Corporate Law Notes 2013 Comprehensive Notes

Transcription

1 Corporate Law Notes 2013 Comprehensive Notes Raising capital 1 Transactions with shares 9 Corporate borrowing 13 Directors duties (1) Context, scope and application 16 Directors duties (2) Duties of loyalty continued 25 Directors duties (3) Remedies, statutory enforcement, exceptions 34 Members remedies 39 What to look for in exam questions 48 **weeks 1-4 not examined (assignment material)!

2 KEY CONCEPTS WEEK 5: Equity vs. debt finance Membership and share transfer Share capital Issue of shares Nature and types of shares Voting Preference shares Class rights Disclosure Chapter 6D Week 5: Raising Capital COMPANY FUNDRAISING POWERS Section 124: Issue and cancel shares o unless company limited by guarantee Grant options over unissued shares Grant security interest in uncalled capital Issue debentures Grant a circulating security interest (formerly floating charge ) over everything it had. Debt or Equity Finance? Companies can raise finance through debt (borrowing) or equity (shares) The ratio of debt to equity = gearing A highly geared company carries more debt relative to equity Note: debt does have advantages. Debt interest is tax deductible. Gearing is largely a financing matter, but: o ASX listed companies must have at least 500 shareholders with $2000 parcel of main shares each rule [minimum gearing ratio] o Regulation of capital adequacy for banks, or European companies Factors: o Type of business/sector o Debt and interest must be repaid; shareholders expect dividends o Debt comes with restrictions (covenants), and/or security interests; shares carry control rights e.g. votes o Debt interest is tax deductible; dividends are not. MEMBERSHIP OF COMPANY s 231. If limited by shares, membership is linked to share ownership. s 231 Membership can arise through: o original registration (subscription) s 117, or o agreement to become a member after registration and name entered on register of members, or o conversion from company limited by guarantee May agree to become a member through: o Issue and allotment of shares o Transfer (e.g. purchase) o Transmission (e.g. death or bankruptcy) - s 1072A + B. #

3 REGISTER OF MEMBERS Companies must maintain a register of members s o at registered office or business premises s 172. Anyone may inspect register or get a copy s 173. o Though not if improper purpose (e.g. soliciting for donations or information about personal wealth) But use of information restricted s 177 o E.g. for advertising purposes or improper use o IMF v Sons of Gwalia Ltd (2005): IMF trying to get a class action going wanted to use register of members to advertise to join class action. Held that is was an improper purpose so no. o A legitimate use is a company looking to takeover could send information to existing members. Evidence of members rights [this is why you have a register] o Details of number, type and class of shares, dates of issue, amounts paid or unpaid s 169. Membership of company dates from entry in share register Standing to exercise members remedies under s 140 or s 232 (statutory oppression) TRANSFER OF SHARES Presumption: shares are freely transferrable (ie can sell them), but Constitution may place restrictions on transfer o E.g. board approval: Sung Li Holdings v Medicom Finance (1995) o E.g. Pty Ltd Company may want to retain control Rights of pre-emption right of first refusal to existing shareholders o Replaceable rule s 254D(1) must offer to existing holders of that class of shares, in proportion as far as practicable o General meeting may resolve that shares may be issued without compliance Restrictions on transfer in insolvency procedures Replaceable rule s 1072 F o Transferor remains member/owner until transferee entered in register of members o Directors not required to register until:! Transfer and any share certificate lodged! Any fee payable, and! Any reasonably required information as to right to transfer has been provided [share transfer doc + share certificate] Directors refusal to transfer Can refuse to transfer: governed by: Constitution, or Replaceable rule s 1072 G directors may refuse for any reason if Pty Co ASX Listing Rules prohibit refusal, BUT: directors power to refuse/register has to be exercised in good faith, for company s benefit o Re Smith and Fawcett (1942) [directors duties] D s will not be liable. Returned to register shares. Honesty test would probably be different today. $

4 s 1071 F may apply to the court if refused registration without just cause o Roberts v Coussens (1991) despite constitutional discretion, court found desire to choose a compatible co-shareholder was not just cause o Directors wanted to choose a compatible person with them. Trying to keep the company int he family. Court said not just cause. o If they say nothing court may infer that reasons are without just cause. Procedure for transfer or transmission For unlisted companies, share transfer form and share certificate delivered to registered office s 1072F(2) o And compliance with any constitutional requirement o Company then issues new share certificate to transferee Where agreement to sell shares until registration, transferor holds as trustee for purchaser CHESS electronic transfer and registration for listed companies CS licensed facility for shares, financial products o Brokers or company (issuer sponsored) hold share register electronically CS Facility is statutory contract governed by CA and Regulations s 822B o Court can enforce s 822C o Share transfer governed by CS rules, not constitution SHARE CAPITAL Chapter 2H covers Shares. Share capital = total amount of money representing what members have provided/agreed to provide in cash/other value o Fully paid or partly paid (uncalled reserve capital) s 124 o uncalled capital = part still owing on partly paid shares Historically, maintenance of share capital was a cushion of protection for creditors o still important in modified form, for company transactions with shares (week 6) o but other measures of company s value, e.g. net asset backing taking into account balance sheet, earnings etc are now more important o Market capitalisation = number of shares on issue, multiplied by price at which each was issued Authorised share capital Before 1998, constitution had to state amount of authorised or nominal capital o AND division into shares of fixed amount, known as par value [no longer the case] This did not require all of the capital to be issued, and could be changed by ordinary resolution But par value no longer exists, so shares can now be issued for any amount s 254C o Therefore no concept of issuing shares at a premium or discount Creditors are now protected through directors duties and insolvent trading stuff. Issue of shares Directors have the power to issue shares, subject to constitution: see Part 2H.1 Shares may be issued on terms, rights and restrictions as determined by the company s 254B [types of shares] Court may validate invalid issue s 254 E %

5 Power must be used for benefit of the company many cases on directors duties arise out of share issue Share usually issued for $$$ but may be non-cash see form 201 on registration o E.g. Salomon: sale of business assets to new company o Public companies must give details of non-cash consideration on registration s 117(2), or on later issue s 254X o Problems of valuation of non-cash consideration may also be breach of directors duties. [don t want things to be overvalued for example] Nature of shares A share = personal property s 1070A o i.e. a chose in action (intangible) but is not a debt. Pilmer v The Duke Group (2001) o Not a right in specie i.e. not a right to any part of the company s assets, due to separate legal entity of company! Macaura v Northern Assurance (1925) don t own specific assets, tried to claim proceeds of fire insurance as a director. Can be transferred, sold, given as security, left in will, held on trust (see 1070A(2) re: trust) Gambotto v WCP (1995) HCA: valuable proprietary rights attached to shares, hence require special procedure for expropriation o Can t take away people s property rights o Show that it is legitimate o Links to members remedies Types of shares Company may wish to issue shares carrying different rights, e.g. to dividend, voting, priority on winding up Bonus shares, preference shares, or partly-paid shares s 254A Where more than one type of share with different rights attached, classes of shares exist: o Must detail classes on registration, s 117(2), or on later division into classes o Listed companies can only have ordinary shares unless ASX approves other classes LR 6.2 Ordinary and preference shares two most basic types, but these could be further divided o E.g. family control through weighted voting (two votes per share) Class A, B etc o Shares can be converted from one type to other s 254G Options rights to become a shareholder on exercise of option often issued to executives as significant remuneration element (also employees) o Disclosure requirements, particularly for listed companies o Can be traded by a certain date/price etc o Listed co s need ASX permission. Rights issues existing shareholders proportionate to holding o Renounceable (rights transferable before offer close) or non-renounceable o Subscribe for further shares offered to existing shareholders &

6 PREFERENCE SHARES Company has power to issue preference shares s 254A Preference (or ordinary) shares not defined in CA. Preference shares must carry rights over and above at least one other class: Re Capel Finance (2005) But no need for other shares to be issued yet o HCA Beck v Weinstock [2013] definition of preference shares *** Nature of preference shares Dividend at a fixed percentage of issue price (that ordinary shareholders are not entitled to) Cumulative or non-cumulative o Right to be paid arrears in subsequent years (ahead of ordinary shares) presumed cumulative: Webb v Earle (1875) Other preferential rights to be paid capital ahead of ordinary shareholders on winding-up o This means solvent winding up o ASX listing rule 6.6. requires priority of capital on winding up Participating or non-participating o Whether they share in surplus on winding up, after repayment of capital o Presumed non-participating if not stated in constitution: Will v United Lankat Plantations (1914) o Where terms set out rights to participate, those rights are exhaustive! re Isle of Thanet Electricity Supply Co preference shareholders could participate in profits while company in business, held implied limit, so could not participate on winding up. o Participating preference share = can be entitled to surplus on winding up Convertible preference shares o May be converted into ordinary shares at fixed date, hybrids concern to ASIC Common law, all shares carry equal rights unless constitution says otherwise: Birch v Cropper (1889) BUT: s 254A(2) Company can only issue preference shares if rights attached are set out in any constitution, or special resolution, regarding any of: o repayment of capital o participation in surplus assets and profits o cumulative and non-cumulative dividends o voting Court may validate improper issue s 254E Redeemable preference shares Company may issue redeemable preference shares ( s 254A(1)(b)) only on terms upon which issued Cannot convert other issued shares into these s 254G(3) Company can pay back the issue price and obtain return of shares (which then cancelled s 254J) o E.g. Beck v Weinstock o Capital being extinguished company to balance equity/debt When? Either at a fixed time, or at option of company or member s 254A(3) Equity, but with characteristics of debt due to repayment. '