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Share CapitalShare Capital

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In general terms, a company's capital includes all its business assets, including premises, equipment, stock in trade and goodwill.

In company law, capital is used in a In company law, capital is used in a specialized sense to mean capital specialized sense to mean capital raised through the issue of shares or raised through the issue of shares or through loans made to the company. through loans made to the company.

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A share is the unit of measure for A share is the unit of measure for determining a member’s interest in determining a member’s interest in the company.the company.

Buyers of shares from a company Buyers of shares from a company become company members and the become company members and the money collected becomes share money collected becomes share capital of the company.capital of the company.

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nominal value for each share – an nominal value for each share – an amount which members must amount which members must contribute for getting the sharecontribute for getting the share

A member is a shareholder.A member is a shareholder. A member is A member is NOTNOT a creditor. a creditor.

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Categories of share Categories of share capitalcapital

Issued capital: this refers to the number of Issued capital: this refers to the number of shares issued to members and represents some shares issued to members and represents some guarantee of progress for the company's guarantee of progress for the company's creditors. The sum equals to the nominal value creditors. The sum equals to the nominal value f all the hares which the company has actually f all the hares which the company has actually issued.issued.

Paid-up capital: the amount paid by share Paid-up capital: the amount paid by share holders. This should be the same as the called holders. This should be the same as the called up capital unless a shareholder has hailed to up capital unless a shareholder has hailed to pay what is due. The amount of paid up capital pay what is due. The amount of paid up capital is a good indicator of the company's financial is a good indicator of the company's financial health.health.

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Uncalled capital: The difference Uncalled capital: The difference between the called up capital and between the called up capital and the nominal value of the shares.the nominal value of the shares.

Reserved capital: This is created by Reserved capital: This is created by the company passing a special the company passing a special resolution which remove issued resolution which remove issued capital from the directors' control in capital from the directors' control in order to provide a fund out of which order to provide a fund out of which creditors may be paid in the event of creditors may be paid in the event of a winding up. a winding up.

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Typical Rights of Typical Rights of Shareholders Shareholders

right to control company through right to control company through voting at meetings voting at meetings

right to participate in distribution of right to participate in distribution of profits profits

right to participate in surplus assets right to participate in surplus assets in a winding up.in a winding up.

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Types of SharesTypes of Shares

Preference SharesPreference Shares Give preferential right to a dividend of Give preferential right to a dividend of

fixed amount or fixed percentage per fixed amount or fixed percentage per share - this dividend is paid before share - this dividend is paid before anything is paid to ordinary anything is paid to ordinary shareholders. shareholders.

Right to dividend is normally Right to dividend is normally cumulative. cumulative.

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usually give a preferential right to usually give a preferential right to repayment of capital on a winding up. repayment of capital on a winding up.

normally have restrictions placed on normally have restrictions placed on shareholders’ power to vote at general shareholders’ power to vote at general meetings.meetings.

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In practice, preference shareholders In practice, preference shareholders may vote if dividends are in arrears or may vote if dividends are in arrears or on a resolution to reduce capital or to on a resolution to reduce capital or to wind up the company or that the wind up the company or that the resolution is likely to affect their class resolution is likely to affect their class rights.rights.

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Ordinary SharesOrdinary Shares (or equity shares) (or equity shares) Dividend depends on company profits Dividend depends on company profits

and there is no automatic right to a and there is no automatic right to a dividend. Ordinary shareholders are dividend. Ordinary shareholders are entitled to be paid a dividend only after entitled to be paid a dividend only after preference dividends have been paid.preference dividends have been paid.

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(c) Redeemable shares(c) Redeemable shares Sections 49 and 49A allow a company, if Sections 49 and 49A allow a company, if

authorized by its articles, to issue both authorized by its articles, to issue both ordinary and preference shares which ordinary and preference shares which are redeemable. are redeemable.

These shares are issued on a short-term These shares are issued on a short-term basis. basis.

The holder takes them for a specified The holder takes them for a specified period of time after which the company period of time after which the company buys them back. buys them back.

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The redemption must be financedThe redemption must be financed

(a) out of distributable profits, or (a) out of distributable profits, or

(b) out of the proceeds of a new issue (b) out of the proceeds of a new issue of shares made for the purposes of of shares made for the purposes of the redemption.the redemption.

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Practical use: Practical use: a useful means of raising capital for a a useful means of raising capital for a

new small business. new small business. may also be used as employee incentive may also be used as employee incentive

schemes offering shares to employees. schemes offering shares to employees.

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Variation of class rightsVariation of class rights

Shares may be issued with differing Shares may be issued with differing rights. rights.

A group of shares with the same A group of shares with the same rights constitutes a class. rights constitutes a class.

The terms of issue of a class of The terms of issue of a class of shares may specify how these rights shares may specify how these rights may be varied. may be varied.

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If there is no specific provision for variation, If there is no specific provision for variation, the method of variation depends on where the method of variation depends on where the terms of issue are laid down.the terms of issue are laid down.

if the terms of issue are specified in the if the terms of issue are specified in the memorandum, the rights may be varied if memorandum, the rights may be varied if all members of the company agree (s. all members of the company agree (s. 63A(3));63A(3));

if the terms of issue are specified in the if the terms of issue are specified in the articles or in a contract, consent of 75% in articles or in a contract, consent of 75% in nominal value of the issued shares of the nominal value of the issued shares of the class or by special resolution passed at a class or by special resolution passed at a separate class meeting. (s. 63A(1)) separate class meeting. (s. 63A(1))

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if the terms of issue are specified in the if the terms of issue are specified in the memorandum, the rights may be varied memorandum, the rights may be varied if all members of the company agree (s. if all members of the company agree (s. 63A(3));63A(3));

if the terms of issue are specified in the if the terms of issue are specified in the articles or in a contract, consent of 75% articles or in a contract, consent of 75% in nominal value of the issued shares of in nominal value of the issued shares of the class or by special resolution passed the class or by special resolution passed at a separate class meeting. (s. 63A(1)) at a separate class meeting. (s. 63A(1))

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Not all variations to a company's Not all variations to a company's structure will constitute a variation structure will constitute a variation of class rights. of class rights.

Only if the rights of the class of Only if the rights of the class of shareholders are altered in shareholders are altered in substance, not merely in value, is substance, not merely in value, is the consent of that class required. the consent of that class required.

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Protection given to a Protection given to a minority of shareholdersminority of shareholders

Where a variation of class rights is Where a variation of class rights is approved by the consent of a approved by the consent of a proportion of shareholders or the proportion of shareholders or the passing of a resolution at a class passing of a resolution at a class meeting, the holders of not less than meeting, the holders of not less than 10% in nominal value of the issued 10% in nominal value of the issued shares of the class may apply to the shares of the class may apply to the court to have the variation court to have the variation cancelled. (s.64 of CO)cancelled. (s.64 of CO)

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If the affairs of the company are If the affairs of the company are being or have been conducted in a being or have been conducted in a manner unfairly prejudicial to the manner unfairly prejudicial to the interests of the members generally, interests of the members generally, a petition may be presented to the a petition may be presented to the court by an individual member under court by an individual member under s. 168A.s. 168A.

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Majority rule and the Majority rule and the statutory protection of statutory protection of minority shareholdersminority shareholders

General PrincipleGeneral Principle

All the powers of a company may be All the powers of a company may be exercised by a majority decision of:exercised by a majority decision of:

shareholders in general meeting; or shareholders in general meeting; or the board of directors.the board of directors.

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Courts will generally not interfere: Foss v Courts will generally not interfere: Foss v Harbottle (1843)Harbottle (1843)

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Statutory protection of the Statutory protection of the minority:minority:

Against abuse of majority power-Against abuse of majority power- A special resolution is required for important A special resolution is required for important

matters such as alteration to the company's matters such as alteration to the company's constitution. Holders of just over 1/4 of constitution. Holders of just over 1/4 of voting rights could block passage of such voting rights could block passage of such resolution.resolution.

Sanction of court is required for decisions Sanction of court is required for decisions directly affecting creditors of the company.directly affecting creditors of the company.

Dissentient members have right to apply for Dissentient members have right to apply for court order to cancel a resolution for court order to cancel a resolution for alteration of objects, variation of class rights alteration of objects, variation of class rights or the redemption of capital.or the redemption of capital.

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Holders of 5% of paid-up capital may Holders of 5% of paid-up capital may requisition the directors to call a meeting.requisition the directors to call a meeting.

Holders of 5% of voting rights or 100 Holders of 5% of voting rights or 100 members, each with $2000 paid up, may members, each with $2000 paid up, may requisition for a resolution to be requisition for a resolution to be considered by the company's general considered by the company's general meeting.meeting.

100 members or holders of 10% issued 100 members or holders of 10% issued shares may apply to the Financial shares may apply to the Financial Secretary to appoint an inspector to Secretary to appoint an inspector to investigate the company.investigate the company.

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Right of minority to be bought out in a Right of minority to be bought out in a successful take-over offer.successful take-over offer.

Court may grant relief to members who are Court may grant relief to members who are unfairly prejudiced by the manner the unfairly prejudiced by the manner the affairs of the company are being conducted.affairs of the company are being conducted.

Minority shareholders have right to be Minority shareholders have right to be bought out in a successful general offer to bought out in a successful general offer to buy back shares.buy back shares.

A member may petition to court for the A member may petition to court for the winding up of the company.winding up of the company.

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Judicial protection of the Judicial protection of the minorityminority

As exceptions to the rule in Foss v HarAs exceptions to the rule in Foss v Harbottle:bottle:

to enforce some individual right of his owto enforce some individual right of his own, e.g. a dividend is declared but not paid;n, e.g. a dividend is declared but not paid;

where a right has been infringed which afwhere a right has been infringed which affects all or a number of shareholders in a fects all or a number of shareholders in a similar way;similar way;

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where the alleged wrongdoers are in where the alleged wrongdoers are in control of the company so that it is control of the company so that it is impossible for the company to bring an impossible for the company to bring an action in its own name (a fraud on the action in its own name (a fraud on the minority - abuse of power by those in minority - abuse of power by those in control of a company).control of a company).