DPA30083 Company Law Topic 3 - Corporate Equity PDF

DPA30083 COMPANY LAW TOPIC 3: CORPORATE EQUITY  OUTLINE Shares & dividends: - Definition - Ordinary shares & preference shares - Types of dividends Debentures & charges: - Definition - Sole debenture & serial debenture - Trustee & duties of trustees - Fixed cha...

DPA30083 COMPANY LAW TOPIC 3: CORPORATE EQUITY  OUTLINE Shares & dividends: - Definition - Ordinary shares & preference shares - Types of dividends Debentures & charges: - Definition - Sole debenture & serial debenture - Trustee & duties of trustees - Fixed charge & floating charge SHARES  SHARE CAPITAL Is the amount of capital raised through the issuing of shares by a company for the purpose of collecting funds to run the company. May be classified as follows: 1. Authorised capital 2. Issued capital 3. Paid-up capital 4. Unpaid or uncalled capital  Shares Borland’s Trustee v. Steel Brothers & Co Ltd was defined shares as ‘the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders.’ – Farwell J.  ‘measured by a sum of money’ = a reference to the nominal value.  ‘liability’= the member has a duty to pay for his shares.  ‘interest’ = shows that the shareholder has rights, such as to attend & vote at meetings.  ‘mutual covenants’ = stresses the contractual nature of a shareholder’s rights.  S. 69- types of shares: subject to the constitution of the company, shares in a company may: a) Be issued in different classes b) Be redeemable in accordance with S. 72 c) Confer preferential rights to distributions of capital/ income d) Confer special, limited/ conditional voting rights; or e) Not confer voting rights  S. 70 nature of shares- a share/ other interest of a member in a company is personal property & transferable in accordance with S. 105. S. 71(a)-(e) rights & powers attached to shares. S. 72 (1)- subject to its constitution, a company having a share capital may issue preference shares.  PREFERENCE SHARES  Are designed to appeal the investors who want a steady return on their capital with a high level of safety. 1. Dividends: - Have fixed rate of dividend. - Must be paid before ordinary shareholders. - Divided into Cumulative dividend & non- cumulative dividend.  PREFERENCE SHARES 2. Voting: - Voting rights for preference shareholders are restricted at a company general meeting. 3. Rights on liquidation: - In most cases of the articles/constitution, will give preference shareholders priority of return of capital.  PREFERENCE SHARES Types of preference shares: - cumulative preference share - non cumulative preference share - redeemable preference share - convertible preference share  ORDINARY SHARES  Rights of ordinary shareholders remain after the rights of the other classes of shareholders have been satisfied.  Control resolutions at general meeting (control voting rights).  Dividends will be paid after preference shareholders have been paid.  SHARES CERTIFICATES S. 97 – A company shall not be required to issue a share certificate unless an application by a shareholder has been received OR otherwise provided by its constitution. S. 98 –application for issuance of share certificate. S. 99 – delivery of share certificate S. 100 –numbering of shares.  SHARES CERTIFICATES S. 101(1) registration of members constitute as evidence of legal title. S. 102(1) the secretary shall cause the register of members to be properly kept & maintained regularly & all the particulars on issuance & transfer of shares are entered into the register.  DIVIDEND = payment made out of profits to the members of a company.  S. 131(1) subject to S.132, a company may only make a distribution to the shareholders out of profits of the company available if the company solvent. S. 131(2) -Every officer & any other person/ individual who contravene this section commits an offence & shall, on conviction, be liable to imprisonment for a term not exceeding 5 years/ to a fine not exceeding 3million ringgit/ to both.  Need not be paid in cash. Once a dividend has been declared by a company, it is a debt owed by the company to the members. S. 132 – distribution only if company is solvent (1) the distribution shall be authorized by the directors of the company.  Divided into 4 types of dividend: Interim dividend Final dividend Cumulative dividend Non-cumulative dividend  INTERIM DIVIDEND The articles of a company may empower its director to pay to the members interim dividends from time to time. The declaration of interim dividend does not create a debt & the directors may revoke at any time before the payment.  FINAL DIVIDEND Will be considered as company’s debt to the shareholders once the company declared the dividend. The declaration of this dividend can only be made out of profit declared by the company.  Method of dividend payment Dividend can be paid by cash, specific assets, debenture, stock of debenture or other approval or resolution in constitution.  Principles of dividend payment 1. Dividend cannot be paid until the company gained on the date of dividend declared. 2. The dividend contribution is come with the gain of the company. 3. Dividend can be declared if any gain from disposal of fixed assets. 4. Dividend can be declared even they have a loss in the business capital in past year.  Principles of dividend payment 5. Dividend cannot be declared if the company cannot pay the debts. DEBENTURE  A ‘debenture’ under the Act includes “debenture stock, bonds, sukuk, notes & any other securities of a corporation whether constituting a charge on the assets of the corporation or not.” Means that : a document which either “creates a debt or acknowledged it & any document which fulfils either of these conditions is a debenture”. A debenture represents a security for the repayment of a loan.  SOLE DEBENTURE Term debenture are a series of debenture issues that all become due on a single specified date. Term debenture can be short term or long term, and can also be called back or converted to other investments before the maturity date. Normally between financial institution and a company.  SERIAL DEBENTURE Serial debenture on the other hand consist of a debenture issue whose component parts become mature at different dates or series of dates. Debenture issued to the public. A company must issue a document that create a debt within 2 months after received money from the public. Must appoint a trustee. REGISTER OF DEBENTURES Must keep a register of holders of the debentures. Must be kept at the registered office of the company or any other places in Malaysia. If the register is kept at any other place, the company must inform the Registrar within 7days after the 1st kept & also after 7days after any change in the place.  TRUSTEE FOR DEBENTURE HOLDERS Every company which offers debentures to the public for subscription/ purchase in Malaysia must appoint a trustee corporation as trustee for the debenture holders.  TRUSTEE FOR DEBENTURE HOLDERS A ‘trustee corporation’ means: 1. A company registered as a trust company under the Trust Companies Act 1949, or 2. A corporation that is a public company under this Act or under the laws of any other country, which has been declared by the Minister to be a trustee corporation for the purposes of this Act.  DUTIES OF TRUSTEES S. 177 CA 2016: a) Exercise reasonable diligence to ascertain whether or not the assets of the borrowing corporation/ guarantor are likely to be/ become sufficient to discharge the principal debt as & when it becomes due. b) Satisfy that the contents of the prospectus offering the debentures are consistent with the terms of the debentures.  DUTIES OF TRUSTEES c) Ensure that the borrowing corporation complies with the registration requirements in respect of the charges in relation to the debentures. d) Exercise reasonable diligence to ascertain whether the borrowing company/ its guarantor have committed any breach of covenants, terms & provisions of the debentures. CHARGES  Fixed and floating charges are used to secure borrowing by a company. Such borrowing is often done under the terms of a debenture issued by the company. Charges can be divided into two types which are Fixed Charges and Floating Charges.  FIXED CHARGES A fixed charge is a charge secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, trade marks, etc  It gives the holder of the charge an immediate security over the property in priority subsequent claimants.  FLOATING CHARGES A floating charge is a particular type of security, available only to companies. It is an equitable charge on (usually) all the company's assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Very occasionally the charge is over just a class of the company's assets, such as its stock (trade stock)  FLOATING CHARGES  Thefloating charge is useful for many companies, allowing them to borrow even though they have no specific assets, such as freehold premises, which they can use as security. A floating charge allows all the company's assets, such as stock in trade, plant and machinery, vehicles, etc., to be charged.  FLOATING CHARGES  The company can continue to use the assets and can buy and sell them in the ordinary course of business.  It can thus trade with its stock and sell and replace plant and machinery without needing fresh consent from the mortgagee.  Until the charge 'crystallizes', which occurs when the debenture specifies.  CHRYSTALLIZATION OF FLOATING CHARGES It can occur in any one of the following: 1. Any failure to meet the terms of the loan 1. 2. The company goes into liquidation (ceases to trade ) 3. A receiver is appointed of the company’s assets either by the court or under the terms of the debenture or other power.  NEGATIVE PLEDGES  Provision in an unsecured loan agreement that prevents the borrower from obtaining any secured loan without the consent of the unsecured lender.  A bond indenture clause that prohibits the bond issuer from pledging its assets to a third party (thus reducing the level of security for the bondholders) is an example of a negative pledge.  REGISTRATION OF CHARGES S. 352 (1)- All charges must be registered with the Registry of Companies within specific period(30 day of its creation). S. 352 (2) - Failure to do so, the charges is void.  REGISTRATION OF CHARGES S. 352(3) – When the charge become void due to non-registration with the ROC, the obligation for repayment of the money secured by such charge is still valid, and the money secured becomes immediately payable.  REGISTRATION OF CHARGES S. 353(a) – (k) types of charges that required to be registered. S. 357 (1) the registrar shall keep & maintain a register of all charges lodged for registration under the Act.  PRIORITIES OF CHARGES  Fixed charges would rank before the floating charge for payment in the event of insolvency of the company.  A floating charge impose a prohibition on the company granting any fixed charges over the assets that are the subject of the floating charge.  Even if a fixed charge is registered after a floating charge, it would be paid in preference to the fixed charge.  PRIORITIES OF CHARGES  Fixed charge would rank before floating charge.  First & second floating charge- would rank prior to the date of the registration.(if permitted by first floating charge holder.)  First & second fixed charge – would rank prior to the date of registration.  Registered charge would be rank before unregistered charge.  QUESTIONS: 1.What is the significance of charges under debentures? 2.Explain the relevancy of shares and dividend. 3.Classify the differences between fixed charge and floating charge. Give an example.