121. Nature of shares Flashcards
- Nature of shares
General overview
[121.01] Section 121 provides that shares are in the nature of movable property, i.e. personal property. As a result, the company may create legal, equitable and security interests over the shares. When shares are sold or transferred from one shareholder to another, the equitable title to the shares passes to the purchaser and the title is perfected when the purchaser is registered as the legal owner of the shares. Security interests created over the shares may take the form of a charge or a pledge, where the shares are evidenced by a share certificate.
[121.02] Section 121 defines a share or other interest of any member in a company as a movable property, transferable in the manner provided by the constitution, and shall not be of the nature of immovable property. A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se: per Farewell J in Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288, HC. Shares are “a right to participation in the company on the terms of the articles of association”: Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 223, CA . Primarily, a share in a company is a piece of property conferring rights in relation to the distribution of income and of capital: per Dixon J in Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 503, HC. In addition, rights conferred by the Act must be added to those rights and obligations of members set out in the constitution: Soden v British & Commonwealth Holdings plc (in administration) [1997] BCLC 501 at 505, HL. Shares are the property of the shareholder, not the company and he can do what he likes with them: Pilmer v Duke Group Ltd [2001] 2 BCLC 773 at 784, HC .
[121.03] A share is a fraction of the capital of the company; a measure of the holder’s interest in the company as an association of members or shareholders; and a specie of property, a chose in action, which the holder can buy, sell, charge, etc., and in which there can be both legal and beneficial interests
Competing claims to shares
121.04] A legal title to shares will prevail over an earlier equitable title, but a transfer of the legal title is not perfected until registration as holder of the shares: Shropshire Union Rlys & Canal Co v R (1875) LR 7 HL 496, HL. Where the equities in between successive transferees of shares are equal, the first in time prevails: Peat v Clayton [1906] 1 Ch 659, Ch D . A transfer of shares for valuable consideration, even if irregular under the company’s articles, is effective to transfer an equitable interest to the purchaser which will prevail over another equitable right accruing at a later date: Hawks v McArthur [1951] 1 All ER 22, Ch D . An agreement for a sale of shares made contrary to the restrictions of sale imposed by the articles of association of the company was void and no rights, legal or equitable, arose between the purchaser and the member of the company: Gan Sin Tuan v Chew Kian Kor [1958] MLJ 62. In a family company, the court could grant a decree of specific performance of a settlement agreement made between shareholderA and shareholderB thatA would purchaseB’s shares, subject to the determination of the valuation of the shares by an arbitrator, so as to prevent fruitless litigation amongst family members: Tan Yeow Khoon v Tan Yeow Tat & Anor [1998] 2 SLR(R) 19; [1998] SGHC 111, HC.
[121.05] A gift of shares, if perfected is effective to transfer an equitable title to the shares in the transferee: Re Rose [1949] Ch 78; [1952] Ch 499 ; cf Milroy v Lord (1862) 4 De GF & J 264 where a gift of shares by deed was ineffective to transfer any title.
Trust over shares
[121.06] A company is not ordinarily bound by a notice of a trust or other equitable interest affecting its shares; this rule does not apply when the company is itself asserting an interest in competition with the person who gave notice: Mackereth v Wigan Coal and Iron Co Ltd [1916] 2 Ch 293, Ch D ; distinguished Societe Generale de Paris v Tramways Union Co (1884) 14 QBD 424 at 439 (a company need not take notice in any way of trusts); Societe Generale de Paris v Walker (1885) 11 App Cas 20 at 30, HL ; cf Bradford Banking Co Ltd v Briggs, Son & Co Ltd (1886) 12 App Cas 29 ; Rainford v Keith and Blackman Co Ltd [1905] 2 Ch 147 . A gratuitous transfer of shares to another without consideration renders the transferee a constructive trustee of those shares in favour of the deceased transferor’s estate: Tay Choo Foo @ Tay Chiew Foo v Tengku Mohd Saad @ Tengku Arifaad bin Tengku Mansur & Ors (all acting as administrators of the estate of Tunku Mansur bin Tunku Yaacob, deceased) and Another Appeal [2009] 1 MLJ 289, CA. Shares which were transferred to another in trust pending settlement of “personal matters” of the member were held to render the transferee a trustee for those shares: Jesuraj Daniel v Vadivelu Pandi Devi & Anor [2012] SGHC 60, HC. A member declared himself trustee for 5% of the 950 shares he held in a company. Since the shares were of such a nature as to be indistinguishable one from another and were therefore all equally capable of satisfying the trust, it was unnecessary to identify any particular 50 shares; and that, accordingly, the trust was not void for uncertainty of subject matter: Hunter v Moss [1993] 1 WLR 934, Ch D . A shareholder who never insisted to be a director, was never paid for anything as a shareholder, signed all documents that were given to him without question and admitted not to have personal interest, is proved without doubt that he was holding the shares on trust for the plaintiff
Security interests in respect of shares
[121.07] The mere leaving of a share certificate with a blank transfer with a broker did not estop the owner from denying that the broker had either express or implied authority to charge the shares to the banks. There must be something more in the owner’s conduct for estoppel to arise. This could arise where it was shown that the owner had entrusted his shares to the broker for disposal to a third party, whether by way of sale or by way of pledge. If the broker should act outside his actual authority but within the scope of his apparent authority, a transferee who acquired the shares without notice of the agent’s lack of authority took priority over the owner. If the transferee had notice of the limitation of authority, or were put on inquiry, no estoppel could arise: Pan-Electric Industries Ltd (in liquidation) v Sim Lim Finance Ltd & Ors [1993] 2 SLR(R) 154; [1993] SGHC 123, HC ; France v Clark (1884) 26 Ch D 257 followed; Fry v Smellie [1912] 3 KB 282 followed. Where a beneficial owner parts with the indicia of title to his shares to a transferee, in cases where the rights of a third party dealing with the transferee are involved, the test is the owner’s intention. If the owner’s intention was to charge the shares in favour of the transferee, the decision in France v Clark (above) applies. The transferee could sub-charge the third party, but any rights acquired by the third party are limited to the amount owing by the owner. The mere deposit creates no estoppel in favour of third parties against the owner.
[121.08] If, on the other hand, the owner’s intention was to confer authority to the transferee to pledge or sell the shares, the owner cannot set up, against the third party, a limit upon the authority which he gave, provided that the third party is a holder for value without notice
