Contents

G&D Chapter 11: Legal Capital, Minimum Capital & Verification 217

Meaning of Capital 217

Nominal Value and Share Premiums 218

Nominal Value 218

No Issue of Shares at a Discount 218

Share Premium 218

Minimum Capital 219

Objections to Minimum Capital 219

Disclosure and Verification 220

Initial Statement and Return of Allotments 220

Abolition of Authorised Capital 220

Consideration Received upon Issue 220

G&D Chapter 12: Dividends and Distributions 221

Basic Rules 221

Public and Private Companies 221

Identifying the Amount Available for Distributions 222

Interim and Initial Accounts 222

Interim Dividends 222

Adverse Developments Subsequent to the Accounts 222

Disguised Distributions 222

Intra-Group Transfers 222

Consequences of Unlawful Distribution 223

Recovery from Members 223

Recovery from Directors 223

Reform 223

Central Issues 223

G&D Chapter 13: Capital Maintenance 223

Acquisition of own Shares 224

General Prohibition 224

Redemption and Repurchase 224

Reduction of Capital 228

G&D Chapter 24: Share Issue – General Rules 232

Directors’ Authority to Allot Shares 232

Pre-Emptive Rights 232

Allotment 234

G&D Chapter 33: Winding Up, Dissolution and Restoration 234

Collection, Realisation and Distribution of the Company’s Assets 234

Armour, Legal Capital: an Outdated Concept? (2006) 7 EBOR 5 235

Armour, Share Capital and Creditor Protection (2000) 63 MLR 355 236

Questions 237

G&D Chapter 11: Legal Capital, Minimum Capital & Verification

Meaning of Capital

In the context of limited liability, we have seen there are ex post controls to protect the interests of creditors like personal liability for certain wrongdoing directors. Minimum capital requirements are an example of an ex ante control, as it ensures the company has some minimum level of capital out of which it can satisfy its debts. In this context, capital simply means assets contributed to the company by shareholders, typically when they pay their subscription and / or share premium.

Legal capital is typically less than total NAV as company may also turn to debt financing at the outset, and will have (hopefully) generated profits when trading. NAV is the shareholders’ equity – if (NAV-Legal Capital) > 0, the surplus can be distributed as dividends, but no dividends may be paid if (NAV-Legal Capital) < 0.

Alternative to legal capital: minimum capital rules – this is a requirement in the UK for public companies per the Second European Company Law Directive 1977. This means a certain amount of money must be paid in when the company incorporates.

UK company law gives companies great freedom to set their own level of legal capital but their choice can have consequences. Legal capital affects the level of dividend payments that can be declared, eligibility to recapitalise (share buy-backs by company) and reduction in legal capital must be done in a way that protects creditors.

Nominal Value and Share Premiums

Nominal Value

Legal capital – amount that the company receives from those who subscribe to shares. But note the difference between nominal and par value – par value incorporates a share premium. S542(1), (2) – all shares allotted must have a fixed nominal value or else the allotment is void. This means a company may issue eg 20,000 1 shares or 50,000 10p shares. What the shareholder actually pays for the shares can be any amount as long as it is not less than the nominal value – S580. To give themselves maximum flexibility, companies often opt to keep the nominal value as low as possible.

When a company issues more shares after successfully trading for some time, it will be right for them to set a price above par to prevent the later investors from gaining a disproportionate share of the company.

Company Law Review contemplated abolishing par value for private companies but eventually resiled from the proposal. Second Directive – thought to require retention of par value (Art 8).

No Issue of Shares at a Discount

S580(1) – if share is allotted for less than nominal value, the shareholder is liable to pay the company the shortfall. This is meant to be for the good of creditors but may actually be harmful – a company on the verge of insolvency may be desperate to issue new shares but will be unable to do so if their nominal value is too high. However, there are ways around this like issuing a new class of shares.

Perhaps this rule is more about protecting existing shareholders from dilution through having new shares issued too cheaply. However, this only arises where shares are issues for less than market price, which is not strictly related to nominal value, so it is not so helpful to them either. Oddly, there is no duty to issue shares at a premium where the market price is above nominal value – Hilder v Dexter [1902]. However, directors have a duty to act for the success of the company and should ordinarily obtain the best price which they can – Lowry v Consolidate African Selection Trust Ltd [1940].

Share Premium

The amount received by company as nominal value is part of legal capital. The premium is part of legal capital too – S610. This is because it makes no sense for a shareholder to subscribe to shares and for the monies to be immediately paid out as dividends to the other shareholders.

However, money obtain from nominal value and from premium are not treated in exactly the same way. S610 – two exceptions and two reliefs:

• Exception 1: company may apply the share premium account in paying up bonus shares [bonus shares can also be paid for using distributable profits] – this is unobjectionable to the company creditors as it simply moves money from the share premium account to the share capital account – S610(1)

• Exception 2: share premium account may be applied to write off expenses / commissions paid to generate the premiums – S610(2); share capital can be used to pay commission too – S553

• Relief 1: S610 applies to premiums of cash ‘or otherwise’, so a share premium account must...

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