Equity Financing - Raising Share Capital

Question 1

WHAT IS EQUITY FINANCING?

Answer 1

Equity financing is the process of raising capital through the sale of shares. Both private and public companies raise money for short-term needs to pay bills or long-term projects by selling ownership of their company in return for cash.

Question 2

What is a share?

Answer 2

Section 4 TCA: Share includes stock.

Section 2 JCA: “share” means a share in the share of a company and includes stock except where a distinction between stock and shares is expressed or implied.

Section 30 (1) TCA: shares in a company are personal estate and are not of the nature of real estate; and a share is transferable.

Question 3

what was said in bradbury v english sewing cotton co

Answer 3

a share confers upon the holder a certain right to a proportionate part of the assets of the corporation.

Lord Wrenbury: shares are chooses in action. the essence of chooses in action is that they do not give any entitlement to an identified asset or fund of assets, but merely a right in or over general assets. Shares entitle shareholders to certain rights in respect of the company’s capital.

Question 4

what was said in Borland’s Trustee v Steel Bros & Co Ltd

Answer 4

Farwell J: A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability

Question 5

what are the two important aspects of shares

Answer 5

1. Shares confer on shareholders rights in the company.
2. These rights constitute a kind of proprietary interest

Question 6

explain classes of shares

Answer 6

A class of shares are a group of shares with the same benefits and restrictions. The rights are attached to the SHARES as opposed to the shareholders.

Rights of shares include income (dividends, capital growth), pre-emptive rights (right to buy additional shares before issuance to public) voting rights (vote on company’s resolutions) etc. These rights are proprietary, but do not equate to a right to identifiable property of the company. If there is only one class of shares, the shareholders have equal rights.

Question 7

what was said in Bowater Can Ltd v RL Crain Inc

Answer 7

“class rights” are those rights attached to a class of shares

If a right is not expressed to be attached to a class of shares, or is merely a general right of shareholders, it may not be considered a “class right”.

Question 8

what was said in Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper &
Printing Co Ltd

Answer 8

class rights can arise even if not attached directly to the shares in the traditional sense.

Emphasis: Substance over form—what matters is the nature and source of the rights, not just how they’re labelled.

Question 9

explain Shares in series

Answer 9

A series is a subdivision of a class. This is usually done when shares have a preferred dividend right but not limited to this. A preferred dividend right is where shareholders have preference for dividends over other shareholders.

Question 10

Why would a company want to issue shares?

Answer 10

Section 33(1) TCA:
shares may be issued at such times and to such persons and for such consideration as the directors may determine.

Companies issue shares to raise money from investors who tend to invest their money. This money is then used by companies for the development and growth of their businesses.

Question 11

explain allotment vs issue

Answer 11

an allotment creates an enforceable contract for the issue of shares. An issue, on the other hand, occurs after an application to the company has been followed by an allotment and notification to the purchaser and the title to the shares completed by registration on the register of shareholders

Question 12

what is the difference between authorized and issued shares

Answer 12

Authorized shares are the total number of shares a company can legally issue, while issued shares are the number the company has issued to date.

Question 13

classes of shares - McClurg v Minister of National Revenue

Answer 13

Dickson CJ: the division of shares into separate classes is the means by which shares, as opposed to shareholders, are distinguished. The rights and conditions must attach to the shares as opposed to the holder of the share.

Question 14

what are ordinary shares

Answer 14

those shares to which the rights attached are the basic rights which attach to all shares unless contrary provision is made in the articles of incorporation. If the company’s shares are all of one class, then these are necessarily ordinary shares. Indeed, a company cannot create different classes of shares without creating among these classes a class of ordinary shares.

Dividends may vary depending upon the profitability of the company, and the ultimate capital return depends upon the ultimate liquidation value of the company.

Ordinary shares have no right to any fixed dividend or return of capital. However, after the payment of the fixed dividends or return of capital to preference shares, ordinary shares are entitled to the remainder of the surplus distributable income or capital of the company.

The rights of the holders of ordinary shares are statutorily declared to be equal in all respects. Amongst themselves, ordinary shareholders are entitled to share equally in income and capital distribution.

Question 15

what are Preference shares

Answer 15

A preference share confers on its holders some priority in respect of either dividends or of repayment of capital.

It places financial advantage on the holder of such a share and so it is usual for a preference share to have restricted voting rights limited to matters which affect the financial rights attached to it.

Question 16

what are redeemable shares

Answer 16

shares which are issued on terms that they are to be redeemed or are liable to be redeemed by the company at some point in the future.

It appears that any class of shares may be issued as redeemable as long as the right to redeem is provided for in the articles of incorporation of the company.

Redeemable shares are usually issued to allow a company to obtain short term financing without the long term loss of corporate control which could result from an issue of shares to outsiders.

Question 17

IDENTIFY WHETHER THERE ARE RESTRICTIONS ON THE TYPES OF SHARES THAT CAN BE ISSUED

Answer 17

when a company has only one class of shares, the rights of the holders are statutorily declared to be equal in all respects. These rights may be conveniently referred to as voting rights, income rights and capital rights.

A company may provide for more than one class of shares. it must set out the rights, privileges, restrictions and conditions attaching to the shares of each class in the company’s articles. The purpose of this requirement is to ensure that shareholders are fully aware of their rights and entitlements to the extent that the principle of equality among the holders of shares is rendered inapplicable.

Question 18

what are class rights

Answer 18

The rights for each class are contained in the articles of association. Class rights are equal

Question 19

explain the equality of rights

Answer 19

The rights which attach to a share are those which are spelt out the company’s articles. class rights can only be determined by a proper construction of these articles. all shares rank equally.

Question 20

equality of rights - Bowater Can Ltd v RL Crain Inc

Answer 20

articles of association stated that a holder of a special common share would be entitled to 10 votes. If the shares was transferred, the receiver would only be entitled to 1 vote. The court held that rights attach to the share rather than the individual so the articles violated the principle of class shares.

Question 21

Rights set out in the articles are exhaustive

Answer 21

The question may arise as to whether a preference shareholder can invoke the equality principle so as to rank equally with ordinary shareholders in respect of their share capital or any further distribution of profits.

preference shareholders cannot claim to rank equally with ordinary shareholders in respect of either capital or income once their fixed prior dividend entitlement is satisfied.

Question 22

Rights set out in the articles are exhaustive - Re Isle of Thanet Electric Co

Answer 22

‘where the articles set out the rights attached to a class of shares to participate in profits while the company is a going concern, or to share in the property of the company in a liquidation, prima facie, the rights so set out are in each case exhaustive’.

Question 23

Alteration of class rights - power to add or alter

Answer 23

A company has express statutory power to increase or decrease its authorised share capital by amending its articles by special resolution to change the maximum number of shares that the company is authorised to issue

Question 24

Alteration of class rights - power to change the issued or unissued shares of a class

Answer 24

A company also has express statutory power to amend its articles by special resolution to change the issued or unissued shares of any class or series into a di^erent number of shares of the same class or series or into the same or di^erent number of shares of other classes or series.

Question 25

Alteration of class rights - power to divide any class of unissued shares

Answer 25

A company may amend its articles by special resolution to authorise the directors to divide any class of unissued shares into series of shares and to fix the number of shares in each series and the rights, privileges, restrictions and conditions attached thereto. Directors may therefore be given significant powers in respect of the division of a company’s unissued shares. However, a company may amend its articles by special resolution to revoke, diminish or enlarge any of these directors’ powers

Question 26

what is share capital

Answer 26

Share capital is the money a company raises by issuing common or preferred stock.

Question 27

significance of St Michael Uranium Mines Ltd v Rayrock Mines Ltd

Answer 27

Le Bel JA observed that, from the legal point of view, “capital may be thought of as being represented by money or money’s worth consisting of property and valuable tangible assets, the corpus of the corporate business.” Capital is necessary for a company to finance its operations. Generally speaking, there are three sources from which companies derive finance to fund their operations. These are share issues, debt and retained earnings. Money or money’s worth raised by share issues constitute share capital or equity and money or money’s worth raised by debt constitutes debt capital. Retained earnings are the profits generated by the business of the company which is retained by the company. Share capital then refers to that part of a company’s capital which is raised by the issue of shares.

Question 28

what is Paid up capital

Answer 28

Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital, also called paid-in capital or contributed capital, is arrived at from two funding sources: the par value of stock and excess capital. Each share of stock is issued with a base price called its par.

Question 29

Paid up capital vs authorized capital

Answer 29

The maximum amount of capital a company is given permission to raise via the sale of stock is called its authorized capital. Typically, the amount of authorized capital a company applies for is much higher than its current need. Since paid-up capital is only generated by the sale of shares, the amount of paid-up capital can never exceed the authorized capital.

Question 30

what is paid up capital comprised of?

Answer 30

Paid-up capital is made of two components: the par value of the stock (the par value multiplied by the number of shares owned by the shareholders) plus the excess over par.

Question 31

Paid up capital cont'd...

Answer 31

Paid-up capital represents money that is not borrowed. A company that is fully paid-up has sold all available shares and thus cannot increase its capital unless it borrows money by taking on debt. A company could, however, receive authorization to sell more shares. A company's paid-up capital figure represents the extent to which it depends onequity financing to fund its operations

Question 32

what is the stated capita account

Answer 32

The Acts stipulate that a company must maintain a separate stated capital account for each class and series of shares that it issues. It appears from the provisions on stated capital account in these Acts that the stated capital of a company consists of the account of the subscribed share capital made up of the total proceeds where the issue is for money and the value of the property or past service where the payment is by way of property or past services.

Question 33

explain issue at a discount

Answer 33

Sec 38 JCA Shares in a company are to be without nominal or par value. The question of issuing shares at a discount, or, in other words, for less than their nominal or par value, does not therefore arise. Under the Jamaican Act, an existing company may elect to continue to issue par value shares for up to eighteen months after the commencement of that Act.

Question 34

what was said in Ooregum Gold Mining Co of India v Roper

Answer 34

The market value of the shares of the company was less than their nominal value. As it was not feasible to issue them for the full nominal amount, the company issued new £1 shares for 5 shillings each, the remaining 15 shillings being credited as fully paid up. The issue was entirely bona fide and in the interest of the company. It was held by the House of Lords that there was no power under the relevant Companies Act to issue shares at a discount and the issue of shares at a discount by the company was ultra vires and void.