Maintenance of
share capital and the
payment of
dividends
Corporate Law: Law principles and practice
Maintenance of share capital
The principle under common law and the Corporations
Act 2001 (Cth) is that a company should preserve the
capital of the company.
A company should therefore not give away capital, should
not buy overvalued assets, nor buyback shares where that
reduces company capital.
The preservation of capital is important to members who
have invested in the company, and to creditors who
provide lending and credit to the company based on its
financial viability.
Corporate Law: Law principles and practice
Reduction of share capital
A company can reduce its capital and give financial
assistance if it complies with the strict procedures of law.
Any reduction of capital must have the approval of
members and be fully disclosed.
The directors will be personally liable if a reduction of
capital or financial assistance leaves the company
insolvent.
Corporate Law: Law principles and practice
Reduction of share capital cont …
The principle that a company should not reduce its capital
is from the case of Trevor v Whitworth (1887) 12 App
Cas 409.
There are now many exceptions to this rule.
Corporate Law: Law principles and practice
Types of capital reduction
Under legislation there are a number of types of capital
reduction:
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share capital reductions
share buybacks
self-acquisitions schemes
financial assistance
Corporate Law: Law principles and practice
Reasons for reducing capital
The company may reduce its share capital if it:
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wishes to extinguish or reduce its liability on partly
paid share capital by buying them back
wishes to return capital to members
has accumulated losses and wishes to bring the amount
of its issued capital in line with the value of its net
assets
wishes to swap shares for debentures or some other
security instruments
has capital in excess of its needs and decides to return
some of the excess value to members.
Corporate Law: Law principles and practice
Returning capital
If a company does decide to return capital, any such
action must be done in a fair and equitable manner.
Fowlers Vacola Manufacturing Company Ltd [1966] VR
97
Corporate Law: Law principles and practice
Reduction of share capital cont …
Section 256A of the Corporations Act 2001 (Cth) states
the purpose and rationale of the rules behind share capital
reductions and buybacks as being designed to protect the
interests of shareholders and creditors by:
a) addressing the risk of these transactions leading the
company’s insolvency
b) seeking to ensure fairness between the company
and the company’s shareholders
c) requiring the company to disclose all material
information.
Corporate Law: Law principles and practice
Reduction of share capital cont …
Under s 256B of The Corporations Act 2001 (Cth) a
company may reduce its share capital provided it satisfies
the following three requirements. The reduction of share
capital:
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must be fair and reasonable to the company’s
shareholders as a whole
must not materially prejudice the company’s ability to
pay its creditors
must be approved by shareholders under s 256C.
A share for no consideration is a share capital reduction.
Section 256B does not apply to this reduction.
Corporate Law: Law principles and practice
‘Fair and reasonable’ share capital reductions
A company must consider such matters as:
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the price paid for the shares by the company
whether the practical effect is that shareholders are
treated equally according to the company’s constitution,
and this is fair and reasonable to each individual
shareholder
whether the reduction is being used to facilitate or
prevent a takeover bid
whether the reduction involves an arrangement that
should more properly proceed as part of a scheme of
arrangement.
Winpar Holdings Limited v Goldfield Kalgoorlie Ltd [2000]
NSWLR 728
Corporate Law: Law principles and practice
Material prejudice against creditors
Any reduction in the share capital reduces the funds
available to creditors so the company must ensure that
creditors are not put at any further risk.
Assets must exceed liabilities after a capital reduction.
Directors may be personally liable if a reduction leaves
the company insolvent (Corporations Act 2001 (Cth) s
588G).
Corporate Law: Law principles and practice
Equal and selective reduction of share capital and
shareholder approval
The reduction of share capital is achieved by cancellation
of shares and a payment made to those shareholders
whose shares are cancelled.
There are two basic types of reduction of capital:
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equal share capital reduction
a selective share capital reduction (s Corporations Act
2001 (Cth) 256B(2)).
Both types of share capital reduction require shareholder
approval (s 256C).
Corporate Law: Law principles and practice
Types of buyback listed under s 257B
Equal access schemes: allow all members to offer for sale
their shares in equal amounts
Selective buybacks: offering to purchase the shares of a
particular class
Minimum holding: buybacks designed to buy out small
holdings of shares
Employee share schemes: allow employees who have
participated in an employee share participation scheme to
sell their shares back to the company
On-market: a purchase of shares by a company, by making
an offer on the ASX
Corporate Law: Law principles and practice
Shareholder approval of reduction of share capital
A selective reduction of share capital can be approved in two
ways:
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by a special resolution of shareholders where no votes are
cast in favour of the resolution by any person who is to
receive consideration as a part of the reduction or whose
liability to pay any unpaid amounts on shares is reduced, or
by any of their associates.
through approval by all ordinary shareholders, that is, a
unanimous resolution (Corporations Act 2001 (Cth) s
254C(2)).
If a reduction involves a cancellation of shares, then the
selective reduction must also be approved by a special
resolution of shareholders whose shares are to be cancelled, as
well as a special resolution passed at the general meeting (s
256C(2)).
Corporate Law: Law principles and practice
Information about selective buybacks
Information about selective buybacks must be given to
shareholders .
To ensure that shareholders make an informed decision,
the company is required to disclose all material
information on how to vote on the resolution in the notice
of the meeting to shareholders (Corporations Act 2001
(Cth) s 256C(4)).
Corporate Law: Law principles and practice
Information about selective buybacks cont …
Under s 256C(5) of the Corporations Act 2001 (Cth),
before the notice of meeting is sent to shareholders, the
company must lodge with ASIC a copy of:
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the notice of the meeting
any other document relating to the reduction of share
capital.
Resolutions approving the reduction must be lodged
within 14 days after they are passed, and the company
cannot make any reduction until after that 14-day
lodgement (s 256C(3)).
Corporate Law: Law principles and practice
Capital reductions not otherwise authorised (s 256B)
A share capital reduction must comply with s 256B of the
Corporations Act 2001 (Cth).
The contravention of law is not an offence and does not
invalidate the transaction (s 256D(2)).
A civil penalty may apply under s 1317E against directors
who promote a capital reduction.
Directors may be liable for insolvent trading under s
588G.
Corporate Law: Law principles and practice
Capital reductions not otherwise authorised cont …
Directors may be liable for a share capital reduction that
leads to insolvent trading under s 588 of the Corporations
Act 2001 (Cth).
The liquidator of the company may bring an action against
directors for insolvent trading (s 588M) and penalties may
be imposed on directors under s 1317E.
Directors may commit a criminal offence if their conduct
is found to be dishonest (s 256D(4)).
Corporate Law: Law principles and practice
Capital reductions not otherwise authorised cont …
The injunction power under s 1324 of the Corporations
Act 2001 (Cth) provides a remedy for breach of s 256B (s
1324(1A)(b)) if the reduction is not fair and reasonable to
shareholders, or where it prejudices the creditors.
Corporate Law: Law principles and practice
Other share capital reductions
Other share capital reductions are provided for in ss 258A
–258F of the Corporations Act 2001 (Cth) and they fall
outside the requirements of s 256B. These reductions
include:
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share capital reduction by unlimited companies (s
258A)
the company having the right to grant a lease or right
of occupy property belongs to the company.
the company paying brokerage or commission to a
person in respect of that person or another person
agreeing to take up the shares in the company (s
258C).
Corporate Law: Law principles and practice
Other share capital reductions cont …
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cancellation of shares forfeiture under the terms on
which they were issued (s 258D)
the redemption by a company of a redeemable
preference share out of the proceeds of a new issue of
shares made for this purpose (s 258E(1)(a)). This is
governed by ss 254J and 254K
cancellation of paid up shares capital that is lost or
not represented by available assets: (s 258F). This
reduction does not apply to trading losses incurred in
the usual course of business, but applies to unusual
losses.
Corporate Law: Law principles and practice
Company self-acquisitions of shares
Direct acquisition by a company of its own shares
Corporations Act 2001 (Cth) s 259A–259D
A company is prohibited from acquiring shares in itself,
except as provided by the Act.
Trevor v Whitworth (1887) 12 App Cas 409
Companies cannot acquire their own shares directly or
indirectly except as permitted by s 259A.
Corporate Law: Law principles and practice
Company self-acquisitions of shares cont …
There are some exceptions to the rule against a company
acquiring its own shares:
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the buyback is conducted under the share buyback
rules (Corporations Act 2001 (Cth) s 257A).
no consideration has been given for their acquisition
by the company or an entity it controls
the buyback has been ordered by a court
the acquisition is exempt (s 259B(2)(3)): e.g. an
employee share scheme approved under s 259B(2)
the company’s ordinary course of business includes
providing finance on ordinary commercial terms (s
259B(3)).
Corporate Law: Law principles and practice
Taking security over shares
A company must not take security over its own shares or
over the shares of another entity it controls except under
ss 259B(2) and (3) of the Corporations Act 2001 (Cth).
The prohibition is aimed at preventing a company from
taking security over its own shares.
Corporate Law: Law principles and practice
Taking security over shares cont …
The exceptions to this rule are:
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under an employee share scheme approved under s
259B(2) of the Corporations Act 2001 (Cth)
if a company’s ordinary course of business includes
providing finance on ordinary commercial terms (s
259B(3)).
Corporate Law: Law principles and practice
Share buybacks
While there is a first-instance prohibition on a company
purchasing its own shares, this can be done under a
number of exceptions, and for good reasons. For example:
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giving small companies the ability to buy back the
shares of a major shareholder who wishes to leave the
company
allowing the operation of employee share acquisitions
schemes
permitting a company to buy its shares on the market
to stabilise its share price
allowing a company protect itself from a takeover bid
by creating a more competitive price for the
company’s shares.
Corporate Law: Law principles and practice
Permitted share buybacks
A company can buy back limited percentages of their own
shares each year.
A company can buy back 10% of its shares in a 12-month
period.
If the buyback is to exceed the 10%/12 months limit, then
some form of shareholder approval will be required.
Corporate Law: Law principles and practice
Permitted share buybacks cont …
The power to buy back shares is set out in s 257A of the
Corporations Act 2001 (Cth) and states that a company
can buy back its own shares only if:
a) the buyback does not materially prejudice the
company’s ability to pay its creditors; and
b) the company follows the procedure set out in this
Division.
Section s 257A also stipulates that a company cannot buy
its own shares if its constitution imposes restrictions on it
buying its own shares.
Corporate Law: Law principles and practice
Permitted share buybacks cont …
Notice of an intended buyback must be lodged with ASIC
within 14 days of passing the relevant resolution
approving the buyback (Corporations Act 2001 (Cth) s
257F).
Within one month of the registration of the shares back to
the company, it must lodge a notice with ASIC with all
details (s 254Y).
A company must include with the offer to buy back shares
a statement setting out all information known to the
company that is material to the decision whether to accept
the offer (s 257G).
Corporate Law: Law principles and practice
Types of share buyback
Equal access scheme
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a buyback of shares with the same percentage for each
shareholder and on the same terms
shareholders should be given reasonable time to accept
a buyback, and be advised of the time of acceptance
set (Corporations Act 2001 (Cth) s 257B(2))
if the 10/12 rule is exceeded, the company must pass
an ordinary resolution
members must have adequate notice of the meeting,
and all relevant information (s 257C)
ASIC must be informed of all details (s 257F)
Corporate Law: Law principles and practice
Types of share buyback cont …
Selective buybacks
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a buyback where different members are treated
differently
the 10/12 rule does not apply
requires approval by a special resolution
members who own the shares cannot vote
(Corporations Act 2001 (Cth) s 257D(1)).
the usual notification of the meeting and adequate
information must be given to members
ASIC must be notified and documents lodged (s
257D(3)).
Corporate Law: Law principles and practice
Types of share buyback cont …
On-market buyback
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The shares of a listed company are repurchased by the
company in the ordinary course of trading on the
securities exchange.
An ordinary resolution is required and relevant
documents must be filed with ASIC if exceeding 10/12
rule.
Corporate Law: Law principles and practice
Types of share buyback cont …
Employee share buyback
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a buyback of employees’ shares that have been
approved by the directors and a general meeting
An ordinary resolution is required and relevant
documents must be filed with ASIC if exceeding the
10/12 rule.
Minimum holding buyback
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a buyback of all of a holders shares in a listed
company where the shares are less than a marketable
parcel
Corporate Law: Law principles and practice
Types of share buyback cont …
Creditor protection
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s 257J of the Corporations Act 2001 (Cth) deals with
the signposts and warnings of consequences for
companies.
If directors enter into a buyback, this amounts to
insolvent trading, or if the buyback causes the
company to become insolvent under s 588G, then the
director may be liable for insolvent trading.
Other remedies:
• voidable transaction (s 588FF))
• injunction or damages (s 1324(1A))
Corporate Law: Law principles and practice
Financial assistance for acquisition of shares
A company may indirectly reduce its share capital when it
financially assists a person to purchase shares in the
company.
Provisions exist to maintain creditor and shareholder
protection (Corporations Act 2001 (Cth) ss 260A–260D).
Corporate Law: Law principles and practice
Financial assistance for acquisition of shares cont …
A company may financially assist a person to acquire
shares in the company or its holding company provided it
satisfies the following requirements (Corporations Act
2001 (Cth) s 260):
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the assistance does not materially prejudice the
company, its shareholders or the company’s ability to
pay its creditors
the shareholders’ approval is obtained under s 260C
the assistance is exempted under s 260C, which covers
both general and specific exemptions.
Corporate Law: Law principles and practice
What is financial assistance?
‘Giving financial assistance’ includes actions such as:
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making a loan (Corporations Act 2001 (Cth) s 260)
giving a guarantee
being released from an obligation or forgiving a debt
the company providing its own assets as security for a
person’s loan to buy shares in the company.
Corporate Law: Law principles and practice
No material prejudice
Section 260A(1)(a) of the Corporations Act 2001
(Cth)permits a company to give financial assistance as
long as it does not materially prejudice the company, its
shareholders or the company’s ability to pay its creditors.
Corporate Law: Law principles and practice
Shareholder approval
Shareholders may approval the giving of financial
assistance to a person to acquire shares in the company or
in a holding company under s 260B of the Corporations
Act 2001 (Cth) by the following:
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a special resolution passed at a general meeting (with
no vote being cast in favour of the resolution by the
person acquiring the shares, or associates of those
persons)
a unanimous resolution agreed to by all ordinary
shareholders.
Corporate Law: Law principles and practice
Giving of financial assistance
A special resolution to allow financial assistance must be
approved by special resolution passed at a general meeting
of the holding company (Corporations Act 2001 (Cth) s
260B(2)(3))
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A special resolution put to a general meeting must
accompany the notice of meeting setting out all known
information material to the decision on how to vote on
the resolution (s 260B(4)).
A notice of the meeting and the accompanying
documents must also be lodged with ASIC before being
sent to members (s 260B(5)).
A special resolution giving the financial assistance must
be lodged with ASIC within 14 days after being passed
(s 260B(7)).
Corporate Law: Law principles and practice
Giving of financial assistance cont …
Note: improper giving of financial assistance
ASIC v Adler [2002] NSWSC 171
Corporate Law: Law principles and practice
General and specific exemptions to giving financial
assistance
Section 206C of the Corporations Act 2001 (Cth) sets out
a number of exemptions to the giving of financial
assistance under s 260A, including financial assistance:
•
given during the ordinary course of commercial
dealing that consists of:
• acquiring or creating a lien on partly paid shares (s
260C(1)(a))
• entering into an instalment agreement for the
purchase of shares (s 260C(1)(b)).
Corporate Law: Law principles and practice
General and specific exemptions to giving financial
assistance cont …
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given in the ordinary course of business of a financial
institution on ordinary commercial terms
(Corporations Act 2001 (Cth) s 260C(2))
in the form of a guarantee or other security given by a
subsidiary of a borrowing company in the ordinary
course of commercial dealing (s 260C(3))
given under an employee share scheme approved by a
general meeting of the company and, in the case of a
subsidiary, approved by a general meeting of the
holding company (s 260C(4)).
Corporate Law: Law principles and practice
Other exemptions
Other exemptions include:
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permitted reduction of share capital (s 260C(5)(a))
permitted share buybacks (s 260C(5)(b))
assistance given under a court order (s 260C(5)(c))
a discharge on ordinary commercial terms of a liability
incurred by a company in relation to a transaction
entered into on ordinary commercial terms: (s
260C(5)(d)).
Corporate Law: Law principles and practice
Consequences for failing to comply with s 260A
Failure to comply with s 260A of the Corporations Act
2001 (Cth) does not affect the validity of the transaction
and the company is not guilty of an offence.
Contravention of s 260A attracts a civil penalty under s
1317E.
Directors are not relieved from having to comply with
their statutory and common law fiduciary duties because
the giving of financial assistance is authorised by the
provisions of the law or approved by the company’s
shareholders (s 260E).
Corporate Law: Law principles and practice
The legal nature of a share
Shares are a form of personal, intangible property that,
together with debentures and options, are included in the
definition of as a ‘security’ under s 92
Shares are a form of personal property s107A,
shares are a collection of personal rights and obligations a ‘chose in action’.
Shares possess the significant features of being:
•transferable ( through sale and purchase)
•capable of transmission to a personal representative in
the event of death, mental incapacity of bankruptcy
•capable of being used as security.
Corporate Law: Law principles and practice
Share capital
Directors have the power to issue shares in terms of their
broad powers under s 198A of the the Corporations Act
2001 (Cth).
Directors must issue shares for a proper purpose.
A company may issue shares for any amount. In fact,
shares can be issued for different amounts at different
points of time.
Corporate Law: Law principles and practice
Share capital cont …
Issued shares may be partly paid (Corporations Act 2001
(Cth) s 254A(1)(C)).
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Different members may owe different unpaid amounts
according to when the share was paid.
A company may limit its ability to issue shares under
its constitution.
If shares are partly paid, the member will still be liable
for the unpaid amount on a call up (s 254M).
A member need not pay any more if the share is fully
paid up.
Different classes of shares may have different rights
according to the company constitution.
Corporate Law: Law principles and practice
Different classes of shares
The application for registration of a company must
include the class of shares that members agree to take up
(Corporations Act 2001 (Cth) s117(2)(k)).
A company must lodge a notice with ASIC setting out
details of shares divided into different classes (s 246F(1)).
A public company must lodge with ASIC a copy of a
document or resolution that attaches rights, or varies or
cancels rights attaching to shares (s 246F(3)).
Corporate Law: Law principles and practice
Issuing of shares
The issuing of shares follows normal contract law
principles of offer and acceptance:
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an investor makes an offer;
the company must determine if they will accept the
offer and make an allotment, the confirmation of
which forms the contract;
the company must then establish and maintain a
register of members (Corporations Act 2001 (Cth) s
168 and 169) and represent proof of membership,
unless there is contrary evidence (s 176).
Corporate Law: Law principles and practice
Classes of shares
Ordinary shares
The shareholder:
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is entitled to a dividend (subject to dividend rules
concerning directors’ powers, and obligations relating
to capital maintenance)
has voting rights at company meetings
has the right to repayment of capital on winding up
has the right to participate in distribution of capital on
winding up.
Corporate Law: Law principles and practice
Classes of shares cont …
Preference shares
The rights set out in the company constitution or
otherwise approved by special resolution must be
specified in relation to:
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repayment of capital
participation in surplus assets and profits
cumulative or non-cumulative dividends
voting
priority of payment of capital and dividends in relation
to other shares or other classes of preference shares
(Corporations Act 2001 (Cth) s 254A(2) & s 254G(2)).
Corporate Law: Law principles and practice
Preference shares cont …
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Shareholders have a preferential right to:
• payment of any dividend ahead of ordinary
shareholders (the payment of a dividend is usually
calculated as a fixed percentage of the issue price
of the shares)
• repayment of capital on winding up.
Shareholders have restricted voting rights relating to
proposals for reductions of capital, variation of class
rights, or the winding up of the company.
Corporate Law: Law principles and practice
Specific classes of preference shares
Participating preference shares: bestow the right to
receive additional dividends as well as preferential
dividends and the presumed right at common law to receive
surplus capital after repayment of capital contribution.
Cumulative preference shares: presumed to be so at
common law; bestows the right to be paid arrears of
dividends in later years ahead of ordinary shareholders if the
dividend is not paid in a particular year.
Redeemable preference shares: these may be issued under
s 254A(1)(b) of the Corporations Act 2001 (Cth). The
company can pay back (‘redeem’) the issue price to the
shareholder out of profits or proceeds of a new share.
Corporate Law: Law principles and practice
Variation of class rights
Members with special rights attached to their shares can
invoke the protection of ss 246B–246G of the
Corporations Act 2001 (Cth).
Procedures set out in s 246B provide for two possible
courses of action:
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•
If the constitution sets out the procedure for varying or
cancelling class rights, those rights may be varied or
cancelled only in accordance with the procedure.
If there is no constitution, there needs to be a special
resolution by the company to change the rights
attached to shares. This must receive 75% of the votes
of the members in that class.
Corporate Law: Law principles and practice
Variation of class rights cont …
The company must give written notice of the variation or
cancellation to the members of the class within seven days
after the variation or cancellation is made (Corporations
Act 2001 (Cth) s 246B(3)).
Members of a class holding at least 10% of the votes of
the class concerned may apply to court to set aside the
variation, cancellation or modification to the constitution,
if the members in the class do not all agree to the
measures being taken (s 246D(1)).
Corporate Law: Law principles and practice
Remedies
A court may:
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•
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set aside the variation, cancellation or modification if
it is satisfied they would unfairly prejudice the
applicants (Corporations Act 2001 (Cth) s 246D(5))
enforce the statutory contract under s 140(1) and seek
an injunction
apply for a remedy under s 232 if the variation,
cancellation or modification is unfair or oppressive.
Corporate Law: Law principles and practice
Issuing or transferring shares to a controlled entity
A company is not permitted to purchase shares within an
entity it controls (Corporations Act 2001 (Cth) s 259C).
Determination of control is defined in s 259E as the
capacity of a company to determine the outcome of
decisions about the entity’s financial and operating
policies.
Corporate Law: Law principles and practice
Issuing or transferring shares to a controlled entity cont …
There are some exemptions to the prohibition in s
259C(1) of the Corporations Act 2001 (Cth) whereby the
issue is void unless:
(a) the issue or transfer is to the entity as a personal
representative; or
(b) the issue or transfer is to the entity as trustee and
neither the company nor any entity it controls has a
beneficial interest in the trust, other than a beneficial
interest that satisfies these conditions:
(i) the interest arises from a security given for the
purposes of a transaction entered into in the
ordinary course of business in connection with
providing finance; and
Corporate Law: Law principles and practice
Issuing or transferring shares to a controlled entity cont …
(ii) that transaction was not entered into with an
associate of the company or an entity it controls; or
(c) the issue to the entity is made as a result of an offer to
all the members of the company who hold shares of
the class being issued and is made on a basis that does
not discriminate unfairly, either directly or indirectly,
in favour of the entity; or
(d) the transfer to the entity is by a wholly-owned
subsidiary of a body corporate and the entity is also a
wholly-owned subsidiary of that body corporate.
Corporate Law: Law principles and practice
Issuing or transferring shares to a controlled entity cont …
Under s 259C(2) of the Corporations Act 2001 (Cth),
ASIC may exempt a company from the operation of this
section. The exemption:
•
•
must be in writing
may be granted subject to conditions.