Introduction to Business Law Shares By Feruza Bobokulova

Key Legislation Financial Services and Markets Act 2000, ss 72-103, sch. 10 Companies Act 2006, ss 552 and 553, s 578

What is a Share? A share is essentially a unit of account for measuring a member’s interest in a company Each share in a company limited by shares is required to have a sum of money as assigned to it as its nominal value Any amount contributed in addition to nominal value is called share premium

Share Capital Capital contributed in exchange for shares apart from share premium is called a share capital (nominal value of the shares multiplied by the number of shares) All funds received as share premium should be kept in a separate share premium account

Share Capital Share premium received by a company may be used by it to pay the expenses of the issue or any commission paid on the issue or to pay up fully paid bonus shares A company may have different classes of shares with differing class rights simultaneously

Becoming a Company Shareholder By taking shares form the company in exchange for a contribution of capital Through an employees’ share scheme By taking a transfer of shares (on sale or gift or as a trustee from an existing member) By operation of law under which the shares of an existing member devolve on or are vested in the person

What Does ‘Being a Shareholder’ Mean? It means that a shareholder Can influence the way the company’s affairs are conducted by voting at meetings of members Will receive a return of contributed capital when the company is would up (provided there is any property left after paying the company’s creditors) Will participate when the company makes a distribution of its profits to its members

Types of Shares: Ordinary Share If there is no prior limit on the amount, which the holder of a share may receive in a distribution, either as an annual dividend or as a distribution of surplus assets on winding up, the share is called an ordinary share (CA 2006, s 560) or an equity share

Types of Shares: Preference Share A preference share is a share, which entitles the holder to an annual dividend of a fixed amount per share (usually expressed as a percentage of the nominal value of the share), paid in priority to any dividend payments to other members

Types of Shares The right to receive a preference dividend is cumulative, that is, if the dividend is not paid for one period, then double payment is due the next period Deferred share is a share bearing the restriction that no dividend can be paid to the shareholder for a financial year unless ordinary shareholders are paid a certain amount for that year. Deferred shares are also referred to as ‘founders’ shares

Types of Shares Redeemable shares in a company offer temporary membership of the company with repayment of the nominal value of the shares (and in some cases redemption premium) at the end of the period of membership. The shares are redeemed and the membership comes to an end either after a fixed period or at the company’s option depending on the terms of redeemable shares

Issuing and Allotment of Shares The process by which members take shares from a company is called issuing the shares A previously unissued share is said to be allotted when a person acquires the unconditional right to be entered in the register of members in respect of that share

Share Certificates Within two months after the allotment of a company’s shares the company must, under penalty, complete and have ready for delivery, share certificates for all the shares allotted, unless the conditions of issue of the shares provide otherwise

Partly Paid Shares If a share is allotted to a member, who does not contribute its whole nominal value, the share is said to be partly paid If a company issues partly paid shares, at least one-quarter of the nominal value + 100% of share premium must be paid on or before allotment unless the shares are being allotted in pursuance of an employees share scheme (CA 2006, S 586(1))

Partly Paid Shares If a share is allotted in contravention of CA 2006, S 586(1), it must be treated as though the minimum amount had been paid up and the allottee is liable to pay the deficiency and interest at 5% per annum A company that has allotted a share partly paid has the right to make a call for any or all of the remainder of the agreed capital contribution at any time

Form of Contribution Two common forms of capital contributions are Money An existing business (including shares in an existing company) or other fixed assets It is also possible to count services or an agreement to forgive a debt as contributed capital

Valuation of Non-Cash Assets A public company must not allot shares for a consideration other than cash, unless the consideration has been independently valued as being worth at least as much as the amount to be credited as paid up by it on the shares to be allotted

Valuation of Non-Cash Assets The valuation required must be by a person qualified to act as auditor of the company or by someone appointed by a person qualified to act as auditor The report must have been made not earlier than 6 months before the date of the allotment and must state that the value of the assets is at least the amount to be credited as paid up for it on the shares to be allotted

Valuation of Non-Cash Assets If a person is allotted shares in a public limited company in return for non-cash assts, but has not received any valuation report or if he knows that some other provision of s 593 or 596 has been contravened, then he will be liable to pay the company in cash the amount treated as paid up by the alleged value of the assets plus interest at 5% a year

Promises to Perform Services and Future Undertakings A plc may not accept as part or all of the contribution in exchange for issuing shares, a promise to do work or perform services for the company or for any other person If a share is allotted in contravention of this provision, the allottee is liable to pay in cash the amount unlawfully credited as paid up on the shares+interest at 5% per annum

Promises to Perform Services and Future Undertakings The company and any officer of the company in default will have committed an offence Still the allottee’s promise is enforceable A promise to pay cash in future counts as cash and so does not have to be valued for a plc

Promises to Perform Services and Future Undertakings A plc may not accept as part or all of the contribution in exchange for issuing shares, an undertaking to provide a non-cash asset, which is to be or may be performed more than 5 years after the allotment of shares

Promises to Perform Services and Future Undertakings If a share is allotted in contravention of this provision, the allottee is liable to pay in cash the amount unlawfully credited as paid on the share+5% interest per annum The company and any officer of the company in default will have committed an offence Still the allottee’s promise is enforceable

Essential Reading Mayson, Ryan, and French, 2011-2012. Company Law, 28th edn. Chapter 6.

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