COMPANY FINANCE: SHARE CAPITAL & DEBT CAPITAL

1. COMPANY FINANCE:SHARE CAPITAL & DEBT CAPITAL PART IV ;COMPANIES ACT 1965 DR. ZAHIRA MOHD ISHAN

2. Background of Capital Decision Making: • Trading companies need capital: ~ purchase raw materials, hire staff, acquire premises & equipment, undertake marketing activities etc. • Company managers would: ~ decide the source of funds for company’s operation. ~ review on ongoing basis the best capital structure: : most appropriate ratio of debt to equity (gearing ratio); : relative costs of debt & equity; & : most appropriate mix of long-term & short-term sources of funds. • Corporate finance theory (source: CACLM, p.399)

3. Sources of Company Finance For co. ltd by shares, principally: • Share capital; • Debt finance; • Off-balance sheet funding (eg equipment leasing & project finance); trade finance; & • Retained earnings.

4. Islamic share capital • Islamic equity securities: Syariah Advisory Council (SAC) of the Securities Commission. • Criteria of excluded securities: 1. operations based on riba (interest) : activities by fianancial institutions; 2. Operations involving gambling; 3. Activities involving manufacture & / or sale of haram (forbidden) product (liquor, pork & meat not slaughtered according to Islamic rites); & 4. Operations involving elements of gharar (uncertainty) eg conventional insurance

5. Differences between Share capital & Debt finance ☺ • Group work; 10 mins.

6. Characteristics of Debt • The company is often required to pay interest at an agreed rate (whether or not the operations are profitable) • The company is required to repay the principal at the end of an agreed term (the company may sometimes repay the principal earlier). • The lender has priority over shareholders for repayment of the principal on a winding up. • The lender is not a member of the company & has no membership rights (eg voting rights). • The lender has no right to share in any surplus assets on a winding up (ie no right to a share of any assets left in a solvent company on a winding up after all the legitimate claims have been satisfied). • The capital provided is for a short or finite term, & there is an expectation that it will be repaid before the company is wound up.

7. Characteristics of Equity / Shares • The company is able to pay a distribution (in the form of dividends) during the company’s life only out of profits & only if a distribution is recommended by directors. • There is no expectation that the principal will be repaid to shareholders during the company’s life • The shareholders will be entitled to repayment of their principal on a winding up only after all other legitimate claims have been satisfied. • The shareholders are members of the company & have membership rights conferred on them by the Companies Act and the company’s MoA & AoA • The shareholders are entitled to share in any surplus assets on a winding up • The capital provided is long term, & there is no general expectation that it will be repaid prior to winding up.

8. Definition • s.4(1): “share in the share capital of a corporation & includes stock except where a distinction between stock & shares is expressed or implied”

9. Definition • Borland’s Trustee v Steel Bros & Co Ltd: “interest of shareholders measured by 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 shareholders inter se…”. • A movable property / goods. • S. 16(6): record ~ register of members • Share certificates: prima facie evidence of the title to the share & evidence of becoming member & amount of his holding

10. Share Capital • Amount of $ / assets contributed by members to company when they subscribe for shares. • Stated in MoA (s. 18(1): amount) & formed the company’s capital. • $ / assets (capital) becomes company’s property. In return member is issued with shares. • Share is the property of the corporators. Confer certain right in the company.

11. Classification of capital: a) Nominal / Authorized capital • Max amount of capital a company is authorised to raise • Measured by par value • Excess: void [Bank of Hindustan, China & Japan Ltd v Alison] • S.62(1)(a) may be increased by amending its articles b) Issued capital • Part of (a) which has been issued; name of s’holders registered in member’s register. • Caused a person to become a s’holder. c) Allotted capital • Part of (a) which has been alloted: Appropriation of a certain number of shares.

12. Classification of capital: d) Paid-up capital • Part of (b)that fully / credited as having been paid by members e) Unpaid capital • Remaining part of (b) that not been paid up & can be called up f) Reserve capital - Part of uncalled capital. Conditionally capable of being called. Cannot be cancelled / nullified except via reduction of capital.

13. Issuing shares at a discount • Ooregum Gold Mining Co India Ltd v Roper [1892] • S.18(1)(c)& s 214(1)(d): contribute full nominal value ; if lesser, liable to contribute the balance • S.67(3):co can’t give financial help to those who acquire/subscribe for co’s share ~ can’t issue shares at a discount • Exceptions: s.59 & 58

14. Non-cash consideration for shares issued • Ooregum Mining’s case: co issued shares in return for property/services ~ can if honestly done & not relieving subscriber • Risk involved: i-could become issuing shares at a discount ii- directors might abuse company’s power to benefit themselves iii- company without/lesser cash in its hand; detrimental to creditor • Mitigating the risks: s.48(1)(b), s. 132(1), s.54(1) + 54(3), s. 132E

15. Issue of shares at a premium • In excess of nominal / par value of its shares • Hilder v Dexter: no duty upon co directors • Power of raising capital is a fiduciary power to be exercised in the best interests of the company: if not, a breach of s 132(1) • Share premium account: s.60(2): premiums received for shares reflected in the account. • Not divisible profits /not payable to cumulative preferential dividends: Re Hume Ind (Far East) Ltd [1974] • Purpose: s. 60(3)

16. Classes of Shares • Art 2 Table A: shares issued with different rights: • entitlement to dividends • Priority in relation to payment of dividends • Voting rights • Priority in repayment of capital • Rights to surplus assets upon winding up

17. Classes of Shares • Ordinary Share - residual in nature: at a pro rata - s’h got rights to participate: dividend; return of capital; surplus profits & assets. • Preference Share - fixed rate/amount; definition in s. 4 - s.66: must state in MoA & AoA - s.148: rights to attend meeting & vote, & rights may be suspended. - if stated in MoA: s’h entitle to dvd, return of capital & surplus profit & asset.

18. Preference shares… - payment in priority to ordinary s’h. Dividend paid (w’inMoA) cumulative non-cumulative [payment double] [payment based on profit [entitled every year] gained]

19. Marra Development Ltd v BW Rofe Pty Ltd. (1977-1978) CLC 40-375; [1977] 2 N.S.W.L.R. 616 where it was decided that the company must determine the availability of profit at the time the dividends are declared. Thus, the requirement of the companies legislation that the company cannot pay dividends except out of profit must be complied with at the time the company declares the dividend.

20. Participating preference share: holder entitled to participate in the profits beyond the fixed dividends, by way of additional fluctuating dividend if the co is successful. ~ must be expressly stated as participating preference shares.

21. Redeemable preference shares: if authorised by the articles (s.61). Allow for repayment of the principal at a particular time or on the occurrence of a particular event prior to winding up of a co. ~ redeemed by co at a fixed time in the future /at co’s option subject to the terms of the issue. ~funds for redemption: -out of profits available for dividend; or - from the proceeds of a new issue of shares made for the purpose of redemption UOB Venture Investments Ltd v Tong Garden Holdings Bhd [2001] Arah Cipta Sdn Bhd v Piala Gagasan (M) Sdn Bhd & Anor [2010] 9 CLJ 964 (read in PutraLMS)

22. Excerpt from Arah Cipta Sdn Bhd v Piala Gagasan (M) Sdn Bhd & Anor [2010] 9 CLJ 964 at 987. In the Singapore case of UOB Venture Investments Ltd v. Tong Garden Holdings Pte Ltd [2000] 3 SLR (R) 585 at 592 the main issue raised was whether the defendant was in breach of its obligation to redeem preference shares under the investment agreement. The defendants in that case argued that the plaintiff had no remedy against it as it had not made any profits to redeem the preference shares incompliance with s. 70(3) of the Companies Act (Cap 50, 1994 Rev Ed). Section 70(3) of Cap 50 is pari materia to s. 61(3) of the Act.

23. Convertible preference shares: issued sometimes by a co. Carry a right to a preferred, fixed dividend for a particular term & then allow for or require conversion to ordinary shares at the end of the term. ~ usually, conversion ratio will reflect in some way the value of ordinary shares at the time of conversion.

24. Q & A