Chapter 8 - Membership, Shares and Share Capital

Question 1

What are 4 routes to gaining the right to shares?

Answer 1

1 Subscribers to the Memorandum of Association
2 Subscribers to new issues of shares
3 Acquirers of existing shares transferred from an existing shareholder
4 Persons who acquire the right to shares by operation of law on a member’s death, insolvency, or declaration of mental unfitness.

Question 2

Who is a member of a company with a share capital?

Answer 2

S112 CA:
- every person who agrees to become a become a member of the company, and whose name is entered on the register of members.

Question 3

What information is required in the register of members?

Answer 3

S113 CA:

• the names and addresses of members
• the date on which each person was registered as a member
• the date each person ceased to be a member
• the shares held by each member (including class)
• the amount paid on each share

Question 4

When are shares taken to have been allotted?

Answer 4

s558 CA:

- when a person acquires the unconditional right to be included in the company’s register of members.

Question 5

What is a share?

Answer 5

A share is the interest of a person in the company measured by a sum of money for the purposes of liability in the first place, interest in the second.

(Borlands Trustee vs Steel)

Question 6

What is the presumption of equality?

Answer 6

There is a legal presumption that each share in a company provides equal rights. This presumption can be displaced by a company offering different rights with shares (classes).

Question 7

What are the 4 key respects in which one class of share may differ from another?

Answer 7

• nominal value
• right to participate in declared dividends
• rights to participate in residual wealth on winding up
• voting rights

Question 8

What are “redeemable” shares?

Answer 8

Shares which may be redeemed at the option of the company or the shareholder.

Question 9

Distinguish equity and non-equity shares.

Answer 9

Equity shares are those which have unlimited opportunity to share in the financial success of the company, but are also the first to be lost during insolvency.

Question 10

Where are the rights that attach to a share set out?

Answer 10

In the articles, or in the shareholder resolution authorising their issue.

Question 11

What is the presumption of exhaustion as set out in Re National Telephone Company?

Answer 11

The courts will presume class rights to be exhaustive in order to avoid any dispute over rights.

Question 12

What is a preferential dividend, and what does it mean to say that a dividend is cumulative?

Answer 12

Preferential dividends are a right given by a share to receive X% of the nominal value (of the share) each year. These are typically cumulative, in that if the dividend is not paid in year 1, the unpaid amount is carried over into year 2.

Question 13

What are the three concepts of class rights identified by Ferran and which is believed to apply in UK company law?

Answer 13

3 is supported by UK case law.

1 Class rights are those which are exclusive to the class and distinct from rights attaching to any other class
2 Class rights are all the rights which under the constitution of the company attach to shares irrespective of whether those rights are exclusive to a particular class or are enjoyed by other classes
3 Class rights are exclusive to the class and dividend and capital rights, rights to vote, and rights relating to protection of class rights.

Question 14

Why is it important to know whether a feature of a share is a class right or not?

Answer 14

If a feature is actually a class right, then extraordinary resolution of that class of shareholders is required to change the rights.

Question 15

Give an example of a change that is not a variation of a class right, but is regarded merely as a change in the enjoyment of class rights.

Answer 15

In White v Bristol Aeroplane Co, the issue of new preference shares was held to affect the enjoyment of class rights, not an actual variation of those rights.

Question 16

What is the significance of a court ruling that a change is merely a change in the enjoyment of class rights?

Answer 16

No resolution of the shareholders is required for the change to be effective.

Question 17

To which type of shares is the Spens formula relevant, and what does it provide for?

Answer 17

Spens formula is relevant to those shares with limited participation rights, but full dividend rights, and provides for the payment of market price (rather than nominal price) should the shares be cancelled before the company is wound up.

Question 18

What is the initial share capital of a company?

Answer 18

Total shares issues on formation of the company and subsequent shares (s 546).

Question 19

What is the nominal value of a share?

Answer 19

Fixed monetary value attached to a share. I.e. the minimum a share can be bought for.

Question 20

Identify two reasons why the nominal value of a share is important.

Answer 20

To work out the proportion of residual wealth to which a shareholder is entitled.
To work out which class of shares is which (as shares with different nominal values are of different classes.

Question 21

What is a share premium?

Answer 21

The amount paid for a share above the nominal value. i.e. a £1 share issued for £1.20 has a £0.20 premium.

Question 22

Identify four reasons why a company may wish to increase its share capital.

Answer 22

1 To raise money to run the company
2 To issue shares to gain assets
3 To forstall a takeover bid
4 To change the seat of control of a company

(note that 3 and 4 are considered unacceptable, but do happen.)

Question 23

At what point is a share allotted?

Answer 23

When the person obtains the unconditional right to be included in the company’s register of members.

Question 24

How do you determine whether or not the directors of a private company have the power to issue shares of a new class?

Answer 24

If there is only one class of shares, then the directors have the right to issue more shares. However, if there are multiple classes, or to issue shares of a difference class, the directors require a ordinary resolution of the members.

Question 25

What must be sent to the registrar of companies when shares have been allotted?

Answer 25

A return of allotment and updated statement of capital must be issued within one month of the allotment.

Question 26

Why is the issue of shares at a discount prohibited?

Answer 26

To protect creditors and existing members from an unfair purchase.

Question 27

What may a public company not accept as payment for shares?

Answer 27

• an undertaking that a person will do work for the company (s 585)
• an undertaking more than five years after the allotment (s587)
• non-cash consideration, unless it has been valued in accordance with the act (s593)

Question 28

What laws apply, in addition to the prohibition of an issue at discount, when the directors decide the price at which to issue shares?

Answer 28

They must act in accordance with their directors’ suties, particularly s 172 CA.

Question 29

What is a bonus share?

Answer 29

A share credited as fully paid (i.e. free)

Question 30

How may the company fund the issue of bonus shares?

Answer 30

The company must pay for the share out of share premium.

Question 31

What is the rationale for pre-emption rights?

Answer 31

To protect existing equity shareholders from their existing rights being diluted by new shares (e.g. the right to vote).

Question 32

What are renouncable preemption rights?

Answer 32

If made on a renouncable basis, a share offer to one member who refuses may be made to another.

Question 33

In what two ways is the concept of equity share important in relation to preemption rights?

Answer 33

Preemption rights only apply to equity shares.

Question 34

Identify three types of share issues to which preemption rights do not apply.

Answer 34

• bonus shares
• shares for non-cash consideration
• shares to be held under an employee share scheme

Question 35

What are the consequences of shares being allotted in contravention of statutory preemption rights?

Answer 35

The allotment is not invalid, by those responsible for the allotment are jointly and severally liable to compensate the shareholder who missed their preemption rights.

Question 36

What is a proper instrument of transfer for the purposes of CA 2006 S 770?

Answer 36

A stock transfer form.

Question 37

On what grounds may a public company refuse to register a share transfer of certificated shares?

Answer 37

If there is a restriction on the transfer in the article.s

Question 38

What is CREST?

Answer 38

The national computer system for depositing and transferring shares.

Question 39

What is a dematerialised share?

Answer 39

One which is uncertified.

Question 40

Identify three situations in which a person obtains title to shares by operation of law.

Answer 40

Through a member’s:

• death
• insolvency/bankruptcy
• declaration of mental unfitness

Question 41

What is the time limit for the issue of shares to an allottee or the transferee of shares?

Answer 41

Within 2 months

Question 42

What steps should an allottee or transferee take if the company fails to issue the shares in the time permitted?

Answer 42

1 Serve notice giving 10 days for the company to comply.

2 Make an application to court, who may then force the company to make good on the allotment/transfer.

Question 43

What is a share warrant?

Answer 43

A document stating that the person in possession of it holds a certain number of shares.

Warrants are no longer valid.

Question 44

Is a holder of a share warrant a member of a company?

Answer 44

No, because their name is not on the document, or in the register of members.

Question 45

Is a private company entitled to issue partly paid up shares?

Answer 45

No, except for shares taken up on formation of the company. (unless they have modified the articles to say otherwise)

Question 46

Is a public company permitted to issue nil-paid shares?

Answer 46

No - at least 25% must be paid up.

Question 47

Describe the operation of the lien provided for in the model article for public companies.

Answer 47

Article 52 - a company has lien over all partly paid shares for any part of the value (nominal or premium) at which the share was paid. i..e they call up the outstanding monies at any time. If they don’t pay within 14 days, the company can sell the shares, paying back the amount paid up by the shareholder.

Question 48

What is the effect of forfeiture of shares on the liability of the person whose shares are forfeited?

Answer 48

A notice of forfeiture can be sent to any holder of shares in respect of which a call has been made. The person ceases to be a member and the company can sell the shares.