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Lecture 6

Company Law – 79365/0

B.Bus. (University of Technology, Sydney)

Share capital

@ Taylor’s Business School (Kuala Lumpur)

materials prepared by Elvin Tan

 

Registration of shares

Requirements

Shareholders must consent to be registered as members – sec. 231(b)

All companies must have a register of members – sec. 168(1)

This register must contained certain information – sec. 169

It must be kept in Australia – sec. 172(1)

Everyone can inspect this register – sec. 173(1)

Unethical use of information in register prohibited – sec. 177(1)

Significance of register

Proof of matters shown in it – sec. 176

Company only deals with registered person (ie. it is not concerned with the person’s beneficiary)

Only registered shareholder can seek rights under CA2001

Correction of registers

Person aggrieved can apply to court to rectify the register – sec. 175(1)

Minors as members

Can be shareholders BUT see restrictions under contract law

Share certificates

Share certificate is prima facie evidence of title – sec. 1087(2)

Re Independent Quarries Pty. Ltd. (1994) 12 ACLC 159 held that this is still valid despite sec. 176 states that the register is prima facie evidence

Certificate must be ready for delivery within 2 months of allotment or 1 month from lodgment of transfer – sec. 1096

Certificate is not a contractual document, merely a certification of information therein contained

Company is liable for issuing incorrect share certificates

But company is NOT liable for forged certificates

Transfer of shares

General rule to presume that shares are freely transferable

Transferable as provided by company’s constitution – sec. 1085(1)

Restrictions must be clear and unambiguous – Greenhalgh v Mallard [1943] 2 All ER 234

Andco Nominees Pty. Ltd. v Lestato Pty. Ltd. (1995) 13 ACLC 835 held that restrictions in constitution cannot apply to

Directors of proprietary companies can refuse to register transfer – sec. 1091E replaceable rule

If company refuse to register transfer, notice must be sent to buyer within 2 months of lodgment of transfer – sec. 1093

Failure to send notice is an offence, and may result in company losing right to deny registration – Re Swaledale Cleaners Ltd. [1968] 1 WLR 1710

Listed companies with ASX cannot impose restrictions on transfer

Proper instrument of transfer must be delivered to company to effect transfer – sec. 1091(1)

To complete transfer, the executed instrument and share certificates must be delivered to the company’s registered office – sec. 1091D(2)

All other procedures stated in the constitution must also be satisfied – Poliwka v Heven Holdings Pty. Ltd. (1992) 10 ACLC 1759

Buyer whose shares are unregistered has equitable interest

Termination of membership

By transfer

Non-payment of calls

Reduction in share capital

Surrender of shares

Lien

De-registration (dissolution) of company

Liabilities of shareholders

Basic rule

Liability of members for company’s debt depends on type of companies

For companies with liability limited by shares

Member’s liability limited to unpaid on shares – sec. 516

Every past and present member is liable – sec. 515

BUT past member of more than 1 year not liable – se. 521

If it was unlimited converted into limited, only past member of more than 3 years not liable – sec. 523

Past member is liable only if present member cannot satisfy company’s debts – sec. 522

Contributory

‘Contributory’ is any person who is liable to contribute to the property of the company on winding up

Maintenance of share capital

The rule in Trevor v Whitworth

Trevor v Whitworth (1887) 12 App Cas 409

General concern of capital reduction

In effect it is returning capital to shareholders ahead of creditors

Generally to protect creditors

May have an unfair effect to shareholders who were bought-out

Issue of fairness – see Catto v Ampol Ltd. (1989) 7 ACLC 717

Minority protection – sec. 233(1)(e)

To prevent fraud

When does reduction of capital occur?

Examples include

Allowable reductions

Share capital reduction

Fair and reasonable to shareholders as a whole

Does not prejudice company’s ability to pay creditors

Approved by shareholders under sec. 256C

Effects of contravention

Some permissible capital reductions

Redemption of preference shares (PS)

Redemption of PS is NOT a reduction in CA2001 – sec. 254A

It may be redeemed at a fixed time or at company’s option – sec. 254A(1)

It can only be redeemed on the terms on which they were issued – sec. 254J(1)

Further conditions for redemption:

Directors should avoid redemption if it creates insolvency; i.e. beware of sec. 588G and 588M

Share Buy Backs

Prior to 1989 share buy-backs are strictly not allowed

CSLRC report in 1987 considered some valid reasons for share buy-backs, and potential abuse of the system

The final list of allowable share buy-backs are in sec. 257B
[replicated in Lipton – Table 8.3]

Essentially they are:

NOTE that 10/12 limit is a basic requirement – procedures streamlined

‘10/12 limit’ refers to max limit of 10% that a company can buy-back its own shares within last 12 months

Once buy-back agreement entered, all rights attached to the purchased shares are suspended

Upon registration of transfer to the company, shares must be cancelled – sec. 257H

Notify ASIC within 1 month after cancellation – sec. 254Y

Indirect self-acquisition

Avoiding Trevor v Whitworth and sec. 256B & 257A prohibitions

Using cross-shareholding arrangements, company can have de facto buy-back outside capital reduction provisions

X Ltd owns 40% in Z Ltd, and Z Ltd buys 30% of X Ltd
(i.e. 40% of the 30% purchase price of X Ltd shares came from X Ltd itself; the cash was just passed through a round of hands)

Prohibitions on such avoidance – Sec. 259C

Generally, issue or transfer of shares of a company to an entity it controls is void – sec. 259C(1)

Some exceptions in sec. 259C(1)(b) – (d)

Meaning of ‘control’ expanded to when company has capacity to determine the outcome about the entity’s financial and operating policies – sec. 259E(1)

Financial assistance

Another ‘avoidance’ of Trevor v Whitworth etc

Similar to indirect self-acquisition BUT here basically money is given by the company to another person to buy shares in the company

Financial assistance is not defined in CA2001 but examples are given in prohibition sections

Examples from courts include

Prohibition sections found in sec. 260A – 260D

Exemptions in sec. 260C
[see Lipton – Table 8.4]

Recommended Readings

Readings

Lipton 2001 Chap. 8 (Aust.)

Baxt 1999 Chap. 14 (Aust.)

Redmond 2000 Chap. 9 (Aust.)

Gower 1997 Chap. 11 & 13 (UK)

Woon 1997 Chap. 11 (M’sia & S’pore)

Further readings

None at the present moment