Capital

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Capital Financing of Companies

• Types of Share Capital
• Rosemary Craig BA LLB LLM PGCHEP

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Learning Objectives

• Understand the characteristics of the two most
  common types of share, the preference share and
  the ordinary share.
• Distinguish between authorised share capital and
  allotted capital.
• Understand the meaning of class rights.

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Types of Shares

• Borlands Trustee v Steel Bros Co Ltd
  1901
• A share is the interest of a shareholder in the
  company measured by a sum of money, for the
  purposes of a 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.

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Characteristics of a Share

• Right to dividends declared on shares.
• Generally a right to vote at general meetings.
• Right to receive assets.
• Obligation to subscribe capital of a given
  amount.
• Rights of membership under the CA 1985
  Memorandum Articles of Association, e. g. right
  to vote attached to ordinary shares.
• Transferable nature subject to restrictions in
  the articles.

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Types of Shares

• All shares will have the same rights if
  there are no differences expressed.
• Special rights can be attached to different
  shares at the companys option
• Dividends
• Return of capital
• Voting rights
• Right to appoint a director
• Any share which has different rights from
  others is grouped with the other shares carrying
  identical rights to form a class.

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Shares

• Ordinary carry normal rights.
• Preference have the right to preferred
  dividends, therefore guaranteed payment of a
  certain amount.
• Redeemable company has a right to redeem/ buy
  back the shares.
• Deferred/ founders shares.
• Non- voting generally issued to first time
  employee (Tesco).

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Preference Shares priority dividend entitlement

• Right is merely to receive a dividend at the
  specified rate before any other dividend may be
  paid or declared.
• Right to receive preference dividend is deemed to
  be cumulative unless the contrary is stated.
• Holders of preference shares have no entitlement
  to participate in any additional dividend over
  and above their specified rate.
• In the event of liquidation, a company which has
  arrears of unpaid cumulative preference dividends
  will not entitle preference shareholders to the
  arrears unless
• (1) a dividend has been declared though not
  yet paid when liquidation commences.
• (2) the articles expressly provide that in a
  liquidation arrears are to be paid in priority to
  return of capital to members.

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Preference Shares return of capital

• Unless otherwise stated preference shares carry
  the same rights as ordinary shares.
• The result of preference shares priority right to
  return of capital is that
• (1) the amount paid up on the preference
  shares is to be repaid in liquidation or
  reduction of capital before ordinary
  shareholders.
• (2) Preference shareholders are not entitled
  to share in surplus assets when the ordinary
  share capital has been repaid.
• Re Saltdean Estates 1968
• Preference shareholders will be paid off first
  when the share capital is reduced. House of
  Fraser Plc v ACGE Investments Ltd 1987.

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Types of Capital

• Capital is the money businesses use to trade
  with.
• Share capital members buy shares in the
  company.
• Loan capital borrowed money. It is a liability
  owed to the creditors. Usually obtained by the
  issue of debentures.
• Authorised share capital stated in the
  memorandum, this is the value of shares a company
  is authorised to issue.
• Issued share capital nominal value of the
  shares a company is authorised to issue. This can
  be paid up capital or uncalled capital.
• Reserve capital S. 120 CA 1985 company can by
  special resolution determine that any of its
  unpaid capital shall not be called up except if
  the company is being wound up. Rationale is to
  protect creditors.

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Class Rights

• Determined by the common law, the Companies Acts,
  the Memorandum Articles of Association, or
  terms of resolution authorising issue.
• Defined as special rights attached to class of
  share e. g. dividend rights, distribution of
  capital on winding up, voting rights.
• Cumbria Newspapers Group v Cumberland
  Westmorland Herald 1987 extends the concept to
  include special rights conferred on a person as a
  member.

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Variation of Class Rights

• Class rights can be varied only if Ss. 125 -127
  CA 1985 have been complied with.
• A company with only one class of shares can vary
  rights by special resolution under S. 9 CA 1985.
• S. 17 CA 1985 class rights stated in the
  memorandum can be changed by special resolution
  with right of 15 objection.
• Standard procedure for variation of class rights
  requires an extraordinary resolution. This must
  be done by a separate meeting of the class, or
  written consent under S. 125 (2) or any other
  procedures laid out in the articles of
  association.

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Special Situations

• There are a number of rules in place to deal
  with unusual special situations.
• S. 125 (2) ¾ majority consent required where
  there is no variation procedure in the articles
  class rights are defined otherwise than by the
  memorandum. Minority has a right of appeal to the
  court.
• S. 125 (3) ¾ majority consent required if not
  specified in the articles in the case of the
  variation relating to directors power to allot
  shares, or a reduction in capital.
• S. 125 (4) procedure laid down in memorandum
  articles for class rights must be followed.
• S. 125 (5) if rights are attached by the
  memorandum no variation procedure is
  prescribed, consent of all members is required to
  alter rights defined in the memorandum.

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Minority Appeals to the Court

• S. 127 CA 1985 provides that a minority of
  shareholders may apply to the court to have the
  variation cancelled when class rights are varied
  under a procedure contained in the memorandum and
  or articles.
• Objectors must hold 15 of issued shares of the
  class in question must not have consented to, or
  voted in favour of the variation, and apply to
  the court within 21 days of the consent being
  given by the class.
• Under s. 127 (4), the court can either approve
  the variation as made, or cancel it as unfairly
  prejudicial.
• Re Holders Investment Trust 1971 To prove the
  variation is unfairly prejudicial the minority
  must show that the majority was seeking some
  advantage themselves as members of a different
  class.

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Application of Variation Rules

• It is only necessary to follow variation of class
  rights procedure if what is proposed amounts to a
  variation of class rights. The following do not
  constitute a variation
• 1. To issue chares of the same class to allottees
  who are not already members of the class. White v
  Bristol Aeroplane Co 1953.
• 2. To subdivide shares of another class with the
  incidental effect of increasing the voting
  strength of that other class. Greenhalgh v
  Arderne Cinemas 1950.
• 3. To return capital to the holders of preference
  shares. House of Fraser Plc v ACGE Investments
  Ltd 1987.
• 4. To create issue a new class of preference
  shares with priority over an existing class of
  ordinary shares. Re John Smiths Tadcaster
  Brewery Co Ltd 1953.

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Minority Protection

• Protection is afforded under s. 127 CA 1985 where
  class rights have been varied within the meaning
  of the Act.
• If the minority in a class cannot protect itself
  by establishing that there has been a variation,
  or that the variation was unfairly prejudicial,
  it may still obtain a remedy under the minority
  protection rules.
• S. 459 CA 1985 court relief can be sought.
• Rule under Foss v Harbottle.
• Alterations made bona fide for the company as a
  whole cannot be challenged.

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• The End
• I hope you enjoyed the lecture
• Any questions?