Company Share Capital Public company – raise capital from public through shares / debentures

Company Share Capital Public company – raise capital from public through shares / debentures Main method of issuing shares: i- public issue – members of the public are invited to subscribe for the company’s shares directly. ii- offer for sale – issuing house agrees to subscribe the whole issue of shares and in turn publish an invitation to the public offering them the shares – normally at a higher price.

The issuing house will have to pay for all shares not taken iii- placement - shares taken by issuing house – it then sell and transfer them to its clients and associates – usually in substantial blocks iv- tender – minimum price for the shares is fixed. Bids are invited at the minimum or higher price. v- right issue – existing members of the company are given right to subscribe for new shares. Usually in proportion to the existing s/holdings. The price is usually lower than the market price

Debentures are also offered to the public via public issue, offer for sale or right issue Shares Borland’s Trustee v Steel Bros & Co “A share is the interest of the s/holder 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 mutual covenant entered into by all the s/holders inter se in accordance with s 33. The contract in the AOA-

is one of the original incidents of the share”. Movable property, transferable in the manner provided by the AOA. Capital: Nominal / authorised capital – maximum capital allowed to be raised by a company limited by shares – raise by issuing its shares

Issued capital – part of authorised capital wh has been issued to the public Allotted capital – part of the authorised capital wh has been allotted to the members – based on this he has unconditional right to be included in the register of members Paid up capital – part of the issued capital wh has been fully paid up by the members Unpaid capital – the parts of the issued capital wh has not been paid up by the members and can be called upon according to the AOA.

Reserve capital – uncalled capital wh a limited company has by a special resolution determined as incapable of being called up except in the event and for purpose of the company being wound up. Types of shares 1- Ordinary shares Any share wh is not preference share is ordinary share / equity share s 4

Holders of ordinary shares of a limited liability company has full right to: • attend GM; and b) exercise 1 vote per share on a poll on any resolution including: • Appointment of directors and auditors, • Whether to accept the dividend proposed, • Changes to the company's constitution (memorandum and articles of association)

Holders of ordinary shares entitle to return of the paid up value of the shares in winding up after the creditors have been paid and preferential share capital has been returned Holder of ordinary shares – not entitled to fixed or cumulative dividends. Dividends are paid to holder of ordinary shares after preference s/holders have been paid Since the profits of companies can vary from year to year, the dividends paid to ordinary s/holders also vary

2- preference shares s 4(1) Any shares wh does not entitle the holder: i- to the right to vote at the general meeting, except according to s. 148(2); or ii- to the right to participate in any distribution whether by dividend, or on redemption, in winding up except to a prescribed amount Usually holder of preference shares have priority over holder of ordinary shares for:

i-priority in fixed and cumulative dividend; and ii- return of capital in winding up. Fixed dividend: e.g “4% preference dividend RM0.25” This is a preference share with a nominal value of RM0.25 per share. Each share carries a fixed dividend of 4%, that is 4% of RM0.25 every year for every share issued. If a company has issued 100,000 of these shares at par value, 100,000 x RM0.25 = RM25,000 from shareholders on issue -

the company will pay an annual fixed dividend of: RM25,000 x 4% = RM1,000 each year. In case there are surplus assets in winding up – holders of ordinary share and preference shares entitled to the assets proportionally, without preference Preference shares cannot be allocated unless the MOA or AOA set out the holders rights as to (s 66(1)): a) Repayment of capital;

b) Participation in surplus assets and profits; c) Cumulative or non-cumulative dividends; d) voting; and • Priority of repayment of capital and dividend if a company cannot pay its preference share dividend then it cannot pay any ordinary share dividend since the preference shareholders have the right to receive their dividend before the ordinary shareholders under all circumstances

2.1 – Cumulative preference shares Holders have right to received fixed cumulative dividend. If the company declared dividend but fail to pay, the holders of this share is entitled to have the unpaid dividend added to the dividend to be paid in the ensuing years So that if the RM1,000 for 2006 was missed, then preference shareholders will receive RM2,000 in 2007 (assuming the company is in a position to pay the dividend!).

2.2 Non-cumulative preference shares The holders are entitled to fixed rate of dividend in the years the dividends are declared and paid. Failure to pay the dividend does not entitle the holders to claim the unpaid dividends to be added to the dividends to be paid in the following years

2.3 Redeemable preference shares s 61(1) Shareholders have right to require the company to redeem the shares, i.e., the company will effectively buy back its shares. AOA will provides the date when the company shall redeem it shares. It can also provides that the s/holders can serve notice on the company to requiring the company to redeem its shares Redeemable shares usually look like this: “4% cumulative preference share of RM0.25, 2007”

The shares can only be redeemed out of: i- profit which would otherwise available for dividend; or ii- proceeds of a fresh issue of shares made for the purpose of redemption s 61(3)(a) & (b); and iii- they must have been fully paid

2.4 Participating preference shares shareholders have the right to participate in the surplus profits of the company, after payment of equity and preferred dividend. right to participate in, or receive, additional dividends over and above the fixed percentage dividend discussed above. The additional dividend is usually paid in proportion to any ordinary dividend declared

2.5 convertible preference shares the shareholders have the option at some stage of converting their shares into ordinary shares.

Variation of class rights Rights of particular class of s/holders wh are provided for in the MOA cannot be altered.S 21(1B) If the rights are provided for in the AOA they can be altered by special resolution - s. 31(1) H/ever, it is usual for the MOA and the AOA to provide for the variation of the class right with the consent of that particular class. Art 4, Table A

Crumpton v Morrine Hall Pty Ltd A modification of class rights by a company w/out complying with the variation procedures as set out in the AOA was ineffective. Statutory protection S 65(1) allows members of that class who hold not less than 10% of the issued shares of that class to apply to the Court to have the variation or abrogation cancelled

S 65(1) can only be used by members of that class of shares if the MOA or AOA authorised the variation of class rights with the consent of the members Even consented members has the right to apply for the variation to be cancelled or abrogated if at the time their consents were sought the company failed to disclose material facts to them. S 65(2) The application must be made by the members w/in 1 month from the date the consent was given or the resolution was passed. S. 65(3)

s. 65(3) allows all members to make the application if they wish, or any one or more of them can take the action in representative capacity. Court may allow the application if it is satisfied that the variation or abrogation would unfairly prejudice the shareholders of the class. o/wise it may confirm the variation. S 65(4)

Two circumstances when variation is deemed to happen: 1- S 65(6) – if the company issue preference shares wh equal to the existing preference shares – it is regarded as variation of class rights of the holders of the existing preference shares Except i- the terms of the previous issue of preference shares authorised the issue of new preference shares with equal rank; or

ii- the AOA in force at the time the existing preference shares were issued authorised the new issue with equal rank. 2- s 65(7) company altered the provisions of the MOA or AOA wh affect or relate to the manner to vary or abrogate class rights.

In order to succeed in the application the members must show that the rights are varied or abrogated and not mere enjoyment of that rights that are affected. e.g. A holds 5 shares out of 100. Each of his shares carries 5 votes. Each of the 95 shares carries 1 votes. If a resolution was passed to increase the voting power of other shares to 5 vote per shares, A’s class right was not affected. However, if a resolution is passed to reduce A’s voting power to 1 vote per share, that is a variation of class right.

Greenhalgh v Ardene Company capital divided into 10s shares and 2s shares. G held the bulks of 2s shares. Both class of shares has equal voting power. A resolution was passed to subdivide the 10s shares to 2s shares to rank equally with G’s shares. H sought a declaration that the subdivision was void because his class right had been varied w/out his consent as required by the AOA. Held- there was no variation of G’s class right. Before the subdivision he has 1 vote per share and after that he also has 1 vote per share.

Issue of shares S 132D(1) – Directors need the approval of the members in general meeting before they can exercise their power to issue shares If the approval was revoked, the directors may issue shares in pursuance of an offer, agreement or option made or granted before the revocation, provided the approval authorised the directors to make such offer, agreement or option. S 132D (3)& (4)

Issue of share contrary to s. 132D shall be void and consideration given for the shares shall be recoverable”. s 132D (6) In case of contravention - the directors who knowingly contravenes, or permits or authorises the contravention is liable to compensate the company and the personto whom the shares were issued for any loss,damages or costs which the company or that person may have sustained or incurred thereby. S. 132D (7)

What is meant by issue of shares? Re Ambrose Lake Tin and Copper Co The term must be taken to mean more than mere allotment. It means that some subsequent act has been done whereby the title of the allottee becomes complete, either by receiving share certificate or being place in the register of members or other steps where the title to the shares is made complete.

National Wesminster Bank Plc v IRC Shares are issued when an application is followed by allotment and notification and completed by entry on the register of members. One shares have been issued, the s/holder is entitled to certificate that declares that the named person is the registered holder of the shares Issue of shares begin with the issuance of prospectus and culminating with the entry on the register. Only then the issue of shares complete.

How do you think the contract is created? Ramsgate Victoria Hotel v Montefiore

Allotment of shares Spitzel v Chinese Corporation international Ltd “…an appropriation by the directors or managing body of the company of shares to a particular person. The particular effect of appropriation depends on circumstances …of itself allotment does not necessarily create of the status of membership.”

Allotment of shares offered to public must comply with s. 48: If the company registered prospectus under Security Commission Act 1993, the shares shall not be allotted until: i-minimum subscription has been subscribed; and ii- the sum payable for the shares have been received by the company e.g s. 43 of SCA – unit trust company http://www.sc.com.my/eng/html/resources/guidelines/SCA2005.pdf

If after 4 months from the date the prospectus was issued, that conditions cannot be satisfied, the money received from the applicants shall be repaid to them Allotment of shares by public company Public company wh share capital must register the statement in lieu of prospectus 3 days before the first allotment of its shares. S 50(1) Failure to company with s48 or s 50 – the allotment is voidable at the option of the applicant

Prospectus s. 35 SCA 1993 Prospectus is a notice, circular, advertisement or document issued: i- to invite public to make an application to subscribe or to make an offer to subscribe for or purchase securities; or ii- to offer securities for subscription or purchase.

It includes supplementary prospectus, shelf prospectus, short form prospectus, profile statement, supplementary shelf prospectus and abridged prospectus Why regulate the issuance of prospectus? i- facilitate investor decision making process by providing written information ii- material information - allows the investors to make informed decision

iii- to ensure those issuing prospectus exercise due diligence – the process by which persons must conduct enquiries for the purposes of timely, sufficient and accurate disclosure of all material statements/information or documents iv- create liability for giving false or misleading information Now prospectus has to be registered with the SC. S 42 SCA 1993. h/ever it also has to be lodged with the Company Commission Malaysia S. 43 CA

When it is needed? s. 41 (1) & (2) SCA i- company must register prospectus with SC before it seeks public funding(issue, offer for subscription or purchase, or make an invitation to subscribe for or purchase, any securities); ii- prospectus must accompany any form of application for securities in the company

(4) A person who contravenes subsection (1), (2)…shall be guilty of an offence and shall on conviction be punished with a fine not exceeding RM10 million or imprisonment for a term not exceeding 10 years or both. S.153. Civil liability of person in contravention of this Act. A person who suffers loss or damage by reason of, or by relying on, the conduct of another person who has contravened any provision of Part IV or any regulations made under this Act may recover the amount of the loss or damage by instituting civil proceedings against the other person whether or not that other person has been charged with an offence in respect of the

contravention or whether or not a contravention has been proved in a prosecution. Failure to comply: i- offence against the SCA s 41(4)– fine RM10m /imprisonment ≤10 years or both; and ii- civil liability to those who suffers loss or damage by reason of or by relying on the conduct of the person who acted in contravention of s.41

What happen if the company is found liable for acting in contradiction to s 41(1) & (2)? How to enforce the penalty in s. 41(4)?

s. 138(1) “Where a person convicted in respect of any offence under this Act is a body corporate, it shall only be punished with the fine provided for such offence.” h/ever s. 138(2) “…a director, a chief executive officer, an officer, an employee, a representative or the secretary of the body corporate or was purporting to act in that capacity, shall be deemed to have committed that offence if: He was acting in that capacity at the time the company committed the offence

To avoid liability the person must show s 138(2) SCA: i- the offence was committed without his consent or connivance; and ii- that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised

Commission shall refuse to register a prospectus if s. 42 SCA 1993: i- it is of the opinion that the prospectus does not comply with any requirement or provision of the SCA; ii- the issue of, or offer for subscription or for purchase of, or invitation to subscribe for or to purchase securities to which the prospectus relates does not comply with SCA

iii- of the opinion that the prospectus contains statement or information that is false or misleading or is a material omission; iv- the issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase, securities to which the prospectus relates– a) requires the approval of the Commission under section 32 and such approval has not been given; or b) does not comply with any term or condition imposed under subsection 32(5);

v- in relation to a unit trust scheme or prescribed investment scheme, there has been a failure to comply with any term or condition in relation to an approval of a management company or trustee; iv- the company has contravened the CA, or the securities laws (Any of these statute - the Securities Industry Act 1983, the Securities Industry, (Central Depositories) Act 1991, the Securities Commission Act 1993 and the Futures Industry Act 1993) and that contravention raise doubt on fitness of the company to have access to public funding

Guidelines for issuing and registering prospectus See http://www.sc.com.my/eng/html/resources/guidelines/prospectus/Part3.pdf http://www.sc.com.my/

Contents of a prospectus Merit based versus disclosure based approach Merit based = law specified in details the information wh must be in the prospectus Disclosure based = issuer determine the information to be included in the prospectus But the information must be useful to assist the prospective investor to make informed assessment about :

i- assets & liabilities, financial position, profits and losses and prospects of the issuer; Ii- rights attaching to the securities; Iii- merits of investing in the securities and the extent of risk involve [read s 45(1) SCA]

How to determine whether the disclosure was true, false or misleading or there is omission of material information? Test = Whether the prospectus contains all such information that investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment. S. 45 (1) SCA

Company Share Capital Public company – raise capital from public through shares / debentures