LAWS10083 Company law Company -Shares, Members and Class Rights, Study notes of Law

Download LAWS10083 Company law Company -Shares, Members and Class Rights and more Study notes Law in PDF only on Docsity! Company Week 5: Shares, Members and Class Rights Why is debt capital preferred to equity (only in some instances)? Debt if preferred to equity because it relates to control of the company, and the diluting of current member shareholding if there are no existing pre-emption rights. This would be ideal if the company wants to raise finance without losing any equity i.e. issuing debt capital. For tax reasons the interest on tax is tax deductible and thus this can reduce the income tax bill. For large listed companies issuing debt shows confidence in the company as it sends a positive message to the market to show that the board is confident that the project will be successful and the company would be in a good position to repay the debt. Legal capital: Legal capital can be understood as the total value that the company receives from shareholders in exchange for its shares (nominal value + premium). Why distinguish between nominal value and premium? Premium is justified due to the profitability of the company. Share capital- the aggregate nominal value of all issued shares, paid and unpaid- it does not include a premium. A premium is recorded in a premium account- it cannot be distributed to the members. Called up share capital- paid up share capital and any amount to be paid on a specific future date. The company may ask to pay the premium upfront and this is normal. Public companies the minimum called up share capital must be a 25%. Private companies can leave the nominal capital uncalled there is no legal requirement like the 25% minimum called up share capital for public companies. Why would a company opt to leave share capital uncalled? This could act as a sort of guarantee for some creditors that there will be some form of money available if the company becomes insolvent. It doesn’t matter in practice if though if all share capital is called or some is uncalled as the share capital normally registered is so low- this is because of liquidity? Equity share capital is limited only to shares that are participating- they do not have a fixed entitlement to dividend or capital. They include ordinary shares or deferred and preference shares that carry participating rights (except where those rights are limited in amount). The return on the share should not be fixed. Preference shares that have a right to a fixed percent they are considered to be a hybrid security. As long as the company has distributable reserves then as a preference shareholder you will have a preferred right to arrears for previous loss making years and then would any ordinary shareholder be entitled to dividends. Authorised capital (CA 1985) v statement of capital (CA 2006)- the former used to be a requirement to put in the memorandum of association- the purpose of the amount was to ensure that it would reflect the maximum amount of capital the board could issue. It was also an added security against the board issuing too many shares and prevents the board from issuing shares to alter the control of the company, this action would be voidable. A statement of capital is a snap shot of structure of capital and prescribed particulars will describe the classes of shares issued if any- the prescribed particulars also show the rights attached to the shares or each different class of shares. Nominal (par) value and share premiums: CA 2006 s 542 (1)- shares in a limited company must each have a fixed nominal value- why does the law require the fixation of nominal value? to make sure there is a nominal amount available to creditors when the company is insolvent. The share capital is a number but that number could be attached to the company’s assets- they must have the value in terms of assets in the company. Share capital and nominal value are not so useful in protecting creditors. Then should we have a minimum nominal value of shares for companies like that in Germany of 25,000 Euros. But this is arbitrary as there are so many types of businesses with different characteristics, and share capital can only be technically set at a proper minimum level against the risk level of every individual business. It could also be a barrier to entry that could affect competition i.e. if there is a minimum share capital requirement. Shares can never be sold below the nominal value. it is practice to sell shares at a discount below their market value especially for publicly traded companies. The legal nature of the share Borland’s Trs v Steel Bros- Shares are classed as a bundle of rights but CA 2006 have some proprietary features i.e. it has been described as an asset or property but this only refers to the ability of a member to sell or offer the shares as a security (transferability) it refers to the fact that you can dispose of your rights as and when you see fit. Shares have been ruled to be a bundle of rights in this case- a share is an interest measured by a sum of money and made up of various rights (i.e. a measure of the shareholders participation in the company regarded as an association of members.). Process of share issue Decision to issue shares is split between directors and shareholders. CA 2006 shareholders consent must be sought by the board when issuing shares- this consent expires every 5 years and could be revoked by a general resolution. Issue of poison pills- power of board to issue shares to existing members (part or all) at a heavily discounted price to avoid a member to get a controlling stake- this must be preapproved by the member in the UK unlike USA. Pre-emption rights- right of first refusal when the company issues new shares- this is to ensure that a member’s holding is not diluted. It prevents the dilution of voting rights. These rights are exercised for a minimum of 14 days or longer as per agreement. The pre- emption right will be proportional to the shareholding. Let’s say you have the pre- emption right but don’t have money to buy- can the board do anything about this to help you? You can have the right to sell your pre-emptive right - renounceable allotment (rights issue) beneficiary of a pre-emption right have the benefit of selling the renounceable allotment to anyone. This will compensate for the loss economically. Allotment of shares- the effect is that the members have the right to be registered on the register of members. It is a contractual stage where you look for buyers- it sets out the rights attached to the shares, the conditions attached to buying and owning the shares etc. once registered the membership rights are triggered. Unsuccessful allotment in a public co- they don’t find buyers for their shares- they are given a certain time period to find buyers and if the allotment is not fully