Capital maintenance rules and share capital of the Company Law Reform Committee (CLRC): simplification and streamlining of the provisions applicable to shares. First, it requires that a joint-stock company must state its authorized share capital in its articles of incorporation; and.
SECTION B - EXECUTIVE SUMMARY
- RATIONALE FOR ABANDONING THE REQUIREMENTS AS SET OUT IN THE PARAGRAPH 1.2
- CONSEQUENTIAL LAW REFORM OF HAVING ABOLISHED THE REQUIREMENT THAT A COMPANY LIMITED BY SHARES MUST STATE ITS AUTHORISED SHARE CAPITAL IN ITS
- TRANSITIONAL AND CONSEQUENTIAL LAW REFORM OF HAVING ABOLISHED THE REQUIREMENT THAT SHARES ISSUED MUST HAVE A PAR OR NOMINAL VALUE ATTACHED TO IT
- SIMPLIFYING AND STREAMLINING PROVISIONS APPLICABLE TO SHARES
5 In other words, for the purposes of Conversion, the existing nominal value of the issued shares becomes the issue price of the shares after Conversion. Any amount in the company's share premium account and the company's capital repayment reserve is transferred to one account called the 'contributed capital' account.
SECTION C - CAPITAL MAINTENANCE RULES
TREATMENT OF SHARE CAPITAL, SHARE PREMIUM ACCOUNT AND CAPITAL REDEMPTION RESERVE
- Treatment of share premium account
- Treatment of the amount standing to the credit of the share premium account prior to the Conversion date
- Treatment of redeemable preference shares
The amount to the credit of the share premium account can, however, be used by the company for certain permitted purposes only as set out in section 60(3) of the Companies Act 1965. Any amount to the credit of the company's share. premium account and the company's capital redemption reserve will be transferred to one account called the 'contributed capital' account. The company's 'contributed capital' account will be treated as an indivisible reserve for the purposes of the law.
Immediately after the agreed date, any amount to the credit of the company's capital reserve and the reserve for capital redemption becomes part of the company's share capital21." One of the transitional issues that required consideration by the CLRC was whether the amount credited to the company's capital account, once transferred to the contributed capital account, could be used for certain purposes. Whether an amount to the credit of the Company's Share Premium Account for certain purposes after the date of conversion would be permitted to apply is a problem.
The CLRC is inclined to suggest that after the Conversion Date, but limited to the transition period as discussed above, the amount to the credit of the company's share premium account immediately before the Conversion Date may be used for purposes set out in recommendation (IV ). This is to ensure that the company's 'contributed capital' is not used to redeem RPS25. In terms of recommendation (III) in paragraph 2, 'immediately on or after the Conversion Date any amount to the credit of the company's capital redemption reserve shall be transferred to the company's contributed capital account.
CAPITALISATION OF PROFITS, CONSOLIDATION AND SUBDIVISION
- Capitalisation of profits
- Consolidation and Subdivision
In a par value environment, capitalization of profits without issuing new shares is usually not done. However, this does not necessarily translate into increased shareholder value. The CLRC noted that in an NPV environment capitalization of profits can be done without increasing the number of shares held by the shareholder.
In such a case, there may be a perception that there is a loss in the value of the shareholding as no new shares are issued. It is the view of the CLRC that capitalization of profits is possible regardless of whether the shares have par value or not. Consolidation in an NPV environment can be achieved by reducing the number of issued NPV shares.
In a par value environment, a subdivision will result in an increase in the number of shares held, but there will be no corresponding increase in the paid-up capital of the company and in the value of the shareholders' shareholdings. In an NPV environment, the effect of a subdivision can be achieved by increasing the number of shares without par value issued, but this is limited only to fully paid NPV shares27. With the abolition of the authorized share capital, the provision to cancel unissued shares no longer applies.
COROLLARY CHANGES AND TRANSITIONAL PROVISIONS IN RELATION TO THE INTRODUCTION OF NO PAR VALUE SHARES
- Shares issued at a discount
As previously discussed, shares in an NPV environment will be issued for an issue price without reference to par value. In a par value environment, a company whose shares have a market value below par or par may lawfully issue shares at a discount provided it follows procedures in accordance with section 59. If a company does not have available premium of shares or reserves, its ability to issue shares of the same class as the one being traded will be impeded.
The UK management committee stated that the purpose of the transitional provisions would be to preserve the substantive effect of the conversion of a par value to a NPV environment in the articles and memorandum and in contracts and other documents;. The transitional provision must cover the following matters: a) treatment of the amount standing on the share premium account, based on the discussion above31;. If par value is considered to be relevant for determining the liability of contributories on liquidation, an NHW environment recognizes this view and will state that the liability is up to the unpaid amount of the issue price.
The Conversion from par value to an NPV environment does not mean that the liability for the unpaid portion of shares under the existing par value environment will cease to exist. An example of such a transitional provision is provided in terms of section 1449 of the Australian Corporations Act32. In line with the objectives of the Corporate Law Reform Programme, the CLRC revised some of the provisions in the Companies Act 1965 relating to shares.
SECTION D - SHARE CAPITAL
The process of reviewing these provisions was undertaken to determine whether they continue to be relevant and applicable in today's business environment. Furthermore, in the event that the mentioned provisions are considered important, to clarify their application if deemed necessary.
SIMPLIFYING AND STREAMLINING PROVISIONS APPLICABLE TO SHARES
The CLRC recommends retaining
The CLRC recommends abolishing
- Retaining the regulatory controls on the power of the company to make payment of certain commissions and prohibition of payment of other commissions and discounts
- Prohibiting the issue of bearer shares (share warrants) and abolishing the requirement of reserve capital (reserve liability)
The CLRC is also of the view that section 56(1) of the Companies Act 1965 which enables a company to make different arrangements for calls and payment should be retained as this provision is relevant if a company issues partially paid up shares. The CLRC noted that section 57 of the Companies Act 1965 currently prohibits the issue of bearer shares (share warrants). Today, the transfer of shares other than bearer shares is regulated by transfer procedures provided for in the Companies Act 196533 and in the company's constitution.
In the case of bearer shares (share warrants), the transfer took place solely through the delivery of the script. The CLRC believes that section 57 of the Companies Act 1965 should be retained even though the issue of bearer shares has become obsolete. The CLRC noted that reserve capital is provided for by section 56(2) of the Companies Act 1965.
The article states that members can make a special decision not to call up a part of the uncalled capital, unless in the liquidation of a company. The CLRC noted that the UK Management Committee is of the view that reserve capital is. The CLRC is of the opinion that section 56(2) is outdated as company directors already have the power under the company articles to call for the outstanding portion of the issued share at any time.
TYPES OF CONSIDERATION AND VALUATION PROCEDURE
As noted above, there are jurisdictions that address the issue of "compensation inadequacy" by regulating the types of non-cash compensation that a company can receive in exchange for the shares the company has issued to another company. Nevertheless, the CLRC is of the view that, as far as the Companies Act is concerned, the adequacy of the balance should be addressed through the duties of directors and not through the means mentioned above36. Furthermore, the CLRC is of the opinion that the adequacy of compensation by way of valuation for issued shares is primarily a capital market issue and should therefore be addressed in capital market regulations37.
A director who issues company shares for insufficient consideration is in breach of this duty and may be held liable to the company for this breach. The New Zealand Companies Act 1993 provides that the consideration for shares issued may take any form and may be cash, debentures, contracts for future services, real or personal property or other securities of the company: (section 46). However, this provision is only descriptive and does not prescribe that these are the only forms of consideration that can be accepted by the company statute.
The UK Companies Act 1985 prohibits a public company from accepting an undertaking from any person that he or someone else will do work or perform services for the company or any other person in consideration for shares issued by the public company38. It is also prohibited for a public company to accept, as payment for the nominal value of the shares or the premium price, an undertaking that must be fulfilled more than five years after the date of the allocation of shares. However, there is no prohibition on a private company accepting an undertaking to provide services as consideration for the shares issued.
SECTION E — APPENDIX ON PRO-FORMA ACCOUNTING ENTRIES
In a PV environment, "Share Capital" represents the total number of shares issued at the nominal amount and where shares are issued at a premium; the amount equal to the value of the premiums on those shares is recorded in the “Share premium” account. In an NPV environment, a single "Contributed Capital" account representing the total proceeds of the issued shares will replace the "Share Capital" and "Share Premium". The “Share Premium” account is no longer applicable as no premium is payable on the shares in a NHW environment.
In a PV environment, the premium arising from the cash issue of shares of RM2,000 and capitalization of PPE of RM3,000 is recorded in the Share Premium account. In an NPV environment, "Capital Redemption Reserve" is not required and when RPS is purchased from earnings, an amount equal to the subscription amount of the redeemed RPS will be transferred from earnings to "Contributed Capital". When RPSs are redeemed from the proceeds of the new issue of shares, the amount of "share capital" or "contributed capital" before and after redemption remains unchanged.
In an NPV environment, "Capital Redemption Reserve" is not required and when RPSs are purchased from earnings, an amount equal to the subscription amount of the redeemed RPS will be transferred from earnings to "Contributed Capital". When RPSs are redeemed from the proceeds of the new issue of shares, the amount of "share capital" or "contributed capital" before and after redemption remains unchanged. The amount of "share capital" and "contributed capital" in the PV and NPV environment remain unchanged.
