SHARES AND SHARHEOLDERS
Capital must be maintained, as it is the fund to which creditors look for payment of debts owed to them.
Essentially, paid-up share capital must not be returned to the shareholders.
The principle has the following consequences:
a) A company must not purchase its own shares (CA 2006, s658)
b) A public company may not generally give financial assistance to anyone for the purpose of buying shares
c) Dividends must not be paid out of capital (only out of distributable profits)
d) If a public company suffers a serious loss of capital, a general meeting must be called to discuss
e) A subsidiary may not be a member of its own holding company
After shareholders pay for their shares, the money produced constitutes company capital. Because the liability
of the shareholders in the company are limited, this capital must not be diminished. The impact of this on
shareholders is that they cannot normally hand their share certificate back to the company in exchange for the
consideration they originally provided. If they wish to realise their investment, they must sell their shares to
another investor.
There are exceptions to this rule, where a company may:
a) Reduce its share capital with the consent of the court, or by special resolution if it is a private company
(ss641-648 CA 2006)
b) Buy back (s690) or redeem (ss684-689) its own shares
c) Purchase it own shares under a court order made under s994 to buy out an unfairly prejudiced minority
d) Return capital to shareholders, but only after the payment of debts upon winding up
ISSUING SHARES
The allotment of new shares is often known as ‘equity finance’. In return of the issuing of shares, the company
receives cash or property which it may then use for the company business. This is an alternate way for a company
to raise money without having to get a loan i.e. debt finance.
When a company wants to issue new shares, the board will determine the price and number of shares to allot.
An allotment is effected by the board receiving an application from a person who wants to buy shares from the
company, known as a subscriber, making a resolution to allot shares to that person and finally issuing him a
certificate and entering his name into the company’s register of members.
However, the CA 2006 (or articles) may require the board to obtain resolutions from shareholders before allotting
new shares, since new allotment has potential to affect the existing shareholders’ percentage of ownership in
the company. It may also reduce dividends available for payment as the distribution is split among more shares.
Directors’ Powers to Issue Shares
CA 2006, s550 – Private Companies with ONLY 1 Class of Share
Directors of a private company automatically have authority to allot its shares, provided there is only one
type of shares that exist and nothing to the contrary in the articles.
All Other Companies
Directors in any other type of company can only issue shares if they have authority to do so. This must
be given, either in the articles by special article, or by the shareholders at a GM or written resolution
(s549-551). If advising a new company, it is recommended to include a special article in the constitution
in order to avoid the need for consideration at a GM.
If it does happen by ordinary resolution, this is one of the exceptional ordinary resolutions which must be filed
with the Registrar of Companies under s551(9).
Capital must be maintained, as it is the fund to which creditors look for payment of debts owed to them.
Essentially, paid-up share capital must not be returned to the shareholders.
The principle has the following consequences:
a) A company must not purchase its own shares (CA 2006, s658)
b) A public company may not generally give financial assistance to anyone for the purpose of buying shares
c) Dividends must not be paid out of capital (only out of distributable profits)
d) If a public company suffers a serious loss of capital, a general meeting must be called to discuss
e) A subsidiary may not be a member of its own holding company
After shareholders pay for their shares, the money produced constitutes company capital. Because the liability
of the shareholders in the company are limited, this capital must not be diminished. The impact of this on
shareholders is that they cannot normally hand their share certificate back to the company in exchange for the
consideration they originally provided. If they wish to realise their investment, they must sell their shares to
another investor.
There are exceptions to this rule, where a company may:
a) Reduce its share capital with the consent of the court, or by special resolution if it is a private company
(ss641-648 CA 2006)
b) Buy back (s690) or redeem (ss684-689) its own shares
c) Purchase it own shares under a court order made under s994 to buy out an unfairly prejudiced minority
d) Return capital to shareholders, but only after the payment of debts upon winding up
ISSUING SHARES
The allotment of new shares is often known as ‘equity finance’. In return of the issuing of shares, the company
receives cash or property which it may then use for the company business. This is an alternate way for a company
to raise money without having to get a loan i.e. debt finance.
When a company wants to issue new shares, the board will determine the price and number of shares to allot.
An allotment is effected by the board receiving an application from a person who wants to buy shares from the
company, known as a subscriber, making a resolution to allot shares to that person and finally issuing him a
certificate and entering his name into the company’s register of members.
However, the CA 2006 (or articles) may require the board to obtain resolutions from shareholders before allotting
new shares, since new allotment has potential to affect the existing shareholders’ percentage of ownership in
the company. It may also reduce dividends available for payment as the distribution is split among more shares.
Directors’ Powers to Issue Shares
CA 2006, s550 – Private Companies with ONLY 1 Class of Share
Directors of a private company automatically have authority to allot its shares, provided there is only one
type of shares that exist and nothing to the contrary in the articles.
All Other Companies
Directors in any other type of company can only issue shares if they have authority to do so. This must
be given, either in the articles by special article, or by the shareholders at a GM or written resolution
(s549-551). If advising a new company, it is recommended to include a special article in the constitution
in order to avoid the need for consideration at a GM.
If it does happen by ordinary resolution, this is one of the exceptional ordinary resolutions which must be filed
with the Registrar of Companies under s551(9).
