12 Share Capital and Loan Capital

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  • 8/2/2019 12 Share Capital and Loan Capital


    Financial Training Company


    Corporate and

    Business Law- F4(Zimbabwe)


    Authorized share capitalThe critical issue here is that the authorized share capital of the company is already fully issued

    and therefore no new shares can be issued in the company unless the authorized share capital

    is increased.

    Section 87 of the Act allows a company to increase its share capital by special resolution and

    s.89 requires the company to give notice to the Registrar of any increase in the share capital of

    the company within one month after the passing of the special resolution.

    Section 133 provides that a special resolution requires a majority of not less than 75% of such

    members entitled to vote as are present in person or by proxy at a general meeting of which not

    less than 21 days notice has been given, specifying the intention to propose the resolution as a

    special resolution and at which members holding an aggregate of not less than 25% of the total

    votes of the company are present in person or by proxy. A shorter notice period is permitted

    provided that this is agreed by a majority of members entitled to attend and vote at the meeting

    and holding not less than 95% of the total votes of all the members or by all the members.

    Chronologically the steps to be taken are as follows:A general meeting will be convened to pass a special resolution authorizing the increase in

    the company share capital. At this meeting the members will also pass an ordinary resolution

    giving the directors their approval to the issue of the

    new shares.

    The Secretary will draw up a timetable for the work to be done.

    A Board meeting will be convened to approve a draft circular to shareholders advising them of

    the rights offer. A rights issue is an issue of new shares to existing shareholders in proportion to

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    the number of shares they already hold. Once the authorized share capital of the company has

    been increased, existing shareholders will be advised of the proposed rights issue and given a

    certain period within which to exercise their option to take up new shares.

    Since Green Valley Enterprises is a public company, the Stock Exchange will have to be

    notified.The offer documents, comprising letters of allocation and forms of acceptance and

    renunciation will be sent out.

    After the offer closes, a board meeting will be called to make a formal allotment of shares.

    The share certificates will then be prepared and sent to shareholders.

    A return of allotments in form CR2 will be lodged with the Registrar of Companies within one

    month by the Boards

    formal allotment resolution.

    The register of allotments must be updated in terms of s.71.

    Finally the nominal value of the share is $800 each but they are being issued to members at

    $1000 each. In otherwords, the shares are being issued at a premium and the provisions relating to the share

    premium account (sec. 74)


    Section 74(1) reads as follows:

    If a company issues shares at a premium whether for cash or otherwise, a sum equal to the

    aggregate amount or value of the premiums on those shares shall be transferred to an account

    calledthe share premium accountand provisions of this Act relating to the reduction of a

    companys share capital shall apply except as provided in this section as if the share premium

    account were part of its paid-up capital.Types of share capitalShares are basically divided into four different classes, namely ordinary shares, preference

    shares, redeemable preference shares and deferred shares. Ordinary shares, as the name

    implies, constitute the residuary class in which everything is vested after the special rights of

    other classes, if any, have been satisfied.They confer a right to the equity in the company. As a form of company security, ordinary

    shares are the riskiest and it is for this reason that they are referred to asequities orrisk

    capital. Ordinary shareholders bear the risk that payment is postponed until a dividend is

    declared and after the payment of preference shareholders. This remains the same even when

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    regarding the repayment of capital.

    Ordinary shares are not fixed and where the company is doing well they may be paid the

    residuary distributable profit, divided proportionally by ordinary shareholders dividend

    percentage. This is the same with the repayment of capital or where the company is distributingthe remaining capital or assets.

    However, this is only possible where preference shareholders do not have a right to participate

    in the surplus assets.

    Ordinary shareholders normally comprise the bulk of companys shares. In most cases they are

    the majority and participate in most of the decision making within the company and are better

    placed in exercising their right to vote. They overally have control over the running of the


    It is usually spelt out in the Companys Articles of Association that whenever a fresh issue of

    shares is made, these should be offered to ordinary shareholders, usually at a lower price than


    Preference Shares:These confer on holders, preference over other classes of shareholders in respect of either

    dividends, repayment of capital or both. Preference shares include a right to receive dividends

    of specified, or of a fixed, rate of dividend. An example would be 10% of their nominal value of

    profits each year before any dividend may be paid out to holders of ordinary shares.

    Preference shares are cumulative unless the articles or terms of issue state otherwise. This

    means that if the company cannot pay a dividend in one year the arrears must be carried

    forward to future years. If preference shares are non-cumulative and the company cannot pay

    the dividend, the arrears are not carried forward and so the preference shareholder will not

    receive a dividend for that year.

    Preference shareholders have a right to sue, for payment of dividend from the available profits

    where the Articles of Association specifically confer this right and thus would be contractually

    binding. Unless the articles provide to the contrary, preference shares carry the same voting

    rights as other shares. However, preference shareholders voting rights are usually restricted to

    specified circumstances which directly affect them for example when the right of preference

    shareholders are being varied.

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    In Liquidation, preference shareholders do not automatically have a right to prior return of their

    capital. If the articles are silent preference shareholders and ordinary shareholders rank equally.

    Redeemable Preference SharesSection 76(1) of the Companies Act [Chapter 24:03] gives the company powers to issueredeemable shares of any class provided that the articles so allow and also provided that the

    shares are fully paid for.

    Redemption of shares must be effected out of profits of the company which would otherwise be

    available for dividend or out of proceeds of the fresh issue of shares made for the purposes of


    In most cases, the terms of redemption of redeemable shares must be prescribed by the articles

    or to be determined as provided in those articles i.e. how the company would buy back its own


    Where the company is being wound up, the redemption or purchase may be enforced against

    the company unless the redemption or purchase was for a date later than that of

    commencement of winding up or the company could not, before the winding up is completed,

    have lawfully paid a dividend to shareholders of an amount equal to that of the costs of the

    redemption or purchase.

    In a case where the company is being wound-up, all other creditors must be paid first and then

    shareholders who hold preferential shares before payment of amounts which are liable to be

    paid out for a redemption or purchase of shares; per s.110 of the Insolvency Act [Chapter 6:04].

    Deferred Shares/Founders Shares: These are shares which the holder rights are deferred until

    the claims of other classes of shares are satisfied. Sometimes this class of shares is accepted

    by the sellers or vendors of business as part considerations for the sale.

    Deferred/founders shares have the same relationship with ordinary shares that ordinary

    shares have with preference shares.

    A significant amount of risk is attached to these shares given that they rank below ordinary


    However, this risk investment is often rewarded by a large share of surplus profits assets after

    the ordinary shareholders have been paid their minimum dividend or repaid their capital on a

    winding-up or a reduction of share capital.

    Such shareholders often enjoy disproportionally large voting rights as compared to ordinary


    It should be noted, however, that the rights which may be enjoyed by these shareholders is a

    matter to be determined from the document under which the shares are issued.

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    Capital maintenanceThe Companies Act [Chapter 24:03] contains a number of provisions which are meant to

    preserve the share capital structure of the company. The general principle is that a company

    must maintain its capital, it cannot give money which has been contributed by the shareholders

    back to those same people and there are a number of strict rules which seek to maintain

    adherence to that principle. If such money is returned to shareholders, except in a few specific

    and clearly defined situations, then it becomes an unlawful reduction of share capital. Some of

    the rules which are designed to preserve the share capital structure of a company are the


    (a) Prohibition of financial assistance by the company for the purchase of its own or its holdingcompanys shares (s.73) It is unlawful for the company to give whether directly or indirectly,

    whether by means of a loan, guarantee, the provision of security or otherwise any financial

    assistance for the purpose of buying shares in the company or where the company is a

    subsidiary company in its holding company unless:

    (i) such assistance is given in accordance with a special resolution of the company;

    (ii) the companys assets exceed its liabilities and it is able to pay its debts as they become due

    in the ordinary course of its business.

    (b) The Share Premium Account (s.74)If a company issues shares at a premium whether for cash or otherwise, a sum equal to theaggregate amount or value of the premiums on those shares shall be transferred to an account

    called the share premium account. The share premium account cannot be used anyhow and in

    terms of the Act, its use is restricted to the following (among others):

    (i) in paying up unissued shares to be allotted to the companys members, directors, employees

    or to a trustee for such persons, as fully paid bonus shares or

    (ii) in writing off the companys preliminary expenses or the expenses of or the commission paid

    or discount allowed on any issue of shares or debentures of the company.

    (c) Power to Issue Shares at a DiscountWhilst it is permissible for a company to issue shares at a discount of a class already issued,

    this has to be done in accordance with strictly laid down criteria which is as follows:

    (i) the issue of the shares at a discount must be authorised by special resolution of the company

    and must be sanctioned by the court and

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    (ii) the special resolution must specify the maximum rates of discount at which the shares are

    to be issued.

    (d) Prohibition of Loans to Directors (s.177)It shall not be lawful for a company to make a loan to any person who is its director or a directorof its holding company unless:

    (i) the companys ordinary business includes the lending of money or the giving of guarantees in

    connection with loans made by other persons to anything done by the company in the ordinary

    course of that business or

    (ii) where the company is a non-subsidiary company and the consent of members holding at

    least nine-tenths of the issued share capital has been secured.

    (e) Payment of DividendsAs a way of preserving the share capital structure the Companies Act makes it clear (Article 16)

    that No dividend shall be paid otherwise than out of profits

    Even if a company makes profits, shareholders are not automatically entitled to a dividend untiland unless the directors have declared one. Members in general meeting cannot outride or veto

    a decision of the Board of Directors over matters pertaining to a declaration of a dividend.

    Ultimately the provisions cited above are meant to ensure that as far as possible, the share

    capital structure of the company, is not unlawfully interfered with.

    Increase share capital(i) The initial decision to increase the share capital of the company will have been taken at a

    Board Meeting by the Board of Directors. The matter is then referred to members in a general

    meeting of the company. If it is agreed that the share capital of the company be increased, the

    notice of increase in share capital is then submitted to the Registrar of Companies. The meeting

    which preceded the submission of the notice to the Registrar was probably an Extraordinary

    General Meeting at which all the registered members of the company were eligible to attend.

    (ii) The meeting would have been held in terms of s.126 of the Companies Act. Theoretically themeeting could have been an Annual General Meeting convened in terms of s.125 of the Act

    although this is highly unlikely.

    (iii)A special resolution to increase the share capital was passed in terms of s.89 as read withs.133 of the Companies Act, Chapter 24:03.

    (iv) The resolution should be passed by a majority of not less than 75% of such membersentitled to vote as are present in person or by proxy at a general meeting of which not less than

    21 days notice has been given. Members holding not less than 25% of the total votes of the

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    company are required to be present in person or by proxy

    New share certificates and the documents requiredThe manner in which shares are transferred is laid down in the Articles of the company. The

    general rule is that shares are freely transferable in the manner prescribed by the Articles, and

    the Board of Directors accordingly has no discretion to refuse to register a bona fide transfer. In

    brief, the procedure is that a written instrument of transfer must be delivered to the company

    (s.99). The transfer form contains the names and addresses of the transferor and transferee

    and their signatures, the number of shares to be transferred and the price payable (if any).

    The first thing that is required is the original share certificate bearing the name of the deceased.

    This must be accompanied by a tra...


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