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Law Notes Company Law Notes

Capital Rules Notes

Updated Capital Rules Notes

Company Law Notes

Company Law

Approximately 805 pages

Company law notes fully updated for recent exams in the UK. These notes cover all the major LLB company law cases and so are perfect for anyone doing an LLB in the UK or a great supplement for those doing LLBs abroad, whether that be in Ireland, Canada, Hong Kong or Malaysia (University of London). These notes were formed directly from a reading of the cases and main texts and are vigorous, concise and very well written.

Everything is conveniently split up by topic as you can see by the list o...

The following is a more accessible plain text extract of the PDF sample above, taken from our Company Law Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Capital Rules

An important to note is that share capital is only one part of a company’s total assets, and often a very small part. Other tea sources of finances include loans or retained profits.

Objectives of capital rules

Protection of creditors:

  • This is the traditional rationale for capital rules.

  • Ensures that there is a minimum level of capital before trading begins.

  • Ensures transparency in capital arrangements and that capital is not returned to shareholders unless in accordance with stating rules.

    • Procedures for formal reduction of capital.

    • Regulating ability of companies to repurchase their own share.

    • Capital may be a guide for returns via dividend payments.

Protection of investors:

  • Some controls on the price at which shares are bought (e.g. ‘No discount’ rule)

  • Measures to prevent dilution of share holders’ interests.

  • Prevent manipulation of the share price controls on purchases on own shares.

Raising Capital

Nominal value of shares

All shares must have a nominal value. (CA2006s.542(1))

Any allotment of a share value without a fixed nominal value is void. (CA2006s.542(2))

The share capital = number of shares x nominal value.

The no discount rule, shares may not be issued at a price below their nominal value. (CA2006s.580(1))

Any shareholder purporting to take a share at a price below their nominal value remains liable for the difference. (CA2006s.580(2))

Lowry’s Case

Lord Wright said that there is a general duty to obtain the full market value for shares but this could be adjusted for good reason.

Shearer v. Bercain

Cited Lord Wright. Stated that although there is a feeling of freedom for directors to choose the offer price of shares they generally have a duty to obtain the full market value unless there is a good reason to accept less.

Share Premiums

The share premium is the difference between the offer value and the nominal value.

All share premiums must be placed in a special account and identified as the share premium account on the balance sheet. (CA2006s.610(1))

The rules on share premiums apply whether cash or non cash consideration is given for the shares. The premiums are treated in broadly the same way as share capital with a couple of important exceptions:

  • The premium account maybe used to pay off the costs of issuing shares. (CA2006s.610(2))

  • The company may use the premium account to pay up new shares to be allotted to members as fully paid up bonus shares. (CA2006s.610(3))

  • The balance of the premium account may be used in a group reconstruction. (CA2006s.611)

  • Disapplies the rules relating to share premiums in respect of shares issued as part of a merger. (CA2006s.612)

There is no requirement that shares in a private company can be paid for in whole or in part at the time they are allotted but the shareholder will be liable to pay up the remaining value of the share at the request of the company or in liquidation.

Shares of a public company must be paid up to at least a quarter of their nominal value and the whole of any premium value. (CA2006s.586(1))

Payment for shares: cash and non cash consideration

Shares including share premiums must be paid for in money or monies worth. This could include goodwill or knowhow. (CA2006s.582(1))

Re Wragg

The value which the company attaches to non cash consideration is not to be assessed for adequacy in a private company.

Tintin Exploration

The non cash consideration could be found to be insufficient, and thus invalidate the shares, where the directors acted in bad faith.

Re White Star Line

The non cash consideration was obviously not of equivalent value to the shares and was merely illusory.

There are much more stringent rules in relation to public companies accepting non cash consideration for payment for shares.

A public company may not accept an undertaking to do work or perform services as consideration for shares. (CA2006s.585(1))

A public company may not accept a long term undertaking in exchange for shares. (CA2006s.587(1))

A breach of CA2006s.585(1) shall leave the holder liable to pay the amount left outstanding on both the nominal value and the premium value shares.

A breach of CA2006s.587(1) shall leave the holder liable to pay the amount left outstanding on both the nominal and the premium.

Subsequent holders will also be liable if they are not a bona fide purchaser for value without notice. (CA2006s.588)

If a person gives a contract to do work in consideration for shares in a plc. Then he will remain liable to do the work notwithstanding the failure of the undertaking to be good consideration for the shares. (CA2006s593(1))

All noncash consideration provided to a plc. In exchange shares must be independently valued. (CA2006s.593(1))

If an independent valuation has not been obtained then the allotment remains valid but the person must pay the nominal premium values. (CA2006s.604)

The courts have a discretion to provide relief against liability arising from invalid non cash consideration.

Re Bradford Investments

  1. The principle behind the rules that the company must receive assets worth at least the allotted value and the premium. If this is the case then no liability need arise.

  2. Not on the facts though.

Re Ossory Estates

  1. The principle behind the rule was that the company must receive assets worth at least the allotted value and the premium.

  2. On the facts this was a so relief from liability was granted.

Minimum capital rules

There is no minimum capital requirement for private companies in the UK. In this respect UK is very different to other EU member states which significant minimum capital rules.

Centros

Denmark had a high minimum capital requirement and so Centros simply registered in the UK and then used the free movement provisions of the EU to allow it to trade in Denmark.

There is a minimum capital requirement for public companies though.

A public company must have a minimum paid up share capital of at least 25% of the nominal value on each share and all of the premium on each share....

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