Share Capital

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Share Capital is the fund raised by a company through the
issuance of common or preferential shares to individuals /
institutional investors for the growth and expansion related
aspects of the company.
It is also known as Equity Financing through which the
shareholders of the issued capital receive rights of ownership
in the concerned company by buying shares of the same.
Buyers of the Share Capital become owners of the company
in accordance to their stake in the same and hence possess
certain degree of control over its operation.

SUNWAY UNIVERSITY
The amount of share capital a company possesses is a
variable. As a company issues more and more shares to
the public in lieu of fund, the amount of share capital
increases.

In the balance sheet of a company, issuing the share
capital, it only reports the initial amount at which the
share capitals were issued in the primary market. The
company does not take into account any price
appreciation or depreciation occurring due to the
transactions in the secondary market into its balance
sheet.
SUNWAY UNIVERSITY
The common law has designed a number of
rules to ensure that a companys share capital
remains intact as a fund to which the creditors
can turn to as security for their debts.
A reduction of share capital is generally illegal
unless authorized by legislation: Trevor v
Whitworth (1887)
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Of course in practise the money obtained will be
used to purchase assets and companies can obtain
loans or incur debts exceeding the amount of capital
secured or raised.
However it is a fundamental rule that share capital
must be maintained and that the company should
not use the share capital except for the purposes set
in the objects clause of the Memorandum.
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The principle therefore means that:
Paid up share capital must not be returned to
members;
Members liability in respect of the share capital
not yet paid up must be reduced and
Shares must be fully paid for.
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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
dividends out of capital.
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The maintenance of share capital involves
consideration of the following matters:

a) the consideration paid for the shares
b) company purchasing its own shares
c) financial assistance
d) reduction of capital
e) issuing shares at a discount
f) payment of dividends

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a) the consideration paid for the shares -
Shares are not all issued for cash. Some
issues, for example, bonus issues arise as a
result of a capital restructuring of the
company, sometimes called a rights issue.

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b) company purchasing its own shares s67
CA 1965, prohibits a company from
purchasing its own shares. The rationale
for this is:
Possible unfair treatment to other
shareholders
Possible infringement of the concept of
separate legal personality

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Exceptions are as listed in s 67A. This is normally referred to as a buy-back of shares.

1) Notwithstanding the provisions of section 67, a public company with a share capital
may, if so authorized by its articles, purchase its own shares.

(2) A company shall not purchase its own shares unless-

(a) it is solvent at the date of the purchase and will not become insolvent by incurring
the debts involved in the obligation to pay for the shares so purchased;

(b) the purchase is made through the Stock Exchange on which the shares of the
company are quoted and in accordance with the relevant rules of the Stock
Exchange; and

(c) the purchase is made in good faith and in the interests of the company.


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c) financial assistance the governing provision in the CA
1965

Section 67. Dealing by a company in its own shares, etc.

(1) Except as is otherwise expressly provided by this Act no company
shall give, whether directly or indirectly and whether by means of a
loan, guarantee or the provision of security or otherwise, any financial
assistance for the purpose of or in connection with a purchase or
subscription made or to be made by any person of or for any shares in
the company or, where the company is a subsidiary, in its holding
company or in any way purchase, deal in or lend money on its own
shares.

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The definition of financial assistance:

Charterhouse Investment Trust Ltd v. Tempest Diesel Ltd
[1986 Ch 1]

Hoffmann J. that there is no definition of giving financial
assistance in the section, although some examples are given.
The words have no technical meaning and their frame of
reference is in my judgement the language of ordinary
commerce. One must examine the commercial realities of
the transaction and decide whether it can probably be
described as the giving of financial assistance by the
company
Note: This is a UK case.
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Why the prohibition?
The rationale is that if a company supports
the purchase of its own shares, it causes a de
facto diminution in the company's value.
Such financial assistance also artificially
inflates a share's price above its market
level.
SUNWAY UNIVERSITY
For examples of financial assistance see pg
446 - A. Sulaiman, A. Bidin, P. Hanrahan, I.
Ramsay and G. Stapledon, 'Commercial
applications of company law in Malaysia', (3
ed, 2008).

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For permissible financial assistance see
s67(2) CA 1965.
For consequences of breach see
s67(3),(4) &(5)
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d) reduction of capital - a capital re-organisation that has
the effect of allowing the return to shareholders of
capital that would otherwise not be distributable.
A reduction of capital is used to increase distributable
reserves to make dividend payments possible, or to
make a large return of capital more efficient. This is
provided for in s64 CA 1965. Note the conditions
stated therein.

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e) issuing shares at a discount

Section 59.

(1) Subject to this section a company may issue shares at a discount of a class already
issued if -

(a) the issue of the shares at a discount is authorized by resolution passed in general
meeting of the company, and is confirmed by order of the Court;

(b) the resolution specifies the maximum rate of discount at which the shares are to be
issued;

(c) at the date of the issue not less than one year has elapsed since the date on which
the company was entitled to commence business; and

(d) the shares are issued within one month after the date on which the issue is
confirmed by order of the Court or within such extended time as the Court allows.



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f) payment of dividends - A portion of a
company's earnings that is distributed to
shareholders. The amount of earnings
distributed as dividends is usually determined
by the board of directors and divided by the
number of shares, but preferred shareholders
often have guaranteed dividends.

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A Company shall not make payment of dividends to
its shareholders except out of the profit or in
pursuant to S60 CA 1965.
S365 CA 1965 stated that dividends should include
bonus and payment by way of bonus.
Therefore any bonus issued must follow the
principles laid down by S 365 CA 1965 i.e. payment
made out of profit.
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(i) A dividend cannot be paid if:
(a) it would result in the companys assets being
insufficient to pay its debts;
(b) it is paid out of the borrowed money unless the
company has divisible profit available.
(ii) A dividend can be paid:
(a) Out of the profit of one year without making
losses of previous year.
(b) Out of the profit arising from the bona fide
revaluation of unrealized fixed assets.
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What is the meaning attributed to the term
profit?
The Companies Act 1965 is silent on this and
as such this has been determined by
reference to decided cases.
For liability issues, see s 365(2)(b)
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