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Lecture

7.1 Share Capital

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Department
Law
Course
JSB171
Professor
All Professors
Semester
Spring

Description
Issuing Shares Definition  Legal chose in action: “a collection of rights and obligations relating to an interest in a company of an economic and proprietary character but not constituting a debt” Pilmer v The Duke Group [2001]  „more than a “capitalized dividend stream” – it is a form of investment that confers proprietary rights on the investor‟: Gambotto v WCP Ltd (1995)  A share is— (s1070A(1)) (a) personal property;  Chose in action | intangible personal property  ‗more than a ―capitalized dividend stream‖—form of investment that confers proprietary rights on the investor‘: Gambotto v WPC Ltd (b) transferable or transmissible as provided by the company‘s constitution, or on stock exchange (the operating rules of a prescribed CS [electronic clearance settlement] facility (if applicable)); and (c) capable of devolution by will or operation of law.  Subject to— (s1070A(2)) o company‘s constitution o replaceable rules o the operating rules of a prescribed CS facility (if applicable):  Need not specify authorised capital: 1998 Amendments (applies to companies formed before then as well)  Must have some share capital, shares & shareholders unless corporation limited by guarantee Power to Issue Directors have powers of company unless constitution states otherwise: s198A (rr)  Company (s124(1)(a)) has power to issue shares including— o bonus shares: s254A(1)(a) o preference shares (including redeemable preference shares) : s254A(1)(b) o partly paid shares: s254A(1)(c)  Can determine rights attaching to shares & terms of issue: s254B(1)(a)&(b)  NL company—when wound up → o surplus distributed in proportion to shares held—regardless of amounts paid on shares: s254B(2)(a) o member hasn‘t paid call → not entitled to distribution until paid: s254B(2)(b) CL Contractual Principles Correspond to normal contract—  Invitation to treat = Invitation for subscriptions for shares (→ no obligation to accept application) o Generally set out in prospectus & disclosure document: s721 & s723  Offer = potential shareholder sends an application form and funds to the company  Acceptance = Directors resolve to allot the shares and send notice of allotment to shareholder o Postal acceptance rule = acceptance by company effective when posted: Byrne v Van Tienhoven (1880) (case on postal rule generally)  Contract formed even if lost in mail—liable to pay calls on shares: Household Fire & Carriage Accident Insurance Co v Grant (1879)  Consideration = o Normal issues  Value  Pre-1998—Par value (fixed amount—authorised capital divided by fixed number of shares)  Now—can set whatever price: s254C (abolishes par value)  Generally—Court will generally not examine adequacy: Re Wragg Ltd (1897) Andrew Trotter LWB334 Corporate Law  BUT not sufficient to be nominal—must be more than ‗sufficient‘ consideration normally required by contract: Re White Star Line Ltd (1938) (= Money or property representing money‘s worth—Not valid if illusory non-cash) o Bonus issues—No consideration need be paid: s254A(1)(a) (power to issue bonus shares)  ← In lieu of paying a dividend  Misleading & deceptive conduct: s1041H Statutory restrictions  Proprietary companies— (s113) o No more than 50 non-employee shareholders o Cannot engage in activities requiring disclosure = offering to public at large—but can—  Existing shareholders of the company  Employees of the company or of a subsidiary of the company o First offer of a particular class to existing shareholders— (s254D (rr))  Offer must set out—number of shares offered & period of offer: s254D(2)  Declined → directors may issue as they see fit: s254D(3)  Can exclude requirement by GM: s254D(4)  Public companies—fundraising regulated by Chapter 6D Notification of ASIC  On application for registration—of number & class of shares issued: s117(2)(k)  On issue—within 28 days of— o Number: s254X(1)(a) o Class: s254X(1)(b) o Paid amounts of share issue: s254X(1)(c) o Unpaid amounts of share issue: s254X(1)(d) o if public coy and shares issued for non-cash consideration—particulars of issue or attach contract if issued under contract: s254X(1)(e)  On conversion into class shares— (s246F(1)) o division of shares into classes o conversion of shares in a new class  Public companies when attaching, varying or cancelling rights to shares: s246F(3) Conditions & Classes of Shares Company can determine terms of issue (s254B(1)(a)) and rights & restrictions (s245B(1)(b))  Can issue preference shares (s254A(2)) with better conditions  On registration—must set out number & class of shares: s117(2)(k) Test as to whether different classes—whether rights so close that could effectively vote together in their interests: Clements Marshall Typical Conditions  Fixed dividend % of issue price—regardless of performance of coy o subject to rule that dividends may only be paid out of profit  Preference to repayment of capital on a winding up  Entitlement to dividends  Right to priority in payment of dividends  Voting rights  Rights to participate in a distribution of surplus assets on a winding up Andrew Trotter LWB334 Corporate Law Types of preference shares  Cumulative—Dividend roll-over (if not paid in one year, carries over to next) o Shares presumed to be cumulative if nothing to the contrary: Webb v Earle (1875)  Converting—converting into fully-paid ordinary shares at a set date o Determine no. depending on the market value – formula for discounting to ordinary shares  Participating—right to a further share in surplus assets on winding up  Redeemable—company can repay investor amount of capital paid: s254A(3) (tax system for a while treated them as loan capital—tax advantages—deduction for interest paid ↔ no deduction for dividends paid on normal shares → but now system has changed so not so popular) Partly Paid Shares  Power—company may issue partly paid shares: s254A(1)(c)  Paying the rest o On winding up—Limited liability—  members have to contribute on winding up: s515  but no more than amt owing: s516 o Calls—in accordance with the terms: s254M(1)  Effect of failure to pay—forfeits shares & shares cancelled after agreement in GM: s258D  NL companies—if fail to pay—  no right to recover calls made under s254P (s112(2)(c) & s254M(2)) o Must be made payable 14 days from when made: s254P  not entitled to dividend: s254W(3)  share forfeited 14 days after becomes payable: s254Q(1) (=at least 28 days from when made) o Can redeem before sale by paying call & costs of forfeiture: s254R(1) Dividends Payment Previously—Profit Dividends can only be paid out of the profits of the company: old s254T (pre-July 2010)  Payment of dividend is also included in incurring a debt for purposes of insolvent trading: s588G  profits = o undefined in CA o Gain made in a year—Assess by comparison of assets at start & end: Re Spanish Prospecting Co Pty Ltd [1911] o Accounting periods treated in isolation: Ammonia Soda Co Ltd v Chamberlain [1918] (not required to make good prior revenue losses) o Better view is that does not include unrealised profits (where asset increased in value): Westburn Sugar Refineries Ltd v Inland Revenue Commissioners  ↔ provided that not offset by fall in value of other assets: Dimbula Valley (Ceylon) Tea Co Ltd v Laurie Andrew Trotter LWB334 Corporate Law Currently—Balance Sheet Test: s254T Must not pay dividend unless— 1. Assets exceed liabilities by enough for the dividend: s254T(1)(a) 2. Fair & reasonable: s254T(1)(b) 3. Does not materially prejudice ability to pay creditors: s254T(1)(c) Uncertainty—  New Test: Balance sheet test o Company A in group X has more liabilities than assets, but company B from same group guarantees debts o Company A no longer able to pay dividend—which would often just be back to company B  Negative wording—must not pay dividend unless o Does not expressly authorise if conditions satisfied o Could not be used as a shield against duty to otherwise avoid reduction of share capital  Assets exceeding liability when dividend ‗declared‟ o Board would declare—members would ratify—dividend would be paid  ← Problem with delay between declaration & payment—if company went insolvent in the meantime o Legislation altered in 1998 to allow to ‗determine‟ dividend—no legal obligation to pay dividend: s254U (rr)  Company only incurs debt when time comes for payment: s254V o → ‗Declared‘ probably means ‗determined‘ Generally  Can pay by— o Cash o Bonus shares  Payment to—  Public → generally each class has the same dividend rights unless otherwise provided by the constitution or a special resolution of the company: s254W(1)  Proprietary → directors can pay as see fit: s254W(2)  NL coys →  No entitlement if call made, due & unpaid: s254W(3)  in proportion to no of shares regardless of amounts paid on shares: s254W(4)  subject to any provisions in coy const re non-ordinary shares Characterisation—as a debt to member  Arises at time fixed for payment—not when declared: s254V(1) o unless coy constitution states that debt arises on declaration: s254V(2) o can be withdrawn anytime before payment due: s254V(1)  Amount— o Fixed by directors: s254U(1) (rr) o Interest not payable: s254U(2) (rr) Andrew Trotter LWB334 Corporate Law Maintenance of Share Capital Generally must not reduce—Share capital used to satisfy debts so must be maintained: Trevor v Whitworth (in modern commercial reality share capital would never be enough to pay back all creditors) Company may wish to reduce by—  Has plenty of cash & wants to pay back to shareholders  to eliminate small holdings by paying out shareholders  to extinguish liability on partly paid shares Regulation— (s256A)  Addressing the risk of these transactions leading to the company‘s insolvency  Seeking to ensure fairness between the company‘s shareholders  Requiring the company to disclose all material information General Exceptions Specific Cases  Unlimited coy—however it likes: s258A o Members‘ liability not limited anyway so it doesn‘t matter  All companies may— o grant right to occupy/use real property: s258B o pay brokerage or commission to a person for taking up shares, or another person taking up shares: s258C o can cancel shares that have been forfeited under terms of issue: s258D Otherwise: s256B(1) 1. Fair and reasonable to shareholders as a whole: s256B(1)(a)  Consider— (Explanatory Memorandum to Company Law Review Bill 1998) o Adequacy of consideration paid to shareholders o Whether the reduction effectively—  depriving some shareholders of their rights  being used to effect a takeover  more properly proceed as a scheme of arrangement.  Look at effect & not purpose—Gambotto principles need not be satisfied: Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd  Look at overall fairness—will always be some dissenters: Re Allgas Energy Ltd [1999] (―In determining whether to confirm a company‘s reduction of its share capital…the Court is concerned with overall fairness and recognises that in most arrangements there will be some who dissent and some who may be less favourably served than others. However, as far as possible the Court endeavours to determine whether the reduction is fair and equitable to all concerned….Ordinarily the Court is slow to dissent from the decision of an informed sh
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