenses” = expenditures referable to the
routing conduct of business (COGS, wages, power,
stationery etc).
 “Changes in value of circulating assets” includes
depreciation of circulating assets.
 Ammonia Soda v Chamberlain: Current revenue profits can
be distributed without making good prior years’ losses.
[But this is contrary to current accounting practice. As courts give
close regard to the accountancy profession, it may not be
followed in modern times (QBE Insurance v ASC)]
Accumulated past profits
 Marra Developments v Rofe: Undistributed past profits can
be carried forward in a reserve, and distributed in later years.
 If there are current trading losses, they must be written
off the reserve before distributing the reserve.
Gains in value of fixed assets (profit from fixed assets)
 Profits from disposal of fixed assets  realised gain in value
of fixed assets.
 Profits from revaluation of fixed assets  unrealised gain in
value of fixed asset.
 Australasian Oil Exploration v Lachberg: Gains in value of
fixed assets are distributable only if there is an accretion to
capital and P&L accounts.
  need to make good past losses before funding
dividends from this source.
 May need to revalue all fixed assets. If there is a surplus
over paid-up capital, the surplus may be distributed by
way of dividend.
 Dimbula Valley v Laurie: Cash dividends can be paid from
unrealised gains in fixed assets if:
 The valuation was made in good faith by competent
valuers;
 The asset’s value does not fluctuate over the short-term;
 The constitution does not restrict the distribution of that
(capital) profit by way of cash dividend; and
 There is an accretion to share capital (Australasian Oil
Exploration v Lachberg).
[But paying cash dividends out of unrealised capital gains
conflicts with current accounting standards. Under current
conditions, Dimbula may not be followed (QBE Insurance v
ASC).]
588G).
Remedies for improper dividend payments
Injunction to restrain dividend payment
 S 1324: Shareholders and creditors may apply for an
injunction to restrain the company from contravening s 254T,
if the company’s insolvency is an element of the
contravention (s 1324(1A)(a)).
Unauthorised reduction of capital
 Dividends paid otherwise than out of profits, is a reduction of
capital. If the reduction is not authorised by s 256B, the
company contravenes s 256D(2), and the directors
contravene s 256D(3), a civil penalty provision (s 1317E).
Insolvent trading
 S 588G(1A): A company is deemed to incur a debt when a
dividend is:
 Paid; or
 Declared (if the constitution provides for declaration of
dividends).
 S 588G: The directors involved may be personally liable to
compensate the company for the amount paid, if:
 the dividend is paid while the company is insolvent, or
causes the company to become insolvent; and
 at that time, there are reasonable grounds for suspecting
that the company is insolvent, or would become
insolvent in that way.
Breach of fiduciary duties
 SHARE CAPITAL TRANSACTIONS
REDUCTIONS OF CAPITAL
 S 256B(1): A company may reduce its share capital if the
reduction:
 (a) is fair & reasonable to the company’s shareholders as
a whole; and
 (b) does not materially prejudice the company’s ability
to pay its creditors; and
 (c) is approved by shareholders under s 256C.
 Nicron Resources v Catto
 Constitutions may restrict the exercise of statutory
power to reduce share capital.
 Once the reduction procedure is complied with, the
reduction is compulsory  expropriation.
 Winpar Holdings v Goldfields Kalgoorlie: If the statutory
requirements in Pt 2J.1 are complied with, Gambotto should
not apply.
 House of Fraser v ACGE Investments: A reduction of capital
(by cancellation of all shares in a class) does not constitute a
variation of class rights.
Examples
 Reductions of capital include:
 Cancellation/part-cancellation of shares with repayment  S 256C(5): Before the notice of meeting is sent to
of capital to shareholders (return of capital);
 Cancellation/part-cancellation of shares without
repayment of capital to shareholders (loss reduction of
capital);
 Reduction in issue price with repayment of difference
between former and current price to shareholders;
 Reduction of liability to meet calls (cancelling uncalled
capital);
 Exchange of equity for debt (swap).
 If the company pays a large premium to cancelled
shareholders:
 (a) The reduction may not be “fair and reasonable to
shareholders as a whole” if the other shareholders cannot
share in the premium; and
 (b) The company’s ability to pay creditors may be
materially prejudiced.
Shareholder approval
Equal or selective reduction?
 S 256B(2): The reduction is equal if:
 (a) it relates only to ordinary shares; and
 (b) it applies to each ordinary shareholder in proportion
to the number of ordinary shares held; and
 (c) the terms of the reduction are the same for each
ordinary shareholder.
Otherwise, the reduction is selective.
 S 256B(3): Ignore differences in the terms of reduction that
are:
 (a) attributable to different accrued dividend
entitlements;
 (b) attributable to different amounts unpaid on the
shares;
 (c) introduced solely to ensure each shareholder is left
with a whole number of shares.
Approval
 S 256C(1): An equal reduction of capital must be approved
by ordinary resolution passed at a general meeting.
 S 256C(2): A selective reduction of capital must be approved
by either:
 (a) a special resolution passed at a general meeting –
with no favourable votes cast by any person (1) who
receives consideration as part of the reduction, or (2)
whose liability to pay amounts unpaid on shares is to be
reduced; or by their associates; or
 (b) a resolution agreed to, at a general meeting, by all
ordinary shareholders.
If the resolution involves cancellation of shares, the reduction
must also be approved by a special resolution passed at a
meeting of the shareholders whose shares are to be cancelled.
Information provided to shareholders
 S 256C(4): The company must provide a statement with the
notice of meeting, setting out all information known to the
company that is material to the decision on how to vote on
the resolution to approve the reduction.
But the company need not disclose information that would be
unreasonable to disclose because it had previously disclosed
the information to shareholders.
Lodgement with ASIC
shareholders, the company must lodge with ASIC:
 (a) the notice of meeting; and
 (b) any accompanying document relating to the
reduction.
 S 256C(3): The company must lodge with ASIC any
resolution under s 256C(2) within 14 days after it is passed.
The company must not make the reduction until 14 days after
lodgement.
 S 254Y: Within 1 month after shares are cancelled, the
company must lodge with ASIC a notice [about the
cancellation] in the prescribed form that sets out:
 (a) the number of shares cancelled;
 (b) the consideration paid by the company on the
cancellation; and
 (d) the cancelled shares’ class.
Consequences of contravention
 S 256D(1): The company must not reduce capital unless it
complies with s 256B(1).
 S 256D(2): Contravention of s 256D(1):
 (a) does not affect the validity of the reduction, or of any
contract or transaction connected with it; and
 (b) does not make the company guilty of an offence.
 S 256D(3): Any person involved in a company’s
contravention of s 256D(1) contravenes this subsection.
 This is a civil penalty provision under 1317E.
 S 256D(4): A person commits an offence if they are
dishonestly involved in a company’s contravention of s
256B.
Injunction
 See s 1324 with assistance of s 1324(1A)(a), (b)(ia).
Insolvent trading
 S 588G + s 1317H: Directors may have to compensate the
company if it is, or becomes, insolvent when the company
reduces its share capital.
 SHARE CAPITAL TRANSACTIONS
Permissible capital reductions
 S 258A: An unlimited company may reduce its share capital
in any way.
 S 258B: A company may transfer a right to occupy or use
land it owns to its shareholders.
 S 258C: A company may pay brokerage or commission to a
person agreeing to take up its shares.
 S 258D: A company may cancel shares forfeited under their
issue terms by resolution passed at a general meeting.
 S 258E(1): A reduction in share capital is authorised if it is
involved in:
 (a) the redemption of redeemable preference shares out
of the proceeds of a new issue of shares made for that
purpose (see s254K);
 (b) share buy-back under ss 257A-257J that is paid for
out of share capital.
 S 258F: A company may reduce its share capital by
cancelling any paid-up share capital that is lost, or is not
represented by available assets (without following the
procedures of Pt 2J.1).
But this doesn’t apply if the company cancels shares.
SELF-ACQUISITIONS
 S 259A: A company must not acquire shares in itself, except:
 (a) in share buy-backs under s 257A;
 (b) in acquiring a non-legal interest in fully-paid shares
if no consideration is given for the acquisition; or
 (c) under a court order [eg. s232]; or
 (d) in circumstances covered by ss 259B(2)-(3).
 [or in redeeming redeemable preference shares out of
profits or through proceeds of a share issue made for the
purpose of the redemption (s 254K)]
 S 259E(1): A company “controls” an entity, if it has the
capacity to determine the outcome of decisions about the
entity’s financial and operating policies.
Taking security over shares in itself or controlling co
 S 259B(1): A company must not take security over shares in
itself or in a company that controls it, except as permitted by
ss 259B(2)-(3).
 S 259B(2): A company may take security over shares in
itself bought pursuant to an employee share scheme that
has been approved by resolution passed at general
meeting.
 S 259B(3): A company may take security over shares in
itself or in a company that controls it if:
 (a) the company’s ordinary business includes
providing finance; and
 (b) the security is taken in the ordinary course of
that business, on ordinary commercial terms.
 S 259B(4): Within the 12 months following an
acquisition by a security permitted by ss 259B(2)-(3),
the company must cease to hold those shares. ASIC may
extend this period if the company applies before the end
of the period.
Issuing/transferring shares to controlled co
 S 259C(1): The issue or transfer of shares in a company to an
entity it controls is void, subject to some exceptions.
 S 259D(1): If X Co obtains control of Y Co which already
holds shares in X, then (1) Y must sell its X shares within 12
months or (2) X must cease to control Y.
Consequences of contravention
 S 259F(1): If a company contravenes s 259A or B:
 (a) the contravention does not affect the validity of the
acquisition or security, or of any contract or transaction
connected with it; and
 (b) the company is not guilty of an offence.
 S 259F(2): Any person involved in a company’s
contravention of s 259A or B contravenes this subsection [a
civil penalty provision  s 1317H].
 S 259F(3): A person commits an offence if they are
dishonestly involved in a company’s contravention of s 259A
or B.
 Also – s 1324 injunction and oppression provisions.
 SHARE CAPITAL TRANSACTIONS
SHARE BUY-BACKS
 S 257A: A company may buy back its own shares if:
 (a) the buy-back does not materially prejudice the
company’s ability to pay its creditors; and
 (b) the company follows the procedures laid down in
Part 2J.1 Div 2.
 5 types of buy-back:
 Buy-back of a minimum holding: Listed company buys a
parcel of shares worth less than $500 (s 9).
 Employee share buy-back: A company buys shares of
employees under an existing employee share acquisition
scheme that has been approved by the company in
general meeting (s 9).
 On-market buy-back: A listed company buys its shares
in the ordinary course of trading on the stock exchange
(s 257B(6)-(7)).
 Equal access scheme applicable only to ordinary
shareholders: A company makes uniform offers to each
shareholder to buy back an uniform percentage of each
shareholder’s ordinary shares (s 257B(2)-(3)).
 Selective buy-back: Company buys back from a
particular shareholder (s 9).
Buy-back procedures
S 257C: Ordinary resolution
 S 257B(4): “10/12 limit” = 10% of the smallest number, at
any time during the last 12 months, of votes attaching to
voting shares of the company.
 S 257B(5): A proposed buy-back exceeds the 10/12 limit if
the # of votes attaching to:
 (a) all the voting shares that have been bought back
during the last 12 months; and
 (b) the voting shares that will be bought back if the
proposed buy-back is made;
would exceed the “10/12 limit”.
 S 257C(1): The buy-back agreement terms must be (1)
approved before it is entered into, by a resolution passed at a
general meeting, or (2) conditional on such an approval.
 S 257C(2): The company must include with the notice of
meeting, a statement setting out all information known to the
company that is material to decision on how to vote on the
resolution. (but not information that is unreasonable because
of previous disclosure)
 S 257C(3): Before the notice of meeting is sent to
shareholders, the company must lodge with ASIC:
 (a) the notice; and
 (b) any document relating to the buy-back that will
accompany the notice.
S 257D: Special/unanimous resolutions
 S 257D(1): The buy-back agreement terms must be approved
before it is entered into, by either:
 (a) a special resolution passed at a general meeting –
with no favourable votes cast by any person whose
shares are proposed to be bought back, or by their
associates; or
 (b) a resolution agreed to, at a general meeting, by all
ordinary shareholders;
or the agreement is conditional on such an approval.
 S 257D(2): The company must include with the notice of
meeting, a statement setting out all information known to the
company that is material to the decision on how to vote on
the resolution. (but not information that is unreasonable
because of previous disclosure)
 S 257D(3): Before the notice of meeting is sent to
shareholders, the company must lodge with ASIC:
 (a) the notice; and
 (b) any document relating to the buy-back that will
accompany the notice.
 S 257D(4): ASIC may exempt a company from this section
only if it is in writing and before the buy-back agreement is
entered into.
S 257E: Lodge offer documents with ASIC
 S 257E: The company must lodge with ASIC, before the
buy-back agreement is entered into:
 (a) a document setting out the terms of the offer; and
 (b) any document that accompanies the offer.
S 257F: 14 days notice lodged with ASIC
 S 257F(1): The company must lodge a notice of intended
buy-back at least 14 days before:
 (a) the resolution is passed (if the buy-back is
conditional on a resolution); or
 (b) the agreement is entered into (if it is not so).
S 257G: Disclose relevant info when offer made
 S 257G: The company must include, with the buy-back offer,
a statement setting out all information known to the company
that is material to the decision on whether to accept the offer.
S 257H: Cancel shares
 S 257H(1)-(2): When a company enters into a buy-back
agreement, all rights attaching to the shares are suspended &
the company cannot deal in those shares.
 S 257H(3): When the transfer of shares is registered, the
shares are cancelled.
S 254Y: Notify cancellation to ASIC
 S 254Y: Within 1 month after shares are cancelled, the
company must lodge with ASIC a notice in the prescribed
form that sets out:
 (a) the number of shares cancelled;
 (b) the consideration paid by the company on the
cancellation; and
 (d) the cancelled shares’ class.
Consequences of unauthorised buy-back
 If s 257A is not complied with, and other provisions of the
CL (eg. capital reduction or redeemable preference shares
provisions) do not authorise the buy-back, then s 259A may
be contravened [see above].
 Also – s 1324 injunction with assistance of s 1324(1A)(b)(i).
 SHARE CAPITAL TRANSACTIONS
FINANCIAL ASSISTANCE
 S 260A(1): A company may financially assist a person to
acquire shares in the company, or its holding company, only
if:
 (a) giving assistance does not materially prejudice:
 (i) the interests of the company or its shareholders;
or
 (ii) the company’s ability to pay its creditors; or
 (b) the assistance is approved by shareholders under s
260B; or
 (c) the assistance is exempted under s 260C.
 Case law: the assistance need not be a cause of acquisition,
but must be given for the purpose of the acquisition.
“Financial assistance”
 S 260A(2): Financial assistance may:
 (a) be given before or after the acquisition or shares; and
 (b) take the form of paying a dividend.
 Direct financial assistance includes:
 A company lending a person money, to enable that
person to acquire the company’s shares: DJE
Constructions v Maddocks.
 A company guaranteeing a loan by a third party to a
person, to enable that person to acquire its shares (even
though contingent liability): Milburn v Pivot.
 A company providing assets as security for a person’s
loan, to enable that person to acquire its shares: Firmin v
Gray & Co.
 Indirect financial assistance includes:
 A company purchasing an asset from X, for the purpose
of putting X in funds to enable X to purchase the
company’s shares: Belmont Finance Corp v Williams
Furniture (No 2).
 A company entering into a joint venture agreement,
which induces the other party to the venture to lend
money to a person who buys the company’s shares:
Darvall v North Sydney Brick and Tile.
 Ie. A company entering into a transaction with
another person, which enables a purchaser to obtain
finance to acquire the company’s shares.
 A company giving a benefit to a person to induce that
person to sell the company’s shares to a purchaser.
 A company assisting a person to acquire shares in its
holding company.
Material prejudice
 Ford: Material prejudice is likely to occur where:
 The company lends money to a company bordering on
insolvency;
 The company guarantees a loan to a company that is
likely to default;
 The company buys an asset at an overvalue;
 The company buys an asset at fair value, but does not
need it for business purposes + illiquid market.
Shareholder approval
 S 260B(1): Shareholder approval for financial assistance
must be given by:
 (a) a special resolution passed at a general meeting –
with no favourable votes cast by the person acquiring the
shares, or by their associates; or
 (b) a resolution agreed to, at a general meeting, by all
ordinary shareholders.
 S 260B(2)-(3): If the company giving financial assistance
becomes a subsidiary of an Australian holding company
immediately after the person acquires its shares, it must also
be approved by a special resolution passed at a general
meeting of that holding company.
Information provided to shareholders
 S 260B(4): A company that calls a meeting for the purpose of
s 260B(1)-(3) must include with the notice of meeting, a
statement setting out all information known to the company
that is material to the decision on how to vote on the
resolution. (but not information that is unreasonable because
of previous disclosure)
Lodgement with ASIC
 S 260B(5): Before the notice of meeting is sent to members,
the notice and accompanying documents relating to the
financial assistance must be lodged with ASIC.
 S 260B(6): At least 14 days before giving the financial
assistance, the company must lodge with ASIC a notice in
the prescribed form stating that the assistance has been
approved.
 S 260B(7): Within 14 days after a special resolution
approving the financial assistance is passed, it must be
lodged with ASIC.
Exemptions: s 260C
Consequences of contravention
 S 260D(1): If a company contravenes s 260A:
 (a) it does not affect the validity of the financial
assistance, or of any contract or transaction connected
with it; and
 (b) the company is not guilty of an offence.
 S 260D(2): Any person who is involved in a company’s
contravention of s 260A contravenes this subsection [a civil
penalty provision by virtue of s 1317E].
 S 260D(3): A person commits an offence if they are
dishonestly involved in a company’s contravention of s260A.
 Also – s 1324 injunction with assistance of s 1324(1A)(a),
(b)(ii); s 588G; breach of directors’ duties & oppression.
S 1324 INJUNCTION
 S 1324(1): Where a person would contravene the CL, a
person whose interests would be affected by the conduct may
apply to the court for an injunction restraining the
contravention.
 S 1324(1A): For the purposes of s 1324(1):
 (a) If the insolvency of the company is an element of the
contravention, the contravention affects the interests of a
creditor or member; and
 (b) A company’s contravention of:
 (i) s 257A(1)(a) (share buy-back not to prejudice
ability to pay creditors); or
 (ia) s 256B(1)(b) (share capital reduction not to
prejudice ability to pay creditors); or
 (ii) s 260A(1)(a) (financial assistance not to
prejudice company or shareholders or ability to pay
creditors);
affects the interests of a creditor or member; and
(c) A company’s contravention of s 256B(1)(a) (fair and
reasonable test for share capital reduction) affects the interests of
a member.