SHARE CAPITAL

INTRODUCTION

In a company, members will contribute money to the company. In return, the members are issued with shares. The shares form part of a company’s share capital. The amount of the company’s share capital is stated in the M/A: s 18(1)(c), CA 1965. This is known as authorised share capital.

— If a company issues shares in excess of the authorised share capital, the issue of shares is void – Bank of Hindustan, China and Japan Ltd v Alison (1871).

— Thus, a company should first increase its authorised share capital. This can be done by passing an ordinary resolution: s 62(1), CA 1965. This means that the company must obtain at least 51% approval from the company’s shareholders.

TYPES OF CAPITAL

— Authorised share capital means the maximum amount of share capital a company can issue.

— Issued share capital means the actual number of shares issued by the company. It should be noted that a company is not bound to issue all its shares at the same time.

— Paid up capital means the amount actually paid by the shareholders. In some cases the shareholders may pay for their shares in full or in part.

— Called up capital means the amount the company calls on partly paid shares.

— Uncalled capital means the remainder of the issued capital, not called up by the company.

TYPES OF SHARES

— Shares are an investment in a company.

— Shares are moveable property: s 98, CA 1965. The shares or other interests of any member in a company shall be moveable property, transferable in the manner provided by the A/A, and shall not be of the nature of immovable property. This means that the shares can be bought, sold and bequeathed.

— Shares have been defined as an interest measured by a sum of money for the purpose of liability and interest – Borland’s Trustee v Steel Bros & Co Ltd (1901).

— The term ‘liability’ means the amount to be paid on the shares. The term ‘interest’ means the rights attached to the shares in terms of attending general meetings, voting at general meetings and receipt of dividends.

— A company can issue various types of shares. This is to accommodate the different needs and preferences of different types of investors.

1. Preference shares are defined in s 4 of CA 1965. It means a share by whatever name called, which does not entitle the holder thereof to the right to vote at a general meeting or to any right to participate beyond a specific amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise.

— Preference shares have priority of payment of dividends over other shares.

— Preference shares have priority of return of capital in the case of a company’s winding up over other shares.

— The rate of dividend is fixed in the A/A or terms of issue.

— Holders of preference shares have to voting rights at the general meeting although they do have a right to vote at class meetings.

2. Redeemable shares are preference shares that can be redeemed by the company: s 61, CA 1965. Subject to this section, a company having a share capital may, if so authorised by its A/A, issue preference shares which are, or at the option of the company is to be, liable to be redeemed and the redemption shall be effected only on such terms and in such manner as provided by the A/A.

3. Ordinary shares are shares that are not preferred shares and do not have any predetermined dividend amounts.

— Payment of dividends is only after preference shares.

— Return of capital in the case of the company’s winding up is only after preference shares.

— The rate of dividend is recommended by the BOD.

— Holders of ordinary shares have voting rights at the general meeting

4. Deferred shares are also sometimes known as founders’ or promoters’ shares. They are usually taken by the persons who formed the company or the promoters of the company. They are known as ‘deferred’ because the holders of such shares are the last to receive dividends and return of capital when a company is being wound up. However, their voting power is high. Generally, one share is entitled to one vote but holders of deferred shares will have more than one vote.

ISSUE OF SHARES

— A contract is formed between a company and a shareholder when a shareholder accepts a company’s offer – ANZ Nominees Ltd v Lennard Oil NL (1985). Thus, the company’s M/A and A/A will bind the company and its shareholders: s 33(1), CA 1965.

— A company cannot issue shares at a discount – Ooregum Gold Mining Co of India v Roper (1892). This means if the par or nominal value of shares is RM1.00, the company cannot issue shares at below RM1.00, e.g. RM0.80 whereby a discount of RM0.20 is given. This is because the capital will be reduced. The idea of issuing shares is to raise capital and the share capital must be maintained.

— Furthermore, a reduction in capital means that the amount available to repay creditors is reduced. Creditors are more concerned about issued share capital than authorised share capital.

— It would also be unfair to existing shareholders who have been issued shares at a nominal value. This is because those issued shares at a discount will have the same rights as those who have been issued shares at a nominal value.

— Additionally, it is in conflict with the M/A which provides that the nominal value of the share is RM1.00.

— However, if the following requirements in s 59 CA 1965 are complied with, shares can be issued at a discount:

— It must be shares of a class already issued.

— It must authorised by a resolution passed at general meeting.

— The company must obtain a court order.

— It must be done not less than one year after the company is entitled to start its business.

— The issue of shares at a discount must be done within one month of the court order.

— The issue of shares at a discount must first be offered to the existing shareholders in proportion to their holding.

— If it is a public company, the prospectus must contain particulars of the discount.

— There are two exceptions whereby shares may be issued at a discount without having to comply with the requirements of s 59 CA 1965:

— Convertible debentures can be issued at a discount. The debentures will then be converted to shares provided the debentures are converted to shares only after a reasonable time – Moseley v Koffyfontein Mines Ltd (1904).

— Shares can be issued at a discount to underwriters provided it is not more than 10% of the issued value of shares: s 58, CA 1965. Underwriters are those companies that are willing to take up shares not taken by the public. This is necessary as there is no guarantee that when a company offers shares, all the shares will be taken up.

— A company is allowed to make allotment of shares: s 54, CA 1965. However, the power is given to the directors. The power should be exercised in the interests of the company. Additionally, the directors must obtain approval from the existing shareholders before issuing new shares: s 132D, CA 1965.

— If a company issues shares at a value higher that the nominal value, it is known as issue at a premium: s 60, CA 1965. For example, if the nominal or par value is RM1 and the share is issued for RM1.50, the premium would be RM0.50.

TRANSFER OF SHARES

— Transfer of shares means shares are passed from one person to another. This must be distinguished from issue of shares, where the company issues the shares to an individual.

— Shares can be transferred: s 98, CA 1965. However, with regard to a private company, s 15(1) of CA 1965 places a restriction on the right to transfer shares. Nevertheless, the right to transfer shares cannot be prohibited.

— The restrictions to the transfer of shares must be expressly stated in the A/A – Greenhalgh v Mallard (1943). Therefore, a member is bound by the restrictions provided in s 33(1) of CA 1965 which stated that a member is bound by the company’s M/A and A/A.

— When the BOD refuses to register a transfer of shares, the reasons for refusing the transfer must comply with the restrictions as provided in the A/A. Examples of restrictions include:

— The A/A gives absolute discretionary power to the BOD. Even in such a situation the power should be exercised in the interests of the company – Kesar Singh v Sepang Omnibus Co Ltd (1964). If the directors were to give their reasons for their refusal, the court will evaluate whether they were sufficient – Lim Ow Goik v Sungei Merah Bus Co Ltd (1969).

— The A/A contains a pre-emption clause. A pre-emption clause means the existing shareholders have a right to be offered the shares before a shareholder offers his shares to an outsider. If the shareholder offers to an outsider first, he is in breach of the pre-emption clause and therefore the BOD has a right to refuse to register the transfer of shares.

— If refusal to register a transfer of shares amounts to oppression, the affected shareholder can bring an action under s 181 of CA 1965.

— Forged transfer means the transfer is unauthorised. It is a nullity. It is not valid. Therefore ownership of the shares will not pass. Usually the situation is as follows:

— A is the original owner. B forges a transfer without anyone’s knowledge, i.e. A or the company. B is then issued a share certificate in his name which shows he is owner of the shares. B then transfers the shares to C who has no knowledge that it is a forged transfer. The company then issues a share certificate to C who is now the owner of the shares. A now realises the position. The Register of Members has C’s name as the member.

— It should be noted that the ownership of the shares will not pass to the transferee, i.e. B or C. This is so even if the transferee has provided value for the shares and acted in good faith, i.e. he has no knowledge that it is a forged transfer. Therefore the ownership of the true owner is protected, i.e. A.

— However, A must make an application to the company to restore his name to the Register of Members. This is because at present, the transferee’s name, i.e. C is in the register. In such a case, the transferee (i.e. C) is no longer a member of the company because the register has been rectified. His ownership is affected. What should C do then? C has no knowledge that it is a forged transfer.

— The transferee (i.e. B) was registered under a forged transfer. Therefore, the share certificate issued to him is not valid. In fact he is liable to compensate the company for any loss suffered. The subsequent transferee (i.e. C) did not make the forged transfer. He does not get back his shares since the true owner’s name has been restored. Furthermore, he cannot obtain ownership from a person who has no ownership himself. This is based on the rule of ‘nemo dat quod non habet’.

— However, he has two options – he can bring an action against B who committed the forgery; or he can bring an action against the company for compensation.

— In such a case, the company may refuse to pay compensation to the subsequent transferee on the ground that it is not responsible for the forgery. In other words the company is denying C’s rights. In such a case the subsequent transferee (i.e. C) is advised to rely on the doctrine of estoppel. The purpose of the doctrine is to stop the company from denying the rights of the subsequent transferee. In order for the doctrine to apply, the following must be satisfied:

— a representation is made by the company that the transferor has rights on the shares

— the representation is made to the transferee, and

— the transferee must have relied upon the representation before buying the shares.

— If the doctrine applies, the company will have to compensate the loss suffered by the subsequent transferee – Re Bahia & San Francisco Rly Co (1868).