MNG 3200: COMMERCIAL LAW.

LECTURER: MS SASHA ROBERTS

WEEK: 4 EQUITY FINANCE: SHARES/ MAINTENANCE OF CAPITAL
SHARE CAPITAL: All issues touching and concerning share capital and the
maintenance of capital can be found in sections 25 to sections 40 of the
Companies Act 89:01
In company law the word capital refers to the “issued share capital” of the
company. That is the money raised by the issuance of shares as opposed to loan
capital.
There are three main ways in which the company raises capital:
1. Persons taking shares in the company (share capital)
2. Persons giving loans to the company (loan capital)
3. Retained earnings i.e the capitalization of profits not distributed to share-
holders.
The share capital of a company is only one source of funding that a company uses
to finance its activities. In the raising of share capital, a distinction should be
made between private and public companies.
A public company usually invites the public to take shares in the company. This
can only be offered under certain conditions, and this is designed for the
protection of those taking up shares. Any advertisement of the shares for sale to
the public must be accompanied by a “prospectus” and the contents of this
document must contain the matters listed in the schedule to the Companies Act.
Prospectuses must be registered with the Registrar on or before publication.
Private companies on the other hand, are prohibited from selling their shares to
the public and there are also restrictions on their rights to transfer shares to non-
members as may be specified in the articles of the companies.

TYPES OF CAPITAL
NOMINAL (OR AUTHORISED) CAPITAL: A company limited by shares, or by
guarantee and having a share capital is required to state the amount of its
nominal capital in the capital clause of the memorandum of association. These
figures show the maximum number of shares the company is authorized to issue.
Shares must not be issues beyond the nominal capital.

ISSUED CAPITAL: This is that portion of the nominal or authorized capital which
has been issued as shares to shareholders. A company is not obliged to issue all its
nominal capital at once.
References to “capital” are usually references to issued capital. Issued capital
cannot exceed the nominal or authorized capital.
PAID-UP CAPITAL: That is the amount of issued capital that has been paid up.
Shares may be partly paid up or fully paid up.
Other types of capital include: uncalled capital, Reserve Capital, Minimum and
Maximum Share Capital.
ALTERATION OF SHARE CAPITAL
Companies limited by shares may, in general meeting, if so authorized by its
articles, by ordinary resolution, increase its share capital by such amount as it is
considered expedient.
An increase in share capital is only necessary when all the nominal capital as
stated in the memorandum has been issued.
Where there is an increase of share capital beyond that registered, the Registrar
(of companies) must be notified of the increase (within 15 days) of the increase
recorded.
Increase in share capital is normally made with a view of raising further capital for
the company or to bring the nominal capital into close relation with the actual
assets of the company.
SHARE CAPITAL
A share can be described as a unit measuring a member’s interest in a company. It
is often referred to as a “chose in action”. Shares are personal property with
rights and obligations and can be dealt with as such. However, ownership of
shares does not constitute part ownership of the assets of the company.

A shareholder’s right or interest will depend on the kind of share he holds, as a

share gains its values from the rights that are attached to it. A person who takes a
share in a company will become a member of the company, on the other hand if
he lends money to the company he is not a member but a creditor.

CLASSES OF SHARES
Shares are divided into different classes and each class is defined in the
Articles of Incorporation. The shares in a company may all be alike, that is they
carry the same voting rights, dividends and the return of capital on winding up,
but this is not often the case as different classes of shares have different rights.

The region does not expressly authorize companies to issue shares of different
classes, although many of the Acts empower the issue of preference shares if
the articles of the company authorize it do so.

A company may, by virtue of its articles of incorporation issues different

classes of shares with varying rights. However, any preferential rights given to
a class of shares must be clearly defined, as these will be construed against the
holder and any preference given to a particular class of share must be stated in
the article. In absence of anything stated in the Articles of Incorporation, each
share is presumed to be equal in rights and obligations.
To ascertain the rights conferred on a share, reference is to be made to the
articles and to the particulars of the terms of issue for the particular class of
shares.

In the absence of anything in the articles to the contrary, each share is

presumed to be equal in rights and obligations. This presumption can be
rebutted by the terms of issue for the shares. Rights may vary considerably.

1. Ordinary shares: The rights of ordinary shares remain after the rights of the
other classes of shares have been satisfied. Ordinary shares usually give the
shareholder the right to vote as opposed to preference shares in which
voting is restricted. By virtue of this right, ordinary shareholders are given
control over the management of the company. Ordinary shares normally
carry the residue of any distributed profits after the preference shares, if
dividends have been distributed.

A company may issue non-voting or restricted voting ordinary shares which

form a separate class of shares. These shares carry equal rights with
ordinary shares except for the voting restriction.

2. Preference shares: A company may create a special class of shares with

certain special rights in order to attract capital. The main characteristic of
this type of share is that is affords the holder certain preferential rights and
that it has a fixed dividend of a certain fixed percentage and this dividend is
 paid before other shareholders. Preference shares can either be cumulative
or non -cumulative.
They are presumed to be cumulative or non-cumulative. They are
presumed to be cumulative, unless expressly described as non-cumulative.
They are cumulative in the sense that if the company cannot pay a dividend
in a particular year, it will accumulate from year to year until they are paid.
It is non-cumulative in the sense that if a dividend is not paid in any year it
will not accumulate for payment in future years. In other words, the
preference shareholder will not get a dividend for that year.
Preference shares do not carry voting rights and they do not have priority
to a return of capital in a winding up unless the memorandum or articles or
terms of issue specifically give them this right.
The right to receive the preferred fixed dividend in priority to other classes
of shares only exists if a dividend is declared by the company. It is not a
right to compel the company to pay the dividend in any event.

3. Deferred shares
4. Redeemable shares.
ISSUE OF SHARES
The process by which a person takes chares in a company is called the issuing of
shares and it ends with an allotment letter. An acceptance by the company by
letter of allotment must be communicated within a reasonable time: Case, In the
case- Ramsgate Victoria Hotel Co. Ltds V. Montefiore [1866] M applied for a
number of shares in the Plaintiff company in June but no allotment was made
until November of that year. M refused to accept the shares. It was held the offer
had lapsed as the allotment was not made within a reasonable time.
Once shares are allotted to a person, he or she is issued with a share certificate
that he is a registered holder of a specified number of shares of a certain class.
Under the laws of Guyana, the share certificate must contain the seal of the
company specifying the shares held by the person is evidence of the title of the
member of the shares mention in the certificate.

1. The power to issue shares is vested in directors only by either the

Company’s Act, the Articles of Incorporation and by the company giving
directors same in a general meeting.
2. If the Directors are not authorized they cannot issue same.
3. The power to issue shares cannot be delegated.
4. The director’s powers to issues shares are governed by fiduciary
considerations and must be exercised for the purpose for which it is
granted, which is to raise funds for the company in order to satisfy the
financial needs of the company and to ensure financial stability of the
company.
5. The issuing of shares by the directors is to be made bona fide for the
benefit of the company as a whole. If it is not so made it will be presumed
to be made to perpetuate the directors control over the company.
( Percival v. Wright [1902])
6. The director is also not entitled to issue shares merely to prevent a take
over because they fear that the new controllers will conduct the company
in a way which they consider disadvantageous or simply in order to
eliminate the existing majority.
7. The Courts will examine the reason for the issuance of shares and if it was
not for the reason of raising capital, it will be considered abuse of power.

In the case of HOWARD SMITH LTD V. AMPOL PETROLEUM LTD [1974]

ALLER1126, it was found that the primary purpose of the allotment was to
enable the minority shareholders to sell at a more advantageous term by
diluting the majority voting power. It was held that the directors must not use
their fiduciary power over the shares purely for the purpose of destroying the
existing majority or creating a new majority. To use their fiduciary power solely
for the purpose of shifting the power cannot be related to any purpose for
which the power was conferred. The allotment was therefore held to be void.

WAYS OF BECOMING A SHARE HOLDER.

1. By taking shares in a company.

2. By taking a transfer of shares from an existing shareholder, either by sale or
by gift.
3. By the operation of law under which the shares of an existing shareholders
are devolved or vested in the person eg where the shares of a deceased
shareholder devolve on the personal representatives (called the
transmission of shares).

ISSUING AND ALLOTMENT Of SHARES

The process by which members take shares from a company is called issuing
the shares and it ends when an allotment is made.
 The basic feature of an allotment is that the allotee acquires his shares directly
from the company and not from the previous share holder.
Shares are taken to be allotted when a person acquires the unconditional right
to be included in the company’s register of members after an application for
shares has been made.
In a private company shares cannot be issued to the public. In this case the
process is usually informal and is handled by the company secretary or
accountant or an attorney-at-law. The articles are to be looked at as to the
process.
In a public company shares can be issued to the public but a prospectus must
be issued
APPLICATIONS FOR SHARES
The general law of contract applies to contracts for allotment of shares in a
company. The issuing of a prospectus and application form by a public company is
not an offer to take shares in the company in the contractual sense, but merely an
invitation to the public to offer or take up shares in the company.
It is the applicant for the shares who has completed and submitted the
application form to the company who accepts or rejects. The company signifies its
acceptance to the applicant by sending him a letter of allotment.

LETTER OF ALLOTMENT
An acceptance by the company by letter of allotment must be communicated
within a reasonable time.
In RAMSGATE VICTORIA HOTEL Co. LTD V. MONTEFIORE [1866], M applied for a
number of shares in the Plaintiff Company in June but no allotment was made
until November of that year. M refused to accept the shares. It was held that the
offer had lapsed as the allotment was not made within a reasonable time

SHARE CERTIFICATE
A member’s share certificate certifies that he is the registered holder of a
specified number of shares of a certain class.
Under the Acts of the region, a certificate under the common seal of the company
specifying the shares held by a member is prima facie evidence of the title of the
member to the shares mentioned in the certificate.
A share certificate gives rise to estoppel, both as to title and the amount paid on
the shares, as against the company and in favour of a person who has relied on
the certificate. If a person suffers loss because of an untrue statement on the
share certificate, the company must compensate him_ RE BAHIA AND SAN
FRANCISCO RAILWAY CO LTD[1868].
It is usually provided that a share certificate is to be made out by the company
and delivered to the member within two months from the date when a transfer
was lodged for registration or three months after allotment.

TRANSFER OF SHARES
Shares are capable of being transferred as personal property in the manner
provided in the articles subject to the proper instrument of transfer having
been completed and delivered to the company.
Every shareholder has a right to transfer his shares when he likes unless the
articles provide otherwise. The articles may impose fetters upon the right to
transfer.
 In the case of a private company, the articles usually restrict the right to
transfer shares. There is normally a pre-emption clause which restricts transfer
to a non-member so long as a member can be found to purchase the shares at
a fair price to be determined in accordance with the articles.
The articles may also provide that the directors have the power to refuse
registration of a transfer without giving reasons. The court will not interfere
with the director’s exercise if such a power, unless it is proved that they were
not acting bona fide in the interest of the company.
PROCEDURE FOR THE TRANSFER OF SHARES.
Entry in the register of members is the decisive step by which a person
becomes the legal owner of the shares.
To obtain the legal ownership of shares:

a. Proper instrument of transfer is delivered to

the company;
b. Stamp duty on the instrument is to be paid;
c. Share certificate and stamped instrument
must be sent to the company.
 MAINTENANCE OF CAPITAL
The common law has developed a number of rules designed to ensure that a
company’s share capital remains intact as a fund to which creditors of the
company could look to as a security for their debts. A reduction of capital is
generally illegal unless authorized by legislation-TREVOR V. WHITWORTH
[1887]12 App Cas 409

The common law rules relating to the maintenance of capital were designed to
ensure:

1. That the money or other consideration that the company receives from
shareholders for their shares is equal to the nominal value and any
premium payable for the shares;
2. That the money received by the company is maintained as a capital fund to
which creditors of a company can look to as security for their debts

It is the practice for monies received from shareholders be used to purchase the
company’s corporate assets, i.e the land, building, plant and stock, and creditors
take charge over these assets.

The rules relating to the maintenance of capital do not prevent companies from
obtaining loan capital or incurring debts that exceed the amount of share capital
raised.

THE FUNDAMENTAL RULE

It is a fundamental principle of company law that share capital must be

maintained by the company and that the company should not use the money
from the share capital except for the purposes as set out in the objects clause of
the memorandum of association i.e it must be used to carry out the business of
the company for which it was formed.

The principle that share capital must be maintained means that:

1. Paid up share capital must not be returned to the members,

2. Members liability in respect of the share capital not yet paid up must not
be reduced;
3. Shares must be fully paid for.

That because of this principle, the rules developed by the courts prevent a
company from purchasing its own shares,or issuing shares at a discount or
paying a dividends out of capital.

MATTERS TO BE CONSIDERED

The maintenance of share capital involves consideration of the following matters:

1. The consideration paid for shares issued

2. Company purchasing its own shares
3. Financial assistance by the company for purchase of its shares
4. Reduction of capital
5. Issuing of shares at a discount
6. Redeemable shares
7. Payment of dividends
8. Issuing of shares at a premium

THE CONSIDERATION PAID FOR SHARES ISSUED

The basic common law rule states that as long as the company received some
consideration for the shares, it was immaterial whether they were issued for cash.
The consideration may be in the form of property, goods or services)i.e
consideration may be other than for cash). In other words, shares may be paid for
in money or money’s worth (including goodwill and know-how). The court is
generally very reluctant to decide the value of non-cash assets and will normally
accept the valuation given unless there is fraud or dishonesty (Re Wagg
Ltd[1897]. However, shares must always be paid for. Until paid, it is a debt owed
to the company.

PURCHASE BY A COMPANY OF ITS OWN SHARES

It is the basic principle of the common law that a company may not purchase its
own shares-TREVOR V. WHITWORTH [1887]. To allow a company to purchase its

own shares would, in effect, be to return share capital back to the shareholders.
Acquisition of its shares by a company, therefore, is a reduction of capital.

In recent years, this prohibition has been relaxed for the benefit of the company
and the shareholders, provided the position of creditors and other interested
parties can be protected and its authorized by the articles

FINANCIAL ASSISTANCE FOR THE PURCHASE OF THE COMPANY’S OWN SHARES.

Instead of a company buying its own shares, it could provide financing for a
person to buy its shares. This, however, is tantamount to a company buying its
own shares. In the case of SELANGOR UNITED RUBBER ESTATES LTD V. CRADOCK
(NO.3) [1968] 1 WLR 1555, for example, it was held that a company cannot
provide funds for the purchase of its own shares.

This prohibition may be relaxed for private companies but subject to a number of
procedural restrictions, e.g it must be by special resolution; there is no reduction
of the company’s net assets; or it is made out to distributable profits and
supported by a statutory declaration to that effect.

Financial assistance includes the giving of gifts, loans, guarantees, securities and
other financial assistance that reduces the company’s net assets to a material
extent.

Modern legislation generally provides for financial assistance to be given to a

company in the following circumstances:

1. The company may lend money where its ordinary business is the lending of
money
2. It may provide money in accordance with an employee share scheme for
the acquisition of fully paid shares in the company or its holding company;
3. It may make loans to employees, other than directors, to enable them to
acquire fully paid shares in the company or its holding company.

REDUCTION OF SHARE CAPITAL

A reduction of capital is generally illegal unless authorized by statute. Generally,

legislation provides that a company can only reduce its share capital (i.e the
authorized share capital) with the approval of the court and any intended
alteration must be authorized by the articles and must be carried out on the
authority of a special resolution.

Before any reduction of capital is made, consideration must be given to any effect
the reduction may have on existing voting rights of members.

If the reduction in capital affects creditors, the court will not confirm the
reduction unless the creditors agree, or are paid off, or are given security.

In addition to the interests of the creditors, the court will ensure that the
reduction in the share capital is equitable between various classes of
shareholders- RE HOLDERS INVESTMENT TRUST LTD [1971]

In the case of CARRUTH V. IMPERIAL CHEMICAL INDUSTRIES [1937] a company’s

capital consisted of ordinary shares and converted every four deferred shares into
one ordinary share. The company’s article permitted a reduction of capital as may
seem expedient. As the reduction strengthened the company’s financial base, the
court upheld this decision.

If a reduction involves a reduction of liability in respect of uncalled capital or a

return of capital, a list of creditors must be obtained.

The court will generally sanction a reduction in share capital, unless the reduction
is unfair to the creditors, the shareholders, and the public who may have dealings
with the company.

The primary concern of the court is to be assured that the interests of the existing
creditors are protected, but the question of whether there should be reduction is
a domestic matter for the company to decide. However, the court must be
satisfied that the cause of the reduction was properly put to the members so that
they could make an informed decision.

If the court approves a reduction it makes an order confirming the reduction. The
order confirming the reduction is to be delivered to the Registrar of Companies
together with a minute stating the company’s new capital structure. The Registrar
will then issue a certificate specifying the new share capital of the company.

Certain types of reduction, which will not affect creditors are generally permitted
if the articles so provide, usually by ordinary resolution of a general meeting,
without the need for the court confirmation e.g the cancellation of un-issued
shares is so permissible.

It is to be remembered that any reduction of share capital would entail an

alteration of the memorandum of the company which can only be done by special
resolution as provided under the companies Acts.

SHARES ISSUED AT A DISCOUNT

The general rule is that shares must not be issued at a discount, i.e they must not
be issued as fully paid for a consideration which is less that the nominal or par
value.

If the shares are allotted at a discount, the allottee is liable to pay the company
the full nominal value of the share and any subsequent purchaser who is aware
that the shares were issued at a discount is also liable.

REDEEMABLE SHARES
Payments made by a company to redeem shares may constitute a reduction of
capital, if those payments are made out of capital, since the company will be
purchasing its own shares.

Redeemable shares are issued shares which, at the option of the company or the
shareholder, can be repurchased by the company. Such a repurchase must be
funded from the proceeds of a new issue of shares or from distributable profits,
and in the latter case a sum equivalent to the repaid capital must be transferred
to the capital account called the capital redemption reserve, which can be used to
finance an issue of bonus shares allocated to existing shares.

Normally, therefore, shares are not redeemable, except with the consent of the
court, as this is a reduction of capital.

The Acts in the region, however, permit a company to issue redeemable shares, if
the articles allow it to make the issue. The redeemable shares may be redeemed
only out of distributable profits, revenue reserves or out of the proceeds of a
fresh issue of shares made for this purpose.

sources

https://mola.gov.gy/laws-of-guyana

MANGAL RAMBARRAN, AN INTRODUCTION TO COMPANY LAW IN THE COMMONWEALTH

CARRIBEAN, 1edn (1995)

CHARKESWORTH &CAIN, COMPANY LAW, 12th ed (1983)

SLORACH, SCOTT & ELLIS, JASON, BUSINESS LAW, 12th ed (2003)