Share Capital: Definition and Types

The Capital of the Company

I. Share capital

Definition

• The nominal value of shares refers to the fixed nominal value in monetary terms, which may include a share premium and share premium account.
• A share represents the shareholder's interest in the company, measured by a sum of money for liability and interest purposes, and comprised of mutual covenants among all shareholders (Borland's Trustees v. Steel, 1901).
• Shareholders must pay the nominal value, although not always immediately.
• Shareholders have the right to profits via dividends, to vote in proportion to shares held, to information, and to transfer shares, subject to pre-emption clauses.

Types of Share Capital

• Authorized Share Capital is the maximum capital a company is authorized to issue.
  • It was abolished by the Companies Act 2006 (CA 2006).
  • It requires a statement of capital and initial shareholdings.
• Issued Share Capital refers to the nominal value of shares actually issued.
  • Public companies must have a minimum issued capital of £50,000.
• Paid-up capital is the proportion of the nominal value of issued capital that shareholders have actually paid.
  • This requires a statement of capital and initial shareholdings (fully or partly paid-up).
• Called and uncalled capital is when uncalled capital is the amount remaining unpaid on the issued share capital.
• Reserve capital arises when a company resolves not to call on any unpaid capital, and the unpaid capital becomes a reserve.

Classes of Shares

• Companies can issue different types of shares with varying rights attached.
• The articles of association may authorize the company to issue different classes of shares.
• Classes of shares have identifiable “classes” and “class rights.”
  • Modifications can be made to the articles of association through ordinary resolution and submission to the Registrar.
• Ordinary shares exist unless there are different classes of shares, and represent “equity in the company”.
  • Ordinary shareholders can attend and vote at general meetings and receive dividends.
• Preference shares have priority over ordinary shares in terms of dividends and repayment.
  • These shares carry a fixed dividend rate that must be paid before any payment to ordinary shareholders.
• Cumulative unless otherwise provided
• Preference shares do not automatically have priority unless expressly stated.
• Voting rights are usually restricted, and companies might not grant preference shareholders the right to vote at general meetings unless dividends are in arrears.
• Preference shareholders cannot share in any surplus if the company is wound up and still solvent.
• Redeemable shares are issued with the understanding the company may buy them back.
  • A public limited company can only issue redeemable shares if its articles authorize it.
• A company's issued share capital is diminished in proportion to the nominal value of redeemed shares.
• Treasury shares are shares a company buys back and keeps "in treasury”.
  • These may be subsequently sold.
• Treasury shares have no voting rights and are excluded from dividend calculations.

Distribution/Dividends

• Private limited companies can reduce their capital by passing a special resolution supported by a solvency statement.
• Public limited companies must pass a special resolution, which must be confirmed by the court.
• There is no automatic right to receive a dividend.
• Dividends can only be paid out of profits and cannot be paid out of capital.
• Under the Companies Act 2006 (CA 2006), any distribution of a company's assets to members must come from "profits available for that purpose”.
  • Available profits mean “accumulated realized profits”.
• Public limited companies are subject to profits controls.
  • Net assets at distribution must exceed the total called-up capital plus undistributed reserves.
  • The distribution must not reduce net assets below the total called-up capital plus undistributed reserve value.
• Directors who knowingly pay dividends out of capital are liable to the company.
• Shareholders who receive payments via dividends out of capital are also liable.
• A recommendation must be contained in the directors' report.
• Public limited companies must hold a general meeting to declare a dividend.
• When a dividend is declared but unpaid, members have up to 12 years to bring action against the company.

II. Loan capital

• Public limited companies cannot use borrowing powers until issued a trading certificate.
• Borrowing, even when secured, does not give the lender company interest, but represents a claim against them.

Debentures

• Debentures are a deed that secures a loan by granting the lender control over the assets and business.
• The lender becomes a creditor with the power to appoint an administrator if the debt is not repaid.
• Single debentures are issued to a single creditor.
• Debentures issued in series allow companies to raise capital from a number of lenders.
  • Each lender should rank equally in terms of rights and security (pari passu).
• Debenture stock is how companies raise loans from the public at large.
  • The total loan sum is raised from many people, who hold a share of the total loan stock.
• Individual lenders get a debenture stock certificate.
• Only public limited companies can offer debenture stock to the public.
• A deed of trust involves appointing a trustee for the debenture stockholders.
  • The trustee is the creditor, while individual debenture stockholders do not have a direct relationship with the company.
• The trust deed outlines the loan terms, including securities and trustee powers.
• Debentures can be transferred.
• Debenture holders are creditors, not members.
• As creditors, they get interest, not dividends.
• Debenture holders receive interest whether or not the company is profitable, even if paid from the company's capital.
• Debentures can be issued at a discount.

Company Charges

• Company charges are contractual agreements that act as security on certain assets of the company for a loan.
• The company allows the rights over property to transfer to the lender.
  • If the loan is unpaid, the lender can dispose of the property and secure the loan return.
• A company charge is a means for the loan secured on tangible property.
• A charge on a specific asset to secure a debt.
• The company cannot dispose of the property without debenture holder consent.
• Benefits include control over property and higher ranking than other creditors (preferential creditors and floating charge holders).
• Floating charge does not attach to specific property but rather to a group of assets.
• The security is provided by all property owned by the company.
• Benefits of floating charges apply to borrowers, who are free to trade in the goods/assets subject to the floating charge.
• If the loan is not repaid when due, the charge becomes fixed, or “crystallizes” over the assets.
• Crystallization happens if the company enters administration or is wound up or under events outlined in the contract establishing the floating charge.
• The charge fixes on the company’s assets at that time, catching acquired assets but not those already disposed of.
• The charge holder may appoint an administrator.

Registration of Debentures and Charges

• Debentures and charges must be registered with the Registrar within 21 days of creation.
• After registration, there is a certificate of registration
• If a debenture or charge isn't registered, the charge is void against other creditors but is still valid against the company.
• Priority of charges: For properly registered charges of the same type, priority is based on creation date.
• For charges of different types, a fix charge takes priority over a floating charge, even if created later.
• A debenture that creates a floating charge can include a provision preventing later fixed charge that takes priority over the floating charge if a provision indicates.
• Effectiveness of such clause on future charge holders?