Company Law LA37810 and LA31310

Corporate Financing: Shares, Debentures & Loans

Loans

often the only realistic financing option for private companies (major lenders tend to require personal guarantees from the directors and securities in form of fixed or floating charges)

Shares v Debentures

s.540 CA06: 'share' means share in the company's share capital

‘A share is the interest of a shareholder 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 a series of mutual covenants entered into by all the shareholders inter se in accordance with [s.14]. The contract contained in the articles of association is one of the original incidents of the shares. A share is not a sum of money.. but is an interest measured by a sum of money and made up of various rights contained in the contract…’Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 CH 279, 288

shareholders have the right eg. to call meetings and put resolutions on the agenda and appoint a proxy

other rights which are usually, although to varying degree, attached to shares are:

the right to share in the profits ie. receive a dividend
the right to vote at meetings - for a list of ancillary rights see s.145(3)CA06
the right to a return of capital when the company is wound up and its debts have been paid

the principal obligation of a shareholder is in the event of a director making a call on shareholders, in respect of money unpaid on their shares, to pay up the required amount (Art 12) AND in the event of an insolvent company being wound up, to pay any amount outstanding on the shares for the payment of the company's debts and liabilities s.74(2)(d) IA86

'what the correct meaning of 'debenture' is I do not know. I do not find anywhere any precise definition of it. We know that there are various kinds of instruments commonly called debentures. You may have mortgage debentures, which are charges on property. You may have debentures which are bonds; and if this instrument were under seal, it be a debenture of this kind. You may have a debenture which is nothing more than an acknowledgement of indebtedness.'
British India Steam Navigation Co v IRC (1881) 7 QBD 165

debentures are often secured by a floating shares which generally entitles the debenture holder to appoint a receiver or administrator when a debt is due by the company under the charge and has not been paid

other rights/characteristics of debentures:

entitlement to interest on the loan (generally a fixed amount the payment of which does not depend on whether the company made a profit; contrast to position of shareholders and their entitlement to a dividend)
ranks higher than shareholders in the winding up of the company
return capital to debenture holder is not subject to capital maintenance rules which restrict the extent to which companies can buy back shares

Note: The rights which you enjoy as a debenture holder are largely dependant on the terms of the loan agreement. Often debenture holders enjoy rights which are identical or similar to those customarily by shareholders eg. voting rights.

value of shares

if bought company: nominal value (also called par value) + premium
if bought/sold on the market: market value

classes of shares (ss.629-640 CA06)

... any share may be issued with such rights or restrictions as the company by ordinary resolutions determines. Art 2 of Table A in Companies (Table A to F) Regulations 1985 (new model articles still being drafted)

note: generally classes set out in the Articles, but if not, registrar of companies must be given a notice of the rights attaching to a particular class

ordinary shares
preference shares
shares with no or limited or enhanced voting rights
redeemable shares
No redeemable shares may be issued at a time when there are no issued shares of the company which are not redeemable. s.684(4)CA06. Note financing of redemption must be out of distributable profits or the proceeds of a fresh issue of shares. s.687(2) CA06
derivatives e.g. share options

Dividend: a distribution out of profits of a company to a shareholder in proportion to his/her shares and in accordance with his or her rights; once declared a dividend constitutes a debt

presumption of equality (within a class)

pari passu - ‘with equal step’ - equally, without preference
Birch v Copper (1889) 14 App Cas 525

variation of class rights

difficult - why?

preconditions s.630 CA06

either: in accordance with any variation provision in the Articles

or: written consent of 3/4 of holders of shares of the class which is to be varied or special resolution passed at a separate GM by the holders of that class approving the variation

and those not agreeing with the variation can always challenge it before the courts - is it unfairly prejudicial? s.633 CA06

fresh issue of ordinary shares: pre-emptive rights

s.561 (1) A company must not allot equity securities to a person on any terms unless (a) it has made an offer to each perso who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company, and (b) the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made.

WHY???

becoming a member

transferability of shares

shares are transferable in accordance with the articles (s.544 CA06)

often severely restricted in private company but the right to refuse to register a transfer must be exercised in good faith
Re Smith and Fawcett Ltd [1942] Ch 304, [1942] 1 All ER 542

s.770 CA06: a company may not registers a transfer of shares in or debentures of the company

unless a proper instrument of transfer has been delivered to it

after transfer accepted...Share Certificate
s.776 A company must within 2 months after the date on which a transfer of any such of its shares is lodged with the company, complete and have ready for delivery the certificates of the shares transferred...

here's an old one: http://www.trainweb.org/oldtimetrains/stockyards/shares.jpg

or the transfer is in accordance with regulations under Chapter 2 of this Part (evidencing and transfer of title to securities without written instrument)

CREST http://www.crestco.co.uk/

(electronic settlement of securities transfers)

s. 112 (1) CA06 The subscribers of a company's memorandum are deemed to have agreed to become members of the company, and on its registration become members and must be entered as such in its register of members.
(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company.

Register of Members
s.113 CA06: Every company must keep a register of its members (include: name, address, date when person became and ceased to be a member, shares held by member and amount paid up)

maintenance of share capital

Examples:

rules on redeemable shares (see above)
rule against company acquiring its own shares

Trevor v Whitworth (1887) 12 App CAS 409

s.658 CA06 A limited company must not acquire its own shares, whether by purchase, subscription or otherwise, except in accordance with the provisions of this Part.

rules on dividends

s.830(1) CA06 A company may only make a distribution out of profits available for the purpose.

s.830(2) ) A company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

WHY???

'paid up capital may be diminished or lost in the course of the company's trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid... they are entirled to assumed that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.' Trevor v Whitworth (1887) 12 App CAS 409, 423f.