Membership, Dividend, Shareholders’ meetings PDF

Preview

Summary

This set of notes explains how to become a member; transfer of shares and liability of members and dividends...

Description

Topic 5: Membership, Dividend, Shareholders’ meetings An unlisted company must generally issue a share certificate when shares are issued or a transfer of shares has been lodged. A share certificate is evidence of the title of a member to the shares specified. A share certificate may be relied upon and if it contains incorrect information, the company is liable for any loss arising from the error. A transfer of shares occurs on a sale or gift and passes ownership from one shareholder to another. Shares are presumed to be freely transferable although proprietary companies in particular typically restrict the transfer of shares by a provision in the constitution that allows directors to refuse to register a transfer. The procedure for transfers of shares requires delivery to the company of an instrument of transfer signed by the transferor and transferee and the share certificate held by the transferor. The constitutions of companies often give directors the right to refuse to register a transfer of shares and they need not give reasons for a refusal unless required to do so. Directors must exercise their discretion in accordance with their fiduciary duties. The court may intervene where a refusal to register a transfer is without just cause or is oppressive. CHESS is the electronic settlement system used in Australian Securities Exchange (ASX) trading and has replaced the traditional procedure of paper transfers for share market transactions. Shares may pass from a shareholder to another by operation of law. This occurs upon the death or bankruptcy of a member and involves a transmission of shares to an executor or other personal representative or the trustee in bankruptcy, respectively.

How to become a member -

-

Agreeing to be a member and identified as such on registration o A person must agree to become member and have their details entered on the company’s register of members. o The register of members is proof of matters shown in it in the absence of evidence to the contrary. A person may apply to the court to have the register corrected Exercising an option to acquire shares Applying for and receiving an issue of shares Transmission on death or bankruptcy of a present member Transfer from a present member Conversion of a company limited by guarantee to a company limited by shares Buying shares under a call warrant Exercising rights to convert convertible notes into shares

Introduction The members of a company limited by shares are its shareholders. To become a shareholder, it is first necessary to become a member. The members of company limited by guarantee are not shareholders. An unlimited company can be formed without share capital and so its members are not shareholders. S114: minimum member of a company is 1. S113: maximum of non- employee shareholders of a proprietary company is 50.

Important to determine whether a person is a member of a company because: -

Only members are entitled to vote at general meetings Only members are entitled to receive dividends Members are liable to pay calls made by a company other than a no liability company if their shares are partly paid Members may be liable to contribute towards payment of the debts if the company is in the process of winding up Members are entitled to share in company’s surplus assets on winding up

Becoming a member S231(b): members must agree to become members and have their names entered on the register of members A person may become member in several ways: i.

S231(a) being a member on the registration of the company o S117(2)(c ) the application for registration of a company must state the names and addresses of each person who consents to become a member o S168(1)(a),s169: all companies must set up and maintain a register of members containing prescribed information about shareholders and the shares they own.

ii.

S231( c) arising from conversion of a company from one limited by guarantee to one limited by shares Applying for and receiving an issue of shares Accepting a transfer of shares from a present members Receiving shares by transmission on the death or bankruptcy of a member Exercising an option over shares and requiring the company to issue the shares Buying shares at the strike price under a call warrant Holders of convertible notes may exercise their right to convert them into shares in the company.

iii. iv. v. vi. vii. viii.

Transfer of shares -

Transfer of shares occurs when ownership of shares passes from one shareholder to another person Shares in a company are presumed to be transferable without restrictions ( an important characteristic of listed companies and necessary for stock exchange trading) S 1072G: proprietary company directors have discretion to refuse to register a transfer for any reason.

Instrument of transfer -

S 1071 B(2): prohibits a company from registering a transfer unless a proper instrument of transfer has been delivered to the company An instrument of transfer documents the transfer of ownership of shares from an existing shareholder to another person. It provides for the signature of both transferor and transferee. The sellor (transferor) delivers a signed transfer, together with share certificates, to the buyer (transferee). S1072 F(1): the transferor remains the holder of the shares and a member until the transfer is registered and the name of the transferee is entered in the register of members. ( important

where shares are partly paid because transferor remain liable for calls until the transfer is registered. Unregistered transfers Usually… -

There is a contract between the transferor and transferee The transferor hands over the duly executed transfer and share certificate to the transferee The transferee lodges the completed transfer and certificate with the company The company registers the name of the transferee in the register of members and issues a new share certificate in the transferee’s name

Problem is… -

Where the transferor and transferee enter into a contract for sale of shares but the share transfer is not registered by the company. The transfer is incomplete. This is a problem because the company needs only recognise legal interests in shares and is not affected by notice of any trusts. If a shareholder enters into contract to sell the same shares to two buyers, the buyer who first obtains registration becomes the holder of the shares. Where neither buyer obtains registration, the first to acquire an interest under contract prevails.

Restrictions on transfer of shares The owner of property has general right to transfer personal property. Companies are allowed to restrict transfer of shares. Any restrictions contained in the company’s constitution must be clear and unambiguous. Restriction on the transfer of shares in the constitution did not apply: -

to a transmission of shares on the death or bankruptcy of a shareholder; to a compulsory transfer of shares by court order; or to a transfer of shares from a retiring trustee to a new trustee.

Transmission of shares -

Occurs if a shareholder dies, becomes incapable through mental or physical incapacity or becomes a bankrupt. Procedure of transfer of shares does not apply S1072A(1) the company will only recognise the personal representative as being entitled to the deceased shareholder’s interest in the shares S1072A (2)(b) the personal representative has the same rights as the deceased shareholder, whether or not registered as the holder of shares S1072A (3) If the personal representative chooses to be registered, the company must register the representative as a shareholder

Liability of members -

S516: members of company limited by shared is only liable to the amount that is unpaid on their shares S515: on winding up of a company, every present and past member is liable to contribute to the property of the company to an amount sufficient for payment of its debts, costs of winding up and adjustment of rights as between its contributories.

-

-

-

S521: a part member who has ceased to be a member for more than one year prior to commencement of winding up is not liable to contribute S520 a past member is not liable to contribute to repay debts incurred after they ceased to be a member; s 522 only liable where it appears to the court that the existing members are unable to satisfy the company’s debts S517: the liability of a member of a company limited by guarantee is limited to the amount undertaken to be contributed by the member to the property of the company in the event of its being wound up. Members of unlimited company are liable to contribute to the full extent of the debts and liabilities of the company S140(1) although members are contractually bound by the company’s constitution and any replaceable rules, they are not bound by a modification of the constitution made after they became members where the modification requires them to take more shares or increases their liability to the company.

Dividends -

-

The rules governing the procedure for payment of dividends are contained in either the replaceable rules (ss 254U, 254W(2)) or in a company’s constitution Under the replaceable rules, directors have power to pay dividends. If a company provides for declaration of dividends in its constitution, the directors usually have the power to recommend that a dividend be paid and the shareholders can only declare a dividend up to the recommended amount. Shareholders cannot override the powers of the directors not to pay a dividend even where the company’s assets sufficiently exceed its liabilities Dividend may be paid if the company’s assets exceed its liabilities and the excess is sufficient for the payment of the dividend. Payment of a dividend must be fair and reasonable to shareholders as a whole and must not materially prejudice the company’s ability to pay its creditors

Introduction -

Dividends are payments to shareholders and represent a return on the shareholder’s investment in the company Before amendment, ‘profits test’ applies that specified that dividends could only be paid out of company profits After amendment, ‘balance sheet’ solvency test applies

Payment of dividends Methods of payment: -

Cash Issue of shares ( “bonus shares”) Grant of share options Transfer of assets Paying up unpaid amount on partly paid shares

Who decides whether to pay dividends? -

S254U(1) directors have power to pay a dividend without the need for a prior dividend declaration by shareholders S254U(1) is replaceable rule and so can be displaced or modified by a provision in a company’s constitution

-

-

S254V (1) A debt to shareholders entitled to the dividend is not incurred until the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then. S254V (2) if a company has a constitution that provides for the declaration of dividends, the company incurs a debt when the dividend is declared. General rule: shareholders cannot force a company to pay dividends even if it has sufficient surplus assets to do so ( Burland v Earle) However, shareholders may be able to force the company to declare a dividend in circumstances where the company is lawfully able to do so and the terms of the company’s constitution indicate that it was the intention of the parties that the shareholders would be entitled to a fixed, mandatory dividend ( Sumiseki Materials Co Ltd v Wambo Coal)

Balance sheet solvency test -

-

S254T(1)(A): A company must not pay a dividend unless its assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend. Assets and liabilities are calculated in accordance with accounting standards in force at relevant time ( balance solvency test)...