Share capital Introduction A public company can acquire funding by offering or inviting the public to subscribe to its securities (shares). A company limited by shares issues and allots shares to a shareholder in return for capital. This called share or equity capital. Capital structure Authorized Share Capital Meaning of authorized and issued capital: S18(1)(c) Company Act 1965: If the company is limited by shares, its memorandum must state the amount of share capital and its division into shares of a fixed amount. Any issuances of excess shares are void: Bank of Hindustan, China & Japan Ltd v Alison (1871).
Reserved or Uncalled capital Shares that are partly paid. The amount unpaid called ‘reserve capital’ or ‘uncalled capital’. Variation of authorized capital Table A art 40(a) allows company to increase its authorized share capital in accordance with s62. The decision of increase must made by the general meeting. s62(1)(e): cancel shares which at the date of the passing of the resolution in that behalf has not been taken or agreed to be taken by any person... and diminish the amount of its shares capital by the amount of the shares so cancelled. 62(2) A cancellation of shares under this section shall not been deemed to e a reduction of share capital within the meaning of this Act. Issue of Shares Contractual rules Offer and acceptance A company seek to raise equity funding from members of the public, the company will make an invitation to the public. The offer is accepted by the company through its director, to allot the shares and sends the applicant a notice of allotment, these communications usually by post, and acceptance by post is deemed effective when posted: Byrne v Van Tienhoven (1880) Consideration for shares
Nominal / Par value of shares Shares issued by the company limited by shares must have a nominal or par value, as stated in s18(1)(c). Fixed amount refers to the nominal or par value of the share. In return for having allotted shares to a shareholder, must receive money or monies worth equal to the nominal or par value of the shares allotted: Ooregum Gold Mining Co of India Ltd v Roper (1892). Non-cash consideration It is common for companies to issues shares for a consideration other than cash; this form of issue is permitted: Re Wragg (1897).
Fully paid shares Shares held by a shareholder will only be deemed to be fully paid up when a company receives payment that is equivalent to the nominal or par value of those shares: Ooregum Gold Mining Co of India Ltd v Roper (1892). Partly paid shares As the company does not receive a payment that is equivalent to the nominal or par value of the shares held by a shareholder, those shares shall be deemed to be partly paid up shares. Prohibition against issuing and allotting shares at a discount When does a company issue and allot shares at a discount
A company that issues and allots shares to shareholder as being fully paid up when in fact the company has only received an amount less than the nominal or par value of those shares has engaged in an issue and allotment of shares at a discount: Ooregum Gold Mining Co of India Ltd v Roper (1892). Justification for this prohibition An issue and allotment of shares at a discount is prohibited, contrary to s18(1)(c) and s214(1)(d). Implications of issuing and allotting shares at a discount
For the company’s officer, s67(3): if s67(1) is contravened, it is not the company but the company’s officers who have committed an offence punishable with imprisonment of up to 5 years or a fine up to RM100,000. S67(4): the court can also order the convicted officer to pay compensation to the company or any other person for loss or damage suffered as a result of the offence. For the shareholders, where shares are issued and allotted at a discount, the holders of those shares continue to remain liable to pay its full nominal value to the company: Ooregum Gold Mining Co of India Ltd v Roper (1892).
Validity of shares issued at discount Issue of shares at a discount is valid as it is within the apparent authority of the company directors. Non-cash consideration and issuing and allotting shares at a discount A company that issues and allots shares in return for non-cash consideration such as property or services may inadvertently be issuing and allotting shares at a discount. If this proven the court can refuse to give effect to the transaction: Ooregum Gold Mining Co of India Ltd v Roper (1892).
Other risk related to shares issued and allotted for non-cash consideration Apart from the risk that shares issued at non-cash consideration, the company directors could benefit themselves at the expenses of the company from the non-cash consideration. Mitigating the risks s48(1)(b): if a company offers shares to the public or where a prospectus has been registered with the Security Commissions (SC), a minimum subscription of 5% of the nominal value of the share must be paid in cash. 48(6): every director of the company who knowingly contravened of s48(1)(b) is guilty of an offence which incurs imprisonment for up to three years or a fine of RM1 Million or both. s132(1): company directors who issue shares for non-cash consideration must use that power in the interests of the company. s132(3)(a)&(b): contravening s132(1) can result in that director incurring both civil and criminal liability. s54(1): the company must lodge with the CCM a return of the allotment of shares, within one month of the company making an allotment of shares. 54(3): require a copy of that contract to be lodged with the CCM. s54(7): if section 54 is contravened, every officer in default is guilty of an offence s132E: prior approval of company members is required before the company enters into any transaction or arrangement with its director or directors of its holding company or with the person connected with such director to acquire or dispose to such a person any non-cash asset of substantial value. s132D: prior approval of members is also required before company directors can exercise their power to issue shares. Paragraph 6. 11(1), Listing Requirement of the Bursa
Malaysia Securities Berhad: a public listed company mist also ensure that it and its subsidiaries do not issue shares or convertible securities to a director or major shareholder unless the shareholders of that company in a general meeting have approved of the specific allotment. Prohibition against issuing and allotting shares at a discount-exceptions Section 58 empowers a company to make a payment in the form of a commission to a person in consideration of that person taking up shares, provided the payment of that commission is not more than 10% of the issued value of the shares and is authorized by the company’s articles.
This covers the legitimate practice of paying underwriting commissions. The effect of giving this commission is to give a discount to the subscriber. Companies frequently enter into underwriting agreements with the stockbrokers or merchant banks whereby the underwriter contracts to place shares and to takes up any shares which are not subscribed for by the public increases the chance of success for the company in placing all its issued shares. Section 59
A company can issue shares at a discount of a class if:- ·the issue has been authorized by an ordinary resolution passed at a general meeting and confirmed by a court order; ·the resolution sets out the maximum rate of discount; ·the shares are issued within one month of the court order confirming the issue; ·not less than 1 year has elapsed since the date on which the company was entitled to commence business. s59(4): shares and allotted pursuant to s59 must first be offered to the existing shareholders of that class in proportion to the number of shares currently held by the shareholder. 59(7): if the above requirements are not complied with, the company and every officer who is in default shall be guilty of an offence punishable with a fine of RM1000 and default penalty. Issue and allotment of shares at a premium Directors not obliged to issue and allot shares at a premium there is no duty imposed upon directors to issue and allot shares at a premium: Hilder v Dexter (1902), failing to do so could result in company director being held negligent. Share premium account
When a company receives a premium, that premium must be credited into the share premium account: Henry Head & Co ltd v Ropner Holdings Ltd (1952). s60(2): the share premium account is treated as paid up share capital of the company for the purposes of share capital reduction. s60(4): when a company issues shares in consideration for the acquisition of at least 90% of the equity shares in another company a share premium account does not have to be created even if the shares are issue at a premium. Application of the share premium account
Section 63 of Company Act 1965 provide the company can apply its share premium account for:- ·paying up unissued shares to be issued to members of the company as fully paid bonus shares; ·paying up in whole or in part the balance unpaid on shares previously issued to members of the company; ·paying dividends if such dividends are satisfied by the issue of shares to members of the company; ·appropriating or transferring to any statutory fund established and maintained pursuant to any law of Malaysia relating to insurance in the case of a company which carries on an insurance business in Malaysia; ·writing off preliminary expenses of the company or the expenses of, or the commission or brokerage paid or discount allowed, on any duty, fee or tax payable on or in connection with, any issue of shares of the company; or providing for the premium payable on the redemption of redeemable preference shares. s67A(3): a public listed company that purchase its own shares in accordance with s67A can also use its share premium account to provide consideration for the purchase. Right of the member if any regards to premium paid
Premium received and credited to the company’s share premium account are regarded as part of the company’s paid up share capital cannot be returned to the shareholders, s60(3) it is illegal to pay monetary dividends out of the share premium account: Re Hume Industries (FE) Ltd (1974). Shareholders who have paid a premium on their shares have no right to the return of their premiums ahead of other shareholders in a winding up, any surplus remaining after the return of the nominal amount of shares is distributable on a ratable basis: Re Driffied Gas Light Co (1898). A shareholder who has not paid the full amount of the premium owing on the shares, is not liable as a contributory in a winding up to pay the unpaid amount of the premium, the unpaid amount of premium is not an amount unpaid on the shares within the meaning of s214(1)(d): Niemann v Smedley (1973).
When a company redeems its redeemable preference, the company is prohibited from redeeming them at a lesser value than the aggregate amount subscribed, a subscriber of shares has paid a premium to a company at the time he or she subscribed to the redeemable preference shares and the company later redeems those shares, the shareholder is entitled to a return of his or her premium: Chloride Eastern Industries Pte Ltd v Premium Vegetables Oils Sdn Bhd (2002). Shares s98: shares in a company shall be a movable property transferable in the manner provided for by the company’s articles. s100: share certificate that is issue by a company shall be prima facie evidence of the title of a member to the number of shares specified in that share certificates. Classes of shares
Company articles empower company directors to issue shares, which carry different rights: Table A art 2 Ordinary / Equity shares s4: ordinary shares carry a general right to participate beyond a specified amount in any distribution whether by way of dividend, or redemption, in a winding up, or otherwise. Preference shares s4: a preference share to include a share, by whatever name called, which does not entitle the holder to the right to vote at a general meeting or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or redemption, in a winding up, or otherwise. Preference shareholders voting rights
It is allowed a company’s articles to provide preference shareholders with a restricted right to attend and vote at a company’s general meeting when: preferential dividend or any part thereof remains unpaid; a class meeting of preference shareholders is held to vary rights attached to the preference shares, or; s148(2) a resolution is proposed to wind up the company. Rights of preference shareholders to be set out in the company’s constitution s66(1) requires rights of preference shareholders to be set out in the company’s constitution: repayment of capital; participation in surplus assets and profits; cumulative dividends; voting and priority of payment of capital and dividends. 66(2): contravention of s66(1) may result in the company and its defaulting officers committing an offence punishable with a fine of up to RM2000. Civil consequences for contravening section 66 s154(1)(b): every resolution or agreement which effectively binds any class of shareholders, whether agreed to by all the members of that class or not must, unless otherwise stated by the Act, be lodged with the CCM within one month after the passing of that resolution or the making of the contract. Variation of class rights The Act and Table A has provisions that are designed to protect class rights from being varied or abrogated. These only apply when there is a variation of class rights.
Variation of class rights in accordance under the common law Occurs only when the strict legal rights attached to a class of shares are varied and not when the economic value attached to that class shares is affected. There is no variation of class rights if the rights attached to a class of shares remain exactly same as they were before a corporate action was taken. Variation of class rights in accordance with the Act s65(5): a later allotment of preference shares ranking equally with existing preference shares to be a variation of rights of the holders of existing preference shares. s65(6): there will be no variation of rights if at the time the existing shares were allotted, the company’s memorandum or articles authorized a later issue of equally ranking shares. 65(7): any alteration to the medication of right clause shall also be deemed to be a variation of class rights. Protection Afforded By The Act Against The Non-Observance Of Class Right 1. Entrenching class rights by inserting class rights in the memorandum Section 21(1B) said nothing In subsection (1A) permits the alteration or deletion of the memorandum that relates to rights to which only members included in a particular class of members are entitled. 2. Protection afforded by the articles against variation of class rights Where class rights are provided for in a company’s articles then variation of those rights must be in accordance to the procedure prescribed by the company’s articles and not otherwise. If no procedure is prescribed by the ompany’s articles then class rights as provided for in the company’s articles cannot be altered. 3. Variation or modification of rights clause in the company’s articles Table A art 4, is therefore a variation or modification of rights clause as it provides that before a company can proceed with a proposed exercise to vary class rights, the company must : * Convene a class of shareholders meeting. That meeting is to be attended by the holders of that class of shares whose rights are to be varied; and * The holders of three quarters of the issued shares of the class whose rights are to be varied must give their consent in writing or pass a special resolution consenting to the proposed variation of class rights. 4. Section 65
Section 65(1) provides that where a variation or modification of rights clause exists in the company’s memorandum or articles and class rights have been varied in accordance with that variation or modification of rights clause, the holders of not less than 10% of the issued shares of that class whose rights have been varied or abrogated can, within one month thereafter the variation or abrogation, apply to the court to cancel the application is made, the proposed variation or abrogation of class rights. If such an application is made, the proposed variation or abrogation of class rights will not take effect until confirmed by the court. The right to apply to the court is also extended to those who voted in favour of the variation previously but such an applicant would have to show the court that the company did not disclose a material fact to the applicant at the time he or she voted in favour of the proposed resolution : s65(2). Dilution Of Voting Power When directors issue and allot new shares, the voting power held by existing shareholders may be diluted.
To prevent this from occurring the company’s articles will usually provide that the company must offer the new issue of shares to its existing shareholders in proportion to their existing shareholding unless otherwise directed by the general meeting: Table A art 41. Validation Of Improper Issue And Allotment Of Shares: Section 63 Section 63 empowers the court to validate an improper issue or allotment of shares if it thinks that it is just and equitable to make such an order. The application for validation may be made by the company, a shareholder or by the company’s creditors. Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng (1991) 1 MLJ 301
An application was made under s 63 to validate shares that had been issued by persons who were not the company directors. The court held that a distinction must be made between an act which was done incorrectly by persons representing the company and an act which was done not by the company at all in the sense that the persons purporting to act did not actually represent the company at all. Options An option is a contract whereby a company agrees to issue a certain number of shares to a person at a future date, if he or she chooses to take up the shares. If the person does so, he or she is said to exercise an option and can require the company to allot the shares.
As with any other contract, the option holder must give some consideration to the company even though this may be a small amount. S 68(1) said that an option granted after the commencement of this Act by a public company which enables any person to take up unissued shares of the company after a period of 10 years has elapsed from the date on which the option was granted shall be void. S 68(2) said that subsection (1) shall not apply in any case where the holders of debentures have an option to take up shares of the company by way of redemption of the debentures. The company is required to enter these particulars into the register within 14 days after the grant of an option. Doctrine Of Capital Maintenance
Section 67(1) imposes 5 distinct prohibitions upon a company limited by shares. Unless otherwise provided by the Act, a company limited by shares cannot: * provide direct or indirect financial assistance to anyone who purchases or subscribes to the company’s shares; * if it is a holding company, give direct or indirect financial assistance to its subsidiary in order to enable the subsidiary to purchase or subscribe to its shares. This prohibition is imposed so as to give effect to the rule that provides that a subsidiary cannot be a member of its holding company: s 17(1); * deal with its own share; * purchase its own share; or * lend money on the security of its own shares.
Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors (1999) 5 MLJ In this case plaintiff contended that the agreement was in contravention with s 67 of the Companies Act 1965. The second defendant argued that the agreement fell within s 67(2)(c) of the Act which provides for the giving of financial assistance by a company to its employees to purchase fully-paid shares in the company. Court held that second defendant knew that first defendant was a trustee of the company, therefore the monies received is as a constructive trustee. Self Purchase Prohibition Unless permitted under the Act, a company limited by shares is not permitted to buy back its shares. A share buy back constitutes an illegal reduction of the company’s paid up share capital if done in contravention of 67(1).
However, the Act provides 4 exceptions to the self-purchase prohibition. These are: * redeeming redeemable preference shares in accordance to s 61; * shares purchased in accordance with s 67A; * redeeming shares for purposes of cancellation under s 64; and * shares purchased in accordance with s 181(2)(c). Chloride Eastern Industries Pte v Premium Vegetables Oils Sdn Bhd (2002) 1 CLJ 373 This means that if the preference shareholders has paid RM1 per share while 10 cents is par value and 90 cents is premium share. The company when it redeems its preference shares must redeem them at RM1 per share and not for any lesser value. Authorised Reduction Of Paid Up Capital: Section 64
Section 64 provides that before a company limited by shares can reduce its paid up share capital the company must ensure that: * the company’s constitution includes a provision that allows the company to reduce its issued capital. In the case of a company that has adopted Table A, this requirement is fulfilled: Table A art 42; * its proposed exercise to reduce capital must have received the prior approval of the general meeting by way of a special resolution; and * before the company implements its proposed capital reduction exercise the company has obtained the court’s approval to that exercise. The Companies (Reduction of Capital) Rulesn1972 sets out the procedures and the necessary forms that must be lodged with the court to obtain the necessary court’s approval. A company can reduce its issued capital by: extinguishing or reducing the liability on any of its shares in respect of share capital not paid up: s 64(1)(a); * cancelling any paid up share capital that is lost or is no longer represented by available assets: s 64(1)(b); or * paying off any paid up share capital that in excess of the company’s needs: s 64(1)(c). Reference Arjunan Krishnan, (1998). Company Law in Malaysia: Cases and Commentary. Butterworths Asia CCH Company law editors. Companies Act 1965 with subsidiary legislation 2nd edition. CCH Company Tan Cheng Han, (2009). Walter Woon on Company Law revised 3rd version. Sweet & Maxwell Asia Malaysian Law Journal Shanty Rachagam, Janine Pascoe, Anil Joshi, (2010). Concise Principles of Company Law in Malaysia. Lexis Nexisa