Corporate Financing

Ajay Kumar
Agenda
• Lifting of Corporate Veil

• Corporate Funding

 Share capital
1. Classes of Shares

 Loan Capital
1. U K – Charge (Fixed & Floating); Debentures
2. UAE - Commercial Mortgage; Mortgage & Pledge
Gilford Motor Company, Ltd v Horne1933 Ch 935

• Plf company bought various parts of motor vehicles

from manufacturers, assembled the parts on the
company's premises and sold the products under the
name of Gilford Motor Vehicles

• They also sold separate parts which were handed over

to the buyers for cash

• By an agreement dated May 30, 1929, the defendant

was appointed managing director of the plaintiff
company for a term of six years

3
Gilford Motor Company, Ltd v Horne1933 Ch 935

• Clause 9 of the agreement :

• “The managing director shall not at any time while he

shall hold the office of a managing director or
afterwards

• Solicit, interfere with or endeavour to entice away

from the company any person, firm or company who
at any time during or at the date of the determination of
the employment of the managing director who were
customers of or in the habit of dealing with the
company”
4
Gilford Motor Company, Ltd v Horne 1933 Ch 935
• The employment of the Def. as managing director was
determined in November, 1931, by an agreement

• Shortly afterwards the Def. opened a business for

the sale of spare parts of Gilford vehicles

• Business run as a company, JM Horne & Co Ltd; in

which his wife and a friend called Mr Howard were the
sole shareholders and directors

5
Gilford Motor Company, Ltd v Horne1933 Ch 935

Held:
• In the circumstances the covenant was not wider than
was reasonably necessary for the protection of the
plaintiff company's trade and was therefore
enforceable

• This company was formed as a device, a stratagem,

in order to mask the effect carrying on of the
business of Mr Horne; against the contract with
former employers

6
Jones and Another v Lipman and Another1962 1 All ER 442

• By a written agreement dated February 27, 1961, the 1st

Def. (L) agreed to sell for £5,250 to the plaintiffs
certain freehold land which was registered with absolute
title

• Pending this sale, the 1st Def. sold and transferred the
land to the Def. company for £3,000

• The Co. had a nominal capital of £100, had been acquired

by the 1st Def.

• He and another were its shareholders and directors

7
Jones and Another v Lipman and Another1962 1 All
ER 442
• This sale was financed by the borrowing £1,564 from a
bank; the rest of the purchase-money was contributed by
1st Def.
• Plf. asks specific performance of the agreement of
February 27, 1961

Held:
• Def. Co. was a creature of the first Def., a mask to avoid
recognition by the eye of equity
• By his control of the limited company, in which the
property was vested a decree of specific performance
could not be resisted
8
When Veil Lifted?
• Must be - wrong doing

• Wrongdoing/impropriety should be done with

the use of the corporate structure

• Wrong doer controlled the Co. & used it as a

facade

9
Share Capital
Borland’s Trustee v Steel Brothers & Co Ltd [1901]
1 Ch 279
A share is the interest of a shareholder in the company
measured by a sum of money -

• for the purpose of liability in the first place;

• & of interest (proprietary) in the second –

but also consisting of a series of mutual covenants

entered into by all the shareholders inter se in
accordance with S 16 (C A1862).
Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279

• A share is not a sum of money settled in the way

suggested, but is an interest (proprietary) measured by
a sum of money and made up of various rights
contained in the contract, including the right to a sum of
money of a more or less amount

• The contract contained in the AoA is one of the original

incidents of the share
Ordinary/Equity Shares (common stock)
• They carry 1 vote per share, are entitled to participate equally
in dividends

• If the company is wound up; share in the proceeds of the

company after paying all the debts

• Some companies create different classes of ordinary shares,

e.g. 'A' ordinary shares, 'B' ordinary shares, etc.

• Done to create some small difference between the

different classes (Ex: to pay different dividends to the holders
of the different classes, or for different rules to apply for share
transfers, etc).
Equity Shares
• There can also be ordinary shares in the same
company that are of different nominal values

• Ex: 10Dh ordinary shares and 1Dh ordinary shares

(Each share has one vote regardless of its nominal
value; the holder of the 1Dh shares will get 10 votes
for every 10 Dh paid for them, while the holder of the
10 Dh shares will only get one vote per share)
Redeemable Shares
• Shares issued on terms that the company will, or may,
buy them back at some future date (date may be fixed,
after 5 yrs) or at the directors' discretion
• Redemption price is often the same as the issue price,
but need not be (clear arrangement with an outside
investor)

• May also be redeemable at any time at the company's

option (often done with non-voting shares given to
employees so that, if the employee leaves the company
his shares can be taken back at their nominal value)
Preference shares
• Usually have a preferential right to a fixed amount of dividend
- as a percentage of the nominal (par) value of the share,
• Ex: a 1Dh, 7% preference share will carry a dividend of 7 fils
each year
• The dividend may be cumulative (i.e. if not paid one year then
accumulates to the next year) or non-cumulative -
(presumption - is cumulative)
• Preference share are often non-voting (or non-voting except
when their dividend is in arrears)
• Sometimes redeemable
• They may be given a priority on return of capital on a winding
up
Bonus Share
• Additional shares given to existing shareholders, without any
additional cost, based upon the number of shares that a
shareholder owns
• Individuals hold same proportion of outstanding shares
• Ex: A 3 for 2 bonus issue entitles each shareholder three
shares for every two they hold before the issue. A shareholder
with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 =
1500)
• Paid from accumulated profits/distributable reserves
• Increases the ‘Issued share capital’
• Generally issued - to increase retail participation (increase in
price - reduces price), increases equity base/share capital;
accumulated profits reduced; sign of good health of Co.
Art 221: Shareholder Rights
1. A shareholder in a Joint Stock Company shall have:
a. All the rights attached to the share - particularly the right to
obtain its share of the profits and assets of the company upon
its liquidation, to attend the meetings of the General Assembly
and voting on its Decisions (as per Co. Law & AoA)
b. The right to inspect the books and documents of the
company and any documents or instruments in connection with a
deal made by the company by entering into the deal with a related
party by authorization from the Board of Directors or under a
decision of the General Assembly or as provided by the Articles of
Association of the company in this respect.
2. The Court may demand the company to provide specific
information to the shareholder - not in conflict with the
interests of the company
3. Board of Directors or the General Assembly cannot take
decisions to prejudice the rights of the shareholder (whether
Foss v Harbottle [1842]
• 2 shareholders commenced legal action against the
promoters and directors - alleging that they had
misapplied the company assets and had improperly
mortgaged the company property

• The Court rejected their claim

• Held: a breach of duty by the directors of the company was

a wrong done to the company for which it alone could sue

• In other words, the proper Plf. in that case was the

company and not the two individual shareholders
• Derived from two general legal principles of
company law:

• First - a company is a legal entity separate from its

shareholders

• Second - the Court will not interfere with the internal

management of companies acting within their powers

• Where an ordinary majority of members can ratify the

act, the Court will not interfere

• Implies - if the majority can ratify an act, the minority

cannot sue
• 4 exceptions to the rule in Foss v Harbottle:

1. Ultra vires/illegal acts (objects)

2. Transactions requiring special majorities
3. Personal rights; and
4. The ‘fraud on the minority’ exception
(fraud, negligence, default in complying with any
statutory provision or rule of law or breach of
duty)
• Under this exception, a minority shareholder can bring
an action on behalf of the company, where he can show:

• the wrong constitutes a ‘fraud against the minority’ &

• the ‘wrongdoers are in control of the company’ and will

not allow the company to sue
I. Classes of Shares
• The individual rights relating to different classes
could differ
• Voting rights attached to them
• Whether or not they can receive dividends?
• Whether guaranteed / variable dividend?
• Payouts received on the winding up of the company?
• No statutory limit on the number of classes or
groups of shares a company can create
Art 206: Rights Attached to Shares

1. Unless otherwise provided in this ‘law’ the

shareholders of the company shall be equal in the
rights attached to the shares. The company shall not
issue different classes of shares
2. Notwithstanding the provision of Clause 1 of this
Article, the Cabinet may, on proposal by the Chairman of
the Authority, issue a Decision determining other
classes of shares and the conditions of issuing the
shares, the rights and obligations arising from such
shares and the rules and procedures regulating them
3. A shareholder may not demand to recover its
contribution to the capital of the company
• (DIFC ) Provision 35:
1. The rights attached to Shares (or to any class of Shares) shall be
determined by the Articles
2. Variation of class rights (UK)
• Depends whether any procedure in AoA; if there is – follow it (S 630
(2))

• Or if no procedure - A separate meeting of that class must be called

• Spl. resolution/ written consent of shareholders representing 75% in

nominal value of that class (S 630 )

• Could be opposed by holders of 15% of nominal value of that class in

21 days to cancel variation (S 633)

• Courts interfere, only if rights affected - not value or power derived

from rights
Cumbrian Newspapers Group Ltd v Cumberland &
Westmorland Newspaper and printing Co. Ltd [1987] Ch 15

• Claimant acquired a 10.67% stake in the Def.s’ company (Story -

rivals, issuing 10%)

• With special rights attaching to those shares, including pre-

emption rights and the right to appoint a director to the board

• Def. company passed a special resolution to remove these rights

Held: this was unlawful

• In providing these special rights they had effectively created
new class of share, with one shareholder
• Alteration therefore required the shareholder’s consent,
which was refused

• Illustrates the requirement - for class rights to be varied a

75% majority of shareholders in that class should support
White v Bristol Aeroplane Co [1953] ch 65
• The company had ordinary and preference shares in issue,
both classes of share carried full voting rights
• The Co made a bonus issue to ordinary shareholders only, as
permitted by the Articles
• Preference shareholders objected to the bonus issue on the
grounds it reduced their voting power in the company, which
effectively amounted to a variation of their rights without
consent
Held: the bonus issue was valid, and rejected the call for
cancellation
• The court stated that the bonus issue was NOT a variation
of class rights and therefore did not require consent from
preference shareholders
Art 207: Nominal/Face Value (Shares)
1. The nominal value of the share in a company may not
be less than 1 Dirham and shall not exceed 100 Dirham

2. (Part payment) Shares may be issued by payment of

at least 1/4 of their nominal value, provided that the
balance shall be paid within 3 years from the date of
registration of the company with the CA

3. The company may, under a Spl. Decision and with the

consent of the Authority, divide the nominal value of its
shares into a smaller value, provided that the new value
shall be at least one Dirham per share
Paying for Shares (UK)
• Ltd - may issue shares for noncash consideration. Court interference
only if there is fraud or the consideration is ‘illusory, past or patently
inadequate’
• Plc – S584 - Subscribers to the MOA must pay cash for their
subscription shares
• S 585 - Payment for shares/premium must not be in the form of work
or services
• S 586 - Shares cannot be allotted until at least ¼ their nominal value
and the whole of any premium have been paid
• S 587 – Noncash consideration must be received within 5 years
• S 590 – Contravention – company & all Officers in default – conviction
leads to fine
• S 593 – Non-cash consideration must be independently valued and
reported on by a person qualified to be the company’s auditor. The
valuation must be carried out in the six months prior to the allotment
Art 122: Entities Authorized to receive Subscriptions

2. The entity/ entities receiving subscriptions shall

withhold the monies paid by the subscribers and the
revenues from the amounts of subscription to the shares
for the account of the company under incorporation.
• Such monies may not be paid to the Board of
Directors of the Company until the ‘Authority’ issues a
‘certificate of incorporation’ and the registration of the
company in the Commercial Register with the CA
Art 217: Non-Payment of Balance Value of Share
1. If a shareholder fails to pay the instalment of the share
value on the maturity date, the Board of Directors may
notify the shareholder to pay the outstanding instalment
under a registered letter
- if the shareholder fails to make payment within 30 days,
the company may sell the share at a ‘public auction’ or
according to the Decisions issued by the Authority

2. The company shall apply the sale proceeds to settle any

overdue instalments and expenses as compensation for the
delay and shall pay the balance amount to the holder of
the share
Art 218: Discharge of Shareholders

1. The company may not discharge a shareholder

from his obligation ‘to pay the value’ of a share;
• Such obligation may not be set-off against any rights of
the shareholder from the company

2. Any of the creditors of the company may file a lawsuit

against the shareholder to demand him to pay the value
of the share
 III. Art 196: Issue Premium

1. With increase of the capital - company shall issue

shares under a nominal value equal to the nominal value
of the original shares
However, the company may, with the ‘consent of the
Authority’, add a premium to the nominal value of the
share and determine the amount of such premium
Such premium shall be added to the legal reserve; even
if the reserve exceeds half the capital thereby

2. The Authority shall decide the method to calculate

the premium
Issue at discount (UK)

• The common law rule S580 (CA06) is that a company

cannot issue its shares for a price which is at a discount
on their nominal value

• Dirs.’ cannot devalue the existing shareholders interest

in the Co. (not very sensible)

• Every share has a nominal value which is fixed at the

time of incorporation

• The nominal value of the share represents the extent of

a shareholders potential liability
Issue at discount (UK)
• In addition S582 (CA06) - that shares are only treated
as paid up to the extent that the company has
received money or money's worth

• If this rule is breached the issue is still valid, but the

allottee must pay up the discount plus interest
• This applies to any subsequent holder of such a share
who was aware of the original underpayment S588
(CA06)
Share Premium Account

• Where a share is allotted at a value greater than its nominal

value, the excess over the nominal value is share premium

• This is where the market value of the share is greater than the
fixed nominal value

• S610 (CA06): requires any premium to be credited to a share

premium account, which may only be used for

• Writing off the expenses of the issue of new shares

• Writing off any commission paid on the issue of new shares

Share Premium Account
• Issuing bonus shares; Reducing Share Capital, to
Redeem

• The company cannot pay dividends from this account as

dividends can only be paid from distributable profits

• Any payment of dividend from the share premium

account would be an illegal return of capital to the
shareholders

• Part of non-distributable reserves

• Art 219: Share Buyback
1.…purchase such shares unless the purchase is
intended to ‘decrease the capital’ or for the ‘redemption’
of the shares….
2. Notwithstanding the provision of Clause 1 of this
Article,
• If registered as Public Joint Stock Company for 2
financial years may purchase shares representing up
to 10% of its capital (for resale) as per conditions set
by the Board of Directors of the Authority
Acquisition of own shares
• S 658: Co. cannot acquire its own shares (void) – using
assets due to shareholders, to buy their shares - Creditor
protection

But exceptions:

• S 659(1) (a): Co. does not need equity finance – internally

generate funds

(or)
• Give an exit to shareholders who do not view the Co. as an
attractive investment
• S 690: Power of limited company to purchase own
shares:
1)A limited company having a share capital may
purchase its own shares (including any redeemable
shares), subject to:
b) any restriction or prohibition in AoA
2) ..[I]f as a result of the purchase – remaining shares
only redeemable and treasury shares

• S 691: Cannot be bought unless fully paid

• S 692: 1) paying for share buy-back – Pvt. Ltd co. if
AOA allows; up to 5% of nominal values (fully paid)
• 2) Ltd. Co. – buy back only from distributable profits; or
fresh issue made for that purpose
Art 209: Disposal of the Shares
• Method and conditions for disposal of shares to be
determined - this Law, the Authority and AoA,
• provided that the disposal of the shares shall not lead
to the decrease of the share of the UAE nationals in
the capital of the company below the applicable limit
Art 193: Issued & Authorized Capital of the
Company
1. The minimum limit of the issued capital of a Public
Joint Stock Company is AED 30 million (this limit may
be increased)

2. The AoA of the company may determine as authorized

capital such amount not exceeding the double of the
issued capital, in accordance with such terms and
conditions laid by the Authority in this respect
Increasing Share Capital

Art 194: Increase

1. The capital of the company may be increased upon payment of its
issued capital in full (Board of Dir’s approval); up to approved
authorised capital
2. The authorized capital may be increased with the consent of the
Authority under a Spl. Decision issued by the GA
3. Board can increase issued to previously approved Authorised by GA

Art 195: Methods to Increase

Capital increased - by any of the following ways:
1. Issue of new shares
2. Capitalize the reserve; or
3. Convert the bonds or Sukuk issued by the company into shares
Common Law (UK):
• No requirement of Authorised Capital under CA 2006
• Pvt. Co.s’ - No of shares was in Memorandum – merged
with AOA
• AOA could give power to Directors’
• Pass Spl. Resolution/ordinary to amend AOA
• Directors must be authorised (expiry of resolution &
number of shares specified)
• In Pvt. Companies with one class no spl. resolution required
• Not creating new class

(Subject to/check pre-emption rights)

Art 197: Pre-emption Rights
1. Subject to this Law, the ‘existing shareholders shall
have priority’ to subscribe to the new shares
Any provision to the contrary in the AoA of the
company or the Decision to increase the capital shall be
void
2. A shareholder may sell the pre-emption right to
another shareholder or to third parties with a material
consideration. The Board of Directors of the Authority
shall issue the Decision regulating the conditions and
procedures of selling the pre-emption right
Decrease of the Capital
• Art 202: Capital of the company may not be decreased without the
consent of the Authority and issuing a Spl. decision upon hearing the
report of the Auditor
• The capital may be decreased in either of the following cases:
1. If it exceeds the needs of the company;
2. The company suffers such loss that cannot be compensated by future
profits

Common Law:
1. S 641 (1) – (3)(Both public/private) Spl resolution; Requires the
approval of court (for Pvt – solvency statement)
- Reduce liability of members for uncalled capital
- Reflect diminution of the company’s assets
- Should be in public interest (expulsion of a shareholder/class)
- Pvt. if only redeemable left – cannot do
Art 239: Legal Reserve
1. 10% of the net profits ‘shall’ be set aside every year
and allocated to create a legal reserve; unless the AoA
provides for a higher percentage

2. General Assembly may suspend such deduction

whenever the legal reserve reaches 50% of the paid
capital of the company, unless AoA of the company
provide for a higher percentage

3. The legal reserve may not be distributed to the

shareholders.
But legal reserve in excess of 50% of the capital may
be distributed as profits to the shareholders in
Art 240: Voluntary Reserve

• AoA of any JSC may provide for the allocation of a certain % of

the net profits to create a voluntary reserve to be allocated for
purposes provided by the AoA
• Can be used for other purposes - under a Decision by the GA
Art 200: Capitalization of the Reserve

• Under a Spl. Decision the reserve may be merged in

the capital of the company by creating bonus shares
to be distributed to the shareholders pro rata to the
shares held by each of them, or by the increase of
the nominal value of the shares pro rata to the
percentage of urgent increase in the capital

• The shareholders shall not bear any financial

obligation as a result thereof
Art 241: Distribution of Profits
1. GA shall determine the % of the net profits to be distributed to
the shareholders after deducting the legal reserve and the optional
reserve

2. A shareholder shall be entitled to his share of the profits in

accordance with the conditions as determined by the
Authority

3. AoA may provide for the distribution of annual, biannual or

quarterly profits