COMPANY SHARE CAPITAL
Share capital is the amount that purchasers of shares have agreed to contribute to the Company in return of its shares. This is the amount of capital raised or to be raised by issue of shares by the Company.
Types of Shares Capital
Authorized Share Capital
It is also known as nominal / registered capital
Every Company limited by shares is required to have a nominal capital with which it is to be registered
This is the maximum amount of share capital which is stated in the memorandum of association and which the Company is authorized to issue in its lifetime unless it alters provisions of the capital clause.
It is the nominal value of the shares which have been taken up or offered to public for subscription. It can either be equal to or less than the authorized capital but cannot exceed it
It is that part of issued capital which has been taken up by the public. The entire issued capital may be subscribed by the public or it may be less where not all of the issued capital is taken up 4. Called up capital
It is that part of the subscribed capital which has been called on the unpaid shares
It is that part of the subscribed capital which has not been called up by the Company. It includes part of the capital which Company through a board resolution decides not to call until during winding up of the Company 6. Reserve capital
It is that part of uncalled capital which the Company decides by a resolution not to call except when the Company is being wound up. Such a step is usually taken by the Company as security to creditors.
Definitions of share
The capital of a company is divided into certain indivisible units of a fixed amount called shares. A share denotes a unit of capital.
A share is a transferable form of property, carrying rights and obligations, by which the interest of a member of a company limited by shares is measured.
A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of a liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se.
Characteristics of shares
Is a yardstick of the holder’s liability to the company in respect to the amount unpaid on shares he holds (if the company is limited by shares);
Is the yardstick of the holder’s right in the company, particularly the dividends (profits) payable by the company to the shareholders correspondent to the number of shares he holds, voting rights and return of capital on a winding up;
Is the foundation, of the bundle of rights and liabilities arising from the statutory contract contained in the Articles of Association.
A share is a form of personal property which, being transferable can be bought, sold, given as security for a loan or disposed of under a will.
Shares in a limited company having a share capital are each required to have a fixed nominal value and are required to be denominated in shillings.
Note: A share is therefore not a sum of money but an interest measured by a sum of money, consisting of various rights.
A person who acquires a share in a company automatically becomes subject to the obligations imposed by the Companies Act, and the company’s Articles of Association. He also becomes entitled to the rights conferred therein.
Right to dividend
A shareholder is entitled to dividend if the company is a going concern and when a profit has been made. However a company is not legally obliged to pay dividend. This right is only exercisable if dividend has been declared and become payable.
Right to Vote
A shareholder has an individual membership right to attend and vote in all general meetings of the company.
Right to capital
If the company is wound up and all the creditors are paid the remaining assets are available for division among the members.
A shareholder is entitled to a proportionate part of the company’s capital in the event of winding up after payment of debts and other liabilities of the company.
- Right to notices of General Meetings of the company.
- Right to copies of the Balance sheet laid before the company in General Meetings and its annexes.
- Right to copies of the Memorandum and Articles.
- Right to inspect the minute book of General Meetings.
- Right to inspect copies of charges, various registers maintained by the company.
- Right to petition for the alternative remedy in the event of opression of the minority.
The primary obligation of a shareholder is:
- To observe the provisions of the Companies Act as well as the provisions of the company’s Memorandum and Articles of Association.
- In the case of a company limited by shares, he is also under an obligation to pay, when called upon to do so, the amount, if, any, unpaid on the shares he holds. Classes of Shares
This are also referred to as the equity capital.
Members holding them are said to have the equity in the company and equity here means ownership of the company.
These are the most common types of shares. The rate of dividend to be paid is not fixed, but normally, such shares carry full voting rights which enable the shareholders to attend the meetings, appoint directors and auditors of the company etc.
As the ordinary shares carry the main financial risks, they are entitled to the following rights which are not available in respect of other shares:
- After providing for any dividend which is payable on preference shares, the whole of the profits can be made available to them
- They are entitled by use of their voting power at the general meeting to control the company.
- In winding up, the holders of the ordinary shares are entitled to the entire residue after payment of the company’s liabilities
This is the highest class of shares a company can create because as the name suggests it gives
preference to the holders over the holders of the other classes of the shares
The preference here is in respect of the following matters: –
When a divided is declared it shall carry a preferential right as to the payment of dividend first before any other shareholder. ii) When receiving dividends, preference shareholders are paid at a fixed rate so that the company cannot pay them more or less than the rate agreed upon. E.g. they will receive the dividend at a rate of 5%. For this reason the company, must pay them the dividend at the rate of 5%.
In the case of the holders of other classes of shares, they are not paid dividend at any fixed rate but it depends upon the amount of dividend declared by the company and available for distribution. If the dividend declared is large they may end up earning more than the preference shareholders. As far as dividends are concerned, preference shareholders can boast of a steady rate of income from their investment in this class of shares
In the event of winding up, there is a preferential right to the repayment of the paid up capital. They however do not have residual rights.
Shares can further be classified into the following;
- Accumulative preference share: Dividend earned or to be paid in one year which is not claimed will be carried forward to the next year automatically. If the dividend was fixed at 6% and is not paid in the current year, it’s carried forward and paid at 12% in the next year.
- Non-accumulative preference shares: Are shares on which dividend is fixed but will not accumulate.
- Redeemable preference shares: Are shares whose dividend are fixed but are issued for a specific period of time. During that period, the company can redeem these shares.
Conditions for redemption of redeemable shares
A company may issue redeemable preference shares pursuant to the following conditions: ❖ The issue must be authorized by the articles.
- The company’s capital must be divided into different classes of shares.
- The issue must be disclosed in the company’s prospectus or statement in lieu. ❖ The registrar must be notified of the issue.
- The shares must be fully paid.
- The share must be redeemed out of profit or proceeds of a special issue for that purpose.
- If the shares are redeemed otherwise than out of the proceeds of a special issue, the capital redemption reserve fund must be created.
Irredeemable preference shares: Are shares which once issued cannot be redeemed unless the company is dissolved.
Participative preference shares: Are shares where the dividend is fixed but once all the shareholders and creditors are paid, they can participate in the residual profit of the company together with the ordinary shareholder.
The dividend of preference shareholders is fixed but the following points should be remembered as regards to priority;
- Payment of dividend is entirely at the discretion of the directors and if the directors decide to transfer the whole profit made by the company to reserve capital, then nobody can question the decision.
- Payment of dividend to preference shareholders only becomes due once the dividend has been recommended and approved and the date of payment is due.
- If the dividend was not declared and the company goes into liquidation, even preference shareholders will not be paid.
- If it was declared before the company went into liquidation and was not paid, then the right will not be lost.
Non participative preference shares: these are shares where the dividend is fixed and once all the shareholders and creditors are paid, they cannot participate in the residual profit of the company together with the ordinary shareholder.
Deferred (Founders) Shares: These are shares that are usually issued to the founders or promoters as a reward for their services. They are entitled to dividends only after other classes of shares. Although their rights depend on the articles, these shares normally take a larger share of surplus assets during winding up than ordinary shares and they also carry greater voting rights.
Employee Shares: A company may have shares issued to employees to encourage them to have a direct interest in the company. This is done through an employee shares scheme managed and administered by a trustee for the benefit of deserving employees and those that have rendered exemplary service to the company. Usually employees make no payment for these shares and the shares have no voting rights at company’s Annual General Meeting. They serve as a retirement benefit for employees as they will be able to enjoy dividends and other benefits.
Bonus (Scrip) Shares: These result from payment of dividends in terms of shares instead of cash. It results in capitalizations of profits which then proportionately increases the shares held by each shareholder.
Treasury shares are created when a private or public limited company legitimately purchases its own shares out of cash or distributable profit. The purchased shares are then held by the company
‘in treasury’ which means the company can re-issue them without the usual formalities. They can only be sold for cash and the company cannot exercise the voting rights which attach to them.
Class rights are rights which are attached to particular types of shares by the company’s constitution.
A company may at its option attach special rights to different shares regarding: Dividends
Return of capital
The right to appoint or remove a director
Shares which have different rights from others are grouped together with other shares carrying identical rights to form a class. The most common types of share capital with different rights are preference shares and ordinary shares. There may also be ordinary shares with voting rights and ordinary shares without voting rights.
Variation of class rights
The holders of issued shares have vested rights which can only be varied by following a strict procedure. The standard procedure is by special resolution passed by at least three-quarters of the votes cast at a separate class meeting or by written consent.
A variation of class rights is an alteration in the position of shareholders with regard to those rights or duties which they have by virtue of their shares.
Transfer of Shares
This is a voluntary conveyance of title in shares from one person to another.
Ownership changes hands at the instance of the parties.
Under the Companies Act, the shares or other interests of any member in a company shall be movable property transferable in manner provided by the Articles of the company; shares in public and private companies are transferable.
For public companies, shares are freely transferable; however, the directors may decline to register the transfer of a share (not being a fully paid share):
- To a person of whom they shall not approve; or ❖ On which the company has a lien.
In private companies, transfer of shares is restricted by:
- Pre-emption clauses that require directors to offer the shares to existing members at the first instance.
Def of pre-emption clause
Pre-emptive rights (or “rights of pre-emption”) are any rights shareholders may have to be offered shares in a company before they are made available to anyone else. They can arise on the allotment, transfer or transmission of shares.
Pre-emptive rights on the issue of shares do not apply if:
- The articles of a private company exclude them
- The company passes a special resolution to exclude them; or
- The shares are issued for non-cash consideration;
- Shares within employees’ share scheme.
Restrictions on register of transfer by directors
This rule confers upon directors, total discretion to refuse to register a transfer.
NOTE: It is important to note that Articles of a company may restrict but not forbid the transfer of shares. This is because the right of a member to transfer his shares is a statutory right which cannot be taken away by the Articles since the Articles are subordinate to the express provisions of the Companies Act.
The Companies Act requires the articles of private companies to restrict the right to transfer the company’s shares.
Directors may in their absolute discretion and without assigning reasons refuse to register any transfer of any shares whether paid up or not; and as long as the directors have acted in good faith the transferor has no actionable claim against them.
Therefore, the directors must in every case, genuinely consider the application for the transfer and if they do not act in good faith, the court may order the company to register the transfer.
Therefore, if the Articles give the directors an absolute discretion to refuse to register the transfer, they are empowered to decline registration without giving their reasons.
The rules on the exercise of the discretion to refuse to register transfer of shares by directors are:
To exercise their power, the directors must consider the transfer and take a decision to refuse to register it
In RE Hackney Pavilion
A transfer of shares was sent in by the executors of a deceased director and shareholder. The two surviving directors held a board meeting and disagreed as to whether the transfer should be registered. There was no casting vote. The secretary wrote to the executors to inform them that the directors had declined to register the transfer.
This was incorrect since a positive act of refusal was necessary and there had been none. The register must be rectified by registering the transfer.
- The directors in reaching their decision must act bona fide in what they consider to be the best interests of the company.
- Where the articles specify grounds of refusal, the directors may be required to identify the grounds of refusal. However, they are not obliged to disclose the detailed reasons for their decision (unless the articles so provide). If nonetheless the directors do disclose their reasons, the court will consider whether the directors acted bona fide or whether their reasons accord with the grounds specified in the articles (if that is the case).
In Re Bede Ss Co Ltd (1971)
The directors were authorized to refuse transfers if in their opinion it was contrary to the interests of the company that the transferees should be members. The directors rejected transfers of small numbers of shares (and of single shares) on the ground that it was prejudicial to the company that its issued share capital should be fragmented.
The reason given could be challenged and was invalid. The power to refuse registration must (on the formula used in the articles) be confined to cases of objection to the transferees on personal grounds. In this case the directors were objecting to the small amount of shares transferred which was not an objection to the transferees personally.
- d) The power of refusal must be exercised within a reasonable time from the receipt of the transfer. A company is required to give notice of any refusal within sixty days. If the power is not exercised within a reasonable time it lapses and can no longer be used. The requirement of notice of refusal within sixty days effectually makes that the “reasonable” period.
In Re Swaledale Cleaners Ltd (1968)
On 3rd August 1967, transfers of shares were presented. There was only one director then in office and he purported to refuse to register the transfers in exercise of a power of refusal given by the articles. But a quorum for meetings of the directors was two and so the one director was not competent to exercise the powers of the board. On 11th December 1967 proceedings were begun for rectification of the register, i.e., a court order that the transfers should be entered in the register. On 18th December 1967 a second director was appointed and there was a board meeting at which the two directors refused to register the transfers (4 months, 14 days).
The attempt to exercise the power of refusal on 18th December 1967 was invalid since, in the interval of 4 1/2 months (since the transfers were presented), the power had expired (as regards those transfers). Since the power of refusal had not been exercised the transfers must be entered in the register.
Reasons why a transfer may be declined by a board of directors
There are a number of reasons why the transfer may instead be rejected. A few possible examples include:
- The transfer has not been documented correctly using an acceptable form;
- The transferring shareholder has failed to return their share certificate.
- The shares are not fully paid and the proposed transferee has not accepted liability for future calls on them;
- The proposed share transfer is to an infant, person of unsound mind, a bankrupt or an entity which is not a corporate body able to hold shares itself;
- Where the company has a lien on the shares;
- Where transfers in the shares have been suspended;
- Where the Articles of Association define pre-emption rights over the shares and the appropriate procedure related to these rights has not been followed;
If a company refuses to register a transfer of shares or debentures, it must notify the transferee within 60 days of presentation of the transfer for registration failure in which the company and every officer in default are liable to a default fine.
Shares may be transferred by:
- A registered holder
- Personal representative of a deceased member (administrator or executor)
- Trustee in bankruptcy of an undischarged bankrupt
Procedure of Transfer of Shares
- The parties enter into an agreement to sell and buy shares
- The transferor and the transferee execute a written instrument of transfer specifying the name address and occupation of the transferee
- The executed instrument of transfer must be presented for stamping
- The executed instrument of transfer and share certificate are presented to the company for registration of the transfer
- the directors then registers the transferee as the owner of the shares and enter the name of the transferee in the register in place of that the transferor
- On registration of the transfer the share certificate is cancelled and another issued in the name of the transferee
- The parties enter into an agreement to buy and sell shares
- They execute the proper instrument of transfer
- The transferor produces the share certificate along with the transfer instrument to an officer of the Company who certificates the transfer by writing in its margin the words “certificate lodged” and mentions the number of shares for which the certificate has been lodged
- The certificated instrument is handed back to the transferor with a balance ticket for any shares that have not been transferred. The ticket entitles the transferor to apply for a new certificate for the shares which have not been transferred
- The certificated instrument is then forwarded to the transferee who can make a good title for the shares bought. The Company will then register the transferee as a shareholder of the shares sold to him and then cancel the old certificate and then prepare two certificates:
- One for the shares sold and which shall be given to the transferee
- The other for the unsold shares which will be handed over to the transferee N/B the Company’s liability for false certification is subject to the qualification that the person certificating is authorized by the Company to do so and in the absence of such authority; the Company is not liable to the transferee for any loss suffered by him
Contents of a Transfer Form
- Name and address of transferor
- Name and address of transferee
- Name of the Company
- Number of shares being transferred
- Date of transfer
- Consideration paid
- Signatures of transferor and transferee
Effects of Transfer
A transferee does not acquire the legal title to the shares transferred or the full status of a member until his name is entered in the register. Until this happens;
- The transferor continues to be the legal owner of the shares but holds them in trust for the transferee.
- The transferee cannot exercise the rights of a share holder
- The transferee only has an equitable claim on the shares
- If calls are made the transferor must pay them but he can recover the amount so paid by him from the transferee
- If dividends are paid, the transferor is the person entitled to them
- The transferor must vote as the transferee directs him since the voting rights attaching to the shares have been transferred to the transferee
With the coming into force of the Central Depositories Act 2000, all tradable securities (shares) ought to be immobilized and shareholders who desire to transfer shares are required to open a securities account with the central depository and settlement corporation.
To transfer shares in a members account the shareholder must give written instructions to the broker or investment bank which ascertains or confirms that the shareholder has shares in his account.
The stock broker or investment bank offers the shares for sale at the NSE. When the shares are sold, the shareholder’s account is debited and the proceeds are credited to the stock broker or investment bank (client) account.
This is a legally binding agreement between the transferor and the transferee which comes into existence when the parties execute the proper instrument of transfer.
However, it is incomplete with regard to the transfer of shares as the transferor retains legal title in them. The transferee however retains an equitable interest.
If two or more transferees are beneficiaries of an unregistered transfer, the equities are said to be equal and the first in time prevails. However, the first transferee to secure a valid registration acquires the legal title (which takes precedence over the equitable title).
An instrument of transfer of shares on which the signature is forged is called a forged instrument and any transfer effected on such instrument is called a “forged transfer”.
The first thing that a company should do when an instrument of transfer is tendered to it is to enquire into its validity. The company should send a notice to the transferor at his address and inform him that such a transfer has been lodged and that if no objection is made before a specified day, it will be registered.
Where a transfer is effected through forgery, such a document is a legal nullity. It confers no rights and imposes no obligations on the parties.
It was so held in Ruben v. Great Fingall Consolidated where the certificate was not signed by the proper officers, but were forged and the company were held not liable.
Consequences of a Forged Transfer Therefore it follows that:
- Where the true owner of the shares has been removed from the register of members, the company must restore his name and pay him any dividends which have been declared during the time of his name having been removed.
- The person who lodged the forged transfer for registration must indemnify the company against any loss it suffers as a consequence of the registration.
- If the company issues a share certificate to the transferee under the forged transfer and the transferee sells or mortgages the shares to another person, who relying on the certificate takes them bona fide for value, the company is estopped from denying the transferee’s title to the shares.
- The company would be liable in damages to the purchaser or mortgagee in respect of the loss arising out of the fact that he does not obtain registration.
Notwithstanding anything in the Articles of the company, it shall not be ;lawful for the company to register a transfer of shares unless a proper instrument of transfer has been delivered to the company, this means that an oral transfer is illegal and void.
If the company registers an oral transfer of shares. The transferee would not acquire title to those shares and the transferor would be deemed to remain the registered holder of the shares.
Implied terms in the transfer of shares
The contract of transfer of shares is a contract of sale as the transferor agrees to sell and the transferee agrees to buy shares. Though the parties may set out the terms of the contract, some are implied by law, such as;
- That the transferee will pay the price of the shares
- That the transferor will hand over genuine instruments of transfer and the share certificate
- That the share certificate carries the rights and interests which it purports to convey iv) That the transferor will do nothing to prevent the transfer from being registered or delay the process
- That the transferor does not undertake that the transfer will be registered; it is the responsibility of the transferee to ensure that it is registered.
- That the transferee will indemnify the transferor with respect to all calls and other liabilities arising on the shares after the transfer
Effect of transfer
Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected through the agency of a stockbroker who is a member of the Nairobi Stock Exchange which will be evidenced by a purchase contract note and a sale contract note issued by the stockbroker. The property in the shares is however not vested in the transferee unless and until his name is entered in the company’s register of members. Until that happens the position is as follows:
- The transferor continues to be legal owner of the shares but holds such shares in trust for the transferee
- The transferee cannot exercise rights of a shareholder vis-à-vis the company iii) The transferee has an equitable claim to the shares
- If calls are made, the transferor must pay them but he can recover the amount so paid by him from the transferee
- If dividends are paid, the transferor is the person entitled to them according to the company’s records. He would however hold the dividends on trust for the transferee.
- The transferor must vote as the transferee directs him since the voting rights attaching to the shares have passed to the transferee
Transmission of Shares
This is an involuntary conveyance where title changes hands by operation of law. A transmission takes place in the event of death or bankruptcy of a shareholder.
Transmission by death
Upon death, the shareholder ceases to be a member and his shares pass to the personal representative who becomes a member when entered in the register of members as a member.
However he is free to transfer the shares to a 3rd party before his name is entered into the register.
Transmission by bankruptcy
Under the provision of the Bankruptcy Act, when a member is declared bankrupt his shares pass to the trustee in bankruptcy but remains a member as long as his name remains in the register. The trustee in bankruptcy may transfer the shares to a 3rd party before his name is entered in the register.
Share Certificates and Share Warrants
Every person who is entered as a member in the register of members of a company has a right to receive a share certificate in respect of those shares he holds in the company.
A share certificate is a certificate issued by a company certifying that on the date the certificate is issued a certain person is the registered owner of shares in the company.
It is documentary evidence of members’ rights and under and it is evidence of its contents and the member’s right to the share.
Most companies will require the share certificate to be produced when a request is made to transfer shares.
Certificate No… Number of Shares….. Ordinary Shares
BENSUNDA SECURITIES COMPANY LIMITED
Incorporated under the Companies Act (Cap 486)
100,000ordinary shares of 10/= each
P.O BOX 222777
this is to certify that Ocampo of………….is registered proprietor of two hundred and fifty ordinary shares of ten shillings each
numbered 1077 to 1133 both inclusive, in the above named company subject to the memorandum and articles thereof, and that up to this date there has been paid in respect of each share the sum of five thousands shillings.
Given under the COMMON SEAL of the said company on the 7th day of 2007.
1. Winston Oganda…………Director
Contents of a share certificate
- Name and common seal of the company
- Date of issue
- Name of the registered holder
- Number of shares and class
- Extent to which they are paid up
- Serial number of shares
- Serial number of the certificate
- Signatures of at least two directors
Legal Effects of Share Certificate
A share certificate is not a document of title but is prima facie evidence of ownership. The company therefore requires the holder to surrender his certificate for cancellation when he transfers all or any of his shares. If the company issues a share certificate which is incorrect it is estopped (prevented) from denying that it is correct but only against a person who has relied upon it and thereby suffered loss.
The issue of a share certificate makes the company liable in two ways:-
Estoppel by Share Certificate
Although the share certificate is only prima facie evidence of title, its contents may lender the company liable under the equitable doctrine of estoppel. This is because the contents of the share certificate are a representation by the company to 3rd parties and a bona fide 3rd party who suffers loss or damage by reason of relying upon the representation will hold the company liable under the doctrine of estoppel. The company cannot argue that it never made the representation or that it was false.
This phenomenon is referred to as estoppel by share certificate.
However, the conditions necessary for estoppel must be fulfilled.
Conditions for Estoppel were set in the precedent of (High Trees Case) and are as follows:
- A legal relationship between the parties must exist e.g. landlord and tenants
- There must be a promise or representation by one party intended to affect the legal relations and to be acted upon by the other
- There must be reliance upon the representation
- There must be a change in the legal position as a result of the reliance
- It would be unfair not to estop the plaintiff
The doctrine of estoppel by share certificate does not operate where:
- The 3rd party is aware of the falsity of the representation
- The share certificate relied upon is forged and the forgery was discovered before the registration was effected.
Estoppels as to payment
If the share certificate states that the shares are fully paid, the company is estopped as against a bonafide purchaser from alleging that he amount in the share certificate as being paid has not being paid.
In Bloomenthal V Ford (1897)
The company borrowed money from B and as security gave him share certificates for 10,000 shares of 1 pound each in his name in which the shares were described as fully paid. B believed that the amount due on shares had been paid by a previous holder. But this was not true. The company went into liquidation and the liquidator claimed from B the amount due on his shares.
The company was estopped by its own statement on the certificate that the shares were fully paid. The claim must fail.
Mortgage of Shares
As personal property shares may be disposed of by way of transfer or as a security.
Mortgage of shares is therefore a transaction whereby shares are used as collateral security for loans.
Mortgage of shares may be legal or equitable.
Under a legal mortgage the borrower transfers his shares to the mortgagee who becomes the registered holder subject to a separate agreement by which he undertakes to re-transfer the shares to the mortgagor on repayment of the loan.
The lender becomes the temporal owner thereof. The terms of such ownership are contained in the mortgage instrument (deed). Upon repayment the shares are retransferred to the borrower but in the event of default the transfer becomes absolute.
The agreement also determines who is entitled to the dividends and gives the mortgagee the right to sell the shares if the mortgagor defaults on the loan. As registered holder, the mortgagee can transfer the shares to a purchaser who buys from him. The voting rights exercisable in respect of the shares will depend on the provisions of the mortgage deed.
The main disadvantage of a legal mortgage is that it involves the formalities of a transfer and a retransfer
N.B: a legal mortgagee is, for the period when the contract is in force, a member of the company.
This transaction is affected by the deposit of the share certificate and a blank instrument of transfer with the lender. The borrower retains title and membership with all the rights exercisable by a member other than the right to transfer the shares. The lender acquires an equitable title on the shares.
N.B: A Blank transfer is a transfer signed by the mortgagor as registered holder but without the name of a transferee inserted in it.
This usually gives the mortgagee an implied power to insert his own name as transferee in case of default. He can then dispose of the shares after transferring them into his name. Upon repayment the share certificate is returned to the borrower (redemption)
Distinction between legal mortgage and equitable mortgage
|Legal mortgage||Equitable mortgage|
|• Borrower transfers his shares to the lender||• Borrower deposits the share certificate and signs a blank transfer with the lender|
|• The lender becomes temporal holder capable of exercising all the rights of the owner.||• Borrower retains legal ownership of the shares but has no custody of the share certificate|
|• In the event of default the transfer becomes absolute||• In the event of default the lender may sell the shares if the article so provide failing which the application must be made to the court to facilitate the sale|
Lien on Shares
“Lien” means a right to retain possession of some property of another until some claim attaching to it is settled. The right of lien on shares is not conferred on a company by the statute.
A lien is therefore an equitable charge on the shares of a member to secure sums owing by the member to the company. The company has a lien only if its articles so provide and to the extent that the articles provide.
The company has a first and paramount lien on un-fully paid shares for the amount outstanding. This lien extends to dividends payable on the shares.
Priority of Lien
If the company and a 3rd party have liens on a member’s share, the question will arise as to which lien has priority particularly; particularly where the company’s lien is subsequent to the 3rd party’s.
Generally, the person whose lien arose first has priority if the second person had notice of the first person’s existing lien. The subsequent lien can only have priority if the second person was unaware of the 1st lien.
Bradford Banking Company V Briggs & Co
A member deposited his share certificate with the bank as an equitable mortgage of the shares to secure a loan to him by the bank. The bank gave notice to the company of its interest as mortgagee. Later, the member became indebted to the company.
Held: As the company had prior notice of the bank’s mortgage, its lien (although the right to a lien existed when the notice was received) was postponed to the mortgage since the company’s claim under the lien arose after the bank’s notice was received.
Loss of lien
A company loses lien if:-
- It registers transfer of shares subject to the lien of the transferee
- A member pledges his shares to a third party as security for a loan and the company has notice thereof, and then incurs a liability to the company. In such a case, the pledge has priority over the lieu of the company as was held in Bradford Banking Company V Briggs & Co
Calls on Shares
This is a demand by the company through its directors to members with amounts outstanding on shares held to pay the same or any instalments thereof after allotment of shares at any time during its lifetime. Although the unpaid value of the shares is a debt due from a member of the company, the liability for its payment does not arise until a valid call has been made.
Calls are necessary where the company’s issued capital is not fully paid and they may be made by directors or the liquidator in the cause of winding up.
Usually the articles of association of the company prescribe rules for making calls on shares.
Rules relating to calls on shares:
Directors may from time to time make calls to the amount unpaid on shares
- Time: Such calls must be separated by at least one month
- Rate of call: a call must not exceed a quarter of the nominal value of the shares
- Notice: Members must be accorded a notice of at least 14 days
- Resolution: a call is deemed to have been made at the time the resolution authorizing it is passed by the board of directors.
- Powers of directors: Directors are empowered to postpone or revoke a call before it is effected
- Liability of joint holders: joint holders of a share are jointly and severally liable to pay all calls made
- Interest payable: if a member fails to pay a call on appointed dates he is bound to pay interest at the rate of 5% per annum
- Directors are empowered to accept calls paid in advance. This means that:
- The shareholders liability is reduced or extinguished
- The member becomes a creditor to the company entitled to interest at 6% per annum
- The company cannot be compelled to repay the sum except in winding up
- The shareholders must give consent for such repayments
- Upon winding-up, the shareholder ranks after other creditors but must be paid before the other shareholders
- The non-payment of a call or instalment thereof renders the shares liable to be forfeited
Types of calls
Call in advance
The board of directors may if it thinks it fit and if authorized by the articles and for the benefit of the company receive from any member the whole or any part of the amount uncalled and unpaid upon any shares held by him.
The board upon all or any of the money received may pay interest at such rate not exceeding 6% p.a unless the company in a general meeting otherwise directs.
Calls in arrears
If a sum called in respect of a share is not paid on or before the day appointed for payment, the person from whom the call is done shall pay interest from the day appointed for the payment at 5% p.a or such rate as the BOD may determine. The directors have the discretion to waive payment of any such interest wholly or in part.
Call in the event of winding
Where a shareholder did not pay the call money due on the shares and the company has not passed the resolution to forfeit the shares, he will continue to be a member till his name is removed from the register of members. In the event of winding up, the amount of calls in advance together with interest will rank in priority before payment of called up and paid up capital.
Consequences of non-payment of calls
Non-payment by a director within 6 months from the date of call is disqualification on his part leading to vacation of his office
No member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the company have been paid by him
The company may subject to the provisions of its articles forfeit the shares and the amount received thereon after due notice and a resolution passed in this regard
The company shall have a first and paramount lien on every share unpaid or not fully paid. The company can sell the shares in exercise of the lien.
Forfeiture of Shares
Def: This means the cancellation of shares of a shareholder by way of penalty for non-payment of any call made in respect of them.
If a shareholder falls to pay the call the Company has two remedies:
- It may sue for the amount
- It may forfeit his shares
Normally a Company should take legal action against defaulting members, however it avoids going to court and instead prefers to acquire the power under its articles to forfeit the shares of such members.
Rules relating to a valid forfeiture
- Authority of articles; a forfeiture must be authorized by articles of the Company and it will only be valid if such provisions are strictly compelled with.
- Notice; a proper notice of the intention to forfeit must be served on the defaulting member requiring him to pay the outstanding amount of call which remains unpaid with interests if any. The notice must further state that in event of non-payment of the call at or before appointed time the shares shall be liable to be forfeited.
- Resolution of the board; if the member does not comply with the notice the board will pass a formal resolution of forfeiture.
N/B Shares can only be forfeited for non-payment of calls but not for any other debt.
- Good faith; the power to forfeit shares must be exercised by directors in good faith and for benefit of the Company. The power cannot be used at the request of a shareholder to relieve him from liability on his shares.
Statutory declaration; the secretary or director of Company shall make a statutory declaration in writing that certain shar
- shares in Company have been forfeited on the date specified in the declaration.
Effect of forfeiture: a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares.
Statutory provisions on forfeiture of shares
The Companies Act describes the circumstances in which shares may be forfeited.
- If a shareholder fails to pay a call the directors may serve a notice on the member demanding payments and interest.
- The notice must specify:
- The due date
- The fact that the shares are liable to forfeited
- At least 14days notice must also be given.
- The forfeiture of shares is concluded by a statutory declaration sworn by a director or company secretary to the effect that the shares have been duly forfeited. This declaration is conclusive evidence of the forfeiture.
- If the notice is not honoured the board of directors may pass a resolution determining the shares as forfeited.
- A forfeited share maybe sold or otherwise disposed of as per the directions of the board. The board is also entitled to cancel the forfeiture.
- A shareholder whose shares have been forfeited ceases to be a member of the company in respect of the shares but remains liable for amount unpaid until it is received by the company.
Effect of forfeiture
- The defaulting member ceases to be a member of the company and his name is removed from the register of members
- He loses his claim to be paid amount on his shares
- He remains a contributory as a past member
N/B: A forfeited share may be sold on such terms and in such manner as the directors think fit and at any time before such seal, the forfeiture may be cancelled by the directors.
Surrender of Shares
It is the loss of shares by a member at his instance or option.
The member gives up the shares to the company.
However, if the Articles allow for forfeiture then the surrender of shares may be implied.
A valid surrendered of shares may take place in two circumstances:
- Where the share are accepted to avoid the formality of forfeiture. Where the Articles give power to the directors to accept surrender of shares and it is accepted in case of partly paid shares to save the company from going through the formalities of forfeiture, the surrender is valid. Any provision in the Articles for the acceptance of surrender in other circumstances is invalid.
- Where fully paid shares are accepted in exchange for new shares of the same nominal value surrendered.
Surrendered shares may be reissued by the directors to other persons if the articles authorise their re-issue.
The ultimate effect of surrender and forfeiture of shares is the termination of the membership of a shareholder. But surrender of shares is voluntary whereas forfeiture is at the instance of the