SHARE CAPITAL
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).
SHARE CAPITAL
Reviewed by Kamaruddin Mahmood
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