Financing Company

Question 1

meaning of legal capital and shares (case)

Answer 1

legal capital of company means amount of money a company has received from investors who subscribed to company’s shares.

Borland Trustee v Street Bros; ‘a share is not a sum of money settle in the way suggested, but am interest measure by a sum of money and made up of various rights contained in the contract’

Question 2

Equity finance - functions of shares

Answer 2

1) a fraction of capital, denoting holder’s proportionate financial stake in the company and defining liability to contribute to equity funding
2) is a measure of holder’s interest in company and basis of their right to become a member and enjoy voting rights etc.
3) it is a species of property, which holder can buy, sell, charger etc. and in which there can be both legal and beneficial interests

Question 3

directors misusing allotment of shares (equity finance)

Answer 3

may do this to influence composition of company (CA 2006 ss.549-551) limits this by providing general rule that it is an offence for directors to allot shares without authority of members given either in articles or by ordinary resolution.

Question 4

minimum capital requirement for companies

Answer 4

public companies = £50,000 (S.763)

private companies = no minimum or authorised capital - shares in a limited company must each have a fixed nominal value: void if not (S.542(1)(2))

Question 5

issuing allotting shares at discount (case)

Answer 5

overall company forbidden to do so (S.552) - S.553 allows for payment of commissions and discounts up to a statutory limit

Ooregum Gold Mining of India v Roper; action brought against holder of ordinary shares to test validity of preference shares being made by directors on basis that each new share (£1 nominal value) should be credited with 75p paid - transaction bona fide seen in best interests/way to raise funds for company - HoL held beyond power of company to do so and consequence = preference sharegolders liable for full nominal value - reinforced by S.580(1-2) & 609; companies have to pay interest of 5% year in addition to paying discount amount

Question 6

partly paying value of shares

Answer 6

not legally prohibited - remaining amount may never be paid depending on success of company/whether terms on allotment specified particular date.

if company is in financial difficult it may call for shares to be paid up - will need to check directors have right to do this (usually do unless specifically excluded)

Question 7

issuing shares at premium (case)

Answer 7

company free to charge more than nominal value if investor found willing to pay - CA 2006 requires premiums shares to be shown in company’s accounts under separate head “share premium accounts” = ensures these are treated for all intents and purposes s capital in company’s hands and not in any sense as income/profit

shareholders who pay premium have no right to return of their premium on winding up.

Question 8

Hilder v Dexter (shares at discount - where does not apply)

Answer 8

company issues 1/6 of its shares at par value to selected private persons to obtain working capital at par value with option to take furhter shares at par for 2 years - after share prices rose Mr Hilder exercised his option; held hilder entitled to exercise option as it in no way directly or indirectly contravened rule against issuing shares at discount under CA 580

Question 9

shares may be issued at premium even though not issues for case - henry head co. v ropner holdings

Answer 9

D company formed to acquire shares of 2 shipping companies, and did so by exchanging shares in these companies (£7 million) for share in itself of equivalent nominal value of £1,175,000 court held that difference of £5 million had rightly been shown in company’s balance sheet as carried to a premium share account.

Question 10

protection provided when shares offered to public

Answer 10

requirements a company must comply with in order to offer shares to public are governed by CA 2006 and Financial Services and markets Act 2000 (S.85(1))

Question 11

Misrepresentation of shares offered to public (remedy 1 = rescission) (case)

Answer 11

there must be a connection between directors action’s and material misrepresentation

requirements for rescission - Lynde v Anglo Italian Hemp Spinning co;
- where misrep is made by directors or other general agents of company entitled to act

• where the misreps are made by a special agent of the company while acting in scope of his authority
• where company can be held affected, before contract complete, with knowledge that it is induced by misrep
• where contract made on basis of certain representations, whether particulars of rep known to company or not, and it turns out those were material and untrue

Question 12

exceptions where rescission cannot be used

Answer 12

i) if parties cannot be restored to position before contract
ii) if contract has been affirmed (continuing it despite breach/misrep)
iii) if 3rd party interests are at stake and will be affected
iv) if order for winding up company has been made = Oakes v Turquand; prospectus failed to mention company insolvent and been carrying on at loss for years - year later company went into liquidation - shareholders argued contract induced by fraud

Question 13

remedy 2 (damages)

Answer 13

available instead or in addition to rescission for consequential losses

i) at common law if misrep was fraudulent (Derry v Peek)
ii) at common law for negligent misstatement
iii) under misrep act 1967 for any contract induced by fraud unless misrepresentor can prove she had reasonable grounds to believe facts represented at time were true

Question 14

shares, classes and rights (definition and what they relate to)

Answer 14

classes of shares/class rights are not defined in CA 2006 other than S.629 - companies may be divided into different classes either by company constitution or by terms of share issue itself - different rights usually relate to:

• entitlement to vote
• entitlement to dividends
• entitlement to return capital when company is wound up

Question 15

ordinary shares

Answer 15

if all company’s s shares distributed without differentiation they will be OS - remaining shares not split into certain classes/rights will also be ordinary shares.

Question 16

preference shares

Answer 16

shares usually entitled to dividend paid at a predetermined rate in priority to any dividend on ordinary shares - 1st necessary for company to have distributable profits and for dividend to be declared.

if conditions met, first claim on corp profits in any year will be preference shareholders. - a company may alter its articles so as to take power to issue shares ranking in preference to its existing shares

reducing capital: Preference shareholders are entitled to receive an amount per preference share equal to the par (nominal) value of the shares together with all accumulations and arrears on the dividends.

Question 17

Birch v Cooper

Answer 17

when terms of issue make no express distinction between rights of different categories of shares in respect of
1) dividends
2) return of capital
3) voting
then rule of construction is all shareholders rank equally unless expressed otherwise

case facts: articles of company provided dividends should be paid in proportion to amounts paid up on shares - no express provision on distribution of assets on winding up. (ps = 5% preference shared at £10 paid up & Os = £10 for which £3.50 left to pay) - HoL held that, in distributing surplus assets available in company’s liquidation after returning capital, the paid up and partly paid shares were to be treated alike = where terms of issue do not make express provision as to rights of a class of shares then that provision is presumed to be exhaustive statement of rights of the class in that partnership.

Question 18

Alteration of class rights

Answer 18

class rights defined S.629(1)

alteration of class rights is dealt under S.630, may only be varied:

• according to relevant provisions in company’s articles
• where there is no such provision, variation requires consent in writing of holders of no less than 3/4 in nominal value of issued shares of that class, or a special resolution passed at class meeting sanctioning variation.

S.633 = members of class who hold 15% of shares of that class the right to object to variation in court within 21 days.

Question 19

cumbrian newspaper group (case concerning when shares are attached to shareholder) pros + cons

Answer 19

pro: class rights can be varied, providing benefit of elasticity and benefit for a company of being able to adapt to circumstances
con: Ferran argues that if the distinguishing mark of a class right is exclusivity, if that effect of Cumbrian has consequence of narrowing scope of protection for minority shareholders then it shouldn’t be followed.

Question 20

White v Bristol Areoplane (rights not altered or even affected by change in company’s structure if change merely affects enjoyment of rights)

Answer 20

claimed bonus issue of new shares to existing shareholders ‘affected’ the voting rights attached to their shares - Company and CoA believed the rights themselves were not ‘affected by proposal’ so no class meeting required.

Question 21

certified shares =

Answer 21

not to be traded on public market - legal title obtained by registration of holders name in company’s register of members.

Question 22

formalities to transfer shares

Answer 22

i) complete and sign a share form
ii) send transfer form and share certificate to transferee; payment of price and stamp duty (equitable interest acquired at this point)
iii) request to register the transfer in the company’s register of members: after reg transfer has legal title

Question 23

importance of legal title over share (case)

Answer 23

shropshire union railway v r; lender had equitable interest in shares (no legal as no reg) - directors had beneficial interest in rights and when wife of lender requested reg, directors refused and won because their right preceded lenders.

Question 24

attaining equitable interest in shares (case)

Answer 24

3 ways:
1) transferor declares a trust of shares for benefit of transferee (can be oral but recommended in writing)

2) if dealing in a sale that’s enforceable and unconditional then trasnferee becomes owner in equity
3) transfer by way of gift, donee may acquire equitable ownership in advance of transfer of legal title

in absence of registration, earliest equitable right prevails = Peat v Clayton