英国公司法讲义5

University of Exeter, Business School

Corporate Law 2011/12

Part B (Sections 4-6): FUNDING THE COMPANY

SECTION 5 – SHARE CAPITAL

Material to accompany lectures and lecture slides

Principle of capital maintenance

Re Exchange Banking Co, Flitcroft’s Case (1882) 21 ChD 519:

“The creditor has no debtor but that impalpable thing the corporation, which has no property except the assets of the business. The creditor, therefore … gives credit to that capital, gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business, and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders, though it may be a right which he cannot enforce otherwise than on a winding up (Jessel MR)

Trevor v Whitworth (1887) 12 App Cas 409: “One of the main objects of the legislature, in restricting the power of limited companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interest of the outside public who may become their creditors. … 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 … and they are entitled to assume 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 business.” (Lord Watson)

Minimum share capital

S. 761

S. 763(1) “The authorised minimum”, in relation to the nominal value of a public company’s allotted share capital is – (a) ￡50,000 or (b) the prescribed euro equivalent.”

Issue for non-cash consideration

S. 582(1) Shares allotted by a company, and any premium on them, may be paid up in money or money’s worth (including goodwill and know-how).

Re Wragg Ltd [1897] 1 Ch 796:

“Provided a limited company does so honestly and not colourably, and provided that it has not been so imposed upon as to be entitled to be relieved from its bargain … agreements by limited companies to pay for property or services in paid-up shares are valid and binding on the companies and their creditors.” (Lindley LJ)

Salomon v A. Salomon & Co Ltd [1897] AC 22:

“The price on paper was extravagant. It amounted to over ￡39,000 – a sum which represented the sanguine expectations of a fond owner rather than anything that can be called a businesslike or reasonable estimate of value.” (Lord Macnaghten)

Hong Kong and China Gas Co Ltd v Glen [1914] 1 Ch 527

S. 593(1) A public company must not allot shares as fully or partly paid up (as to their nominal value or any premium on them) otherwise than in cash unless –

(a) the consideration for the allotment has been independently valued in accordance with the provisions of this Chapter,

(b) the valuer’s report has been made to the company during the six months immediately preceding the allotment of shares, and

(c) a copy of the report has been sent to the proposed allottee.

S. 1150-1152: independent valuer

S. 596 : details of report

S. 597 : copy to Registrar

S. 593(3) … allottee is liable to pay the company an amount equal to the aggregate of the nominal value of the shares and the whole of any premium … with interest at the appropriate rate.

Re Ossory Estates plc [1988] BCLC 213

s. 585(1) A public company must not accept at any time, in payment up of its shares or any premium on them, an undertaking given by any person that he or another should do work or perform services for the company or any other person.

S. 587(1) A public company must not allot shares as fully paid up (as to their nominal value or any premium on them) otherwise than in cash if the consideration for the allotment is or includes an undertaking which is to be, or may be, performed more than five years after the date of the allotment.

S. 585(3), s. 587(2) : liability

S. 590 : liability of co / officers

S. 589; s. 606 : relief from liability

Re Bradford Investments plc (No. 2) [1991] BCLC 688

Re Ossory Estates plc [1988] BCLC 213

Issue at a discount

Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125

S 580(1) A company’s shares must not be allotted at a discount.

(2) If shares are allotted in contravention of this section, the allottee is liable to pay the company an amount equal to the amount of the discount, with interest at the appropriate rate. Commission payments

S. 553

Issue at a premium

Henry Head and Co Ltd v Ropner Holdings Ltd [1952] Ch 124

Shearer v Bercain Ltd [1980] 3 All ER 295

S. 610(1) If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares must be transferred to an account called “the share premium account”.

S. 610(2) Where, on issuing shares, a company has transferred a sum to the share premium account, it may use that sum to write off – (a) the expenses of the issue of those shares; (b) any commission paid on the issue of those shares.

Ss 611-612 : merger relief and group reconstruction relief

Shearer v Bercain Ltd [1980] 3 All ER 295

Alteration of share capital

S. 617 : alteration of capital

S. 618 : subdivision / consolidation

S. 620 : reconversion

S. 622 : redenomination

S. 659(2) Section 658 [rule against co acquiring its own shares] does not prohibit … (c) the forfeiture of shares, or the acceptance of shares surrendered in lieu, in pursuance of the company’s articles, for failure to pay any sum payable in respect of the shares.

Reduction of capital

Trevor v Whitworth (1887) 12 App Cas 409

S. 641(1) A limited company having a share capital may reduce its share capital – (a) in the case of a private company limited by shares, by special resolution supported by a solvency statement … (b) in any case, by special resolution confirmed by the court ….

S. 641(3)

S. 641(2)

S. 641(4) : suggested reasons for reduction

Ex parte Westburn Sugar Refineries Ltd [1951] AC 625:

“The general rule is that the prescribed majority of the shareholders are entitled to decide whether there should be a reduction of capital and if so in what manner and to what extent it should be carried into effect.” (Lord Normand)

Re Ratners Group plc [1988] BCLC 685

S. 642 : reduction without court confirmation

S. 644(4) : statements to Registrar

S. 641 : reduction with court confirmation

Scottish Insurance Corp v Wilsons & Clyde Coal Co Ltd [1949] AC 462

S. 645(2) & s. 646 : list of creditors

S. 645(3) : court discretion not to require list

Re Jupiter House Investments Ltd [1985] 1 WLR 975

Westburn Sugar Refineries Ltd [1951] AC 625

Scottish Insurance Corp v Wilsons & Clyde Coal Co Ltd [1949] AC 462:

“[I]t is abundantly plain … that the court’s jurisdiction is a discretionary one, not confined to verifying the technical correctness of the formal procedure, nor even to determining according to strict law the precise rights of the contending parties, but involving an application of broad standards of fairness, reasonableness and equity …” (Lord Cooper)

Ex parte Westburn Sugar Refineries Ltd [1951] AC 625

Re Robert Stephen Holdings Ltd [1968] 1 WLR 522

S. 648(1) : terms and conditions

Purchase of own shares

Trevor v Whitworth (1887) 12 App Cas 409:

“[T]he notion of a limited company taking power to buy up its own shares is contrary to the plain intention of the [Companies Acts], and inconsistent with the conditions upon which, and upon which alone, Parliament has granted to individuals who are desirous of trading in partnership the privilege of limiting their liability.” (Lord Macnaghten)

S. 658(1) A limited company must not acquire its own shares, whether by purchase, subscription or otherwise, except in accordance with the provisions of this Part.

S. 658(2) & s. 658(3) : liability

S. 659 : exceptions

S. 690(1); ss. 690-708 : statutory purchase of own shares

S. 690(1) A limited company having a share capital may purchase its own shares (including any redeemable shares), subject to – (a) the following provisions of this Chapter, and (b) any restriction or prohibition in the company’s articles.

(2) A limited company may not purchase its own shares if as a result of the purchase there would no longer be any issued shares of the company other than redeemable shares or shares held as treasury shares.

S. 691 : only fully-paid shares

S. 693 : market / off-market purchase

S. 694 : approval of terms

S. 696 : copy available to members

S. 701 : prior authority

S. 692(1) A private limited company may purchase its own shares out of capital in accordance with Chapter 5.

(2) Subject to that – (a) a limited company may only purchase its own shares out of -

(i) distributable profits of the company, or

(ii) the proceeds of a fresh issue of shares made for the purpose of financing the purchase, and (b) any premium payable on the purchase by a limited company of its own shares must be paid out of distributable profits of the company, subject to subsection (3).

S. 710(2) ... such amount as, taken together with any available profits and the proceeds of any fresh issue of shares made for the purpose of purchase, is equal to the price of purchase... S. 721 : right to apply

S. 733 : capital redemption reserve

S. 724 : treasury shares

Redeemable shares

S. 684(1) A limited company having a share capital may issue shares that are to be redeemed or are liable to be redeemed at the option of the company or the shareholder (“redeemable shares”) ….

S. 684(2) : private co may exclude/restrict right

S. 684(3) : public co must have authorisation in articles

S. 684(4) : not if no non-redeemable shares left

S. 686(1) : must be fully-paid

S. 685 : terms and conditions

S. 686(2) & (3) : amount paid in full

S. 687 : funding

S. 688 : cancellation of shares

S. 733 : capital redemption reserve

S. 689 : notice to Registrar

Dividends/Distributions

Ss. 829-853

S. 830(1) 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.

S. 831(1) A public company may only make a distribution – (a) if the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves, and (b) if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate.

S. 831(4) : undistributable reserves

Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531

Aveling Barford Ltd v Perion [1989] BCLC 626

S. 847(1) & (2) ... knows or has reasonable grounds for believing ...

It’s a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544

“Section [847] must be interpreted as meaning that the shareholder cannot claim that he is not liable to return a distribution because he did not know of the restrictions in the Act on the making of distributions. He will be liable if he knew or ought reasonably to have known of the facts which mean that the distribution contravened requirements of the Act.” (Arden LJ)

Serious loss of capital

S. 656(1) Where the net assets of a public company are half or less of its called-up share capital, the directors must call a general meeting of the company to consider whether any, and if so what, steps should be taken to deal with the situation.

S. 656(2)

S. 656(3)

Ss. 656 (4) & (5) : offence

Financial Assistance for the purchase of a company’s shares

S. 678(1) Where a person is acquiring or proposing to acquire shares in a public company, it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place. …

(3) Where (a) a person has acquired shares in a company, and (b) a liability has been incurred (by that or another person) for the purpose of the acquisition, it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability if, at the time the assistance is given, the company in which the shares were acquired is a public company. Belmont Finance Corporation v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393

Heald v O’Connor [1971] 1 WLR 497

s. 677:

Financial assistance given by way of gift, by way of guarantee, security or indemnity, by way of release or waiver, by way of loan or other similar agreement, or any other financial assistance which reduces, to a material extent, the net assets of the company giving the assistance, or any other financial assistance given by a company with no net assets.

British and Commonwealth Holding plc v Barclays Bank plc:

“[T]he section requires that there should be assistance or help for the purpose of acquiring shares and that the assistance should be financial.” (Aldous LJ)

Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1:

“The words have no technical meaning and their frame of reference is … the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.” (Hoffman J)

Anglo Petroleum Ltd v TFB Mortgages [2008] 1 BCLC 185

“In cases where its application is doubtful, it is important to remember its central purpose, to examine the commercial realities and to bear in mind that it is a penal statute.” (Toulson LJ) S. 678(2) Subsection (1) does not prohibit a company from giving financial assistance for the acquisition of shares in it or its holding company if –

(a) the company’s principal purpose in giving the assistance is not to give it for the purpose of any such acquisition, or

(b) the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company,

and the assistance is given in good faith in the interests of the company.

S. 678(4)

Brady v Brady [1989] AC 755:

“[The first exception] envisages a principal and, by implication, a subsidiary purpose. The inquiry here is whether the assistance given was principally in order to relieve the purchaser of shares in the company of his indebtedness resulting from the acquisition or whether it was principally for some other purpose – for instance, the acquisition from the purchaser of some asset which the company requires for its business. … That is not this case, for the purpose of the assistance here was simply and solely to reduce the indebtedness incurred by [the company].”

“[The second exception] is where it is not suggested that the financial assistance was intended to achieve any other object than the reduction or discharge of the indebtedness but where that result (ie the reduction or discharge) is merely incidental to some larger purpose of the company. … What has to be sought is some larger overall corporate purpose in which the resultant reduction or discharge is merely incidental.”

“[I]t is important to distinguish between a purpose and the reason why a purpose is formed. The ultimate reason for forming the purpose of financial the acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself. But “larger” is not the same thing as “more important”, nor is “reason” the same as “purpose” … The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing financial assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be said to be an incident.” (Lord Oliver)

Ss. 681 & 682: exceptions

(i) lawful distribution of co’s assets by dividend or on winding-up;

(ii) reduction of capital;

(iii) allotment of bonus shares;

(iv) redemption of shares;

(v) purchase of shares;

(vi) various reconstructions and arrangements under IA 1986

(vii) loan of money in ordinary course of money-lending business if co is private co, or if public co provided that it does not reduce net assets or is provided out of distributable profits; (viii) employee share schemes.

S. 680(1) : offence

Heald v O’Connor [1971] 1 WLR 487

Re Hill and Tyler Ltd [2005] 1 BCLC 41

Carney v Herbert [1985] AC 301

Belmont Finance Corp v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393 Wallersteiner v Moir [1974] 1 WLR 991

Re Continental Assurance Co [1997] 1 BCLC 48