COMPANY LAW BM054-3-5-3

Capital The word capital in company law refers to:

- nominal or authorised capital - issued capital - allotted capital - paid up capital - unpaid capital - reserve capital

 Nominal or authorised capital

- this is the maximum amount of capital which a company is authorised to raise by issuing its shares - it is measured in terms of what is called the par value - it does not represent the amount of capital in fact subscribed or paid up by the members

 Bank of Hindustan, China and Japan Ltd v

Alison (1871) - the court held that any issue of shares by a company in excess of its nominal or authorised capital is void and the allottees are entitled to have their allotment consideration refunded

 Issued capital

- it is that part of the authorised capital of the company which has been issued to its members - the act of issuing shares by a company to a person involves a set of proceedings which result in that person becoming a shareholder

Allotted capital - it is that part of the authorised capital which has been allotted to the members Raja Khairulzaman Shah bin Raja Aziddin v Zaman Indah Sdn Bhd (1979) - it was stated that an allotment is the appropriation to a person of a certain number of shares, though not necessarily specific shares and an allotment of itself does not necessarily create the status of membership

 Paid up capital

- this represents that part of the issued capital which has been fully paid up by the members, or credited as having been paid - it is not uncommon for shares of a company to be fully paid up by the company in accordance with its articles

 Unpaid capital

- this represents that remaining part of the issued capital of a company which has not been paid up by the members - it can be called up by the company in accordance with its articles

 Reserve capital

- it is that part of the uncalled capital which a limited company has by a special resolution determined must not be capable of being called up except in the event and for the purposes of the company being wound up Section 56(2) CA 1965 - the object of the section is to preserve intact the amount of that uncalled capital for the general creditors in the event of winding up

Shares S98 CA 1965 provides that shares shall be - moveable property and - transferable in the manner provided by the Articles of the company Borlands Trustee v Steel Brothers & Co Ltd (1901) - 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 interest in the second

A company may have different classes of shares The rights attached to each of the different classes of shares are called class rights. These rights usually relate to: (i) voting rights (ii) dividends receivable (iii) distribution (return) of capital when liquidation takes place

Cumulative preference shares A cumulative preference shareholder is entitled to receive a fixed cumulative dividend So, if in any year a dividend is not paid, the cumulative preference shareholder is entitled to have the equal amount of the unpaid dividend added to the dividend to be paid in the ensuing year

Until the deficiency in the dividend is paid in full, other deferred shares, like the ordinary shares, may receive no dividend
Non-Cumulative Preference Shares Non-cumulative preference shares, on the other hand, entitle the holder to a dividend at a fixed rate only in the years where a dividend is declared and paid

Preference Shares Preference shares according to section 4(1) CA 1965 means any share which does not entitle the holder thereof: 1. to the right to vote at a general meeting; or 2. to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up or otherwise

A preference share may have a priority in relation to: - a fixed and usually cumulative dividend and - to the return of capital on a winding-up
Redeemable preference shares may be redeemed at a specified date or alternatively the company is given the right to repay the capital within a specified period

Commissioner of Taxation v Coppleson (1981) - it was held that the obligation to redeem depended on the availability of profits or the proceeds of a fresh issue of shares and if neither is available the company would not be in breach of its obligation to redeem even though notice has been given by the shareholder

Ordinary shares are merely not preferred shares A holder of an ordinary share - has a full right to attend general meetings and exercise one vote per share on a poll on any resolution put to a meeting - has the paid up value of the shares returned in a winding up after all creditors have been paid in full, and any preference share capital has been returned

Offer to the Public Generally, a prospectus is required if an invitation is made to the public for the subscription or purchase of shares or debentures in a corporation in section 37 CA 1965

A prospectus is widely defined by section 4(1) CA 1965 to mean: any prospectus, notice, circular, advertisement or invitation inviting applications or offers from the public to subscribe for or purchase or offering to the public for subscription or purchase any shares in or debentures of or any unit of shares in or units of debentures of a corporation or proposed corporation

Government Stocks and Other Securities Investment Co. Ltd v Christopher & Ors (1956) - a circular was sent to members of two companies by a newly formed company, British and Commonwealth Shipping Co. Ltd (the New Company) offering to acquire the whole of the issued capital of the two companies in exchange for unissued shares in the New Company - the circular was sent to all the members of the two companies accompanied by a form headed Form of Acceptance and Transfer

- held: the circular was not a prospectus because it did not involve an offer for the purchase of any shares , as the shares to be acquired were unissued shares of the New Company. ..subscription means taking or agreeing to take shares for cash . Since the circular did not invite subscription for shares for cash, the circular was not a prospectus

Section 39(1) CA 1965 provides that to comply with the requirements of this Act a prospectus (a) shall be printed in type of a size not less than the type known as eight point Times; (b) shall bear the date of issue of the prospectus;

(c) shall state that a copy of the prospectus has been lodged with and registered by the Registrar and that the Registrar takes no responsibility as to its contents;

d) shall subject to Part III of the Fifth Schedule state the matters specified in Part I of that Schedule and set out the reports specified in Part II of the Schedule; (e) shall contain a statement relating to adjustments made to the reports specified in Part II of the Fifth Schedule setting out those adjustments and the reasons for the adjustments

(f) shall contain a statement that no shares or debentures shall be allotted on the basis of the prospectus later than six months after the date of the issue of the prospectus;
(g) shall, if it contains any statement made by an expert state the date on which the statement was made and whether or not it was prepared by the expert for incorporation in the prospectus;

(h) not contain the name of any person as a trustee for a debenture holder and other professional advisers unless with their consent (i) where the offer is from a foreign company, state the following particulars: (1) the instrument constituting or defining the constitution of the company (2) the law under which the incorporation of the company was effected or is to be effected (3) an address in Malaysia where such law (instrument, enactment or provision) may be inspected

(4) the date on which and the place where the company was or is to be incorporated (5) whether the company has established a place of business in Malaysia, and if so, the address of its principal office in Malaysia (j) state (if so) that the prospectus offers shares which have been specified by a stock exchange as prescribed securities

Capital maintenance It is a fundamental principle of company law that the share capital of the company once raised must be maintained The concept of capital maintenance is geared substantially towards the protection of creditors of the company, who in the eyes of the law, have an interest in the paid-up share capital and other assets of the company

Re Exchange Banking Co (Flitcrofts Case) (1882) - it was held that when a creditor gives credit to a company, he gives credit on the faith of the representation that the capital of the company shall be applied only in the legitimate course of its business and the creditor has a right to say that the corporation shall keep its capital and not return it to the shareholders

The rule that the capital of the company must be maintained has, subject to a few statutory exceptions, given rise to the following consequences:
1. that a company may not purchase its own shares the rule in Trevor v Whitworth ((1887)

 Mookapillai & Anor v Liquidator, Sri

Saringgit Sdn Bhd & Ors (1981) - an agreement was reached between majority members and the minority members of a limited company, inter alia that the company would purchase the shares of the minority members for RM 1,260,910 and for a reduction of the paid up capital of the company and that the company would raise the stipulated sum by a charge of its assets

- the court held that Section 67(1) CA 1965 clearly prohibited the purchase by a company of its own shares

The Companies (Amendment)(No.2) Act 1998 (1998 Amendment Act) now provides for public companies with share capital to purchase their own shares, the legislative intention as stated in the explanatory statement of the Act being to stabilize the supply and demand as well as the price of the sharesand to ultimately create a healthy environment for the capital market..

2. that a company may not provide financial assistance for the purchase or acquisition of its own shares

Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor (1990) - in or about October 1980, the appellants (the bank) had granted a company, Johore Tenggara Sdn Bhd (Johore Tenggara) a fixed loan of RM 1.25 million on all the assets of the hotel

- in September 1982, the bank granted an overdraft facility and a further term loan of RM 2.5 million to the hotel, secured by landed properties of the hotel and of the hotels subsidiary - one of the terms of the 1982 loan was to liquidate the 1980 fixed loan upon release of the 1982 loan - the loans were defaulted and the bank took several actions to realise the securities provided by the hotel

- it was held that the purpose of the 1980 fixed loan was to finance the purchase of the whole of the share equity in the hotel by Johore Tenggara and the security for the loan was property belonging to the hotel, so the hotel had given financial assistance contrary to Section 67(1) by way of providing security in connection with the purchase of shares in the hotel itself

What is financial assistance? Section 67(1) CA 1965 comprises 2 major elements: a. there must be some kind of financial assistance given by the company b. the financial assistance should have been given for the purpose of or in connection with a purchase or subscription for any shares in the company or its holding company

3. that a company may not lend money on security of its shares 4. that a subsidiary company may not be a member of its holding company any allotment or transfer of shares in the holding company to the subsidiary is void 5. that a company may only pay dividends out of its profit and 6. that a company may not reduce its share capital unless complying with Section 64 CA 1965

 reduction of capital the common law concept of capital

maintenance extends to prohibiting a company from refunding capital to its members by reducing its share capital

 Section 64 CA 1965 provides:

. a company may, if so authorized by its articles, by special resolution reduce its share capital in any way and in particular may do all or any of the following: (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) cancel any paid-up capital which is lost or unrepresented by available assets; or

(c) pay off any paid-up share capital which is in excess of the needs of the company, and may so far as necessary alter its memorandum by reducing the amount of its share capital and of its shares accordingly

Increase of share capital Section 62 CA 1965 provides: A company if so authorized by its articles may in general meeting increase its share capital by the creation of new shares of such amount as it thinks expedient..

As the section expressly empowers the increase of the capital to be exercised by a general meeting, it appears that the directors have no power to exercise it An increase of the share capital may enable the company to increase its borrowing capacity Where a company has increased its share capital beyond the registered capital, it shall within fourteen days after the passing of the resolution authorizing the increase lodge with the Registrar notice of the increase

Dividends One of the financial returns which a member may receive from his investment in the shares of a company is the payment of dividends A dividend is a share of profits in a company, whether at fixed rate or otherwise, allocated to holders of its shares Since it is a share of profits, dividends need not be paid in cash

Payment of the dividend can be satisfied by

- distribution to the shareholders in specie of particular company property OR - paying up shares of the company to be distributed as bonus shares

Birch v Cropper (1889) - it was stated that dividends are payable to the shareholders in proportion to the nominal amounts of their shares, irrespective of the amounts paid up unless otherwise provided by the articles

To ensure that the spirit of the concept of capital maintenance is not infringed, Section 365(1) CA 1965 prohibits a company from paying a dividend to its shareholders - except out of profits OR - pursuant to Section 60 CA 1965 (out of a share premium account

The articles of a company may empower its directors to pay to the members interim dividends from time to time There is a well-recognized difference between a final dividend and an interim dividend

Potel v Inland Revenue Commissioners (1971) - it was held: One consequence of the distinction is that although the declaration of a final dividend gives rise to a debt payable by the company to the shareholder immediately or from the date stipulated for payment, a resolution for the payment of an interim dividend does not create such a debt in favour of the shareholder

Transfer of Shares A person s complete legal title to shares in a company cannot be acquired without registration The provisions as to transfer of shares are contained in sections 103 to 107 CA 1965 Section 103(1) CA 1965 provides that notwithstanding anything in its articles, a company shall not register a transfer of shares unless a proper instrument of transfer in the prescribed form has been delivered to the company The use of the word shall indicates that this requirement is mandatory and not directory

The prescribed instrument of transfer can be found in Form 32A Form 32A requires: a. information relating to the name of the company b. information relating to the names of the transferor and transferee c. the consideration of the transfer to be stated

Where the shares are jointly held by two or more persons, for an instrument of transfer to be effective, it must be executed by all of the joint holders Generally, the duty to prepare an instrument of transfer is on the purchaser and not the vendor The obligation of the vendor is to execute a proper instrument of transfer and have it delivered together with the relevant share certificate to the purchaser upon completion of the sale of the shares

In order to transfer a legal title in a share of a company completely, the transferees name must be entered into the register of members maintained by the company Section 105(1) CA 1965 provides that if a company refuses to register a transfer of any shares, it must send to the transferor and to the transferee notice of the refusal within one month after the date on which the transfer was lodged with the company

Imposition of restrictions on the transfer of shares is for the most part more frequently found in private companies Section 15(1) CA 1965 requires the memorandum or articles of a private company to incorporate a restriction on the right to transfer its shares Section 15(1) does not prescribe the nature, extent or scope of the restrictions and the question of share transfer in a company is essentially a contractual matter governed by its articles

The English law lays down the rule that unless the articles of a company so restrict, a member has a free right to transfer his shares to whom he will, and the directors are bound to register the shares Re Bede Steam Shipping Co. (1917) - it was held that a member of a company .has property in his shares, a property which he is at liberty to dispose of, subject only to any express restriction which may be found in the articles of association of the company

This English principle that a member has a prima facie right to transfer his shares has been well received by the Malaysian courts Lim Ow Goik & Anor v Sungei Merah Bus Company Ltd (1969) - it was held that shares being personal property are prima facie transferable and the right to transfer is legal right

Conforming perfectly with this common law principle is section 98 CA 1965 which provides that shares of any member in a company shall be movable property, transferable in the manner provided by the articles

Precision in drafting the articles of association of the company is desirable if the company wishes to restrict the right of transfer of shares Re Smith and Fawcett Ltd (1942) - the court held that if it is to be cut down, must be cut down with satisfactory clarity

The discretionary power of the directors to refuse transfer of shares is a fiduciary one which must be exercised bona fide in the interest of the company Re Smith and Fawcett Ltd (1942) - the court held that the directors must exercise their discretion bona fide in what they considernot what a court may consider-is in the interests of the company, and not for any collateral purpose

This principle has been cited with approval by Malaysian courts on various occasions Kesar Singh v Sepang Omnibus Co.Ltd. (1964) - the articles of the company gave the directors an absolute and uncontrolled discretion to refuse to register any transfer of shares - it was held that the directors had acted bona fide and in the interest of the company in rejecting the transfer on the basis of the hostile relationship between the applicant and the directors of the company

The absolute and uncontrolled type of discretion was also found in the following case Mohan a/l Paramsivam v Sepang Omnibus Co Sdn Bhd (1989) - the decision of the directors to reject the transfer so as to preserve the bumiputra status in the company was held to be proper and not mala fide

The above two cases were cited with approval in the following case Kwality Textiles ( Malaysia) Sdn Bhd v Arunachalam & Ors (1990) - the articles provided that the directors of the company might in their absolute discretion without assigning any reason refuse to register any transfer of shares - the directors of the company had refused to approve the transfer of shares in order to prevent a possible breach in the condition of the manufacturing licence

- it was held: The court should not interfere with the proper exercise of discretion of the board of directors conferred by the articles of association to refuse registration for the wellbeing of the company. Indeed the court should be slow to question the exercise of the discretion in the absence of evidence that the Board of Directors had acted mala fide

The right to decline registration of the transfer of shares by the directors can only be disposed by a positive resolution of the board exercising the power, otherwise the transferee is entitled to be registered as a member Re Hackney Pavilion Ltd (1924) - the court used the expression a formal active exercise of the right to decline to denote the requirement of a positive resolution

Royal Trust Nominees Ltd v Sri Hartamas Development Sdn Bhd (1989) - the secretary wrote to the solicitors for the transferee, that the company was unable to register the transfer as the Board of Directors has not approved the said transfer

- held: 1. the use of the words has not approved, in the absence of evidence that a board resolution had been passed to reject the transfer did not, on the balance of probabilities, satisfy the requirement of a positive resolution 2. the burden of proving that in fact that there had been such positive exercise of the power rested on the company which asserted that there was such a resolution

Transfer and Transmission of Shares Transfer Transfer of shares is a voluntary act of members and it is the method of transferring the ownership rights of the shares from one person to another. Transmission Transmission of shares is the result of operation of Law and it takes place only on the death, insolvency or lunacy of the share holder.

Transfer Vs Transmission Transfer 1. By a deliberate act. Transmission 1. By the operation of law. 2. Requires the execution 2. Requires an of formal instrument of evidence transfer showing the legal entitlement. 3. There must be adequate 3. There is no question consideration. of consideration. 4. Stamp duty is payable. 4. Stamp duty is not payable.