LECTURE 4 : SHARE CAPITAL

Company Law
LW 4024
 SHARES
 Borland’s Trustee v Steel Bros & Co [1901] 1 Ch 279,

 Farwell J defined a share as follows: A share is the interest of a

shareholder in the company measured by a sum of money, for the
purpose of liability and interest

 Section 70 CA 2016 provides:

“A share or other interest of a member in a company is personal property
and transferable ….”

2
 SHARE CAPITAL

 The term share capital refers to the amount of capital raised by a company
through the issue of shares. Share capital can only be raised by companies
limited by shares and registered with a share capital.

 By Section 618(10) CA 2016 the share capital of the company shall be the
“aggregate value of the shares issued by the company”. It is the issued capital
of the company until the company files a notice of its share capital as required
by Section 618(8) or (9) CA 2016

3
SHARE CAPITAL

No par value shares

Section 74. - All shares issued before or upon the commencement of this Act shall
have no par or nominal value. This means companies need not set any minimum
values for the shares issued.
EFFECTS
The adoption of a no-par value regime:
(a) has simplified the company's accounts (e.g. the concept of share premium
accounts and reserves would no longer be required);
(b) clarified the misleading perception that because of the par value, the company
would have reserves and be able to pay its debts to creditors; and 4
 CATEGORIES OF SHARE CAPITAL
Authorised share capital
 The amount fo shares that may be shown in the Constitution. It is the maximum amount that can be raised
by the company through shares.
Issued capital
 that part of the authorised capital of the company which had been issued or offered for sale to investors.
 It included shares allotted to members for consideration.
Allotted capital
 It is that part of the authorised capital which has been allotted to the members.
Paid up capital
 This represents that part of the issued capital which have been fully paid up by the members, or credited
as having been paid.
Unpaid capital
 This represents that remaining part of the issued capital of a company which has not been paid up by the
members. It could be called up by the company in accordance with its articles.
5
 SHARE CAPITAL

 The general power to allot shares is vested in the members by passing a resolution
(Section 75 CA 2016). Members’ approval can be specific to a particular or general issue
of shares.(Section 76(1) CA 2016. Members’ approval must be lodged with the ROC
within 14 days from the date of approval.(Section 76(2) CA 2016).

 See Section 76(3) CA 2016 –when an approval expires……

 Section 76(4) CA 2016:

“Notwithstanding subsection (3), an approval may be revoked or varied at any time by a
resolution of the company.”
6
 WHY DO COMPANIES ISSUE NEW SHARES?

 There are many reasons why companies choose to issue new shares after
company formation, such as:
• Raising additional capital from investors.
• Repaying borrowings
• Funding a new project.
• Awarding a bonus share to employees in place of a cash bonus.

7
TYPES /CLASSES OF SHARES
S 2(1) CA 2016 definition
ORDINARY/EQUITY SHARES
The dividend is paid after the payment of all
liabilities
Cannot be converted
can participate in the distribution of the surplus Cannot participate in the distribution of the
assets
Ordinary shares carry voting rights
Not entitled to cumulative dividend
Equity shares are the ordinary shares of the
company representing the part ownership of
the shareholder in the company.
PREFERENCE SHARES
Priority in payment of dividend over equity
shareholders
Can be converted to ordinary shares
surplus assets of the company
Preference shares have very limited voting
rights
Entitled to cumulative dividend
Preference shares are the shares that carry
preferential rights on the matters of payment of
dividend and repayment of capital.
8
 TYPES OF PREFERENCE SHARES
A company may issue different classes of shares. Different rights and benefits are
attached to the different classes of shares.
 Cumulative preference shares
 A cumulative preference shareholder is entitled to receive a fixed cumulative
dividend per annum.

 Non-Cumulative Preference Shares

 Non-cumulative preference shares, on the other hand, entitle the holder to a
dividend at a fixed rate only in the years where a dividend is declared and paid.
9
 REDEEMABLE PREFERENCE SHARES
 Redeemable preference shares may be redeemed at a specified date or
alternatively the company is given the right to repay the capital within a
specified period. Section 72(2) CA 2016 provides:
“Subject to this section and if authorized by its constitution, a company may issue preference
shares which are liable, or at the option of the company are to be liable, to be redeemed in
accordance with the constitution.”
 The shares shall be redeemable only if the shares are fully paid up and the
redemption shall be out of—
(a) profits;
(b) a fresh issue of shares; or
(c) capital of the company.” 10
 VARIATION OF CLASS RIGHTS
 A company that has a share capital can issue shares with different rights as
seen from the description of the shares above.
 The rights relate to rights of the holders of those shares with respect to :
- repayment of capital,
- participation in surplus assets and profits,
- cumulative or non-cumulative dividends,
- voting,
- and priority of payment of capital and dividend in relation to other shares or
other classes of preference shares…
11
 VARIATION OF CLASS RIGHTS
The CA 2016 allows the class rights to be modified. The class rights are said to be modified or
varied under the following circumstances:
(i) the rights attached to the shares in that class are varied S91(1) CA 2016)
(ii) where the provision in the company’s constitution for the variation of rights attached to
shares in the class is amended. Section 339(6) CA 2016
(iii) where there is insertion into the constitution a new provision on the variation of rights
attached to the class shares. Section 339(6) CA 2016
(iv) Section 339(6) CA 2016 where there is an abrogation (cancellation) of any right attached
to the class shares

In summary, variation is any alteration in the position of the shareholders in relation to those
benefits or duties which they have by virtue of the shares they own. 12
 PROCEDURE FOR VARIATION OF CLASS RIGHTS

Where the company’s constitution has provided the procedure for the variation, then
the procedure for the variation of class rights is to be followed. Section 91(1)(a) CA
2016.

Where the constitution does not prescribe the procedure, then the company may do so
with the consent of the holders of the shares in that class as follows:
(i) by way of written resolution representing not less than 75% of the total voting rights of
the holders of the shares of that class (Section 91(2)(a) CA 2016 or
(ii) by passing a special resolution of the holders of shares of that class (Section 91(2)(b)
CA 2016
13
 PROCEDURE FOR VARIATION OF CLASS RIGHTS
Section 92 (1) CA 2016 states:
“ If the rights attached to shares in any class of shares in a company are varied, the company
shall give written notice of the variation to each shareholder in that class within fourteen days
from the date on which the variation is made.
By Section 95(1) CA 2016:
“ If the rights attached to shares in any class of shares in a company are varied, the company
shall lodge with the Registrar, within thirty days from the date on which the variation takes
effect—
(a) a copy of the resolution or other document that authorized the variation; and
(b) a notice as may be determined by the Registrar including a statement of capital as at the date on
which the variation takes effect.”
14
 PROCEDURE FOR VARIATION OF CLASS RIGHTS
Section 93(1) CA 2016 provides for disallowance by the court:
“If the rights attached to shares in any class of shares in a company are varied, the
shareholders representing at least ten per centum of the total voting rights in the
class may apply to the Court to have the variation disallowed.”
By Section 93(2) CA 2016
“ An application under subsection (1)—
(a)  shall be made within thirty days from the date on which the variation is made;
and
(b)  may be made on behalf of the shareholders by any shareholder appointed in
writing by all shareholders in that class.”
15
 Issue and allotment of shares

 When shares are created by a company they are "allotted' or 'issued" to those people
or other companies who then become the company's members (shareholders).
Raja Khairulzaman v Zaman Indah Sdn Bhd (1979)
It was stated that an ‘allotment’ was the “appropriation to a person of a certain
number of shares, but not necessarily of any specific shares.”

 A share is said to be issued when the shareholder is put in control of the shares
allotted to him.

16
 Issue and allotment of shares

 There is a difference between an issue of shares and a sale of shares. When shares are
issued, the price payable is received by the company. When shares are sold, however, the
money is paid to the shareholder, the company receives nothing.

 A rights issue is a means of raising new capital from the existing shareholders. Each
shareholder is offered new hares in proportion to his existing holdings.

 A company shall register an allotment of shares in the register of members within fourteen
days from the date of the allotment – Section 77 CA 2016

17
 Issue and allotment of shares
Section 78 CA 2016 states:
(1) “A company shall lodge with the Registrar a return of the allotment within fourteen days
from an allotment of shares.
(2) The return of the allotment shall include a statement of capital as at the date of the
allotment and shall state—
(a) the number and amount of the shares comprised in the allotment;
(b) the amount, if any, paid, deemed to be paid, or due and payable on the allotment of each share;
(c) where the capital of the company is divided into shares of different classes, the class of shares to
which each share comprised in the allotment belongs; and
(d) the full name and the address of each of the allottees and the number and class of shares allotted to
him.
18
 DIVIDENDS
 One of the financial returns which a member may receive from his investment in the
shares of a company is the payment of dividends. A dividend is a share of profits in a
company, whether at fixed rate or otherwise, allocated to holders of its shares.

 Since it is a share of profits, dividends need not be paid in cash. Payment of the dividend
can be satisfied by
 distribution to the shareholders in specie (in its actual form) of particular company property OR
 paying up shares of the company to be distributed as bonus shares

 By Section 131 CA 2016:

 “(1) Subject to section 132, a company may only make a distribution to the shareholders out of
profits of the company available if the company is solvent. 19
 DIVIDENDS

By Section 132 CA 2016

“(1) Before a distribution is made by a company to any shareholder, such distribution shall be
authorized by the directors of the company.

(2) The directors may authorize a distribution at such time and in such amount as the directors
consider appropriate, if the directors are satisfied that the company will be solvent
immediately after the distribution is made.

(3) For the purposes of this section, the company is regarded as solvent if the company is able
to pay its debts as and when the debts become due within twelve months immediately after the
distribution is made.”
20
LECTURE 5 : SHARE CAPITAL (II)

Company Law
LW 4024
 TRANSFER OF SHARES

 A person’s complete legal title to shares in a company cannot be acquired without

registration.

 The provisions as to transfer of shares are contained in sections 105 to 107 CA 2016.

 Section 105 (1) CA 2016 says that any shareholder or debenture holder may transfer
all or any of his shares or debentures in the company by a duly executed and
stamped instrument of transfer and shall lodge the transfer with the company.
22
 TRANSFER OF SHARES
Section 106(1) CA 2016:
“ A company shall enter or cause to be entered the name of the transferee in the register of
members as shareholder within thirty days from the receipt of the instrument of transfer under
subsection 105(1) unless—
(a) this Act or the constitution of the company expressly permits the directors to refuse or
delay registration for the reasons stated;
(b) the directors passed a resolution to refuse or delay the registration of the transfer within
thirty days from the receipt of the instrument of transfer and the resolution sets out in full
the reasons for refusing or delaying the registration; and
(c) the notice of the resolution, and in the case of a public company including the reasons
referred to in paragraph (b) is sent to the transferor and to the transferee within seven days
of the resolution being passed.
23
 TRANSFER OF SHARES

 (2) Subject to the constitution, the directors may refuse or delay the registration of a transfer
of shares under subsection (1) where the shareholder fails to pay the company an amount
due in respect of those shares, whether by way of consideration for the issue of the shares or
in respect of the sums payable by the shareholder in accordance with the constitution.
Lim Ow Goik & Anor v Sungei Merah Bus Company Ltd (1969) It was held that shares
being “personal property are prima facie transferable” and the right to transfer “is legal right”.
 If there is a restriction on transfer of shares, the restriction must be unambiguous and clear.
Precision in drafting constitution of the company is desirable if the company wishes to
restrict the right of transfer of shares.
 Re Smith and Fawcett Ltd (1942) The court held that “if it is to be cut down, it must be cut down
with satisfactory clarity”.
 24
 TRANSFER OF SHARES
 The discretionary power of the directors to refuse transfer of shares is a fiduciary one
which must be exercised bona fide in the interest of the company.
Re Smith and Fawcett Ltd (1942) The court held that the directors “must exercise their
discretion bona fide in what they consider-not what a court may consider-is in the interests of
the company, and not for any collateral purpose…”
 This principle has been cited with approval by Malaysian courts on various occasions:

Kesar Singh v Sepang Omnibus Co.Ltd. (1964) The articles of the company gave the
directors an “absolute and uncontrolled discretion” to refuse to register any transfer of
shares. It was held that the directors had acted bona fide and in the interest of the company in
rejecting the transfer on the basis of the hostile relationship between the applicant and the
directors of the company. The court held that “if it is to be cut down, it must be cut down
with satisfactory clarity”.
25
 TRANSFER OF SHARES

 Since by Section 106(1(b) CA 2106 mentioned above the directors would have to pass a resolution
refusing the transfer of shares, it is clear that the right to decline registration of the transfer of shares
by the directors can only be disposed by a positive resolution of the board exercising the power,
otherwise the transferee is entitled to be registered as a member.
Royal Trust Nominees Ltd v Sri Hartamas Development Sdn Bhd (1989)
The secretary wrote to the solicitors for the transferee, that the company was unable to register the
transfer as “the Board of Directors has not approved the said transfer”. Held:
1. the use of the words “has not approved”, in the absence of evidence that a board resolution had
been passed to reject the transfer did not, on the balance of probabilities, satisfy the requirement of a
positive resolution
2. the burden of proving that in fact that there had been such positive exercise of the power rested on
the company which asserted that there was such a resolution
26
 TRANSFER AND TRANSMISSION OF SHARES

 Transfer of shares is a voluntary act of members and it is the method of transferring the
ownership rights of the shares from one person to another.
 Transmission of shares is the result of the operation of law and it takes place only on the
death, insolvency or lunacy of the shareholder.
Transfer Transmission
By a deliberate act By the operation of law

Requires the execution of formal instrument of Requires evidence showing the legal
transfer entitlement.

There must be adequate consideration. There is no question of consideration

Stamp duty is payable Stamp duty is not payable

27
 CAPITAL MAINTENANCE

 In the case of a company limited by shares, the capital subscribed by the shareholders
should be maintained as a fund for the protection of creditors who have an interest in
the paid-up share capital and other assets of the company. The capital should not be
returned to the members.
Re Exchange Banking Co (Flitcroft’s Case) (1882)
It was held that when a creditor gives credit to a company, he gives credit on the faith
of the representation that the capital of the company shall be applied only in the legitimate
course of its business and the creditor has a right to say that the corporation shall keep its
capital and not return it to the shareholders.

28
 CAPITAL MAINTENANCE

 The rule that the capital of the company must be maintained has, subject to a few
statutory exceptions, given rise to the following consequences:
a) that a company may not purchase its own shares – the rule in Trevor v
Whitworth (1887) where it was said:
“Paid-up capital may be diminished or lost in the course of the company’s trading and
that is a result which no legislation can prevent….But persons who deal with and give
credit to a limited company naturally rely upon the fact that the company is trading with a
certain amount of capital already paid, as well as upon the responsibility of its members for
the capital remaining at call. They are entitled to assume that no part of the capital which
has been paid into the coffers of the company has been subsequently paid out except in the
legitimate course of its business.”
29
 CAPITAL MAINTENANCE

Mookapillai & Anor v Liquidator, Sri Saringgit Sdn Bhd & Ors (1981)

 An agreement was reached between majority members and the minority

members of a limited company, inter alia that the company would purchase the
shares of the minority members for RM 1,260,910 and for a reduction of the
paid up capital of the company and that the company would raise the stipulated
sum by a charge of its assets. The court held that Section 67(1) CA 1965 clearly
prohibited the purchase by a company of its own shares.
30
 CAPITAL MAINTENANCE

a) Section 127 (1) Share buy back exception

 Under Section 127(2) CA 2016, a public-listed company may buy back its own
shares if it is so authorised by its constitution, either
(i) through the stock exchange in accordance with the rules of the stock exchange, or
(ii) (ii) buy back its own shares otherwise than through a stock exchange if the
purchase is:
- permitted under the relevant rules of the stock exchange, and
- made in accordance with such requirements as may be determined by the stock exchange.
- the purchase is made in good faith and in the interests of the company.
31
 CAPITAL MAINTENANCE

 Although Section 127 does not say so, the majority of the directors must make a
solvency declaration (Section 113(2)(b) CA 2016) before the company can buy
back its shares. This is found in Section 113 (5) CA 2016 which says:
“Where a company proposes to purchase its own shares under a share buyback,
the directors shall make a declaration that—
(a) it is necessary for the company to buy back its own shares; and
(b) the share buyback is made in good faith and in the interests of the
company.”

32
 CAPITAL MAINTENANCE

 The solvency statement must be:

- signed by each director who makes the statement
 be dated and
 made in a manner determined by the Registrar.

 The solvency statement for a share buyback is a statement made by each director that they
have formed an opinion that the company satisfies the solvency test in relation to the
transaction. The directors’ opinion must be:
- based on the directors’ inquiry into the company’s state of affairs and prospects, and
 must take into account all of the company’s liabilities including contingent liabilities.
Section 113(4) CA 2016 33
 CAPITAL MAINTENANCE- FINANCIAL ASSISTANCE

b) that a company may not provide financial assistance for the purchase or
acquisition of its own shares.
Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor (1990)
 In or about October 1980, the appellants (“the bank”) had granted a company, “Johore Tenggara
Sdn Bhd (“Johore Tenggara”) a fixed loan of RM 1.25 million on all the assets of the hotel. in
September 1982, the bank granted an overdraft facility and a further term loan of RM 2.5 million
to the hotel, secured by landed properties of the hotel and of the hotel’s subsidiary. One of the
terms of the 1982 loan was to liquidate the 1980 fixed loan upon release of the 1982 loan. The
loans were defaulted and the bank took several actions to realise the securities provided by the
hotel. It was held that the purpose of the 1980 fixed loan was to finance the purchase of the whole
of the share equity in the hotel by Johore Tenggara and the security for the loan was property
belonging to the hotel, so the hotel had given financial assistance contrary to Section 67(1) by
way of providing security in connection with the purchase of shares in the hotel itself.
34
CAPITAL MAINTENANCE- FINANCIAL ASSISTANCE
 The s 126 Companies Act 2016 made the following changes
- The ‘whitewash procedure’
- a statutory get-out that enables a company to give financial assistance.
- The ‘whitewash procedure’ will be of interest to financial institutions as they will be able to take
security from a target company if the procedure is correctly followed.
 Public listed companies remain prohibited from providing any form of financial assistance for the
purchase of their own shares or shares in their holding company.
 The aggregate amount of the financial assistance and any other previously given financial assistance
that remains unpaid does not exceed 10% of the company’s current shareholders’ funds.
- The company would receive a fair value for the financial assistance.
- The financial assistance is to be given within 12 months from the date of the solvency statement.
35
“FINANCIAL ASSISTANCE” – PRESCRIBED PROCEDURE

1. Before giving financial assistance

 Pass a special members’ resolution to approve the financial assistance.
 Pass a board resolution to resolve that -
(i) it is in the best interest of the company to give the financial assistance; and
(ii) the terms and conditions of the assistance are just and reasonable.
 Directors who passed the resolution to make a solvency statement on the same day the
resolution is passed.
2. After giving financial assistance, i.e. within 14 days of such assistance
 circulate to all shareholders a copy of the solvency statement and a notice setting out details
of the financial assistance.
36
CAPITAL MAINTENANCE -REDUCTION OF CAPITAL

CA 2016, like CA 1965 permits a reduction of capital. However, there are 2 ways
this may be done, outlined in Sections 115, 116 and 117 CA 2016.
Section 115 says:
“Unless otherwise provided in the constitution, a company
(a) a special resolution and confirmation by the Court in accordance with section
116; or
(b) a special resolution supported by a solvency statement in accordance with
section 117.

37
REDUCTION OF CAPITAL

By Section 116(1) CA 2016

“ Subject to confirmation by the Court, a company may, by a special resolution, reduce the
share capital of the company in any way which includes all or any of the following:
(a) by extinguishing or reducing the liability on any of the shares of the company in
respect of unpaid share capital;
(b) by cancelling any paid-up share capital which is lost or unrepresented by available
assets;
(c) by returning to the shareholders any paid-up share capital which in excess of the
needs of the company. .

38
REDUCTION OF CAPITAL

Section 117 CA 2106 permits a reduction of capital by a public or private company.

“(1) A company may reduce its share capital by a special resolution of the company—
(a) sends a notice to the Director General of the Inland Revenue Board referred to in
section 134 of the Income Tax Act 1967 [Act 53] and the Registrar within seven days of the
date of the resolution and the notice shall state that the resolution has been passed and
contain the text of the resolution and the resolution date; and

(b) meets the solvency requirements under subsection (3)

39
REDUCTION OF CAPITAL

Section 117(3) CA 2016

“The company meets the solvency requirements if—
(a) all directors of the company make a solvency statement in relation to the reduction
of share capital;
(b) the statement is made—
(i) in the case of a private company, within the period of fourteen days ending with
the date of the resolution but shall be within time to comply with subsection (5); or (ii)
in the case of a public company, within the period of twenty-one days ending with
the date of the resolution but shall be within time to comply with subsection (6); and
(c) a copy of the solvency statement is lodged with the Registrar together with the
notice required to be lodged under paragraph (1)(a).
40