Transcript CHAPTER 16 SHARE CAPITAL – GENERAL NATURE At the end of this topic you should understand: • what is a company’s “share capital”;

CHAPTER 16
SHARE CAPITAL – GENERAL NATURE
At the end of this topic you should understand:
• what is a company’s “share capital”; and
• the legal requirements and procedures applying to the
allotment and issue of shares.
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PowerPoint slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.
Introduction
In general terms, the capital of a company is made up of
equity and debt. The ratio of debt to equity is called gearing.
Equity is the amount available to members of the company
after all liabilities have been paid.
A company limited by shares obtains equity by the issue of
shares in return for contributions of capital from the
members.
Debt is capital obtained by borrowing money privately (for
example, from a bank) or publicly (for example, from
members of the public in return for debentures in the
company).
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Legal Nature of a Share
Property Rights
A share is an item of personal property, separate
from the company’s property: s 1070A.
As property, shares attract the rights and benefits
provided by the principles of property law.
They also attract the rights and benefits under a
company’s internal rules, the Corporations Act and
the general law.
Shares are considered to be property capable of
being transferred, inherited, disposed and used as
security or collateral.
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Legal Nature of a Share
Property Rights
Ordinarily, shares also provide members with a
bundle of property rights including:
• the right to vote: s 253C;
• the right to receive notice and attend meetings:
s 252G;
• the right to receive a dividend once declared by the
board: s 254W; and
• the right to use the shares as security for lending
purposes: Beconwood Securities v ANZ Bank and
Opes Prime Stockbroking Ltd [2008].
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Types of Shares
A company may issue different types of shares,
referred to in the Corporations Act as “class of
shares”.
Shares may differ as to the terms on which they are
issued and the rights and restrictions attaching to
them: s 254B.
Shares are said to be ordinary shares when no
special rights or restrictions attach to them.
Companies can also issue preference shares, which
usually have the right to receive payment of dividends
in priority to ordinary shares: s 254A(1)(b).
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Specification of Share Capital
Companies May Issue Shares
At the time of registering a company, a company must
lodge an application with ASIC which includes information
on the initial share capital of the company: s 117(2)(k).
A company can either issue shares privately to certain
people, or it may invite the public to subscribe for shares
by:
• a placement through a broker;
• a rights issue;
• a bonus share issue; or
• a dividend reinvestment plan.
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Issue of Shares to the Public –
Disclosure, Application and Issue
Issues to the public must, at present, be undertaken
by way of a prospectus or other disclosure document
released by the company and must generally comply
with the requirements contained in Ch 6D of the
Corporations Act.
An application form must be attached to the
prospectus or disclosure document.
At the time the shares are issued to a shareholder,
the shareholders receives: a holding statement; and a
Securityholder Reference Number (SRN).
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Issue of Shares to the Public – Requirements
If a public company offers shares or other securities
and the offer requires a disclosure document, the
company cannot issue any securities:
• unless the issue is in response to application form
that accompanied the disclosure document:
s 723(1);
• if the disclosure document included a minimum
subscription condition, until that condition is
satisfied: s 723(2); and
• if the disclosure document stated or implied that the
securities were to be quoted, unless an application
for quotation is made: s 723(3).
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Improper Issues, and Valuation of Shares
Under s 254E, the court can validate an otherwise
improper issue on the ground that it is just and
equitable to do so: Re Monitronix Ltd (1987).
Shares may be valued in a number of ways including:
• by the issue price;
• by market value;
• by calculating the assets of the company; or
• by net present value.
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Issue Price, and Partly Paid
There is no set method for calculating the issue price
of shares.
Companies use a variety of methods, including the
net asset backing per share.
Shares may be issued as fully paid or partly paid.
Partly paid shares are shares issued on the condition
that a shareholder does not have to pay the full issue
price to the company at the time of issue, but there
are terms on which partly paid shares are issued:
s 254M(1), and ss 514-529.
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Consideration Other Than Cash
Companies may issue shares in exchange for assets.
For example, a promoter may take shares in return
for transferring their assets to the company: Salomon
v Salomon & Co Ltd [1897].
The courts are concerned that the consideration be
adequate.
If personal valuations are relied on, directors risk
personal liability for breaching their director’s duties.
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Restrictions on Share Issues –
General, Limitation and Varying
Directors are entitled to issue any number of shares
in a company without obtaining authorisation from the
existing shareholders except in the following
circumstances:
• where the company’s internal rules limit the
number of shares: s 125(1);
• where the proposed share issue would have the
effect of varying or cancelling the rights attaching
to existing shares: ss 246B-246G; or
• where the existing shareholders have a right of
pre-emption: s 254D.
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Share Options, Rights and Dividend
Reinvestment Plans
Companies can increase their share capital in several
other ways apart from making a new public issue (float)
or making placements of shares to individuals,
particularly by:
• issuing options;
• issuing renounceable or non-renounceable rights;
and
• implementing a dividend reinvestment plan.
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PowerPoint slides to accompany Corporations Law: In Principle, 8th Edition. Ciro & Symes.