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Powers of company to raise money: section 124

Legal capacity and powers of a company              (1)  A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to:
                     (a)  issue and cancel shares in the company;
                     (b)  issue debentures (despite any rule of law or equity to the contrary, this power includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long);
                    (c)  grant options over unissued shares in the company;
                     (d)  distribute any of the company's property among the u members, in kind or otherwise;
                     (e)  give security by charging uncalled capital;
                      (f)  grant a circulating security interest over the company's property;
                     (g)  arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;
                     (h)  do anything that it is authorised to do by any other law (including a law of a foreign country).


Options available to a company to raise funds

Issue shares (Equity):
Different classes
Different entitlements
Payment of dividends
Up side of growth or
Downside of fall in value

Borrowings (Debt):
May be secured or unsecured.
Examples of securities:


Distinction between raising share capital and borrowings:

Tax deduction for interest
No tax deduction for payment of dividend
Need to have profits to pay dividends
No need to have profits to pay interest
Interest is a fixed obligation
Dividends is discretionary (consider preference shareholders)
No growth in principal of loan
Upside and downside in value of company
Security offered for debt
Shares at are owners risk
Lender is not a member
The choice is a commercial decision – but with legal implications.


Power to issue shares: sections 254A and 254B

Power to issue bonus, partly-paid, preference and redeemable preference shares             
(1)  A company's power under section 124 to issue shares includes the power to issue:
        (a)  bonus shares (shares for whose issue no consideration is payable to the issuing company); and
        (b)  preference shares (including redeemable preference shares); and
        (c)  partly-paid shares (whether or not on the same terms for the amount of calls to be paid or the time for paying calls).

Terms of issue              (1)  A company may determine:
       (a)  the terms on which its shares are issued; and
       (b)  the rights and restrictions attaching to the shares.


What is a share?

Section 1070A
Nature of shares and certain other interests in a company or registered scheme             
(1)  A share, other interest of a member in a company or interest of a person in a registered scheme:
       (a)  is personal property; and
       (b)  is transferable or transmissible as provided by:
             (i)  the company's, or scheme's, constitution; or
            (ii)  the operating rules of a prescribed CS facility if they are applicable; and
       (c)  is capable of devolution by will or by operation of law.


Distinction between “issue” and “sale” of shares:

Shares are issued when first registered
Further shares are issued by the directors (decide the number, terms and price)
The company receives funds from the issue
A sale of shares is normally by an existing shareholder to another and does not involve the company getting funds.


Types of issues:

Initial public offering (new float)
Private placement (e.g. issue large parcel of shares to a small number of investors and made at a discount)
Rights issue (made to company’s existing shareholders pro rata at the time of offer)
Renounceable (can sell the rights on market)
Non renounceable ( must exercise or they will lapse i.e. be lost)
Dividend reinvestment plans (existing shareholders get shares instead of dividends)
Bonus issue (do not require payment)


Share issues subject to

Directors must act in good faith and for a proper purpose see s 181;
Constitution, s 254D (pre emption clause in proprietary companies);
S 246B if variation, cancellation of class rights involved then must follow the constitution;
Must not exceed maximum membership (50 members for a proprietary company);
Disclosure requirements;
Part 2J.2 (company can not acquire shares in itself);
Shareholders’ approval at general meeting for issue of shares.
Consider Chapter 6 D is this a soliciting of the public? Or are they sophisticated investors? In the latter case, the law allows both parties to agree on what information should be disclosed, because of the relationship, no need to disclosure as in a prospectus.


Shares fully v partly paid

Can be fully paid

Partly paid
Unpaid calls:
S 254M company can sue shareholder for amount owing or
Constitution can say forfeit shares and keep amount already paid and sell shares.


Examples of classes of shares:

Ordinary shares:
Right to share in dividends
Right to vote
Right to be repaid capital on winding up
Right to surplus assets on winding up

Preference shares:
Right to received fixed dividend
Right to be repaid principal
No voting rights
No right to surplus assets on winding up.
Remember to look at the constitution for the shareholders rights based on types of shares they hold – see s 254A(2).


Redeemable preference shares: s 254A(3)

Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed.
They may be redeemable:
(a)  at a fixed time or on the happening of a particular event; or
(b)  at the company's option; or
(c)  at the shareholder's option.


Participating preference shares

Takes precedence over ordinary shares in liquidation


Cumulative preference shares

Cumulative: Has the right to dividends carried forward if no dividend paid in a year
Non-cumulative: Dividends only paid when profits available and no entitlement to prior year if missed out


Convertible preference shares.

Right to a preferred or fixed dividend for a period of time and then allow for the conversion to ordinary shares


Issuing of shares

S 114 all companies must have at least one member
On registration
On acquisition from another shareholder
On devolution
By law
By compulsory acquisition

Process is:
Invited to apply
Accepts application
Board of directors decide to accept application
Once accepted the shares are allotted
After allotment the members name is entered on the register of members and they are a shareholder
Becomes a member when entitled to be entered on register as a member


Return to shareholders: payment of dividends

S 124(1)(d) power to distribute property in kind or otherwise to shareholders
Distribution of profits is called dividends
Types of dividends
Ordinarily paid out of profits
Dividends are decided by the directors
Liability to pay arises when the time to pay arises as determined by the directors
Shareholders can not force the company to pay a dividend (separation of powers)


Payment of Dividends

Dividen rights

Section 254WDividend rights Shares in public companies
(1) Each share in a class of shares in a public company has the same dividend rights unless:
     (a)  the company has a constitution and it provides for the shares to have different dividend rights; or
     (b)  different dividend rights are provided for by special resolution of the company.
Shares in proprietary companies (Replaceable Rule)
(2) Subject to the terms on which shares in a proprietary company are on issue, the directors may pay dividends as they see fit.


Payment of Dividends

Section 245U (RR)Other provisions about paying dividends (replaceable rule--see section 135)   

(1)  The directors may determine that a dividend is payable and fix:
       (a)  the amount; and
       (b)  the time for payment; and
       (c)  the method of payment.
The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets.
(2)  Interest is not payable on a dividend.


Payment of Dividends

Section 254TCircumstances in which a dividend may be paid

(1)  A company must not pay a dividend unless:
(a)  the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
     (b)  the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
      (c)  the payment of the dividend does not materially prejudice the company's ability to pay its creditors.


Payment of Dividends

Section 254V When does the company incur a debt?  

(1)  A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.
(2)  However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.


Breach of section 254T

If the company is insolvent when it pays a dividend or becomes insolvent on paying a dividend then the directors can be personally liable under s 588G to the creditors
See Directors Duties Topics


Maintenance of Share Capital

Company law prevents a company reducing its share capital
But can redeem redeemable preference shares out of profits
Key principle is that a company should maintain its share capital during its life
Rule in Trevor v Whitworth (1887) 12 App Cas 409:
Paid up capital can be lost through trading, but the assumption is that a company is trading with a certain amount of paid up capital and that the share capital has not been paid out other than in the legitimate course of business.


Restrictions on:

Paying dividends to members (see section 254T)
Company acquiring its own shares
Company giving financial assistance to a person to acquire shares in the company


Not permitted to reduce its share capital except under:

Share buy back
Other methods allowed under Chapter 2J


Acquiring own shares

There are restrictions on a company acquiring shares in itself or a company that controls it: s 259A.
This is because it would:
Allow board to entrench control
Allow manipulation of the share price
Create a false sense of value
Exception is in s 259D where company acquires another company that already holds shares in it. In this case:
Company has 12 months to sell the shares
ASIC can extend time period on application


Financial Assistance

Company restricted from giving person financial assistance to acquire shares in the company unless it:
Is approved by members
Will not materially prejudicial to the interest of the company, members or creditors
Or is Allowed under another part of the Corporations Act.
Financial assistance includes:
Lending money
Guaranteeing loan
Gift to person
Other exceptions: See s 260C
Commercial dealing
Employee Share Scheme
Court orders


Why do companies buy back their own shares?

Excess capital that can not be effectively used in the business
Buy back must not materially affect the company’s ability to pay its creditors
Follow procedures set out in the Act (see table in section 257B)
Most common is on market share buy back by public companies where all shareholders can apply but do not need to take up offer.


Reduction of share capital

Members have no choice and share capital can be reduced
Return of all or part of share capital to members


Debt Capital

Recall s 124 power to issue debt:
Issue debentures
Give security over uncalled capital
Grant floating charge over company property
Types of Debt Capital
Bank Finance
Trade Finance
Private Debt
Debentures (common law: any document that confirms a debt)


Characteristics of debt

Pay interest at the agreed rate for the life of the loan
Repay principal at end of agreed term
Lender has priority over shareholders for repayment of principal on winding up
Lender is not a member
Lender has no right to share in the surplus assets on winding up