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Lecture 7:
Shares, Share Capital and Share
Options
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ë Ão define Ɲshare capitalƞ
ë Ão distinguish share/equity and loan/debt capital
ë Ão define Ɲminimum share capitalƞ
ë Ão consider the circumstances in which shares
might be offered for issue
ë Ão consider the way non-
non-cash consideration
issues are regulated
ë Ão explain share splits and share consolidations
ë Ão explain options over unissued shares and
their commercial uses
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ë ¬ost commercial enterprises need

capital/finance to establish and carry
on their business

ë Capital can take the form of share

capital or loan capital
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ë ×aised by issuing shares in the company to
investors
ë Ãhe investors who subscribe for the shares
become members of the company
ë Ãhe company can use the capital for the
purposes of its business
ë Some or all of the capital may be Ɲlostƞ in the
conduct of the business
ë Ãhere are constraints on the ability of a
company to return share capital to its members
 Ãh
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ë m share is a form of personal property known
as a chose in action.
ë Ãhe registered holder of a share has certain
rights and liabilities vis a vis the company that
issued the share [Ɲthe issuerƞ].
ë Ãhe main liability, in a limited company, is to
pay the agreed issue price of the share.
ë Ãhe rights attached to the share will be those
stated in the terms upon which the share was
issued, or set out in the companyƞs constitution
(eg rights as to voting, dividends).
ë wmportantly, a shareholder has no legal or
equitable interest in the issuerƞs property.

ë Ãhe term Ɲequitiesƞ which is often used

instead of Ɲordinary sharesƞ [misleadingly]
suggests otherwise.

ë m shareholder merely has contractual

rights against the company and other
shareholders under s 140(1).
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Shareholders are not entitled to receive
any income (dividends) on their shares
unless:
ë Ãhe company can fund the dividends
from its profits: s 254Ã and
ë Ãhe appropriate company organ
decides to pay dividends from the
profits.
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Loan capital can be raised from:
ë anks and finance companies

ë ¬embers/shareholders

ë Non
Non--member investors
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ë Lenders, as lenders, are not members
of the borrowing company
ë Lenders are creditors of the company

ë Ãhe company will have to pay interest

on a loan to the lender at the agreed
rate and times irrespective of whether
the company is profitable
ë Ãhe company will also have to repay
the loan at the agreed time
 0  ×
ë Ãhe debt to equity ratio of a company
reveals the relative extent to which a
company relies on debt capital. wt is
sometimes calculated by dividing the value
of the companyƞs liabilities into the net
value of the companyƞs assets.
ë Ãhe net value of a companyƞs assets =
gross value of companyƞs assets ƛ gross
value of the companyƞs assets.
 

ë ross value of companyƞs assets = $20m
ë ross value of companyƞs liabilities =
$15m
ë Net value of companyƞs assets: [$20m -
$15m] = $5m.
ë Debt to equity ratio: [$15m/$5m] = 3.
ë Ãhe ratio is 3:1.
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ë Ñntil July 1, 1998, every company with a
share capital had to have a constitution
which:
(a) set out the companyƞs authorised or
nominal share capital [eg
[eg $500m] and
(b) sub-
sub-divided that capital into shares of
a fixed amount [eg
[eg 500m ordinary shares
of $1 each or 1billion ordinary shares of
$0.50 each].
ë Ãhe assigned value of each share was its

Ɲparƞ or Ɲnominalƞ value.

ë Ãhe authorised share capital of a company
was the maximum amount of money that
the company could raise by issuing shares.
ë m company could alter its authorised
capital by resolution.
ë Where market conditions permitted,
shares could be issued for more than their
par value [an issue at a premium].
ë Notwithstanding market conditions, shares
could usually only be issued for less than
their par value [a discount issue] with the
consent of a court.
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ë mustralia abandoned these concepts on
July 1, 1998.
ë Ãhis was so whether the shares were
issued before or after that date: old
Corporations Law s 1444.
ë mny provisions in a company's constitution
which stated the amount of its share
capital and divided that capital into shares
of a fixed amount were automatically
repealed: old Corporations Law s 1427(1).
ë mustralian companies can now issue
shares for any agreed price [their issue
price].
ë Ãhe authorised capital and par value
concepts have also been abandoned in
other common law countries such as
Canada and New Zealand.
ë Ãhe concepts are still part of the Ñ
regulatory framework.
ë However, the former Ñ ovt accepted a
recommendation that the authorised
capital concept, but not the par value
concept, should be dispensed with.
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ë Ãhe Limited Liability mct 1855 (Ñ )
required limited companies to have at
least 25 members who each held at least
one share of a nominal value of at least
£10.
ë Ãhus there was an effective minimum
issued share capital requirement of £250.
ë Further, at least 20% of the par value of
each issued share had to be paid up.
ë Ãhese rules were abandoned in 1856.
  

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ë ¬any countries require limited liability
companies to raise a stated minimum amount
of share capital.
ë EÑ member states must have legislation that
requires a public company to have an issued
share capital of at least EÑ×65,600 of which
at least 25% must be paid up when it is
registered.
ë m Ñ public company must have an issued
share capital of at least £50,000.
ë ¬any countries also have minimum share
capital requirements for pty/private
pty/private
companies limited by shares eg France,
Sweden, ermany, China.

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ë Ãries to ensure that all of the risk of
company failure is not borne by unsecured
creditors
ë ws an arbitrary figure: Ɲminimum capitalƞ
does not equal Ɲadequate capitalƞ
ë Needs to be supported by rigorous
procedures to ensure that the stated
capital has actually been raised: eg expert
valuations of assets exchanged for shares
ë Ãhe minimum required capital might be
Ɲlostƞ before the company is wound up
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ë Ãhe Corporations mct does not specify a
minimum capital for any type of company
ë wt is possible to set up a company with a
nominal issued share capital: eg $1
ë Ão comply with mSX Listing ×ule 1.1 Condition
7, a listed public company must have at least:
(a) 500 shareholders each with a parcel of
ordinary shares with a market value of at
least $2000 and
(b) Persons who are not Ɲrelated partiesƞ of the
company must hold at least 25% of all of the
issued ordinary shares
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ë Shares can be issued for any form of
consideration
ë ¬ost shares are issued for cash

ë Ãhe agreed consideration for a share

is referred to as the Ɲissue priceƞ of
the share
ë m companyƞs Ɲissued share capitalƞ
equals the aggregate of the issue
prices of all shares currently on issue
  
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wf shares are issued by a company in return
for non-
non-cash assets, the company must
lodge a notice with mSwC stating, among
other things:
ë the amount paid, or agreed to be
considered as paid, on each of the shares
and
ë the amount unpaid (if any) on each of the
shares: s 254X(1).
  
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m public company must also provide
prescribed particulars about the issue
of the shares unless they were issued
under a contract, and a copy of that
contract is lodged with mSwC:
see s 254X(1)(e)
m    "#$ 
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m Ltd

 Ltd agrees to m Ltd agrees to

subscribe for one purchase land
million shares at from  Ltd for
an issue price of $10m
$10 each
 Ltd
Ãhe respective $10m liabilities are then off-
off-set.
Ãhe transactions are considered to be cash
transactions.
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ë Ãhere is no general statutory requirement that
assets exchanged for shares should be
independently valued
ë Ãhe position is different in those jurisdictions (eg
(eg
Ñ France China) which have a minimum share
capital requirement
ë wn some circumstances it may be negligent for
directors not to have assets expertly valued
ë mSX Listing ×ules and mSwC Policy Statements
sometimes stipulate the need for an expert
valuation to be obtained, especially where the
company is contracting with Ɲrelated partiesƞ
such as directors or controlling shareholders
 
   

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ë Salomon v Salomon & Co Ltd
ë ×e Wragg Ltd [1897] 1 Ch 796

wn these cases, the relevant assets appeared

to have been Ɲgenerouslyƞ valued by the
companiesƞ directors. However, in the
absence of evidence that the valuations
were dishonest or obviously wrong, the
courts refused to intervene.
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ë wssues pursuant to a pro-
pro-rata offer made
to existing shareholders: eg one for three
ë Non--pro-
Non pro-rata issues of shares (private
placements)
ë wssues pursuant to employee share
schemes
ë wssues pursuant to dividend reinvestment
schemes
ë wssues pursuant to offers made to the
market at large by means of a disclosure
document such as a prospectus
 
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ë Pro-rata offers are known as Ɲrights offersƞ
Pro-
or Ɲrights issuesƞ: see the s 9m definition of
Ɲrights issueƞ.
ë Ãhey can be renounceable or non- non-
renounceable.
ë wn a non-
non-renounceable issue, shareholders
are not entitled to sell or Ɲrenounceƞ their
rights to take up the new shares.
 
 

ë Private placements of shares will
necessarily dilute the percentage holdings
of those members who are not party to
them.
ë Eg:: Co X has 20 million shares on issue.
Eg
You hold 2 million or 10% of them. wf Co X
were to issue 4 million shares to Co Y, you
would hold 2 million of 24 million or 8.5%
of them.
 
 
 
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ë Ãhe constitution of a company may
contain a pre-
pre-emptive rights provision
requiring all new shares to first be offered
to current shareholders.
ë Companies listed on the mSX are limited in
the number of shares they can issue in
any 12 month period on a non-
non-pro-
pro-rata
basis. Ãhe consent of the members must
usually be sought before this limit is
exceeded : mSX L× 7.1
7.1--7.3.
 
 
 
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ë ¬any companies operate employee share
schemes in which shares are offered to
employees on favourable terms.
ë Note that employee shareholders are not
counted in the 50-
50-member limit that
normally applies to proprietary companies:
see s 113(1).
 
   

 
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ë ¬any companies (in particular listed public
companies) have dividend reinvestment
schemes.
ë ¬embers can agree to have their share of
the companyƞs distributed profits applied
to paying up the issue price of new
shares.
ë Ãhe issue price of the new shares is often
slightly less than their market value.
 
  

 
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ë We will be considering the circumstances

in which a company must use a disclosure
document when it is seeking new capital
in a later lecture.
  
 
  

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ë Section 254H(1) says that a company may

convert all or any of its shares into a
larger or smaller number of shares by
resolution passed at a general meeting.
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ë Particularly where a companyƞs shares are
being traded at a relatively high price ($50
or $100), the company may decide to split
each of its issued shares into more shares.
For example, each share might be split into
two or five shares.
ë Ãhe commercial aim is to make the shares
more marketable by reducing their unit
value. For example, when a share trading at
$60 is split into three, it is likely that the
new shares will trade for more than $20
each because of extra buying demand.
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ë Ãhe opposite to a share split.
ë Ñsually used when the market price of a
companyƞs shares is very low (eg
(eg less than
20 cents).
ë For example, ten shares currently trading
at 2.5 cents each might be consolidated
into one share. mfter the consolidation,
each share may well trade for more than
25 cents.
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ë m company might give a person an option
to subscribe for a number [at least 1] of
the companyƞs unissued shares.
ë Ãhe option contract will indicate:
ë Ãhe price that will have to be paid if the
option is exercised [the Ɲexercise priceƞ]
ë Ãhe last date on which the option may be
exercised [the Ɲoption expiry dateƞ] and
ë Ãhe number and type of shares that will be
issued if the option is exercised.
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ë ms part of executive salary packages.

ë ms an inducement for investors to

subscribe for shares in a share offer [eg
[eg:: a
share issue by a speculative no liability
mineral exploration company]
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ë Option holders are not members of the
company until they choose to exercise the
option and become registered
shareholders.
ë m company which grants share options
must maintain a register of option holders:
see s 170.
ë Ãhe register of option holders is separate
from the register of members which must
be maintained under s 169.