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The Formation of Share Capital on the Basis of UK and Bangladesh
Capital market governance refers to the set of laws, rules, and regulations that govern the functioning of capital markets. More importantly, it is the degree of enforcement of those laws, rules and regulations. The capital market governance measures we construct are aimed at capturing different facets of the interaction between insiders and outsiders of the corporations. Corporate insiders have an informational advantage that they can potentially exploit to the harm of ordinary investors. A key prediction from the agency theory literature is that in equilibrium, outsiders will factor in these agency problems and make the insiders bear the cost. We posit that these costs will translate into higher costs of equity, as well as possibly lower market liquidity, and lower pricing efficiency. Each of our capital market governance measures is designed to track a distinct aspect of regulatory protection of investors from insider activities. Insider trading laws and their enforcement is the most direct expression of this type of protection. Similarly, our measure of accounting opacity captures the extent to which insiders might secure an unfair informational advantage over outsiders. Finally, short selling prohibitions increase the risk to outsiders, because they allow corporate values to be potentially overvalued, thus further increasing informational asymmetry between insiders and outsiders.
Share capital (UK English) or capital stock (US English) refers to the portion of a company’s equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can issue shares in exchange for computer servers, instead of purchasing the servers with cash.
The term has several meanings. In its narrow, classical sense, still commonly used in accounting, share capital comprises the nominal values of all shares issued (that is, the sum of their “par values”). In a wider sense, if the shares have no par value or the allocation price of shares is greater than their par value, the shares are said to be at a premium (called share premium, additional paid-in capital or paid-in capital in excess of par); in that case, the share capital can be said to be the sum of the aforementioned “nominal” share capital and the premium. In the modern law of shares, the “par value” concept has diminished in importance, and share capital can simply be defined as the sum of capital (cash or other assets) the company has received from investors for its shares.
Besides its meaning in accounting, described above, “share capital” may also be used to describe the number and types of shares that compose a company’s share structure. For an example of the different meanings: a company might have an “outstanding share capital” of 500,000 shares (the “structure” usage); it has received for them a total of 2 million dollars, which in the balance sheet is the “share capital”. The legal aspects of share capital are mostly dealt with in a jurisdiction’s corporate law system. An example of such an issue is that when a company allocates new shares, it must do so in a way that does not inequitably dilute existing shareholders.
Definition of share:
The shareholders are the proprietors of the company. Therefore a “Share” may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any, and of a proportionate part of the assets of the company upon liquidation. A shareholder has certain rights and liabilities. Formerly it was thought that the shareholders’ are the proprietors of the company.
Features and Characteristics of share:
The main characteristics of shares are stated below.
1. `A share is not a sum of money, but is an interest measured in a sum of money and made up of various rights, contained in the contract..
2. A share is an interest having a money value and made up of diverse rights specified under the Articles of Association.
3. The holder of a share has certain rights, duties and liabilities, as stated in the Companies Act and in the Memo and Articles of a company:
4. A share is transferable and heritable subject to regulations framed in the Articles of Association of the company.
5. The shares or 4 her interest of a member in a company is movable property, transferable in-the manner provided by the articles of the company.
6. The shares must be numbered so as to distinguish them from one another.
Classification of Shares:
The Companies Act of 1956 provides that after the commencement of the Act, there can be only two types of shares capital, viz.,
(a) Equity Shares Capital, and
(b) Preference Share Capital. Preference Shares
Preference shares are those shares which are given, by the articles of the company, two privileges viz.
(i) Priority in the payment of dividends over other share, and
(ii) Priority as regards return of the capital in the event of liquidation.-Sec. 85.
The holder of a preference share is entitled to receive dividend (at rates fixed by the articles) before any dividend is declared on the other shares.
In the event of winding up, if surplus assets are available, the preference shareholders must first be given back the amount which they paid on the share. The balance is available for distribution to the other shareholders.
Meaning of Share Capital:
Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company till its liquidation.
Share capital is owned capital of the company, since it is the money of the shareholder and the shareholder are the owners of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of a company. It was held that the words ‘capital and ‘share capital’ are synonymous purpose.
Features of Share Capital:
- Owned capital: Share capital is owned capital of the company. It is actually the money of the shareholders and since the shareholders are the owner of the company, so share capital is the owned capital.
- Remains with the company: It remains with the company till its liquidation.
- Dependable sources: Share capital is the most dependable source of finance for the joint stock companies.
- Raises creditworthiness: It raised the credit worthiness of the company.
- Substantial funds: It provides substantial funds to the company.
- Available for: Share capital is easily available for expansion and diversification of business activities.
- Amendment: The amount of share capital can be raised by amending the capital clause of the Memorandum of Association.
- No charge: Share capital does not create any charge on the assets of the company.
- Opportunity to participate: Share capital gives its shareholders an opportunity to participate in the company’s management with normal rights of shareholders.
- Benefit of bonus shares: It gives it shareholders the benefit of bonus shares.
- Benefit of limited liability: Share capital also gives its shareholders the befit of limited liability as the liability of its shareholders is limited up to the face value of each share.
- Meaningful participation: Share capital enables its shareholders to have a meaningful participation in the expansion of corporate sector.
Types of Share Capital:
Authorized capital: It is the maximum amount of capital which a company can collect or raise by selling its shares to the general public. Authorized capital is known as nominal capital or registered capital. For example: A company wants to sell 100 shares of Taka 10/- each, so the total amount collected by the company is Taka 1000/- i.e. 100 shares x 10 each = 1000
Can a company alter its authorized share capital?
Unless its articles of association require a special or extraordinary resolution, a company can increase its authorized share capital by passing an ordinary resolution. You must send a copy of the resolution and, notice of the increase in authorized share capital on Form 123, to Companies House within 15 days of passing the resolution. No fee is payable to Companies House.
A company can decrease its authorized share capital by passing an ordinary resolution to cancel shares which nobody has taken or agreed to take. You must send notice of the cancellation, on Form 122, to Companies House within one month. No fee is payable to Companies House.
Public Limited Companies and the ‘authorized minimum’
A public limited company cannot conduct business or exercise borrowing powers unless and until it has obtained a trading certificate from Companies House, confirming that it has the minimum allotted share capital. This is the ‘authorized minimum’. In order to satisfy the requirement and obtain a trading certificate, the company must have either a minimum of £50,000 of allotted share capital denominated in sterling or a minimum of €65,600 of allotted share capital denominated in euros. The company cannot satisfy the requirement by a combination of euro and sterling shares or by shares in any other currency. Further, a share allotted in pursuance of an employees’ share scheme can only be counted towards satisfying the authorized minimum if at least 25% of the nominal value of each share and any premium is paid up.
A company re-registering from a private company to a public company does not have to apply for a trading certificate. But in order to re-register, the nominal value of its allotted share capital must be not less than the authorized minimum and each of its allotted shares must be paid up as to at least 25% of its nominal value and the whole of any premium (although certain shares can be disregarded). The company must satisfy the authorized minimum, for the purposes of re-registration, either by means of sterling shares with a total nominal value of at least £50,000 or by means of euro shares with a total nominal value of at least €65,600. It cannot satisfy it by a combination of euro and sterling shares or by shares in any other currency.
- If a company applying for a trading certificate or for re-registration is capable of satisfying the authorized minimum either in euro shares or in sterling shares, it must choose in its application which currency to rely on. A company that is re-registering from private to public must complete Form 43(3
- Issued capital: It is that part of the authorized capital which is actually issued to the general public. For example: A company has issued 80 shares of Taka 10/- each so the issued capital is Taka 800/-
Can a company reduce its issued capital?
Yes, under the Companies Act 1985, a company can reduce its issued share capital in the following circumstances-
· where a court order confirms a reduction of capital following a special resolution of the company and the registrar registers the order and a court-approved minute detailing the company’s share capital as reduced;
· where the company redeems its shares in accordance with a redemption contract;
· where the company’s articles allow it to buy its own shares and an ordinary or special resolution (depending on the circumstances) authorizes the purchase;
· A public company whose shares are listed on a recognized investment exchange can either cancel those shares or (subject to rules about maximum holdings) hold them “in treasury” for resale, or transfer to an employees’ share scheme, at a later date. In all other cases where the company buys back its own shares it must cancel them and the company’s issued share capital reduces. This does not however reduce the company’s authorized share capital.
From 1 October 2008, a private company can reduce its issued capital by special resolution supported by a solvency statement. This is a new process of capital reduction under the Companies Act 2006 and is only applicable to private companies. A company must deliver to Companies House-
- A copy of a special resolution authorizing the capital reduction
- A copy of the solvency statement made in accordance with sections 642(1)(a) and 643 Companies Act 2006
- A memorandum of capital
- A statement of compliance by the directors
All the company directors must sign the solvency statement. This is a statement confirming that each director has formed the opinion that:
At the date of the statement there are no grounds on which the company could be found to be unable to pay its debts; and
If it is intended to commence a winding-up at any time in the 12 months following the statement, the company will be able to pay its debts within 12 months of the commencement of the winding up; or in any other
The company must send or make available at a general meeting (depending on whether the resolution is proposed as a written resolution or at general meeting) a copy of the solvency statement to every eligible member of the company.
A memorandum of capital is a breakdown of the company’s share capital structure following the reduction.
A statement of compliance by the directors is confirmation that the company made a copy of the solvency statement available to each of the eligible members as required and that the solvency statement was not made more than 15 days before the company’s members passed the resolution.
Can a company increase its issued capital?
A company may increase its issued share capital by issuing additional shares. Shares are “issued” when a person is registered as a member in the company’s register of members.
‘Allotment’ is the process by which the company enters into a contract with someone to allot shares and that person acquires an unconditional right to be issued with the shares. Directors allot shares on the company’s behalf, but either the company’s articles or a resolution of the company passed at a general meeting, needs to authorize them to do so.
- Unissued capital: It is that part of the authorized capital which is not being issued to the general public. That is, company has not issued 20 shares of Taka 10/- each, so the unissued capital is Taka 200/-.
- Subscribed capital: It is that part of the issued capital which is actually subscribed by the general public. That is company has issued 80 shares out of which 70 shares are being bought by the general public, so the subscribed capital is Taka 700/-. That is 70 shares of Taka 10/- each.
- Unsubscribed capital: It is that part of the issued capital which is not subscribed by the general public. That is, if the the company has issued 80 shares out of which 70 are bought by the general public and 10 are not being bought by them, so the unsubscribed capital is 10 x Taka 10 = Taka 100. That is 10 shares of Taka 10 each.
- Called up capital: It is that part of the subscribed capital which is actually called up by the company. For instance, if a company has asked its shareholders to pay Taka 5/- per share so on 70 shares, they have to pay 70 shares x Taka 5 each = Taka 350/-. This is the called up capital.
- Uncalled up capital: It is that part of the subscribed capital which is not being called up by the company. It may be called up as and when the company needs funds. That is out of Taka 10/- per share, Taka 5/- per share is being called up by the company and Taka 2 is being uncalled up and Taka 3 is kept as reserve, that is yet to be called.
- Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extra- ordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company.
- Paid up capital: It is that part of the called up capital which is actually paid up by the shareholders. For example, out of 70 shares which were subscribed for 60 shareholders have paid up their call money, that is 60 x Taka 5 = Taka 300/- is called as the paid up capital of the company.
- Unpaid up capital: It is that part of the called up capital which is not being paid by the shareholders. For example: out of 70 shareholders, 60 shareholders have paid up their call money and 10 shareholders have not paid their call money, so 10 x Taka 5 = Taka 50/- is called as unpaid up capital.
Must a public company notify Companies House when it makes an offer of shares to the public?
A company does not have to register prospectuses and listing particulars at Companies House. However, the general rule is that a public company may not offer securities to the public in the UK, nor seek admission to trading on a regulated market in the UK, unless it has published a prospectus approved by the Financial Services Authority.
Must a company notify Companies House when it has made an allotment of shares?
Within one month of the allotment of shares, a company must deliver a return of allotment, on Form 88(2), to Companies House. No fee is payable to Companies House.
If it allots shares over a period of time, particularly in a rights issue, it is not acceptable to delay delivery of the return until it has allotted all the shares if this means the form will be late for any of the allotments. Instead, the company must complete consecutive forms and deliver each form to Companies House within one month of the first allotment stated on it.
Note: in the case of a rights issue, the date(s) of allotment will usually be the date(s) on which the company allots the shares following receipt by the company of acceptances/renunciations NOT the date on which it issues the provisional allotment letters.
If the shares are paid for in cash you must include details of the actual amount paid, or due to be paid and actually payable, on the form (including any amount paid or due and payable by way of premium). Do not include any amount that is not yet due for payment on a partly paid-up share.
Nominal value and share premium
A company’s authorized share capital divides into shares of a nominal value. The real value of the shares may change over time, reflecting what the company is worth, but their nominal value remains the same. When the company issues shares for more than their nominal value, the actual sum paid will be in two parts – the nominal value and a share premium. You must record the share premium separately in the company’s financial records in a ‘share premium account’.
Must shares be fully paid-up at the time of allotment?
In a private company, shares do not have to be fully paid up at the time of allotment; payment can be deferred. Shares allotted in a public company must be paid-up to at least a quarter of their nominal value and the whole of any premium. However, this does not apply to shares allotted under an employees’ share scheme, that is, a scheme for encouraging share ownership by employees, former employees and their families.
Must people pay for shares in cash?
Payment for shares can be in a variety of ways including cash, goods, services, property, good will, know-how, or even shares in another company. The latter is often the case when one company takes over another. It also includes cash payments to any person other than the company allotting the shares.
There are greater restrictions on public companies in what they may accept in payment for shares.
Paid up in cash:
A share is paid up in cash if the amount due is received by the company (in cash or by cheque), or the company has been released from a liquidated liability or an undertaking has been given to pay cash to the company at a future date. ‘Cash’ includes foreign currency.
Calculating the extent to which shares are paid-up:
If an allotment is partly for cash and partly for a non-cash payment, then the extent to which the shares are treated as paid-up must include the cash and non-cash elements. For example, a £1 share allotted for 50p in cash (either paid or due and payable) and 50p in services is still 100% paid-up. If the shares were allotted at a premium, the percentage includes the nominal value of each share and the premium.
What are bonus shares?
If authorized by its articles, a company may resolve to use any undistributed profits, or any sum credited to the company’s ‘share premium account’ or ‘capital redemption reserve’ to finance an issue of wholly or partly paid up ‘bonus’ shares to the members in proportion to their existing holdings. The shareholders to whom the company issues the shares pay nothing. Since the issue may reduce the amount of money available for paying dividends, the term ‘bonus’ is not always appropriate. The correct term is ‘capitalization of reserves’ or ‘capitalization of profits’ but you can also use the terms ‘scrip -‘ or ‘ scrip – issue’ to describe such shares.
A company can also use a capitalization of profits to credit partly paid shares with further amounts to make them paid up.
The company must notify the allotment of bonus shares to Companies House on Form 88(2). It should show the amount paid or due on each share as ‘nil’ or ‘0.00’ and the shares as paid up ‘otherwise than in cash’.
In addition, if a listed public company issues bonus shares in respect of shares held in treasury, the company must notify Companies House on Form 169(1B). Stamp duty is not payable. No fee is payable to Companies House.
What are pre-emption rights?
Pre-emption rights are the rights of existing members to take priority when a company offers new shares. They give members the opportunity to accept or reject a share offer before the company offers new shares elsewhere.
They do not apply to allotments of shares that companies can issue as wholly or partly paid-up for a non-cash payment, or shares in an employees’ share scheme. An employees’ share scheme is a scheme for encouraging share ownership by employees, former employees and their families. The memorandum or articles of a private company may exclude pre-emption rights but a public company’s cannot.
The Companies Act 1985 allows a company to pass a special resolution not to apply pre-emption rights.
What happens if a person is unable to or refuses to pay for shares?
A member is liable to ‘pay up’ at least the nominal value of each of his or her shares and any amount owing to the company is a debt, which it can ‘call up’.
If a member refuses to pay all or any call on a share (i.e. where there has been a ‘call up’), the company may use forfeiture proceedings if its articles so permit.
Paragraphs 18-22 of Table A of The Companies (Tables A to F) Regulations 1985 set out a typical forfeiture procedure. If you have not adopted alternative provisions, you must follow these provisions. You must follow the provisions exactly; otherwise the court may declare forfeiture proceedings void.
Directors may sell, re-allot or otherwise dispose of a forfeited share at their discretion. You do not need to notify Companies House of the forfeiture or re-allotment except in the list of members on the company’s next annual return.
If a member cannot pay a call on shares, and if the company and member agree, the member may surrender the shares to the company. The effect is the same as forfeiture, but avoids the formal procedure. The company may only accept surrendered shares if it could have used its power of forfeiture.
A private company may hold forfeited shares indefinitely pending re-allotment. A public company must cancel the forfeited shares, if it does not otherwise dispose of them, within three years. If cancellation(s) reduce a public company’s allotted capital below the authorised minimum, it has to re-register as a private company within the same period.
What is paid-up capital, uncalled capital, reserve capital and share premium?
These terms describe the makeup of a company’s share capital:
Paid-up capital is issued capital which has been fully or partly paid-up by the shareholders;
Uncalled capital is that part of issued capital on which the company has not requested payment;
Characteristics of issued share capital in a UK company – general principles.
Ordinarily, references to a company will be understood to mean a limited liability company. Limited liability companies are so called because the liability of each shareholder for the company’s debts and other liabilities is limited to the amount which remains unpaid on his shares. There are two types of limited liability Company in the UK, public and private. The main difference between these types of company is that a public company can apply to be listed and offer its shares to the public in order to raise capital.
There are, however, other types of less commonly used company forms: unlimited companies, with or without share capital, and companies limited by guarantee.
In the latter case the members’ liability is limited to amounts they undertake to contribute in the event of a winding up; the amount of this maximum liability of each of the members will be set out in the “guarantee clause” of the company’s memorandum. The total commitment of the members, taken together, is known as the “guarantee fund”; this fund only comes into existence on a winding up. In practice, this form of vehicle is usually unsuitable for most businesses but is often used, for example, by charities.
Companies limited by guarantee incorporated on or after 22 December 1980 cannot also have a share capital (Section 1(4) Companies Act 1985). Companies limited by guarantee incorporated before that date may, however, also have share capital.
In 1999 the Special Commissioners considered the status of ‘founders’ deposits’ with a company limited by guarantee in the case South Shore Mutual Insurance Co Ltd v Blair 1999 STC (SCD) 296. They came to the conclusion that the deposits were not issued share capital; the company did not, in fact, have any authorized share capital and, as a consequence, could not have issued share capital. Although the decision is not binding authority, the case contains a useful review of some of the authorities about share capital.
Shares in UK Companies:
A company limited by shares is currently required to stipulate the maximum share capital the company may issue and the number and nominal value of the shares into which it is divided, its “authorized share capital”, in a document called the company’s memorandum of association (section 2(5)(a), Companies Act 1985).
The reader should note that the Companies Act 2006 abolishes the requirement for a company to have an authorized share capital by the repeal of section 2(5)(a). This should take effect from 1 October 2008. The new act nonetheless requires that, on formation, a company with a share capital will be required to submit a statement of capital and initial shareholdings to the Registrar at Companies House.
The memorandum is one of two essential documents that must be filed at Companies House on incorporation, the second is the company’s articles of association; these documents together set out provisions governing the manner in which the company will operate. The amount of authorized share capital set out in the company’s memorandum may be later increased by an ordinary resolution of the shareholders (requiring a simple majority of the vote).
The company’s assets are owned by the company itself, not by the shareholders individually, although in turn the shareholders together have ownership of the company. The shares express the shareholders’ proprietary relationship with the company.
In principle, shares are transferable, but in practice there are often restrictions on transfer, found in the company’s articles of association.
The principal rights that usually attach to a share are rights to dividends declared, a right to vote and a right to share in the company’s assets in a winding up. The principal responsibility that attaches to a share is to pay what is due on the share. The rights and duties are all subject to the memorandum and articles of association.
For a company limited by shares, the share capital must be stated in a fixed amount. In Ooregum Gold Mining Co of India v Roper  A.C. 125 Lord Halsbury said
‘The capital is fixed and certain and every creditor is entitled to look at that capital as his security.’
A share certificate is prima facie evidence of ownership of a share. However, it does not, of itself, constitute ownership of the share and is not essential to demonstrate that share capital has been issued. In order to be a member of a company, under the Companies Act, a person must be entered in the company’s register of members. See s22, Companies Act 1985 (s112 Companies Act 2006. The decision in National Westminster Bank plc v CIR ( STC 580), confirms this position, i.e. the ‘issue’ of share capital is only complete when members are recorded in the company’s register of members.