Legal Capital Notes

LEGAL CAPITAL - NOTES

Capital Formation

Payment For Shares

1. Par or nominal value

   section 580: shares must have a fixed par or nominal value

   this price is set by founders of company when it is created

2. Premium

   shares however are commonly sold at a at a premium

   i.e. price above the par value

   this price can be set by directors

   are under duty to obtain best price when doing this (directors’ duties)

   Shearer [1980]

   s.610: share premiums must be treated as though they are capital

   i.e. company must maintain value of share premiums (and not merely the par)

1. Paid Up Capital Requirements

   ‘Paid-up’ share capital: amount of capital money company has received in payment in respect of its issued shares

   s.610(4): paid-up capital does not include share premiums

   Shares may be fully, partly or nil paid up.

   nil/partly: i.e. none or only some of par value is paid at time of issue, but rest later

   Minimum paid up requirement:

1. private companies

   no minimum amount that must be paid-up on issuance

   i.e. can be allotted on a nil paid, partly paid or fully paid basis

2. public companies

   s.586: shares issued must be paid up as to:

   1. quarter of the par value

   2. the whole of the premium

      penalties

      if s.586 not complied with, C must pay minimum amount required to be paid up by company + premium value

      no court relief possible

2. No Discount Rule

   s.580: shares cannot be sold for less than their par value (‘no discount rule’)

   Penalties

   s.580(2): if C receives shares for less than par value, liable to pay difference + interest

   no court relief possible

3. Consideration Requirements

   Section 582: shares can be bought for cash or non-cash consideration

   Cash: includes cash, cheque, an undertaking to pay cash at later date, the release of a liability for a sum of money

1. Public companies

1. Par or premium value of shares cannot be paid for by consideration in form of either:

1. s.585: work or services

2. s.587: ‘long term undertakings’

   i.e. to do something more than 5 years in future

3. s.597: undertaking to do something within 5 years, which C fails to do so within period of time allowed by contract

2. s. 593: any other non-cash consideration permissible only provided it has been independently valued

   procedure for valuation laid down in s.596-603

   e.g. shares in return for property

Exceptions to Independent Valuation

s.594: 2 statutory exceptions to rule that non-cash consideration must be valued:

1. takeover exemption

   i.e. where company issues shares in return for some or all of shares in another company

   exemption applies to allotments ‘in connection with’ arrangement of this nature

   Ferran: thus possible that consideration falls under exemption where it is partly made up of shares in a company (even if most of the value of the consideration comes from other non-cash assets)

2. mergers exemption

   i.e. where company issues shares in return for offer to acquire all the assets and liabilities of another company in return

   however s.594(6): exemption only applies where the takeover/merger is carried out via court order (i.e. so that court can make its own valuation of shares)

Penalties

Penalties for breach

s.585: C liable to full payment of par (or so much as is required to be paid up) and premium value of shares + interest

s.591: however any undertaking provided by C is still enforceable by company

Relief from liability

s.589 + 606: court may grant C relief from liability if this is just and equitable

s.589 + 606: as general principle, company should receive consideration worth par value (or so much as is required to be paid up) + premiums

thus “very good reasons” required for court to relieve liability if relief would mean company had not received sufficient value for shares

Re Bradford Investments (No. 2) [1991]

Contrast Re Ossory Estates [1988]

various factors in s.589+606 which court must take into account

i.e. is company likely to receive payment/performance at all?

2. Private companies

   Court will only interfere if non-cash consideration offered is colourable or illusory

   fact that company has massively overpaid for the consideration does not suffice

   Re Wragg [1897]

   Seems that only consideration which is blatantly bad suffices to impeach transaction

   e.g. no-discount rule is breached

3. Other Issues

   Subsequent holders

   s.588+605: subsequent holders of shares issued in breach of above rules are joint and severally liable in respect of money owed

   this is case unless subsequent holder is bona fide purchasers without notice

   if subsequent holder has actual notice of facts, is not bona fide

   this case even if C does not know those facts actually amount to a breach

   System Controls [1990]

   court may likewise relieve subsequent holder from liability

   Criminal offence

   s. 590+607: company and defaulting officers are criminally liable for breaches of rules relating to payment

   2. Minimum Capital

• Public company

  • Section 761-767: public company must have minimum capital of 50,000

    • of which at least 12,500 must be paid-up

• Private company

  • no minimum capital requirement in private company

    • i.e. is permissible for shares to be nil paid-up (see above)

• Consequences

  • even if value of company’s assets falls below minimum capital, can still continue to trade

  • s.656: company comes under publicity requirements in event its assets fall very far below value of its capital

    3. Regulation of Share Allotment

       Danger that directors will abuse power to issue shares.

       dilute investment of existing shareholders

       e.g. if new shares are offered at a discount to the market value of the shares, the average value of the shares goes down . This causes a net loss in current members’ investment

       dilute voting strength of current members

       Part protection comes from directors’ duties (s.171) and unfair prejudice remedy.

       However are specific remedies in Companies Act 2006.

       Section 549: directors are only permitted to allot shares in accordance with the Act

       i.e. do not have power to do so under their general power to manage company

1. Power to Issue...

Buy the full version of these notes or essay plans and more in our Company law Notes.