COMPANIES: SHARES AND SHARE CAPITAL
Study Unit
COMPANIES: SHARES AND SHARE CAPITAL ~28 min3 exercises
(A) SHAREHOLDERS There is a difference between allotting shares and issuing shares. Shares are allotted when a person acquires the right to be included in the company’s register of members, but shares are issued when the person’s name is entered into the register of members. If the company is successful, a shareholder will receive a dividend, which is a payment of a portion of the company’s profits and a return on a shareholder’s investment. It will be up to the company directors to declare a dividend and members must then pass an ordinary resolution to approve it. Dividends are distributed among the shareholders according to each shareholder’s percentage of ownership.
(B) A COMPANY’S SHARE CAPITAL All shares in a limited company must have a nominal value, also known as the ‘par value’. This is the minimum fixed value of a share, and it never changes unless agreed upon by the members. The subscribers decide on the value when setting up a company, and in the UK, it is common for a share to have a nominal value of £1. However, any person buying a share after this will pay what the share is actually worth, which is its market value. It is a straightforward matter to put a price on the shares of a public limited company because the company is listed on the Stock Exchange and it is therefore possible to track any daily rise or fall in value, more accurately known as fluctuations in value. However, determining the market value of a share in a private limited company is more difficult and two or more valuers will probably arrive at different conclusions. The difference between the market value of a share and the nominal value is known as the share premium.
(C) A COMPANY’S ISSUED AND AUTHORISED SHARE CAPITAL A company’s issued share capital is the total value of all shares which have been issued and is calculated by multiplying the number of shares issued throughout the company’s lifetime by the nominal value of the shares. For example, if there are (1) ….. shares in issue and all the shares have a nominal value of £ (2) ….., the issued share capital will be £ (3) ….. . A company’s authorised share capital refers to the total value of shares that the company is allowed to issue, which again is calculated by using the nominal value. For example, if the subscribers of a company decide that the nominal value of a share will be £ (4) ….., and they decide that the authorised share capital will be £ (5) ….., they would only be able to issue (6) ….. shares and would be unable to issue any more without the members’ approval. However, following the implementation of the Companies Act 2006, the requirement for a company to have a fixed, authorised share capital was abolished, and companies no longer operate under this restriction.
(D) CLASSES OF SHARES AND PRE-EMPTION RIGHTS Ordinary shares, also known as equity shares, are shares that carry equal rights. Each ordinary share carries one vote and each share entitles the holder to equal rights to dividends. However, it is becoming increasingly common for companies to have a dual-class share structure in which the company issues two classes of ordinary shares, and the board of directors typically hold voting shares (class A shares), and the remaining members hold non-voting shares (class B shares), which gives shareholders varied rights in terms of voting and payment of dividends. As an alternative to issuing different classes of ordinary shares, the company may decide to issue preference or preferred shares and although the Articles will decide the exact rights, these shares usually give the holder a right to receive a fixed annual dividend and if a dividend is not paid one year then they usually carry a cumulative right to be paid the following year. In addition, it is usually the case that on winding up the holders of preference shares rank above other shareholders in having their capital contribution repaid to them. As any allotment of shares will result in the dilution of the shareholdings of existing members, to offer some protection, provisions in the Companies Act give existing members pre-emption rights. This means they will be given rights of first refusal on the issue of new shares in proportion to their shareholdings before they are offered for sale to outsiders. However, pre-emption rights only apply to ‘equity securities’ (ordinary shares) and there are no special provisions in relation to rights to capital repayment if the company is wound up.
After reading A and B opposite, try to answer the following questions without referring back to the information they contain.
1. What is the difference between allotting a share and issuing a share? 2. Who decides whether or not a company declares a dividend? 3. What is the difference between declaring a dividend and distributing a dividend? 4. What is the nominal value of a share? 5. What is the market value of a share? 6. What does ‘fluctuate in value’ mean?
Read C opposite and complete the information with the numbers in the box below. Use each number only once. There are two possible correct solutions.
(a) 2 (b) 100,000 (c) 1000 (d) 500 (e) 50,000 (f) 2
Read D opposite and complete the following information about the case of Dixon and another v Blindley Heath Investments Ltd (2015) with a word from the box below.
(a) par (c) unanimously (e) right (g) survived (i) gifted (b) mistake (d) prevented (f) transferee (h) equity (j) block In 2015, this case was considered by the Court of Appeal. It involved the rights of the other shareholders in connection with (1) ….. shares which had already been transferred by a subscriber to a (2) ‘…..’, in other words, the person who received the shares from the subscriber. In 2001, Christopher Dixon became a shareholder in a company named EFI (Loughton) Ltd. He made an interest-free loan of £80,000 to the company and was also allotted 600 shares at (3) ….. value. He drafted a document he called “Terms of Lending”, in which he stated: “No shares are to be issued, sold or transferred unless offered pro rata to existing members on the same terms. Shares may be (4) ….. to immediate family (spouse and children) but further transmissions by those transferees or on death should be required to be offered pro rata at asset value.”
However, in 2011, a transfer of shares made by a transferee was approved, everyone concerned having apparently forgotten the agreement they had entered into 10 years before. A short time later, when the transferee wanted to make a further transfer of 200 shares to the third party, some co-shareholders tried to (5) ….. the transfer on the basis of the pre-emption rights set out in the “Terms of Lending” document.
A judge in the High Court approved the second transfer on the grounds there had been what the common law calls “estoppel by convention”. This means a party is (6) ….. (estopped) from arguing a point and, as a result, also prevented from enforcing a (7) ….., due to the way the parties have acted. In other words, the true legal position regarding the rights of pre-emption had at some point been forgotten and because everyone involved in the first transfer of shares to a third party had acted on what the judge termed “a common (8) ….. ”, they were bound by their actions from that point onwards.
The High Court’s decision was upheld by the Court of Appeal, which concluded that the shareholders bringing the challenge were estopped by convention from relying on the 2001 document and, furthermore, even if the pre-emption rights had (9) ….. the conduct of the parties since then, the directors had (10) ….. approved the transfer.
Speaking & Writing for this topic
Two short tasks scored against TOEFL rubrics. The prompt is generated for this topic — use the vocabulary you have just studied.