COMP Q 1 forfeited shares PDF

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forfeited shares, partly paid shares...

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1 Please mention the main benefits that the members of the company enjoy.

1 the right to influence the way the company’s affairs are conducted, by voting on members’ resolutions 2 the right to a return of contributed capital when the company is wound up (provided there is any property left after paying the company’s creditors0. Sometimes a company returns part of its contributed capital thought continuing in business, but this is subject to rules which attempt to ensure that creditors are not jeopardized 3 The right to participate when the company makes a distribution of its profits to its members. If on winding up a company there is a surplus after paying all its creditors and repaying its contributed capital then the surplus is divided among the members. While a company is in existence it may anticipate an ultimate share-out of surplus by an annual distribution of profits. A distribution of surplus or of annual profits is called a dividend. Payment of dividends before winding up is also subject to rules protecting creditors. 4 The right to transfer shares. This is of great importance in public companies with shares traded on the Stock Exchange, but most private companies restrict this right.

2 Please explain how a contract or the allotment of shares is formed. What happens in the case that an offeror authorizes acceptance of the offer by post?

A contract for the allotment of shares, like any contract, is formed after acceptance by one party of an offer made by the other. There are two possibilities:

1 the offer is made by the potential shareholder. In many issues of shares by public companies, prospective shareholders make offers on the basis of an invitation to treat (called a ‘prospectus’) Issued by the company, which sets out standard term and conditions on which the company will accept offers, an there is no negotiation of any of the terms. In other issues an individual investor and a company may conduct lengthy negotiations to establish the terms on which the investor will put money into the company

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2 the offer is made by the company. This is usually done by means of a provisional allotment letter, which is a letter stating that the company has provisionally allotted certain shares to the address pending acceptance of the offer and specifying a date when the offer will lapse if not accepted. Usually offers of this kind are made only to existing members of a company. If an offeror authorises acceptance of the offer by post (as in the case with most public issues of shares), the contract is formed when a properly addressed acceptance is put into the control of the Royal Mail or other posts operator (Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) Unless a time limit is specified, an offer lapses if it is not accepted after a reasonable time. In Ramsgate Victoria Hotel Co Ltd v Montefiore (1866), Mr Montefiore offered on 8th of June of 1864 to subscribe for shares in the company. On the 23rd of November, the company decided to accept the offer but the court held that it had lapsed and so Mr Montefiore was not liable to pay for the shares and the company had to return his deposit.

3 Please explain when a company acquires the right to forfeit shares. How the courts have interpreted the provisions for forfeiture? ANSWER: Articles may give the company a right to forfeit shares if a demand for payment of a call is not met (Section 659(2) of CA 2006). In the model articles for public companies in SI 2008/3229, articles 58 to 61 deal with forfeiture. A company does not have an inherent right to forfeit shares: the power must be provided in the articles (Re National Patent Steam Fuel Co, Barton’s case (1859) A company is permitted to accept a surrender of shares in lieu of forfeiture if this is provided for in its articles (Section 659 (2) of CA 2006). The courts have always interpreted any provision for the forfeiture of property strictly. The articles specify the procedure for forfeiture and that procedure must be followed or the forfeiture will be invalid (Johnson v Little’s Iron Agency (1877) - wrong amount of interest demanded in demand for call so that forfeiture could not be grounded on failure to meet demand (Goulton v London Architectural Brick and Tile Co [1877]. In Sweny v Smith (1869) a forfeiture was invalid because the company had wrongly refused a tender of the amount demanded.

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4 Please mention the main consequences of forfeiture of shares

ANSWER: A member whose shares have been forfeited or surrendered loses whoever capital was contributed for those shares. However, in principle the member would also be relieved of liability to pay the amounts unpaid on the shares (Re Blakely Ordnance Co, Stocken’s Case (1868). But this would amount to an acquisition by the company of its own shares for valuable consideration, namely, the forgiving of a debt due to the company (Bellerby v Rowland and Marwood’s Steamship Co [1902]. By Section 659 (2) ©, forfeiture, or surrender in lieu of forfeiture, of shares is outside the general prohibition on acquisition of own shares for valuable consideration imposed by section 659 (1). Article 60 (3) (d) of the model articles for public companies avoids this problem by providing that a person whose shares have been forfeited ‘remains liable to the company for all sums payable by that person under the articles at the date of forfeiture in respect of those shares.’ A person who has forfeited shares in a company ceases to be a member in respect of those shares (Re China Steam Ship Co, Dawes’s Case (1868) so that the money owed by such a person to the company under article 60 is owed as a debtor to the company and not as a member of it (Ladies’ Dress Association Ltd v Pulbrook [1900]) Similarly damages due from the company to a person for wrongful forfeiture of shares are not owed to the person qua member (Re New Chile Gold Mining Co (1889). Liability under article 60 arises at the time of forfeiture and the debt is owed by virtue of the articles of association (Re Blakely Ordnance Co, Stockens’ case). However, the liability does not arise under the contract formed between the company and its members by the company’s articles; it arises because the contract of allotment of the forfeited shares was upon the terms of the articles. The company becomes the holder of shares that are forfeited or surrendered in lieu of forfeiture and must attempt to sell them to a new holder who will become liable for the whole amount unpaid of the shares including amounts left unpaid by the previous holder (New Balkis Eersteling Ltd v Randt Gold Mining Co [1904])

5 Please mention the main obligations of the companies in relation to forfeited shares ANSWER: A public company must not exercise any voting rights in respect of shares it holds by forfeiture or surrender in lieu of forfeiture (Section 662 (1) (a) and (5)). If it fails to sell such shares within three years of forfeiture or surrender, it must cancel he shares and reduce its share capital account accordingly (Section 662(2) and (3) (a). If this reduces the nominal value of the company’s 3

allotted share capital to less than the authorised minimum, the company must re-register as a private company (Section 662 (2) (b)) and the directors are empowered to apply for re-registration and to make the necessary changes in the company’s articles without consulting the members (Section 664)

6 What is a partly paid share? What happens in the case that a public company issues partly paid share? ANSWER: If a share is given to a member who does not contribute its whole nominal value, the share is said to be partly paid. Unlike fully paid shares, each partly paid share of a company must have a distinguishing number (Section 543 (2)) which is recorded against the holder’s name in the register of members (Section 113(3)(a)(i)). If a public company issues shares partly paid, at least one-quarter of the nominal value must be paid on or before allotment unless the shares are being allotted in pursuance of an employees’ share scheme (Section 586(2)) If a share is allotted in contravention of section 586 (1), it must be treated as though the minimum amount had been paid up, and the allottee is liable to pay the deficiency plus interest at 5 per cent per annum (section 586 (3) and 592). Further, the company and any officer of the company in default will have committed an offence triable either way (Section 590)

7 What is a call? Who has the right to make a call? Is there any limitation to this right? A company that has allotted a share partly paid has the right to make a call for any or all of the remainder of the agreed capital contribution at any time. The articles of the company normally assign to its directors the power to make calls, but usually set out rules of procedure, as in the model articles for public companies, articles 54 to 62, in SI 2008/3229. In Odessa Tramways Co v Mendel (1878) and in Anglo-Universal Bank v Baragnon (1881), the Court of Appeal said that it could not review the amount called up by directors of a company on partly paid shares because it would not question their judgement on what financial resources were required by the company. The decision to make a call could only be challenged for breach of what is now CA 2006, section 171 or section 172. Mr Mendel did not make such a challenge. Mr Baragnon did, but the court rejected it. (Bailey v Birkenhead, Lancashire and Chehire

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Junction Railway Co (1850) was a similar case concerning a statutory company.) These cases are examples of the court refusing to investigate questions of business judgement. It has been held that directors’ power to make calls is limited by a rule of the general law that members must be treated equally: accordingly, directors cannot make different calls on different shares (Preston v Grand Collier Dock Co (1840). However section 581 (a), permits contracts for the allotment of shares in a company to provide for different calls to be made on different shares, if there is an authorisation to that effect in the company’s articles. Such an authorisation is given in the model articles for public companies (article 55(3)

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