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Legal Capital Notes

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LEGAL CAPITAL - NOTES Capital Formation Payment For Shares

1. 1) Par or nominal value

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

1. this price is set by founders of company when it is created 2) Premium

1. shares however are commonly sold at a at a premium

1. i.e. price above the par value

2. this price can be set by directors

1. are under duty to obtain best price when doing this (directors' duties)

2. Shearer [1980]

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

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

Paid Up Capital Requirements

2. 'Paid-up' share capital: amount of capital money company has received in payment in respect of its issued shares

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

3. Shares may be fully, partly or nil paid up.

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

4. Minimum paid up requirement: 1) private companies

1. no minimum amount that must be paid-up on issuance

1. i.e. can be allotted on a nil paid, partly paid or fully paid basis 2) public companies

2. s.586: shares issued must be paid up as to: i.i) quarter of the par value i.ii) the whole of the premium

3. penalties

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

2. no court relief possible ii) No Discount Rule

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

2. Penalties

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

2. no court relief possible iii) Consideration Requirements

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

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

a) Public companies 1) Par or premium value of shares cannot be paid for by consideration in form of either: i) s.585: work or services ii) s.587: 'long term undertakings'

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

1. procedure for valuation laid down in s.596-603

2. e.g. shares in return for property Exceptions to Independent Valuation

1. s.594: 2 statutory exceptions to rule that non-cash consideration must be valued: 1) takeover exemption

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

2. exemption applies to allotments 'in connection with' arrangement of this nature

1. 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

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

2. 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

1. Penalties for breach

1. 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

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

2. Relief from liability

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

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

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

2. Re Bradford Investments (No. 2) [1991]

3. Contrast Re Ossory Estates [1988]

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

1. i.e. is company likely to receive payment/performance at all?
b) Private companies

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

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