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Question One Share capital- attempt two parts out of four Examples of each partHow is a share transferred? What is the nature of a share? What rights does a shareholder have to a dividend? Why and when would a company buy back its own shares? What are the key features of a disclosure document process? How does the IPO process work?

Question Two Loan capital- attempt two parts out of four What security can a lender take in a company when it lends funds? How is loan capital different from share capital? What are the relative merits of loan capital over share capital? What are the tax issues relevant to both types of borrowing?

Share Capital -

Share capital or as its sometimes referred to as equity capital refers to the owner’s capital, and is shown as such on the balance sheet. Issuing shares to investors is one of the main sources of fund raising for a company limited by shares. o Share capital is the total amount of money or other property that investors provide to the company in consideration for the shares issued to them. Basically meaning that they are buying into the company.

Share Transfer S 1072G provides that directors of a proprietary company have the power to refuse to register a transfer of shares for any reason. S 1072F (3) allows directors to refuse to register a transfer of shares if the shares are not fully paid up or the company has a lien over the shares. Meaning that if your share is partly paid then the directors can refuse to transfer it. Even though directors can refuse to transfer a share, they still must exercise this power

consistently with their fiduciary obligations- that is, in good faith in the best interest of the company Re Smith and Fawcet

Shares -> Directors must exercise share issue power for proper purpose good faith and best interests: s181(1), -> With reasonable care s180, and without conflict of interest. Proper purpose: Increase coy capital, reward employees and execs, acquire asset. Spread shareholding across wide group (Ngurli Ltd v McCann)

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Improper purpose: Dilute shareholder power into weakness. Issue to directors only. Give member personal remedy under Residues Treatment & Trading Co Ltd v Southern Resources Ltd.

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They are regulated by: o The company’s consti, or replaceable rules; o The Corporations Act; and o For listed companies, the ASX Listing Rules

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A share is: s 1070A (1) o an item of intangible property o A chose in action o It provides the registered owner with a right to a specified proportion of the company’s share capital o Personal property o Capable of devolution by will or by operation of law

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Shareholders do not own the company’s property, as the company is a separate legal entity.

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A share is a proportionate interest of a shareholder in the net worth of a company o A shares value is that proportion of the net worth of the company’s enterprise

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E.g. if you have 1% of shares or proportionate interest in the net worth of the company, then your shares value is 1% of the company’s net worth.

o The net asset backing of shares is based upon the balance sheet value of net assets -

Shares options may be granted either by a company or by another person (put or call) options

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Shares issued by a company o The normal rules of contract apply  Offer is made by the investor through an application form and paying the price

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Acceptance is made by the company through its directors that decide to allot the shares and send the notice of allotment

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It is done by post, and it is effective as soon as it is posted

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The offer will lapse if it is not accepted within a reasonable amount of time

A company grants an option when it agrees to issue shares to a person at a future date o That person in the option holder. o Options may be approved for executive remuneration packages o The person becomes a member of the company when the option is exercised and registration has been concluded

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A company can, if it chooses, state to the directors that they cannot issue shares, in excess of a state limit. o This can be useful as a check and balance for shareholders against dilution, and loss of control.

-> s117(2K). no. and class of shares members agree to take up, amount payable, and if shares paid in full or not -> Company can decide later to increase shares on issue. Must notify ASIC of issue details

within 1 month of issue s254X, as well as ASX if listed.

Disclosure Document Disclosure of documents requirements that must be prepared and lodged to ASIC: 1. When offering new shares for subscription by public companies, they must comply with extensive disclosure obligations in s 706 2. Generally, companies must give investors a prospectus (disclosure and marketing document produced in connection with offer of securities) with detailed information about the company and shares before the investors decide to subscribe for those shares. 3. If not significant penalties and sanction on companies, directors and advisors where the prospectus requirements are not complied with. 4. If there is a subscription without a prospectus or a defective prospectus, that person is entitled to civil remedies S 706 An offer of securities for issue needs disclosure to investors unless one of the exemptions in s 708 or 708AA Notification must be made within 1 month after a new share issue, the company must notify ASIC with details, in accordance to s 254X. The extent of disclosure depends on the type of disclosure document. These are as follows from the most comprehensive to the simplest: -

A Prospectus (Reiffel v ACN 075… Ltd , 2003, FCA), ASIC v Sydney Investment House Equities Pty Ltd, 2008, NSWSC o It is a document in writing, carrying with it particular and significant legal consequences. o All statements are clear, accurate and truthful o What actually takes place in practice aligns with the written statements in the prospectus

o Experts are independent and objective, and actively apply their expertise to the particular facts and circumstances -

A short form prospectus A profile statement An offer information statement (OIS)

Payment of Dividends When can the company pay dividends? S 254T Company may not pay a dividend unless: 1. Immediately before the dividend is declared and the excess is sufficient for the payment of the dividend.

2. The payment is fair and reasonable to the company’s shareholders as a whole.

3. They payment does not materially prejudice the company’s ability to pay its creditors. If these are not met: 1. s 588G: Directors may be personally liable if the company becomes insolvent when a dividend is paid.

2. s 588G(1A): Paying a dividend is incurring a debt. The insolvent trading provisions apply if: -

A person is a director at the time the company incurs the debt (paying or declaring the dividend)

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The company is insolvent when the debt is incurred or becomes insolvent by incurring the debt. o (If the insolvent trading provisions apply, s588G(2) then a director may be under civil penalty provision)

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At the time, there were reasonable grounds for suspecting the company is or would become insolvent. o (Criminal offence – if the directors suspected the company at the time was or would become insolvent, and acted dishonestly in failing prevent the company from declaring or paying the dividend.)

Buying back the shares S 257 A company can offer to buy back its own shares from one or more shareholders if: -

if it does not materially prejudice the company’s ability to pay its creditors or;

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if the company follows the procedures set out in the CA act (Corps Act)

A selective buy back may happen if it is approved by either: 1. Special Resolution s 256 or 2. Resolution agreed to by all ordinary shareholders s 256C If any share buy-backs happen, under s 254 Y ASIC must be notified at a prescribed time both before and after the share buy-backs If the company was become insolvent as a result of a share capital reduction or share buyback, the directors may have breached their duties- they may be liable for insolvent trading under S588G...