Shares and payment of capital

Chapter 4

Shares and payment of capital

Chapter Contents

4.1      The nature of a share

4.2      Different classes of shares

4.3      Other classes of shares

4.4      Transfer of shares

4.5      Share warrants

4.6      Pre-emption rights

4.7      Payment for shares

4.8      Issue of shares at a premium

4.9      Return of allotments


Self-test questions

Further reading

4.1  The nature of a share

Where a company is limited by shares, the capital of the company is divided into shares. These are units of a given amount defining a shareholder’s proportionate interest in the company. The nature of a share was discussed in Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 50. The relevant facts of this case were that the company’s constitution provided that on any manager or assistant ceasing to hold such office, or on his death or bankruptcy, he must, on receiving notice, transfer his shares.

The significance here is in the judgment of Farwell J in his definition of a share. Farwell J defined a share as follows:

The share is the interest of the 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 what is now s 33 of the Companies Act 2006].

4.1.1  Main features

The main features of a typical share are as follows:

(a)  a right to dividends declared on the shares;

(b)  generally (unless it is a non-voting share) a right to vote at general meetings;

(c)  on the liquidation of the company or on a reduction of capital, the right to receive assets distributed to shareholders of that class;

(d)  an obligation to subscribe capital of a given amount which will sometimes be the nominal value of the share if the share is issued at par and sometimes will be in excess of this if the share is issued at a premium (the issue of shares at par and at a premium is discussed below in section 4.8);

(e)  rights of membership attached to the shares as defined in the company’s memorandum and articles (discussed above in relation to the s 33 membership contract in section 7.7); and

(f)  a right to transfer the share in accordance with the articles of association (discussed below in section 4.4).

4.2  Different classes of shares

Often, a company will only have one class of share. These will be ordinary shares or the equity of the company. On occasion, the company may have more than one class of share. The classes will be differentiated by reference to rights to dividend, rights to repayment of capital, rights to vote, etc. Where this is the case, matters of the variation of class rights may arise where it is proposed to alter the company’s articles and that alteration varies the rights attaching to a particular class of share (these matters are considered under Variation of Class Rights in section 7.6).

4.2.1  Preference shares

It is perhaps appropriate here to say something about the nature of a preference share, which is probably the most common type of share other than ordinary shares.

The most common feature of a preference share is that it confers a right to a preferential dividend up to a specified amount, for example, 8 per cent of its paid-up value. This dividend is paid before any dividend is paid on the ordinary or equity share capital of the company. Preference shares may also have other preferential rights such as preferential voting rights or a right to repayment of capital in priority to other shares on a winding up.

The rights of the preference shares will depend upon what is set out in the terms of issue or in the articles of association of the company.

In relation to dividends, the preference shareholder is only entitled to a preferential dividend when this dividend is actually declared. Even if there are available profits there is no obligation upon the directors to declare a dividend (the question of dividends is considered separately, see Chapter 8). If, however, a dividend is not declared in any given year in relation to preference shares, the right to that dividend is carried forward. This presumption of the preference dividend being cumulative can be rebutted by a provision in the articles or in the terms of issue but, in the absence of any express statement, it is assumed that the right to a preference dividend is cumulative. Therefore, if a preference dividend of 8 per cent is not paid in year one, the right to that dividend carries forward into year two and so on.

If the preference dividend is paid in full, there is no further right to any additional dividend unless the terms of issue or articles say so. If there is such a right to an additional dividend, the preference shares are termed participating preference shares.

In relation to capital, there is no automatic priority for preference shares in a winding up or in a reduction of capital. The right only exists if the terms of issue or the articles set out such a right. If preference shares are given a priority in a winding up, then once their capital has been returned, this is exhaustive of their rights unless the terms of issue or the provisions of the articles provide otherwise; that is, preference shares do not participate in any surplus assets on a winding up.

4.3  Other classes of shares

The possible types of class of shares are many. It is not uncommon for a company to have redeemable preference shares. These shares are shares that mirror preference shares except they are redeemable at a set date or at the option of the company.

A company may issue deferred or founders’ shares. These shares rank after ordinary shares in respect of dividends and sometimes in relation to a return of capital. They will usually, however, have additional voting rights. Typically, they would be taken up by a company’s promoters.

Many large public companies have separate management shares, for example, the Savoy Hotel Group. These shares carry additional voting rights and they are thus able to outvote the ordinary shares of the company. In other respects, their rights will often be the same as the ordinary shares, for example, in relation to dividends and return of capital.

4.4  Transfer of shares

Shares are freely transferable unless the company’s articles impose restrictions on transfers. It was formerly the case before the Companies Act 1980 that private companies had to restrict the transferability of their shares in some way as a condition of their private status. This requirement was swept away by the Companies Act 1980.

If the articles contain no restriction at all, then the motive of the transferor in disposing of his shares is immaterial. In Re European Bank (Masters Case) (1872) 7 Ch App 292, 12 days before a banking company stopped business, a shareholder transferred shares to his son-in-law. The shares were partly paid shares. The court held that the transfer could not be set aside. The court would not inquire into the bona fides of the transferor. In Re Smith, Knight & Co (1868) LR 4 Ch App 20, the court held that the directors of the company have no discretionary powers except those that are given to them by the company’s constitution to refuse to register a transfer which has been made bona fide.

Restrictions on share transfer can only apply to non-quoted companies. Transfers of uncertificated shares, i.e. those quoted on an exchange, cannot be subject to restrictions. They are carried out anonymously and not face to face and, if the company is a UK one, they must permit transfer in uncertificated form.

4.4.1  Restrictions on transferability

What happens where there is some restriction on transferability? The restriction may take one of many forms. Articles of association may give the directors an absolute discretion to refuse to register a transfer of shares. This was the position in Re Smith and Fawcett Ltd [1942] Ch 304 (see section 12.5.2). In this case, the court held that the directors had a total discretion as to registering transfers. The only limitation on their discretion was that it should be exercised bona fide in the interest of the company. The Court of Appeal refused to draw an inference that it was being exercised mala fide. It is clear that, where the directors have an absolute discretion to refuse to register a transfer, the courts are reluctant to interfere. It should be noted, however, that a refusal to register a transfer of shares may justify a petition under ss 994–996 (considered under Minority Protection, Chapter 15).

Sometimes the refusal to register may only be exercised on certain grounds. A familiar power is one that the directors can exercise if, in their opinion, it is contrary to the interests of the company that the proposed transferee should become a member.

In Re Bede Shipping Co Ltd [1917] 1 Ch 123, which concerned a Newcastle-based steamship company, the court held that such a power only justifies a refusal to register on grounds that are personal to the proposed transferee. It does not, for example, justify a refusal to register transfer of single shares or shares in small numbers because the directors do not think it is desirable to increase the number of shareholders. The refusal to register was exercised on the ground that the directors did not want the shares to be held by many people. Lord Cozens-Hardy MR cited Chitty J in Re Bell Bros (1891) 65 LT 245 with approval:

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