Topic 9 Notes - Corporations Law A PDF

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Australian Corp Law

Week 9: Share Transactions

Legal nature of shares  Shares are a kind of personal property – s 1070A o A share is a form of intangible property and so is called a chose in action o A chose in action is a collection of rights and obligations relating to an interest in a company of an economic and proprietary character  Have the following characteristics: o They are transferable o Capable of being used as a security o Capable of devolution by will  Shareholders usually enjoy other rights such as: o The right to vote at a general meeting o The right to participate in the company’s profits by receiving a dividend o The right to participate in the distribution of any surplus assets of the company in the event of a winding up  A company has the right to expect payment for shares and the right to expect the shareholder to be bound by the company constitution o S 140 creates a statutory contract between shareholders and the company  Power to issue shares – Chapter 2H o A company has all the powers of a body corporate, including the power to “issue and cancel shares in the company” – s 124(1)(a)  This applies regardless of any restriction in the company’s constitution, such as in regard to the purposes for which shares are to be issued o This power is not allowed to be used contrary to the law of a State or Territory – s 124(3) o The power to issue shares is further described in s 254A(1) to include:  Bonus shares (even if no consideration is paid for these shares);  Preference shares (including redeemable preference shares); and  Partly paid shares (whether or not this is on the same terms)  Both ordinary and preference shares may be fully or partly paid  Brisconnections Group Case o Company was seeking to raise capital debt o Unsophisticated investors were persuaded to buy $3 shares that could be bought for $1, with an obligation to pay calls on the remaining $2 per share o The company securities dropped to $0.001 on the ASX as investors were reluctant to buy the securities. o Unsophisticated investors who had bought into such securities had thus assumed a liability of several hundreds of thousands of dollars, facing bankruptcy o Led to ASX reforms which now require brokers to obtain the agreement of their clients prior to purchasing partly paid securities, and that the clients have read and understand the disclosure documents  Classes of ordinary shares o Companies may issue shares in different classes with different class rights and obligations attaching to them o This is done for various reasons:  To confine corporate control in the hands of particular persons  To raise finance by conferring extra rights upon preferential shareholders, but giving them limited voting rights

Australian Corp Law

To minimise the amount of tax payable (foreign shareholders may not benefit from having shares that attract dividend imputation rights) o Companies listed on the ASX list are usually required to have only one class of shares, unless they have been given an exemption – ASX Listing Rule 6.2 o Changes in statutes regarding shares  ‘Par value shares’ (nominal value given to shares) may no longer be issued – s 254C  ‘Bearer shares’ and ‘stock’ must not be issued by companies – s 254F  Subject to some limitations (in s254G(2)), a company may convert an ordinary share into a preference share, and vice versa – s 254G(1)  But, a share that was not a redeemable preference share when issued cannot later be converted into a redeemable preference share – s 254G(3) o Pre-emption rights in companies  In some companies, the constitution may provide for pre-emption rights  Existing shareholders are given the right of first refusal to purchase shares that an existing member wishes to sell / or alternatively that the seller may be required to follow a special procedure in selling their shares – Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR 444  This limits outsiders gaining a foothold in the company  Where there is a pre-emption right in the company, each member is entitled to enforce a breach of this provision – Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1; Rayfield v Hands [1960] Ch 1  Corporations Act  S 254D provides that pre-emptions rights for shareholders in proprietary companies are a replaceable rule. Companies may also choose to draft their own pre-emption right provisions (as these are replaceable rules)  S 1072C(6) allows a trustee in a bankruptcy to sell such a pre-emption share to a nonmember if a reasonable time has been given to existing members to purchase such shares Preference shares o Rights attached to preference shares may vary considerably on a case by case basis, but they all have an enhanced right that is not available in an ordinary share. This includes  Convertible preference shares: allow the conversion of shares into preference shares at the end of a fixed period – s 254D  Participating preference shares: allow the holder to receive both an ordinary dividend as well as preferred dividends  Cumulative preference shares: allow the holder to carry over any unpaid dividend entitlement where the company does not produce sufficient profits to pay a full interest rate  Non-cumulative preference shares: do not carry over to subsequent years  Redeemable preference shares: allow for the redemption/buy-back of shares at a fixed time or on the happening of a specified event, either at the option of the company or the holder – s 254A(3) o ASX Listing Rule 6.3: Preference shareholders must be permitted to vote in the following circumstances:  When a dividend in respect of a share is in arrears  On a proposal to reduce the entity’s share capital  On a resolution to approve the terms of a buy-back agreement  On a proposal that affects right attached to shares  On a proposal to wind up the entity  On a proposal to dispose of or sell the whole of the entity’s property, business and undertaking  During the winding up on the entity 

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Week 9: Share Transactions

Australian Corp Law

Issuing of preference shares  The rights attaching to preference shares must either be set out in the company’s constitution or be approved by way of a special resolution of the company – s 254A(2)  If redeemable preference shares are issued, they can be redeemed at a point of time listed in s 254A(3) o Why issue preference shares?  Some shareholder may only be interested in the economic benefits that they derive from their shares, and are therefore attracted to preference shares that have a high rate of return (even though they have no voting rights)  A company may only redeem preference shares on the terms on which they were issued – s254J  If the shares are fully paid up, redemption must be made out of profits or out of a new issue of shares made for the purpose of the redemption – s 254K  If s 254L or s 254K are not complied with, the redemption will still be valid, but the person who was “involved in the company’s contravention” of these provisions will be liable  They will commit an offence if the person contravenes the provision dishonestly – s 254L(3) o Flexibility of preference shares  Confers an advantage on the holder, whether the advantage be in the form of capital or dividend  Beck v Weinstock [2013] HCA 15  The 1961 Act required that what was a preference share be answered by reference to the rights that the company's memorandum and articles of association attached to that share and whether those rights preferred the holder of the share in question over the holder of any other class of share which the company could issue.  That no ordinary shares were ever issued does not deny that the disputed shares were preference shares. The Company's articles of association provided that the disputed shares were liable to be redeemed. They were redeemable preference shares. Partly paid & fully paid shares o S 254A(1) allows for the issue of fully paid shares or partly paid shares o Shareholders with partly paid shares are liable to pay the unpaid balance of the share price if called to do so by the company  Failure to do so will mean that these partly paid shares will be forfeited  This does not apply in the case of no-liability companies – s 254M o Shareholders with partly paid shares may also be called to make a contribution on the unpaid amount on their shares in the event of a winding up – ss 514-529 Amount of share capital o No limits on the amount of share capital or the value that can be issued  Although the company’s constitution may limit the number of shares o Companies may determine the terms on which the shares are issued and the rights & restrictions that attach to the shares – s 254B  But ASIC must be notified by way of a prescribed form if classes of shares are issued by a company – s 246F(1)  Any variation/cancellation of rights attaching to public company shares must be lodged with ASIC – s 246F(3)  Where class rights attaching to shares are varied/cancelled, ss 246B – 246G provide various safeguards and requirements that must be followed o

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Week 9: Share Transactions

Australian Corp Law

Where a variation takes place without unanimous support, at least 10% of the members can join together to apply to the court seeking to have the variation cancelled – s 246D  If unanimous support for a variation of cancellation of class rights occurs, this will take effect from the date of the resolution or such later date as specified – s 246E  Companies may decide to cancel shares so as to split them and issue new shares in their place – s 246C  Doctrine of Share Capital Maintenance o It is important for the company’s creditors to be aware of the capital strength (equity) of the company  Theoretically aims to ensure there is a pool of shareholder money which they can claim in the event of default by company (this is not often the actuality) o Usually known as the principle in Trevor v Whitworth (1887) 12 App Cas 409  Creditors “are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business’  Most creditors are more concerned with the cash flow & asset valuation of a company over the amount of its share capital (thus doing away with ‘par value’ shares)  This reworked the principle, regulating the areas companies could make transactions with their shares o Court approval is no longer critical in such matters, but the principal is still expressed  S 254K – regarding the redemption of redeemable preference shares Summary: Australia has modernised with the changing times (contrasted to the UK, much more stuck in their ways), and Aus has sought to strike the balance between managerial freedom to use capital, and investor and creditor protection on the other hand. o In 1997 the Company Law Review Bill was eventually passed to bring about the following modern rules:  S 117 sets out the legal requirements that need to be satisfied in applications for the registration of companies in Australia  Does not require the subscription of a minimum amount of capital before a company can be formed o The new “Solvency Test” is crucial  The Insolvent Trading Provision – s 588G  Lists transactions that will trigger the insolvent trading prohibitions  S 588G imposes a duty upon directors to prevent a company from trading whilst it is insolvent (if they have reasonable grounds for suspecting that the company is insolvent)  Directors of companies making any of the above decisions on behalf of a company in breach of the insolvent trading provisions will be found personally liable  S 588G therefore continues the capital maintenance doctrine by imposing liabilities upon directors making these decisions  This is focused on directors as they are the ones empowered to make decisions on behalf of the company – s 198A  In 2017, the Commonwealth reformed s 588G by introducing a new safe harbour defence in s 588GA to encourage directors to seek to rescue viable entities  S 588G covers the following concerns:  Insolvency test: failure to satisfy the solvency test opens director to liability  Fairness test: ensuring fairness between shareholders  Disclosure test: disclosure of all material info in situations where shareholder approval is required 

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Week 9: Share Transactions

Australian Corp Law

Week 9: Share Transactions

Australia’s capital maintenance doctrine is now expressed in Chapter 2J of the Corporations Act  S 256A Purpose:  This Part states the rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by: o (a) addressing the risk of these transactions leading to the company’s insolvency o (b) seeking to ensure fairness between the company’s shareholders o (c) requiring the company to disclose all material information.  

Must be solvent first (Solvency Test above) Deals with the following kinds of transactions which are likely to affect the capital position of the company: o Reductions in share capital and share buy-backs by companies – Pt 2J.1  Reductions in share capital – s 256B(1)  S 256B(1) Company may make reduction not otherwise authorised: A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: o (a) is fair and reasonable to the company’s shareholders as a whole; and o (b) does not materially prejudice the company’s ability to pay its creditors; and o (c) is approved by shareholders under section 256C. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction  When would companies want to rely on this the exceptions under s 256B? o Returning surplus capital to shareholders that is in excess of its commercial needs o To bolster earnings per share o To eliminate small shareholders by buying them out & creating larger holdings  Capital reductions under this section can be of two types: Equal reduction: relates only to ordinary shares & applies to each holder of shares in proportion to the number of shares held by them & the same terms are applied to each shareholder o Selective reduction: doesn’t satisfy the terms of an equal reduction Fair and reasonable under ss (a) o Even if there is some dissent within the shareholders (under part c), it will still be enough if there is overall fairness of the reduction to shareholders o The Courts will be slow to adopt a different view from that reached by an informed meeting of the shareholder – Re Allas Energy Pty Ltd (1998) 27 ACSR 729 Shareholder approval under ss (c) o Where an equal reduction scheme is contemplated, this only required the passage of an ordinary resolution of the shareholders – s 256C(1) o If a selective share reduction is contemplated, this requires passing a special resolution, with no votes being cast by any person who is to receive consideration as part of the reduction – s 256C(2)(a) o

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Australian Corp Law

Week 9: Share Transactions It will be passed where all ordinary shareholders at a meeting of a company agree with the resolution – s 256C(2) o If a cancellation of shares is to occur, a special resolution must be passed by those whose shares are to be cancelled – s 256C(2) Shareholder approval will not be required in a limited number of circumstances o These are listed under s 258 o Other exceptions are capital reductions arising from the cancellation of shares bought back by the company under the buyback provisions in ss 257A-J Other requirements under s 256C o A copy of the resolution must be lodged with ASIC within 14 days of the resolution being passed – s 256C(3) o Before shareholders are asked to vote on a share capital reduction, they must be provided with all material information – s 256C(4)  The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision on how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders. o The company must lodge a copy of the notice of the meeting (and any document relevant to the capital reduction) to ASIC before sending it out to company shareholders – s 256C(5) Consequences of a breach of s 256B(1) o Will not invalidate the reduction, but any person “involved” in the contravention (defined by s 79) will be taken to have contravened under s 256D  Will be subject to regulatory action, such as a civil penalty order under s 1317E  May also be subject to other legal action. If the company becomes insolvent as a result of the capital reduction, then the insolvent trading provisions against the directors under s 588G will apply o It is a criminal offence if it is breached by resorting to dishonesty (risks a fine or imprisonment of up to 5 years) – s 256D(4)  Statutory injunction to restrain the company from an unlawful reduction may also be sought by any person whose interests are affected (ie a shareholder) – s 1324 o

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Buy-back schemes – s 257A  Companies engage in share buy-backs for a variety of different reasons: o To return surplus funds to its members o To signal to the market that the company is undervalued o To increase earnings per share o To reduce administration costs where there are many small parcels of shares or oddlot shares o To reduce the threat of being seen as a takeover target by reducing the number of shares available to a raider o To facilitate the sale of employee shares by departing company employees

Australian Corp Law 

Week 9: Share Transactions Types of buy-back schemes – s 257B o Minimum holding (or odd-lot) buy-backs – s 9  “minimum holding buy-bacl means a buy-back of all of a holder’s shares in a listed corporation if the shares are less than a marketable parcel within the meaning of the rules of the relevant financial market.” o

Employee share schemes – s 9  

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On-market buy-backs – s 257B(6) 

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“A buy-back is an on-market buy-back if it results from an offer made by a listed corporation on a prescribed financial market in the ordinary course of trading on that market.”

Equal access buy-back schemes – s 257B(2) 

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“employee share scheme buy-back means a buy-back under a scheme that: (a) has as its purpose the acquisition of shares in a company by, or on behalf of:  (i) employees of the company, or of a related body corporate; or  (ii) directors of the company, or a related body corporate, who hold a salaried employment or office in the company or in a related body corporate; and (b) has been approved by the company in general meeting.”

“An equal access scheme is a scheme that satisfies all the following conditions:  (a) the offers under the scheme relate only to ordinary shares;  (b) the offers are to be made to every person who holds ordinary shares to buy back the same percentage of their ordinary shares;  (c) all of those persons have a reasonable opportunity to accept the offers made to them;  (d) buy-back agreements are not entered into until a specified time for acceptances of offers has closed;  (e) the terms of all the offers are the same.”

Selective buy-back schemes – s 9 

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“selective buy-back means a buy-back that is none of the following:  (a) a buy-back under an equal access scheme within the meaning of subsections 257B(2) and (3);  (b) a minimum holding buy-back;  (c) an on-market buy-back;

 (d) an employee share scheme buy-back.” Selective buy-back requires special or unanimous resolution – s 257D  (1) If section 257B applies this section to a buy-back, the terms of the buy-back agreement must be approved before it is entered into by either: o (a) a special resolution passed ...