21. SHARE CAPITAL AND SHARES
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This is provided for under Part IV of the Act. Share capital is one of the peculiar features of companies which are limited by shares as opposed to companies which are limited by guarantee, Section 6(2) of the Act provides that, “an application for incorporation shall be in the prescribed form, shall be signed by each subscriber and shall specify if the company is to have share capital
a) The amount of share capital of the company;
b) The division of the share capital into shares of fixed amount; and c) The number of shares each subscriber agrees to take.”
The PACRO Company forms provide that the amount of share capital may be expressed invarious foreign currencies, e.g. British Pounds or American Dollars.
Nominal or Par Value Shares
When you divide the share capital into shares of a fixed amount of say K1 or K5, the shares will give rise to par value or nominal value of each individual share. For example, 10,000,000 shares divided into K1 nominal value or par value. The common Law rationale for this requirement for nominal value was stated in Ooregum Gold Mining Co.
of India Ltd v Roper & Wallroth (1892) AC 125 as follows:
“Every creditor of a company is entitled to look to a fixed and certain amount of capital as security, i.e. what would happen in case of failure by the company to pay back what is owed.”
A company should not be allowed to mislead both the creditors and potential shareholders as regards its real share capital. For example, if a company states that its share capital is K50mn divided into shares of K5 each all of which have been issued and fully paid, creditors and potential shareholders are entitled to assume that the company has indeed received capital to the extent of K50mn and can also take comfort from the fact that the K50mn cannot easily be taken away from the company by the shareholders since there are strict rules governing reduction of capital.
In that case, the market value of 1 Pound ordinary shares of a company was 2s 6d. The company thereupon issued preference shares of 1 Pound each with 15s. Credited as paid, leaving a liability of only 5c. a share. A contract to this effect was registered under the provisions of the Companies Act of England. The transaction was bona fide thought to be the best way of raising further funds for the company, especially since the ordinary shares stood at a great discount. Held, the issue was ultra vires, and allottees were liable to pay the shares in full: “The dominant and cardinal principle of [the Companies] Acts is that the investor shall purchase immunity from liability beyond a certain limit on the terms that there shall be and remain a liability up to that limit.”
The company’s share capital, which is stated in the Incorporation Form, is also known as authorized or nominal capital. Why authorized? Authorized capital implies that the company would not be permitted to issue shares in excess of the authorized share capital unless allowed to increase the share capital. This means alteration of the share capital, which entails creation of new shares by passing a special resolution.
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The capital clause in the Incorporation Form is significant in that it specifies the maximum number of shares that can be allotted at any given time and it is thus a limitation on the company’s power of allotment of shares.
22. CAPITAL
From an academic perspective, Professor Gower has indicated that different disciplines have a different meaning on what is meant by the term “capital”.
Capital is anything tangible or intangible, which must be quantified, in monetary terms.
The term capital is used in modern company law to cover four things:
a) Share capital, i.e. the funds subscribed by members or shareholders of a company.
b) Loan capital, i.e. the funds provided by commercial finance providers as well as debentures loaned to the company.
c) All funds whether provided by members, creditors or through retention of profits.
d) These assets in which all the funds would have been invested.
The Incorporation Form will specify the initial authorized share capital of a company.
The capital may be paid for in full or only paid for partially, i.e. fully paid up or partially paid up. In company law, capital will cover not only the share capital but also loan capital. Share capital represents the rights, which the holders of the capital have in the company while loan capital represents the rights, which the givers of such capital have against the company.
(i) Types of Capital and Share Capital Structure
In company law, the term capital is used in relation to the following:
a). Authorized Shared Capital (or Nominal Capital)
By definition this is the total amount of share capital, which the company is authorized to issue by the capital clause of the Incorporation Form. This total capital must be divided into shares of fixed amounts, e.g. K50mn divided into shares of K1 each. Minimum nominal capital for private companies limited by shares is K5mn while for public companies is K50mn.
b). Issued (or Allotted) Share Capital
This is that part of capital which is actually issued to the members. It represents the nominal value of the shares, which are actually appropriated to the shareholders. Issued share capital is further divided into issued and paid; and issued but not paid for shares.
Issued and paid-up share capital is that part of the issued share capital which has actually
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been paid up for by its members. In this case the company will not be owed. When you add the issued and paid, and issued but not paid shares, you get the issued share capital.
Share allotment entails transferring shares from B to A below. After the shares have been issued the next stage is for the shares to be paid for.
c). Uncalled and Reserve Capital
Uncalled share capital is the amount owing on issued shares which members have not yet been called on to pay. Reserved capital is uncalled capital the company has resolved not to call unless the company is wound-up.