Corporations and Trusts Law Chapter 7 Share Capital

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Corporations and Trusts Law Chapter 7 Share Capital and Fundraising www. learnnowbiz. com Corporations

Corporations and Trusts Law Chapter 7 Share Capital and Fundraising www. learnnowbiz. com Corporations and Trusts Law 1

7. 1 Financial Resources of a Company In any company there are two broad

7. 1 Financial Resources of a Company In any company there are two broad types of financial resource: • internal resources provided as capital by the owners of the company in their capacity as members; and • external resources provided by way of loan or credit by creditors. www. learnnowbiz. com Corporations and Trusts Law 2

What Is Share Capital? The company’s share capital is the amount of money or

What Is Share Capital? The company’s share capital is the amount of money or assets contributed to the company by its members when they subscribe for shares in the company. www. learnnowbiz. com Corporations and Trusts Law 3

Legal Nature of a Share Pursuant to s 1070 A of the Act a

Legal Nature of a Share Pursuant to s 1070 A of the Act a share is an item of personal property, separate from the company’s property. Shares also provide members with a bundle of property rights including: • the right to be paid a dividend out of profits when declared; • the right to attend meetings and to vote; and • the right to the return of capital in a winding up if the company has enough assets after discharging its debts. www. learnnowbiz. com Corporations and Trusts Law 4

Legal Nature of a Share Direct share ownership is defined as having: • Shares

Legal Nature of a Share Direct share ownership is defined as having: • Shares in a company listed on a securities exchange that are held either personally, or via a Self. Managed Super Fund (SMSF) or via a company structure, but not as part of a managed fund or a superannuation fund. • Derivatives and other investments listed on a securities exchange, such as Real Estate Investment Trusts (or REITs), which were previously known as Listed Property Trusts (LPTs), Exchange Traded Funds (ETFs), options, instalments or warrants. www. learnnowbiz. com Corporations and Trusts Law 5

Company’s Power to Issue Shares A company has power to issue and cancel shares

Company’s Power to Issue Shares A company has power to issue and cancel shares in the company pursuant to s 124 (1)(a) of the Act. This power includes the right to issue bonus shares (shares for whose issue no consideration is payable); preference shares and partly paid shares (s 254 A(1)). www. learnnowbiz. com Corporations and Trusts Law 6

CASE: Re Onslow Salt Pty Ltd (2003) FCA 429 Redeemable preference shares were allotted

CASE: Re Onslow Salt Pty Ltd (2003) FCA 429 Redeemable preference shares were allotted by a company to its major shareholder, through a resolution passed by the directors. The company could only issue the preference shares if the memorandum of articles of the company specified the rights attaching to the shares. At the time that the redeemable preference shares were issued, there was no provision in the memorandum or articles of the company which set out the rights attaching to the holders of such shares. www. learnnowbiz. com Corporations and Trusts Law 7

CASE: Re Onslow Salt Pty Ltd (2003) FCA 429 It was held by the

CASE: Re Onslow Salt Pty Ltd (2003) FCA 429 It was held by the court that the purpose of s 254 E was to allow the court, in an appropriate case, to rectify errors and irregularities affecting the issue of shares and to provide certainty where there was real and arguable, (as distinct from fanciful and speculative), uncertainty about the validity of an issue. The court validated the allotment of the redeemable preference shares. There was no prejudice to any person arising out of the validation. The two shareholders of the company supported the issue of the shares. www. learnnowbiz. com Corporations and Trusts Law 8

7. 2 Classes of Share Ordinary Shares Shareholders who hold ordinary shares will have

7. 2 Classes of Share Ordinary Shares Shareholders who hold ordinary shares will have the following rights: • the right to share equally in any dividends with all other ordinary shareholders after all other claimants have been paid; • the right to vote at general meetings; • the right to be repaid capital on a winding up after all other claimants have been repaid; and • the right to share pro rata in any surplus assets upon a winding up www. learnnowbiz. com Corporations and Trusts Law 9

Classes of Share Preference Shares S 254 A(2) provides that preference shares can only

Classes of Share Preference Shares S 254 A(2) provides that preference shares can only be issued by a company if its constitution or a special resolution of the company deals with matters addressed in the preference share such as: • the repayment of capital; • participation in surplus assets and profits; • cumulative and non-cumulative dividends; • voting; or • priority of payment of capital and dividends in relation to other shares or classes of preference shares. www. learnnowbiz. com Corporations and Trusts Law 10

Preference Shares (cont. ) Frequently, preference shares will provide their holders: • a right

Preference Shares (cont. ) Frequently, preference shares will provide their holders: • a right to a fixed dividend • no voting rights unless dividends are in arrears except on a resolution to reduce the company’s capital or wind up the company, or at class meetings on matters affecting their class rights • the right to repayment of capital in a winding up in priority to ordinary shareholders • no right to share in any surplus assets in winding up. www. learnnowbiz. com Corporations and Trusts Law 11

Partly Paid Shares Where a company has issued partly paid shares, the company is

Partly Paid Shares Where a company has issued partly paid shares, the company is entitled to make a “call” at a later time for some or all of the balance owing on the issue price of the shares pursuant to s 254 M of the Act. The money payable to meet a call validly made under the company’s constitution and in accordance with the terms of issue of the shares is a debt due and payable by the shareholder to the company. www. learnnowbiz. com Corporations and Trusts Law 12

Partly Paid Shares Under s 9 (the dictionary section) an ‘externally administered’ company is

Partly Paid Shares Under s 9 (the dictionary section) an ‘externally administered’ company is one: • • • under receivership; under administration; under a deed of company arrangement; under administration of a compromise or arrangement; or being wound up. www. learnnowbiz. com Corporations and Trusts Law 13

Options There are two major kinds of option: Ø Call options – option to

Options There are two major kinds of option: Ø Call options – option to buy shares at a pre- determined price within a specified period of time – (buyers of call options hope that the shares will increase substantially before the option expires); and Ø Put options – options to sell shares at a pre- determined price within a specified period of time (buyers of put options hope that the price of the shares will fall before the option expires). www. learnnowbiz. com Corporations and Trusts Law 14

Options www. learnnowbiz. com Corporations and Trusts Law 15

Options www. learnnowbiz. com Corporations and Trusts Law 15

7. 3 Issuing Shares Initial Share Capital of a Company • When a company

7. 3 Issuing Shares Initial Share Capital of a Company • When a company limited by shares or an unlimited company comes into existence it does so possessing a share capital. • It is possible for a company to be registered with a share capital in which there is only one share, as where the company is registered with only one proposed member and that member has undertaken to take up only one share. • There is no minimum share capital for either a proprietary or public limited company. www. learnnowbiz. com Corporations and Trusts Law 16

Private Issues • Where a small proprietary company is formed to take over the

Private Issues • Where a small proprietary company is formed to take over the business of a sole trader or partnership there will be a contract between the company and the vendors of the business and the company in which a price for the business is fixed. • The vendors may agree to the company issuing shares to them representing the whole or part of that price. EXAMPLE Saloman v Saloman & Co Ltd (1897) AC 22, the vendor of the business, Salomon took up an issue of shares but elected to be a creditor for a substantial part of the purchase price. www. learnnowbiz. com Corporations and Trusts Law 17

Membership All companies are required to have at least one member pursuant to s

Membership All companies are required to have at least one member pursuant to s 114 of the Act and any person (legal or artificial) who can hold property in their own name can be a member of a company. www. learnnowbiz. com Corporations and Trusts Law 18

Membership A person will no longer be a member of a company, if among

Membership A person will no longer be a member of a company, if among other things: • they transfer their shares to another person; • they transfer their shares back to the company under a “buy-back”; • their shares are cancelled by the company under a reduction of capital; • their partly paid shares are forfeited when the person fails to pay a call; or • the company is deregistered and ceases to exist. www. learnnowbiz. com Corporations and Trusts Law 19

Flotations • There may be an offering to the investing public of shares by

Flotations • There may be an offering to the investing public of shares by a public company which is being floated. • Some flotations may involve the company which needs the finance offering to allot new securities to applicants which is referred to as “primary allotment” or “primary issue”. • As the flotation process can take several months, to guard against failure of the issue the company may take out insurance by making an underwriting agreement with brokers or a merchant bank. www. learnnowbiz. com Corporations and Trusts Law 20

Placements • Companies may raise share capital by offering a ‘placement’. • This is

Placements • Companies may raise share capital by offering a ‘placement’. • This is usually achieved through an intermediary such as a broker and occurs when blocks of shares are offered for subscription to particular invitees An example of a share placement announcement is included in the text. www. learnnowbiz. com Corporations and Trusts Law 21

Rights Issues A company whose shares have a strong market value can raise additional

Rights Issues A company whose shares have a strong market value can raise additional equity finance from its own members by a rights issue under which shares are offered by the company for subscription on a pro rata basis at an issue price lower than the market price. www. learnnowbiz. com Corporations and Trusts Law 22

Rights Issues EXAMPLE Carrie owns 1, 000 shares in Cosmopolitan Ltd. The directors of

Rights Issues EXAMPLE Carrie owns 1, 000 shares in Cosmopolitan Ltd. The directors of the company identify a growth opportunity for the company and wish to raise capital. They therefore make a one – for – five rights issue at the discounted price of 10% below market price. So as Carrie owns 1, 000 shares in Cosmopolitan Ltd, she may exercise the rights issue to purchase up to 200 shares at the discounted price. (One new share at the discounted price for every five shares she already owns). Note that if the company was seeking to increase their share capital to pay money to creditors or to stabilise their financial position in some other way, the rights issue may not be as commercially attractive to Carrie. www. learnnowbiz. com Corporations and Trusts Law 23

Pro Rata Issues When a company proposes to issue more shares it shall offer

Pro Rata Issues When a company proposes to issue more shares it shall offer them to existing shareholders in proportion to the amount of capital already held by them in the class of shares to be issued. www. learnnowbiz. com Corporations and Trusts Law 24

Capitalisation or Bonus Issue A public or proprietary company that has operated successfully so

Capitalisation or Bonus Issue A public or proprietary company that has operated successfully so that it has distributable profits can issue shares to its shareholders and treat the profits as if the shareholders had received them and had then immediately paid them back for additional shares. EXAMPLE Carrie now owns 1, 200 shares in Cosmopolitan Ltd which has successfully managed the growth opportunity funded by the rights issue. The company is now providing a one-for-four bonus issue, meaning that shareholders receive one free share for every four shares they own. Therefore Carrie will receive 300 bonus shares. www. learnnowbiz. com Corporations and Trusts Law 25

Dividend Reinvestment Plans A scheme under which shareholders forgo or give up payment of

Dividend Reinvestment Plans A scheme under which shareholders forgo or give up payment of dividends in return for new shares issued to them, usually at a discount on market value. EXAMPLE Having regard to her current financial position and that of Cosmopolitan Ltd, Carrie decides to participate in the company dividend reinvestment scheme. Instead of receiving the dividend payable on her 1500 shares as a cash transfer to her bank account, she elects to have that sum purchase the calculated number of shares at the reinvestment price of 5% below current market value. www. learnnowbiz. com Corporations and Trusts Law 26

Dividends S 254 T of the Act provides that dividends may only be paid

Dividends S 254 T of the Act provides that dividends may only be paid out of the profits of a company. www. learnnowbiz. com Corporations and Trusts Law 27

Restrictions on Share Issues Directors are entitled to issue any number of shares in

Restrictions on Share Issues Directors are entitled to issue any number of shares in a company without obtaining authorisation from the existing shareholders except in the following situations: • Where the company’s internal rules limit the number of shares which the directors can issue without shareholder authorisation; • Where the proposed share issue would vary or cancel the rights attaching to existing shares. • Where the company is a proprietary company governed by the replaceable rule in s 254 D of the Act or a similar provision in its constitution www. learnnowbiz. com Corporations and Trusts Law 28

Variation or Cancellation of Share Rights Sections 246 B-246 G of the Corporations Act

Variation or Cancellation of Share Rights Sections 246 B-246 G of the Corporations Act are the provisions which allow for the variation and cancellation of rights attaching to particular classes of shares. Pursuant to s 246 B(1) if the constitution of the company sets out the procedures for varying or cancelling rights attached to shares of a particular class of members, then these procedures must be followed. If the company constitution does not set out such a procedure, then the procedure in s 246 B(2) must be followed if variation or cancellation is sought. www. learnnowbiz. com Corporations and Trusts Law 29

7. 4 Retention of Capital The main controls are in: • the procedure for

7. 4 Retention of Capital The main controls are in: • the procedure for reduction of capital with approval of the members; • the rules about permitted buy backs of shares; • the regulation of distributions in a winding up. www. learnnowbiz. com Corporations and Trusts Law 30

Self-acquisition and Control of Shares There is a general prohibition on a company purchasing

Self-acquisition and Control of Shares There is a general prohibition on a company purchasing its own shares because that would enable the reduction of capital that would be available to creditors for the payment of debts. Consequently, s 259 A provides that a company must not acquire shares or units of shares in itself except: • in a share buy-back pursuant to s 257 A; or • under a court order; or • under an employee share scheme pursuant to s 259 B(2); or • as security taken in the ordinary course of business of a financial institution pursuant to s 258 B(3); or • in acquiring an interest (other than a legal interest) in fully paid-shares in the company if no consideration is given for the acquisition by the company or an entity it controls. www. learnnowbiz. com Corporations and Trusts Law 31

Share Capital Reduction of share capital occurs when any money paid to a company

Share Capital Reduction of share capital occurs when any money paid to a company in respect of a member’s share is returned to the member. www. learnnowbiz. com Corporations and Trusts Law 32

Examples of Reduction of Share Capital The cancellation of uncalled capital – (the reduction

Examples of Reduction of Share Capital The cancellation of uncalled capital – (the reduction or cancellation of shareholders’ liability to pay calls on partly paid shares); • the cancellation of shares and the repayment of capital by a company to its shareholders; • the reduction of the issue price of shares and the repayment of that capital to shareholders; • the exchange of shares with debentures or other debt instruments (shareholders change status to become creditors); • the redemption of redeemable preference shares www. learnnowbiz. com Corporations and Trusts Law 33

Equal Reduction www. learnnowbiz. com Corporations and Trusts Law 34

Equal Reduction www. learnnowbiz. com Corporations and Trusts Law 34

Selective Reduction www. learnnowbiz. com Corporations and Trusts Law 35

Selective Reduction www. learnnowbiz. com Corporations and Trusts Law 35

7. 5 Share Buy-Backs A ‘buy-back’ is the acquisition by a company of shares

7. 5 Share Buy-Backs A ‘buy-back’ is the acquisition by a company of shares in itself – (s 9). The transaction involves an agreement between the company and the selling shareholders to transfer shares to the company in return for consideration which is usually a specific sum of money. www. learnnowbiz. com Corporations and Trusts Law 36

Types of Permitted Buy-Back • • • Equal access buy-backs – (s 257 B

Types of Permitted Buy-Back • • • Equal access buy-backs – (s 257 B (2) On-market buy-backs – (s 257 B(6)-(7) Employee share scheme buy-backs – (s 9) Minimum holding buy-backs – (s 9) Selective buy-backs – (s 9) www. learnnowbiz. com Corporations and Trusts Law 37

7. 6 Going Public As the company’s business grows, it may need more finance

7. 6 Going Public As the company’s business grows, it may need more finance than its proprietors, their families, their friends or private lenders can provide. It may then convert to a public company to make itself eligible to offer the investing public the chance to invest in it and so obtain further funds to develop. The public may be invited to invest by taking shares and becoming members (flotation) or by lending to it and becoming creditors. www. learnnowbiz. com Corporations and Trusts Law 38

Issues of Shares to the Public – Disclosure Requirements The major purpose of the

Issues of Shares to the Public – Disclosure Requirements The major purpose of the provisions dealing with fundraising by public companies is to ensure that investors are able to make fully informed investment decisions. (A secondary aim is to make it easier for smaller public companies to access capital) www. learnnowbiz. com Corporations and Trusts Law 39

Different Types of Disclosure Document • • • Prospectus Short-Form Prospectus Continuously Quoted Securities

Different Types of Disclosure Document • • • Prospectus Short-Form Prospectus Continuously Quoted Securities Prospectus Profile Statement Offer Information Statement www. learnnowbiz. com Corporations and Trusts Law 40

Accepting the Invitation An application form must be attached to the prospectus or disclosure

Accepting the Invitation An application form must be attached to the prospectus or disclosure document. This is merely an “invitation” by the company for people to invest in it by purchasing its shares www. learnnowbiz. com Corporations and Trusts Law 41

Offers that Do Not Need Disclosure There are many offers of securities which do

Offers that Do Not Need Disclosure There are many offers of securities which do not require a disclosure document as set out in s 708. Three major examples are: • Small Scale-Offerings Exemption – S 708(1)–(7) • Sophisticated Large Investor’s Exemption – S 708(8)– (10) • Professional Investor Exemption – S 708(11) www. learnnowbiz. com Corporations and Trusts Law 42

Supplementary and Replacement Disclosure Documents The issuer of securities must lodge a supplementary prospectus

Supplementary and Replacement Disclosure Documents The issuer of securities must lodge a supplementary prospectus with ASIC if; • the issuer becomes aware of a misleading or deceptive statement in the disclosure document; or • there is an omission of information required under Ch 6 D; or • a new circumstance has arisen since the disclosure document was lodged which would have been required to be included in the disclosure document. www. learnnowbiz. com Corporations and Trusts Law 43