6
Chapter 2
Definition of Share
Shares are financial instruments that provide their holders with a financial
claim on the company. As the shares do not give their holders any property right in
the assets of the business which are owned by the company.1
2.1 Classes of Share
A company may wish to issue different classes of shares for various reasons.
It may wish to raise share capital on terms similar to borrowing from
external creditors. This can be done by issuing shares that carry a stated
rate of dividend but with limited voting rights and no rights to
participation in distribution of surplus assets on winding up.
Small family companies may wish to concentrate control of the
company in the hands of the holders of a particular class of shares. Such
shares often have weighted voting rights.
Some taxation minimization schemes involve the issue of different class
of shares.
A home unit company may own a building and issue different classes of
shares, each of which entitles the shareholder to certain rights in respect
of a particular unit in the building to the exclusion of the holders of
other classes of shares.
The most common classes of shares are ordinary and preference shares. The
other two are known as redeemable shares and deferred shares.
1
Macaura V Northern Assurance Company, 1925
7
Ordinary shares
Ordinary shares commonly referred to as equities are the default category of
shares. Holders of this class participate in the company’s distributable profits after
payment has been made of any fixed level of dividend to preference shareholders.
Where the company is enjoying handsome profits ordinary shareholders are not
restricted to a pre-determined return on their investment. Ordinary shareholders’
rights to a return of capital are commonly deferred to preference shareholders but as
regards participation in any surplus in a solvent winding-up, they will be able to claim
after other shareholders have had their capital returned.2
Preference shares
Preference shareholders are paid a dividend and, should the company be
wound up, receive their capital in preference to ordinary shareholders (Where the
Articles provide).
Others characteristic include:
1. A fixed dividend is paid irrespective of the level of profits. Quite often
the shares are referred to by the level of fixed dividend, for example 6
percent preference shares. There is usually no extra dividend should the
company produce large profits, unless the shares are participating
preference shares.
2. They carry restricted voting rights.
3. They are usually cumulative; this means that should the company make
insufficient profits in one year to meet the dividend on the preference
shares, the unpaid portion remains as a liability and is ‘rolled up’ to the
following year(s), and must be paid before any dividend to ordinary
shareholders. If the preference shares are non-cumulative, this must be
stated on the share certificate.
A share giving its holder preferential rights in respect of dividends and
sometimes in respect of a return on capital following a winding up. Preference shares
typically have restricted voting rights.3
2
Alan Degnam & John Lowry, Company Law, 7th edition, 2012, P.176
3
Paul Raby, Business Law in Practice, 2005, P.31
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Redeemable shares
A redeemable share is one that is intended to be repurchased by the company
at some predetermined time. The main reason for companies to issue redeemable
shares is to raise capital from venture capitalists. The conditions for the issue of
redeemable shares are:
There must be other non-redeemable shares in existence.
The issue of redeemable shares must be expressly provided for in the
company’s Articles.
Redemption must come out of profits of from the proceeds of another share
issue.
The shares to be redeemed must be fully paid (i.e not partly paid).
Fully paid share is a share where the full price has been paid.4
Deferred shares
These are also known as management or founder shares and are rarely see
now. In return for receiving their dividends after the ordinary and preference
shareholders, they carry loaded voting rights; for example, a deferred shareholder may
have three votes to one vote for an ordinary shareholder with the same shareholding.5
Debenture stock
This is a completely different concept from shares: debenture stock is a loan to
the company, whereas shares are, in effect, an investment in the company and a stake
in the ownership in the company.
Other differences include:
Debenture stock ranking before shareholders in respect of repayment
of capital should the company be wound up;
Interest payments to debenture holders being made irrespective of the a
mound of profit made (in fact being made even if the company makes
a loss);
Debenture holders do not have voting rights whilst the company is a
going concern
4
Ibid, P.31
5
Ibid, P.32
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Going concern: Where the future existence of the company is deemed to be
viable.
Debentures may be secured or unsecured. This distinction is important
because of the redress available to the debenture holder. In the event of default by the
company, a secured debenture holder has the right to appoint a receiver under the
terms of the debenture or apply to the court for such an appointment.
Secured debenture is a debenture in which the lender enjoys security over
some assets of the company. Unsecured debenture is a debenture that is not supported
be any security.6
Directors’ loans
These are often referred to as ‘quasi-capital’ and represent monies input to the
company by the directors, but repayable to the directors, quite often on demand. It is
not unusual for lenders to ask the directors to postpone the directors’ loans. This in
effect means that the directors agree that their loan will not be repaid until any other
lender has been repaid full.7
2.2 Types of shareholders
In contrast to the shareholders’ residual interest right, debt or loan capital
provides those who purchase a debt claim (by lending money to the company) with a
right to receive contractually specified fixed payments at specific points in time:
payments of principal repayments of the amount lent to the company and interest
payment of a specified percentage return on the amount lent to the company.8
In oxford word power dictionary prescribe Share as “a part or an amount of
something that has been divided between serval people 9. Shareholder is an owner of
share in company.10 As mentioned above on share, there are three types of
shareholders:
(1) Preference shareholders
(2) Ordinary shareholders
(3) Deferred shareholders
6
Paul Raby, Business Law in Practice, 2005, P.32
7
Ibid, P.32
8
David Kershaw, Company Law in Context, 2nd edition, 2009, P.709
9
Oxford wordpower Dictionary,4th edit, 2012, P-664
10
Ibid, P-664
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(1) Preference shareholders
Preference shareholders are paid a dividend and, should the company be
wound up, receive their capital in preference to ordinary shareholders (Where the
Articles provide). A share giving its holder preferential rights in respect of dividends
and sometimes in respect of a return on capital following a winding up. Preference
shares typically have restricted voting rights.11
(2) Ordinary shareholders
The ordinary shareholders are paid a dividend depending on the profits made
by the company (typically, no profit means no dividend). Should the company be
wound up, they will receive their capital only after all the other creditors and owners
of preference shares (where the Articles provide) have sometimes known as risk
capital the ordinary shareholders acquire voting rights and are often the only type of
shareholders to do so.12
(3) Deferred shareholders
The public limited company with a share capital may, if authorized by its
articles, issue redeemable shares, whether ordinary or preference. Private companies
do not require prior authorization in the articles. Redeemable shares may be made
redeemable between certain dates at the option of the company’s directors. The holder
thus knows that his shares cannot be redeemed before the earlier of the two dates,
which is usually a number of years after the issue of the shares in order to give him an
investment which will last for a reasonable period.13
2.3 Role of shareholder
The shareholders as members are the owners of the company, hence the source
of the name, they hold a share of the company. The company must keep a register of
members showing the name, address and number of shares held by each member. The
minimum number of shareholders in a private company is one and if there is only one
member, the register must be noted that there is only one member and the date that
occurred. Public companies must have at least two members. Subscribers to the
11
Paul Raby, Business Law in practice, 2005, P. 31
12
Ibid, P.31
13
Sarah Riches & Vida Allen, Keenan and Riches’ Business Law, 10th edition, 2011, P.167-168
11
Memorandum become members on incorporation. Thereafter, a member is a member
by virtue of being on the register of members.14
As owners, members pay a price to purchase the company and in return the
acquire rights, powers and liabilities. The powers are typically exercised in
shareholder general meeting. A shareholder can also be a director of the company.
This is not a generally a requirement, although some companies may require that a
director hold a minimum number of shares (known as director shareholding or
qualification of shares).15While the directors are responsible for the day to day
running of the company, decision such as the removal of a director can be made
collectively by the shareholders’ resolution passed at general meetings. One
consideration could well be that directors will be aware of potential takeover bid by or
for the company before any other shareholder and could take financial advantage of
insider knowledge.16
In the case of Celemens vs Celemens Bros Ltd, whereas the director is the
majority shareholder, this position must not be used to sanction an abuse of power by
him in his role as a director. The rule also applies where a number of directors acting
collectively would constitute a majority: this majority cannot be used to sanction their
own misdemeanours. In these situations, should the minority shareholder feel that the
voting has amounted to an ‘unfair prejudice’, he can petition the court, in order to
seek that the resolution be overturned.17
14
Paul Raby, Business Law in practice, 2005, P.31
15
Ibid, P.32
16
Alan Dignam and John Lowry, Company Law,2012, P.176
17
Celemens v Clemens Bros Ltd, 1939