Company Law Lecturer: Ms. Lesley Walcott Date: September 16th, 2003

Corporate Finance

The term equity is applied to the shares of a corporation. Justice Falwell in the case of Re Borlands Trustees gave the definition of a share, he stated: -

“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 interests 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 of the Companies Act of 1985.”
The Jamaica Companies Act S. 2 defines a share as “A share in the share capital of a company.” See also S. 73 which provides that “The share or other interest of a member in a company shall be personal estate transferable in the manner provided by the articles of a company and shall not be in the nature of a real estate.”
Barbados S. 26 section has similar provisions and provides that shares in a company are personal estate and are not in the nature of a real estate.
Share Certificates

A share certificate is an instrument under seal of the company that the person therein named is entitled to a certain number of shares. It is not a negotiable instrument. In Jamaica a share warrant to bearer is permissible, this is a certificate under the seal of the company stating that the bearer of the warrant is entitled to a certain number of paid up shares. A share warrant to bearer is a negotiable instrument. See the Jamaica Companies Act S. 82.

The shares of a corporation may be sub-divided into various classes and the relative rights of the holders of these various classes of shares are usually prescribed in the articles of association.

1. 
   These rank first in priority
   
2. 
   They have attached to them certain preferences or rights over the holders of other classes of shares.
   
3. 
   Holders of this type of security are usually entitled to dividend paid at a fixed pre-determined rate; usually expressed as a percentage of the nominal value of the share. This nominal value⁹⁹ has been abolished in new law jurisdictions such as Barbados, Trinidad & Tobago, St. Lucia. The value of shares is determined by the market value. There is also a book value – this is what the a/c ********says the value is. The nominal percentage is fixed and cannot be increased no matter how large the companies profit may be unless, the shares are accompanied by an express right to participate in the surplus profits.
   
4. 
   Preference shareholders rank equally with ordinary shareholders with respect to the repayment of capital on winding up unless expressly governed by the bylaws or articles of association.
   
5. 
   Preferred dividends may be and usually are cumulative, in other words, if they are not paid in a particular year, they accumulate and are payable in subsequent income years. The arrears of preferred dividends are not a debt of the company, but represents a priority with respect to future dividend distribution.
   
6. 
   Where the preferred dividend is non-cumulative, it is payable only out of the profit of that particular year. There is no allowance for the carrying forward of arrears.
   

1. 
   The right to vote
   
2. 
   The right to dividends
   
3. 
   The right to a return of their capital on winding up.
   

This is the residual category, payment of capital and dividends is postponed. If the company prospers, the increase in value will accrue to the ordinary shareholders since the preferred shares are normally fixed in value. Similarly if the company suffers, on liquidation the common shareholders will bear the brunt of the losses since the preferred shareholders will normally have returned to them the full issue price of the preferred shares and any arrears in dividends before the ordinary shareholders receive anything.

1. 
   This category normally carries the majority of voting rights at general meetings
   
2. 
   If the issued capital does not differentiate then the issued shares are ordinary shares ranking equally. See S. 27 of the Barbados Companies Act.
   
3. 
   Ordinary shareholders are entitled to dividends if and when declared.
   
4. 
   They are entitled to share in the surplus assets of the company if and when wound up.
   

1. 
   Watered Shares: - These are where shares are issued for labour, services or property which is less than the par value of the share, or were less than the value attributed by the director to the labour services or property. (This applies in old law jurisdictions like Jamaica and Belize.)
   
2. 
   Redeemable Shares: - If these are authorised by the article or bylaws, a company may issue redeemable shares. The shares may be redeemed or bought back out of the profits of the company. If there are more liabilities than assets, then the company is prohibited from purchasing or redeeming the shares. See S.40 Barbados and S. 57 of Jamaica Companies Acts.
   
3. 
   Bonus Shares: - These are shares given as extra consideration for what is received by the corporation.
   
4. 
   Discount Shares: - These are where shares are issued for a sum of money that is less than normally obtained by such shares as indicated by their par value. See for example S. 58 of the Jamaica Companies Act. The Barbados statute prohibits the issuing of shares at a discount.
   
5. 
   The Golden Share: - this share is associated with state ownership where in the process of privatisation the government retains a percentage of the share capital.
   

1. 
   There is no implied condition that all shares rank equally.
   
2. 
   A presumption of equality arises in the absence of express provision to the contrary. Barbados S. 27. See the House of Lords decision of Birch v. Cropper [1889] 14 A.C. 525 where the articles of the company provided for only one class of shares i.e. ordinary shares. Preference shares were subsequently created and the articles amended to provide that preference shares are entitled to a dividend of 5% taking preference over the ordinary shares. On winding up the issue was what method should be used to distribute corporate assets between the two groups. The House of Lords held that in distributing the surplus assets, preference shareholders were entitled were to participate rateably with the ordinary shareholders, in proportion to the nominal amount of shares held. Therefore where the share issue does not differentiate between the rights of the classes of shares with regard to: -
   
   1. 
      dividends and
      
   2. 
      return of capital and participation in surplus capital and
      
   3. 
      voting
      

3. 
   If shares are expressly divided into classes, it is a question of construction in each case as to what the rights of each class of shareholders are. See the case of Scottish Insurance Corp. v. Wilson & Clyde Coal Co. [1949] AC 512
   
4. 
   Where a preference is bestowed in respect of dividends, the return of capital or voting, then this preference does not extend beyond that particular right. The preference is exhaustive and the presumption of equality remains in respect of the remaining residual rights. See the case of Re Bridgewater Navigation Co. [1891] 2 Ch. 317 as well as Will v. United Lankat Plantations [1914] AC 11 where Falwell LJ stated that: -
   

Both the Court of Appeal and the House of Lords rejected the argument that the preference shareholders are entitled to participate in dividends equally with the ordinary shareholders after they receive their cumulative 10%. See the case of Re William Metcalf & Sons Ltd. [1933] Ch. 132 which ruled that the principle in Will v. United Lankat Plantations¹⁰⁰only applied to dividend rights and had no application to capital rights. So preference shareholders may be seen as non-participating with dividends but participating with capital, this decision removed by Scottish Insurance Corp. v. Wilson & Clyde Coal Co.¹⁰¹ as well as Prudential Assurance Co. Ltd. v. Chatterly Whitfield Colliers [1949] AC 512. These decisions arguably make preferred shares a less secure form of investment.

5. 
   A company may be empowered to give preference shareholders a share in the profits of the company in addition to preference dividends, this is dependent upon the bylaws and articles of association.
   
6. 
   Where shares are entitled to participate in surplus capital on a winding up, prima facie, they participate in all surplus assets. See the case of Dimbula Valley (Ceylon) Tea Co. Ltd. v. Laurie [1961] Ch. 353 where Buckley LJ rejected the contention that the companies undistributed profits were automatically the sole and exclusive property of the ordinary shareholders. He construed the preference shareholders rights provisions as extending to these funds except in so far as they formed part of the subject matter of the appropriate dividend resolution passed at the commencement of liquidation.
   
7. 
   If preference dividends are provided for, it is presumed to be cumulative. See the case of Webb v. Earle [1875] LR 20 Eq. 556. This presumption is rebuttable.
   
8. 
   There is a presumption that preferential dividends are payable only if declared.
   

The fundamental principle is that a company must maintain its stated or nominal capital, the share capital fund must be preserved and should not be diminished, otherwise than by expenditure specified in the companies memorandum. The law therefore has laid down certain rules to ensure the preservation of this fund.

1. 
   Issuing share at a discount: - See the Jamaica Companies Act S. 58
   
   1. 
      The issue of shares at a discount must be authorised by a resolution passed in a general meeting of the company and must be sanctioned by the court
      
   2. 
      The maximum rate of discount must be specified in the resolution.
      
   3. 
      The company must have been in business for at least a year.
      
   4. 
      The discounted share must be issued within one month after the date on which the issue is sanctioned by the court or within the extended time allowed by the court.
      

“The rationale for this rule is that the requirement is based on limited liability and the investor purchases his interest on this understanding. It operates therefore as a condition precedent which cannot be dispensed with.”

Discounted shares are not allowed in new law jurisdictions see for example Barbados Companies Act S. 26. This rule therefore applies in old law jurisdictions such as Jamaica and Belize.

Maintenance of Capital and Rights of Shareholders:  Examinable
On the subject of what is examinable, Work Sheets 2 and 4 seem to be very examinable as well.
Lecturer: Ms. Lesley Walcott

Date: November 4^th, 2003.
Consideration Other Than Cash

The question is whether this represents a means of evading the rule against issuing shares at a discount. The decision of Re Wragg [1897] 1 Ch. 796 states that the value of the consideration cannot be enquired into unless impeached on the ground of fraud. See Spargo’s Case [1873] LR8 Ch.App. 407 where a lease was sold to a company incorporated to purchase the lease, and the company credited the purchase price against the vendors liability as a payment against the shares for which he had subscribed. The court held that this operated as a payment for cash.

There is no prohibition against the issuing of shares at a premium, in other words, in excess of its nominal or par value. Statute ensures the premium is treated as capital and not as income or profit by stipulating the amount to be credited must be in a separate section on the companies account headed “Share Premium Account”. See the Jamaica Companies Act S. 56 ss.(1) & ss (2).

Note the following: -

1. 
   By virtue of the capitalisation of the company, a rigidity is placed in the corporate structure.
   
2. 
   It represents a special statutory reserve as distinct from profits and revenue reserves.
   
3. 
   Payments out of this account are analogous to a reduction of capital.
   
4. 
   A return of the companies share capital in the form of dividends is prohibited.
   

See the cases of Henry Head & Co. Ltd. v. Roper Holdings Ltd. [1952] Ch. 124 and Shearer (Insp. of Taxes) v. Bercain Ltd. [1980] 3 All ER 295. The case of Shearer (Insp. of Taxes) v. Bercain Ltd.¹⁰² involved an amalgamation whereby the share capital in one company was exchanged for the issue of shares in another company at a lower value. The issue was whether the excess had to be capitalised. The Inland Revenue claimed the excess was subject to tax because it was distributable. The court found the company was under an obligation to capitalise by setting up a share premium account and the “profit” as such was not subject to tax. This decision illustrates that share premium accounts may operate to reduce ones tax liability.

This is a first option restriction and it operates so as to maintain the balance of power between respective shareholders. It is a right given to shareholders to subscribe for any new shares that the company issue in proportion to their existing share holding. See the Barbados Companies Act S. 34 which commences “If the articles so provide.” Work Sheet 6 p.2-3 lists the reasons for Restrictive Provisions or (Pre-emptive rights), these are: -“

1. 
   To prevent intrusion of undesirable business associates
   
2. 
   To preserve the relative interests of the owners
   
3. 
   To resolve deadlock (or as a control device)
   
4. 
   To comply with the definition of “private company” in legislation
   
5. 
   To ensure continuity of the business
   
6. 
   To provide a market at an acceptable price, for shares”