Week 4 - Membership and Share Capital.pdf

Week 4 - Membership and Share Capital Lecture Topics Membership and Share Capital ○ Overview of company membership and share capital. Becoming a Member ○ Membership can be obtained: Upon incorporation: Requires consent and issuance of shares (s...

Week 4 - Membership and Share Capital Lecture Topics Membership and Share Capital ○ Overview of company membership and share capital. Becoming a Member ○ Membership can be obtained: Upon incorporation: Requires consent and issuance of shares (s 231). After incorporation: Through the issue or transfer of shares. Issues of Shares ○ Process and legal framework for issuing shares to members. Transfer of Shares ○ Rules and regulations governing the transfer of shares between members. Types of Shares ○ Various classes of shares that a company may issue. Dividends ○ Distribution of profits to shareholders in the form of dividends. Disclosure ○ Requirements for companies to disclose information to shareholders and the public. Loan Capital ○ Raising capital through loans and related regulations. Meetings ○ The conduct and regulations surrounding company meetings. Readings, Legislation, and Cases Readings: ○ Company Law Perspectives, 5th ed. ○ Specific chapters to focus on: Chapter 13 [13.30] Chapter 14 Chapter 15 [15.40] - [15.70] Chapter 16 Chapter 17  Chapter 26 Membership General Membership Rules ○ All Companies: Must have a minimum of one member (s 114). ○ Proprietary Companies: Maximum of 50 non-employee shareholders (s 113(1)). Crowd-Sourced Funding Exception: Section 113(2) states that CSF shareholders are not included in the 50 non-employee shareholder limit. ○ Public Companies: No maximum limit on the number of shareholders. Regulatory Framework for Equity-Based Crowd-Sourced Funding (Part 6D.3A of the Corporations Act) ○ Allows for equity-based crowd-sourced funding. ○ S 113 - It creates limits on the size of proprietary companies there is an exception in section 113 for crowd-sourced that there is no limitation. ○ Proprietary companies can’t do anything under Chapter 6D (fundraising part), which doesn’t extend to crowd-sourced funding otherwise it makes it impossible. ○ Eligible Companies: Unlisted public companies limited by shares. Proprietary companies with less than $25 million in consolidated assets and annual revenue. ○ Process: These companies can offer ordinary shares to retail investors via a licensed CSF intermediary’s platform. A CSF offer document is required for such offers. ○ Funding Limits: Companies can raise up to $5 million within any 12-month period. Becoming a Member (s 231) ○ On Incorporation: Membership is achieved through consent and the issue of shares. IPO for when a company is formed - it is ‘floated’ when it is put onto the stock exchange. Registration = becoming a company pursuant to section 112  ○ After Incorporation: Membership can be obtained through the issue or transfer of shares. Register of Members (s 168(1)(a), s 169) ○ Companies are required to maintain a register of members, documenting all relevant membership details. Issue of Shares Power to Issue Shares ○ s 124(1): Grants companies the power to issue shares. Companies and Individuals. Determination by the Company ○ Votining, Non-voting, Class A, Class B ○ E.g Can offer two different types of shares - Higher-priced shares may give more ownership/priority. - Lower may give fewer rights. ○ s 254B: The company can determine the following aspects: Terms of Issue: The specific terms under which shares are issued. Rights and Restrictions: The rights attached to the shares and any restrictions on those rights. Pre-emptive Rights on Issue: Consideration of pre-emptive rights when issuing shares. Proprietary Companies ○ s 254D: The rules regarding the issue of shares for proprietary companies are replaceable, meaning they can be replaced by a company's constitution. ○ Companies don’t have external rules (memorandum). Used to have (Table A articles) internal rules. ○ Replaceable rules are now internal rules. Appointing directors and managers etc. - In this is something called a preemptive right - if someone is selling shares in a proprietary company, if they want to sell them they have to offer it first to someone already in the company. Transfer of Shares General Rules for Transfer  ○ s 1070A: Shares are generally transferable, subject to the company's constitution. ○ Can buy, sell and cancel shares Restrictions: Preemptive restriction ○ if someone is selling shares in a proprietary company, if they want to sell them they have to offer it first to someone already in the company. Listed Companies ○ Transfer Restrictions: Listed companies cannot have restrictions on the transfer of shares. ○ Electronic Transfer: Shares are often transferred electronically through the Clearing House Electronic Subregister System (CHESS). Non-Listed Companies ○ Transfer Restrictions: Any restrictions on the transfer of shares must be clear and unambiguous. ○ Transfer Process (s 1071B): A transfer of shares must be delivered to the company for registration. Registration of Share Transfer ○ Refusal of Registration by Directors: s 1072G (replaceable rule): Directors of proprietary companies may refuse to register a share transfer for any reason. Exceptions: Transfer due to death or bankruptcy. Court-ordered transfer. Trustee transfer. Notice of Refusal: Must notify the transferor of the refusal within 2 months (s 1071E). The refusal must be in good faith and in the best interests of the company. Court Intervention: The court can order the registration of a transfer if the refusal was "without just cause" (s 1071F). Types of Shares  Classes of Shares ○ Ordinary Shares: General Characteristics: Right to vote at general meetings. No automatic entitlement to dividends. Participation in surplus assets on winding-up. New share issues: Company sells its shares for the first time and all the money raised goes to the company itself. Rights issues: Company wishes to sell additional shares and organises a rights issue for existing shareholders. Share placements: Company offers additional shares to institutions and other major investors to raise urgent funds. Share Purchase Plans: Offer to existing shareholders in a listed company opportunity to purchase more shares in that company w/o brokerage fees. Shares can also be offered at a discount to current market place. ○ Preference Shares: s 124(1): Companies are individuals. The power to issue preference shares. s 254A(2): Preference shares can only be issued if: Rights are set out in the company's constitution, or The issuance is approved by a special resolution. Characteristics of Preference Shares ○ Restricted voting rights. ○ Cumulative entitlement to dividends. ○ Priority of payment of dividends over ordinary shares. ○ Priority of repayment of capital upon winding-up. ○ No share in surplus assets upon winding-up. ○ It may be redeemable or convertible into other types of shares. ○ Each year at the AGM for businesses - shareholders get a say and vote on directors' pay/remuneration ○ S 202 A Redeemable shares - A company can redeem and cancel shares in a selective reduction of capital. However, such reduction must be approved by special resolution of the redeemable preference shareholders and a company resolution in a general meeting. - Upon redemption, the redeemable preference shares are cancelled. You should remember that a company’s redemption of the shares eliminates  any dividend rights attached to them. An exception to this is where the terms of issue specify otherwise. - Once the company has redeemed the shares, it will pay the shareholder. The company will pay them in accordance with the share price in the terms for the shares. - A company can only redeem these shares following terms as set out in its constitution. Parties must include some terms for any redeemable preference share, such as that the company cannot redeem the shares unless they are fully paid up. - Further, the redemption payment must be made from the company’s profits, or the proceeds of a new issue of shares are made for the purpose of redemption. These restrictions exist to prevent redemption from reducing a company’s capital to the potential disadvantage of creditors. - Even if a company redeems the shares without meeting the requirements, the company will not be guilty of an offence. Furthermore, the redemption transaction will still be valid. However, any person involved in the infringement, such as a director, may face penalties. Dividends Distribution of Profit to Shareholders ○ General Principle: Dividends represent the distribution of a company's profits to its shareholders. Conditions for Payment ○ s 254T(1): Dividends can only be paid if the following conditions are met: Assets Exceed Liabilities: The company’s assets must be greater than its liabilities. Fair and Reasonable: The payment must be fair and reasonable to all shareholders as a whole. No Prejudice to Creditors: The payment must not materially prejudice the company's ability to pay its creditors. ○ s 254T(2): The company’s assets and liabilities must be calculated in accordance with applicable accounting standards. Directors' Discretion on Dividends s 254U (a replaceable rule): ○ Amount: Directors have the discretion to determine the amount of the dividend. ○ Timing: Directors can decide when the dividend is to be paid. ○ Method: Directors can determine the method of payment, which could be: Cash Shares Options Transfer of assets Restrictions on Payment ○ Dividends cannot be paid if: The company is insolvent, or The payment would cause the company to become insolvent. ○ Directors’ Duties: Duty to act in the best interests of the company. Duty to avoid insolvent trading as per s 588G. Legal Consequences ○ Failure to pay dividends can amount to oppression, as highlighted in the case Sanford v Sanford Couriers. Solvency and Timing of Dividend Payments Relevance of Solvency (s 254T): ○ A company’s solvency is crucial in determining the timing of dividend payments. ○ Directors must ensure compliance with s 254T when deciding on dividend payments. Arising of Debt ○ s 254V: A debt related to dividends arises only when the dividends have been declared, and the fixed time for payment has fallen due. Until that time, the company does not incur a debt. If the company’s financial circumstances change before the payment time, the dividend can be revoked. Disclosure General Requirement for Disclosure ○ s 706: Disclosure is required for the issue of shares unless an exception under s 708 or s 708AA applies. Exceptions to Disclosure Requirements (s 708) (1) Small Scale Offerings ○ Disclosure is not required if the offering involves: 20 investors or less. A maximum of $2 million raised within a 12-month period. (8) Sophisticated Investors ○ Disclosure is not required for sophisticated investors who meet one of the following criteria: Minimum investment of $500,000. Assets of at least $2.5 million or income of $250,000 per year. (10) Through Financial Services Licensee ○ Disclosure is not required if: The offer is made through a financial services licensee. The licensee is satisfied that the investor has the experience to assess the merits and risks of the investment. (11) Professional Investors ○ Disclosure is not required for professional investors, including those who: Have $10 million in assets. Manage a superannuation fund. Hold a financial services license. (12) Senior Managers and Family Members ○ Disclosure is not required for senior managers and their immediate family members (spouse, parent, child, sibling). (15) No Consideration ○ Disclosure is not required if no consideration is provided for the shares. (18) Takeover Bids ○ Disclosure is not required for shares issued as part of a takeover bid. s 708AA Exception ○ Rights Issue for Listed Companies: Listed companies conducting a rights issue may be exempt from disclosure requirements under this section. Disclosure Documents (s 709) Types of Disclosure Documents ○ Prospectus: A full disclosure document that provides comprehensive information to potential investors. Must contain all information that investors and professional advisors would reasonably require (s 710). ○ Short Form Prospectus (s 712): Refers to material already lodged with the Australian Securities and Investments Commission (ASIC). ○ Offer Information Statement (s 709(4)): Used for offers involving $10 million or less. ○ Profile Statement (s 721): Requires ASIC approval. Can only be issued by public companies. Proprietary Companies (s 113(3)): ○ Proprietary companies must not engage in activities that require disclosure. Additional Requirements and Penalties Advertising Restrictions (s 734): ○ Advertising of the offer is restricted to ensure that investors receive proper disclosure before making investment decisions. Penalties for Misleading or Deceptive Statements (s 728): ○ There are penalties for including misleading or deceptive statements in disclosure documents. Comparison of Share Capital and Loan Capital (Borrowing) Raising Capital ○ Share Capital: Public companies raise capital by offering shares to investors (shareholders). ○ Loan Capital:  Companies borrow funds from lenders (creditors) and issue debentures. Rights and Roles ○ Shareholders: Shareholders are members of the company with all attendant rights under the Corporations Act. Shareholders are participants in the company enterprise. ○ Creditors (Debenture Holders): Debenture holders are merely creditors of the company, not members. Creditors are not participants in the company; they are considered outsiders. The rights of debenture holders largely depend on the terms of the contract. Returns ○ Shareholders: Shareholders receive dividends as their return. The distribution of profits (dividends) is tied to company performance. ○ Creditors: Creditors receive interest as their return. s 563A: Creditors have the right to be paid before members in the event of liquidation. Loan Capital / Security Debentures ○ Debentures are documents that either create or acknowledge an obligation by a company to repay a debt. ○ s 283BH: Describes three forms of debentures: Mortgage Debenture: A company gives security over real property. Debentures: Any other type of security arrangement. Unsecured Note: No security is given. Trustee Requirement ○ Where debentures are issued to the public, a trustee must be appointed (s 283AA). Personal Property Securities Act (PPS Act) Relevance ○ The PPS Act is relevant regarding securities and covers both individuals and companies. ○ It relates to security over personal property. Security Interests ○ A ‘security interest’ includes traditionally recognized forms of security, such as ‘charges,’ as well as non-traditional forms, such as retention of title arrangements. ○ To be enforceable, a ‘security interest’ must attach to property (‘collateral’), giving the secured party legal rights. Types of Security Interests ○ Non-Circulating: The security interest attaches to a specific, presently identifiable asset (previously known as a ‘fixed charge’). ○ Circulating: The security interest attaches to a circulating asset, such as trading stock, which may be disposed of in the normal course of the company’s business (previously known as a ‘floating charge’). Security Agreement ○ The security agreement will govern the default conditions under which a security interest may be enforced. Priority of Security Interests Competing Security Interests ○ Priority between competing ‘security interests’ is based on the extent to which the ‘security interest’ is ‘perfected.’ Perfection of Security Interests ○ One way to ‘perfect’ a ‘security interest’ is by registering a financing statement on the PPS Register. ○ A financing statement includes information about the secured party and details of the secured property (collateral). Enforceability of Security Interests Conditions for Non-Enforceability  ○ A ‘security interest’ will not be enforceable in certain situations: If it is not registered on the PPS Register within the applicable time period and the company goes into liquidation, voluntary administration, or executes a deed of company arrangement. Where directors seek to enforce a security interest in their favor within six months of the creation of the interest. Types of Members’ Meetings Annual General Meetings (AGM) ○ Regular meetings held once a year to discuss and approve various matters such as financial statements, election of directors, and appointment of auditors. Extra-Ordinary General Meetings (EGM) ○ Meetings held outside the annual schedule to address urgent or special issues that require the approval of the members. Class Meetings ○ Meetings specifically for a particular class of shareholders, such as preference shareholders, to discuss matters affecting their rights. Notice of Members’ Meetings Written Notice Requirement ○ Notice must be given to both members and directors: s 249J(1) ○ Notice can be delivered personally, by post, fax, or email: s 249J(3) Timing of Notice Delivery ○ By Post: Notice is considered given 3 days after posting. ○ Fax or Electronic Means: Notice is considered given on the next business day. Notice Periods ○ Non-Listed Companies: 21 days' notice required: s 249H(1) ○ Listed Companies: 28 days' notice required: s 249HA Short Notice for Meetings ○ AGM: 100% of members must agree for short notice. ○ EGM: 95% of members must agree for short notice: s 249H(2) ○ Exception: Public companies removing/appointing directors require a longer notice period: s 249H(3) Special Notice Requirement  ○ 2 months’ notice required for certain resolutions, such as the removal of directors: s 203D(2) Quorum and Location for Members’ Meetings Reasonable Time and Place ○ Meetings must be held at a reasonable time and location: s 249R Quorum Requirements ○ At least 2 members must be present at all times during the meeting: s 249T(1) ○ If a quorum is not present within 30 minutes, the meeting must be adjourned: s 249T(3) Resolutions at Members’ Meetings Types of Resolutions ○ Ordinary Resolutions: Requires a simple majority of members present and voting (>50%). ○ Special Resolutions: Requires a 75% majority of members present and voting: s 9 Voting Methods ○ Show of Hands: Each member gets one vote: s 250E(1)(a) ○ Poll: Each share gets one vote: s 250E(1)(b) Chair’s Role in Voting ○ The chair has a casting vote in case of a tie: s 250E(3) Demanding a Poll ○ A poll can be demanded by: 5 members Members holding at least 5% of the voting power The chair of the meeting: s 250L Effect of Irregularities in Meetings General Rule ○ An irregularity in the meeting process does not invalidate the meeting: s 1322(2)  Court's Power to Declare a Meeting Void ○ The court can declare a meeting void if a substantial injustice has occurred that cannot be remedied: s 1322(3), s 1322(3A) Case Reference ○ CHEW INVESTMENT AUSTRALIA v GENERAL CORP: A shareholder was entitled to a poll, and the result would have been different if the poll had been conducted. Court's Power to Validate a Meeting ○ The court can declare a meeting not invalid if it is satisfied that: The parties acted honestly It is just and equitable to make such an order: s 1322(4)(a), s 1322(6)