A more recent version of these Raising And Maintaining Capital notes – written by Oxford students – is available here.
The following is a more accessble 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:
Supervision 8 - Raising & Maintaining Capital
1. When a Company is formed, a "Statement of Capital and Initial Shareholdings" must be sent to the registrar per s9(4)(a) CA.
Directors Authority to Allot Shares
Directors may only allot shares if authorised to do so by Articles or ordinary resolution per s551 CA. Authorisation may be general or particular, conditional or unconditional, and must specify the maximum number of shares and may be for a period of up to 5 years per s551(2).
* The directors' power to allot is subject to several constraints:
# Directors are under a duty to exercise powers for the purposes for which they are conferred per s171 CA This power is to raise capital!?
# Directors must promote the success of the company and be fair between the shareholders per s172(2)(f).
# Minority shareholders might petition for relief under s994 CA. Except when private company with only one class of shares, SH consent, in one form of another, is still required for "allotment". Failure to do so is a criminal offence per s549(3). This requirement is also applied to rights to subscribe for, or convert a security into shares per s549
as otherwise Co could issue security with option to convert and bypass!
Thus s551(2) requires Directors put before the shareholders a proposal for the issuance of shares with full details of how the finance raised will be used. This is authorisation for the "particular use of the power".
* Authorisation can be given in advance ("generally"), by the Articles, or by ordinary resolution for renewable 5 year periods per s551(2)(4). Authorisation can be conditional, and may be revoked or varied at any time by resolution, even if the authority is in the Articles per s551(4)(b).
PreEmptive Rights ("Rights Issue")
Whether or not SH consent is required for "allotment", existing SHs have a right to protect their proportion of the total equity by rights of preemption of existing shares and new issue in proportion to the existing holding. This prevents "dilution" of shareholding. The statutory preemption right is found in s561 CA 2006 but there is no statutory right or "rights issue". SH has the right to preempt within 14 days per s562(5) and the offer cannot be withdrawn once made per s562(4). If not accepted in full, shares can be allotted to anyone on any terms, but not more favourable!!
The preemption right is only partial protection SH must have finances to buy in! Accordingly, he is protected as he might be allowed to sell his preemption rights on the open market. This is known as a "rights issue" Co issues a "renounceable letter of allotment" which enables SH to transfer the right to subscribe to TP, and then SH accepts right to acquire, then assigns (or "renounces") the right, for payment, to TP. Exceptions to the PreEmption Requirement
* Allotment of Bonus Shares s564
* Allotments other than for cash s565 But this statutory preemption right only extends to issues for cash of "equity securities" (def: ordinary shares and rights to subscribe for ordinary shares whether or not voting). The right is only triggered if the proposed issue is exclusively for cash s565 If company does share swap with CoB, there is no triggered right of preemption. But Gower & Davies state this is a "severed hole in the principle of protecting shareholders against dilution, especially dilution of their voting position." Exclusion of PreEmption Rights
* Exclusion by Private Companies Articles may exclude the statutory preemption 58
rights under s567. s568 allows the company to substitute an alternative preemption scheme in its Articles which operates on a class basis. NB: Preemption rights for public companies are mandatory as required by Art 29 Second Company Law Directive.
* Allotments to a class The preemption requirement doesn't apply where Articles require allotment on a rights basis to a particular class per s568 CA. If class refuses, then to SH, then to general public. Disapplication of PreEmption Rights
* 1 Class of Shares No requirement of preemption rule per s569 CA?
* General/Specific Disapplication by Public/Private Company Where, under the Act, DIR do not need SH authorisation (private Co with one class of shares), or where such authorisation is given "generally" per s551, the preemption requirement may be disapplied in two ways:
# General Disapplication If Dirs have general authority under s551, the Articles or special resolution, may confer that power to allow shares as if the preemption requirement had been observed.
# Specific Disapplication Special resolution may disapply preemption requirement as may be specified in the resolution per s571 CA. This exists until the general authority under s551 to allott is revoked or expires.
* Treasury Shares
# The preemption requirement applies to sale of treasury shares, but this requirement can be generally or specifically disapplied. But Articles/special resolution may authorise directors to sell shares as if requirements observed per s573, or simply that the rights requirement does not apply to those shares per s573(4).
* the Articles or a special resolution may "disapply" the preemption rights in any way per s569570. The Special Resolution must be recommended by the Directors, and there must be a circulated Written Statement by the Dirs to justify why the proposed issue is being made. Falsification/misleading is a criminal offence per s572. Civil sanction Dirs are jointly and severally liable to compensate any person to whom an offer should have been made per s562 CA. But this doesn't invalidate an allotment made in breach to protect innocent TP purchasers. But in Re Thundercrest rectification was made where the allotment was made by the Directors themselves, to themselves!! Thus no innocent TP.
A bonus issue of shares occurs when a company capitalises distributable profits (or other permissible fund e.g. share premium account per s610(3), capital redemption reserve per s733(5)) and applies the proceeds in paying up bonus shares which go to existing members in proportion to their entitlement This provides SH with additional fully paid up shares in the company.
* It is an accounting exercise as the company's reserves are reduced by its share capital fund increased. All that's happened is each SH holds more shares but each share is worth less than before.
Technical Rules on Allotting Shares
Discount a. M.Art 21 Private Companies states Private Ltd can only issue fully paid up shares. b. The private company cannot offer shares at a discount (PSPar) a. Company doesn't have to take premium. But in Re Sunrise Radio it was held that where the majority directors forewent a significant premium so as to purchase the shares themselves, this was a breach of duty and 'unfairly prejudicial' to the minority. i. The company may use the "premiums account" to pay for bonus shares
Shares issued for free to existing members per s260(3). This reduces the share premium account but increases the share capital by an equivalent amount, thus is unobjectionable by the creditors. ii. Premiums can also be used to pay expenses/commissions paid on the issue of the shares generating the premiums per s610(2). b. When shares are issued at a premium, the value of the premium must be allocated to a "Share Premium Account" per s610 CA. These premiums may only be used: i. s610(2)(a) The expenses on the issue of those shares?
ii. s610(2)(b) Commission paid on those shares?
1. s552 General prohibition on commissions/discounts/allowances.
2. BUT s553(1) allows a commission to be paid to buyers IF a. Payment of Commission is authorised by Articles?
b. Commission paid/agreed does not exceed: i. 10% issue price? OR ii. The amount authorised by Articles (which ever is the least!!!) iii. s610(3) Pay up new shares to be allotted to members as fully paid bonus shares. Payment for Shares a. PLC i. s584 CA Public Companies shares must be paid up in cash!
ii. s586 CA Shares allotted in a public company must be "paid up" at least 1/4 of their nominal value plus the whole premium. IF this hasn't been done, the holder is liable to pay that amount with interest. This disincentivises setting the nominal value well below the issue price, as the whole premium must be paid up front. iii. s585 CA Public companies, unlike private companies, cannot accept performance consideration. If this isn't complied with, the performer is liable to pay the nominal value with the whole of any premium. iv. BUT under s593 CA A public company can accept noncash consideration if:
1. Independently valued?
2. Valuer's Report made 6 months prior to allotment?
3. Copy of Report is sent to Allottee. v. This report must be very detailed per s59 Must include: Nominal value of shares, premium payable on shares, description of consideration, valuation of that consideration, and confirmation that the value of the consideration (together with any cash/premium paid up) is not less than the nominal value and whole of the premium.
1. I.E Cash+NonCash=Nominal Value+Premium vi. NOTE Provided this valuation procedure is complied with, the Company may nevertheless not accept the valuation, and place the noncash consideration value HIGHER!! But must be careful Too great reliance on noncash consideration may breach the director's s172 CA duty. vii. The exception is a share swap with another company per s594, or merger per s595. b. LTD c. Payment can be either for money or money's worth ("including goodwill and know how") per s582 CA. The court will not inquire into the adequacy of the consideration unless it is clearly bad faith, illusory or manifestly inadequate per Re Wragg. In effect, shares for noncash consideration disguises what is, in effect, an issue of shares at a discount. d. Shares are deemed to be "paid up" in accordance with s583(2) if "cash consideration" is received. This is defined in s583(3) as: i. Cash 60
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