Membership of a
company
Corporate Law: Law principles and practice
What are shares?
Shares are one of the securities that a company can issue.
Shares are a form of personal property (Corporations Act
2001 (Cth) s 1070A) and are protected by ‘chose in
action’, a right that can be enforced in a court of law.
Shares are in the form of an intangible right (s 1085(1)).
Corporate Law: Law principles and practice
Shares cont …
A share represents a division of capital within a company
and designates each holder as a member of the company.
Different shares may carry different rights according to the
company constitution.
A member, once on a company’s register of members, is an
owner of the company, with rights granted by the
Corporations Act 2001 (Cth) and contractual requirements
of the company’s internal management rules.
Corporate Law: Law principles and practice
Becoming a member
Members of a company limited by shares are its
shareholders.
Shareholders are company members and are in a legal
relationship with the company (something akin to a
contract).
Members names must be entered on a register
(Corporations Act 2001 (Cth) s 231(b)).
Corporate Law: Law principles and practice
Becoming a member of the company
A person can become a member in various ways, including:
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being identified as a member on the company’s
application for registration (Corporations Act 2001
(Cth)s 231(a))
applying for and receiving an issue of shares pursuant to
a disclosure document (under ch 6D)
receiving a transfer from another member
receiving shares by transmission through death or
bankruptcy
converting debentures into shares or exercise of options.
Corporate Law: Law principles and practice
The liability of a member
The liability of a member depends on the type of company
that issues them, and the type of share actually issued.
In a limited liability company, the shareholder’s liability is
limited to the unpaid amount, if any, on the shares
(Corporations Act 2001 (Cth) s 516).
Corporate Law: Law principles and practice
Register of members
The Corporations Act 2001 (Cth) requires a company to
maintain a register of members that contains details of
such matters as the member’s name, address, number of
shares held, unpaid amounts on shares and date of
acquisition of shares (ss 168(1)(a) and 169).
Corporate Law: Law principles and practice
The register of members is significant
It is proof of matters shown in the register, unless there is
evidence to the contrary (Corporations Act 2001 (Cth) s
176).
A person does not become a member until the person’s
name is entered into it.
Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR
104
Corporate Law: Law principles and practice
Trustee shareholders
In relation to trustees appointed on death or bankruptcy of
a shareholder, the Corporations Act 2001 (Cth) generally
prohibits notice of a trust being entered on the register of
the company (s 1072E(10)).
Note: companies may maintain a register in such a
way that it identifies shares held by a trustee (s 1072E(9)).
Corporate Law: Law principles and practice
The register
The register must be kept at the company’s registered
office, its principal place of business (Corporations Act
2001 (Cth) s 172(2)).
Anyone is permitted to inspect a share register (s 173(1)).
Shareholders can inspect without charge (s 173(2)).
The right to inspect is limited by privacy considerations
imposed by s 177.
Corporate Law: Law principles and practice
Correction of the register
A correction of the register can be ordered by a court on
application by an aggrieved company or person, including
a shareholder (s 175(1)).
A court may order a register to be corrected and the
company compensate the applicant for loss or damage
suffered (s 175(2)).
Corporate Law: Law principles and practice
Share certificates
A share certificate is prima facie evidence of the
shareholder’s title to the number of shares specified s
1070C(2) of the Corporations Act 2001 (Cth).
Once a company issues a certificate, those dealing with
the certificate are entitled to rely on the truth of its
contents.
Corporate Law: Law principles and practice
Share certificates cont …
If a company wrongly issues a share certificate, the
company will be liable to compensate the true owner of
the share or restore them to their rightful position.
Re Bahia and San Francisco Rail Co Ltd (1868) LR 3 QB
584
Transfers of shares without the permission of the owner
may mean the company must restore the true owner to the
register.
McLaughlin v Daily Telegraph Newspaper Co (No 2)
(1904) 1 CLR 243
Corporate Law: Law principles and practice
Share certificates cont …
The share certificate:
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allows a company to identify its members
is required to state the name of company, the
jurisdiction of registration, the class of shares, and the
amount (if any) unpaid on shares (Corporations Act
2001 (Cth) s 1070(1))
must be ready for delivery within two months of
allotment of shares, or within one month after transfer
of shares lodged with company (ss 1071H(1) and (2));
non-compliance is an offence s 1071H(6).
Corporate Law: Law principles and practice
Transfer of shares
A transfer of shares means ownership is transferred and the
transferee is entered on the share register.
A transfer requires a contract of sale and a proper instrument
of transfer (Corporations Act 2001 (Cth) s 1071B(2)).
Section 1072F(2) provides that directors are not required to
register the transfer unless the executed transfer document
and accompanying share certificate are lodged at the
company’s registered office: s 1071D.
Shares are presumed to be freely transferable, unless the
constitution states otherwise (Corporations Act 2001 (Cth) s
1070A(1)).
Corporate Law: Law principles and practice
Transfer of shares cont …
The directors of proprietary companies have the discretion
to refuse to register a share for any reason (s 1072G).
If a company’s constitution does not require the directors
to give reasons or grounds for refusing a transfer, any
challenge to their decision requires proof of bad faith or
improper purpose on their part.
Re Smith and Fawcett Ltd [1942] Ch 304
Corporate Law: Law principles and practice
Refusal to register
If there is a refusal to register, a party can apply to a court
on the grounds of unjustness or unreasonableness
(Corporations Act 2001 (Cth) s 1071F).
A court may order that the transfer be registered or make
such other order as is just and reasonable.
Any time there is a refusal, the company is required to
send notice of the refusal to the transferee within two
months (s 1071E).
Corporate Law: Law principles and practice
CHESS
The Clearing House Electronic Subregister System
(CHESS) allows settlement of transactions that involve a
diverse range of financial products, including shares of
listed companies.
Corporate Law: Law principles and practice
Transmission of shares
The transmission of shares occurs by the operation of the
law in the event a shareholder dies, becomes bankrupt, or
lacks mental or physical capacity. In such cases, the shares
vest in the personal representative of the shareholder
(Corporations Act 2001 (Cth) s 1072A).
The personal representative is entitled:
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to be registered as the holder of the shares—in which
case the company must register them as such (s
1072A(3))
to transfer the shares to another person—s 1072A(4).
Corporate Law: Law principles and practice
Death
If a shareholder who owns shares jointly dies, the
company will recognise only the survivor as being entitled
to the deceased shareholder’s interest in the shares (the
estate is still liable for unpaid amounts) (Corporations Act
2001 (Cth) s 1072A(5)).
Under the Bankruptcy Act 1966 (Cth), the property of the
bankrupt shareholder vests in the trustee in bankruptcy.
Corporate Law: Law principles and practice
Different types of shares
Shares can be issued with different rights attached (in
different classes).
Classes of shares means that a member has more or less
rights than other members (e.g. a member may or may not
have a right to vote, or may or may not have a right to a
dividend).
A preferential shareholder may receive dividends before any
other member.
If a company issues shares with different rights attached,
these rights must be set out in both the company constitution
(Corporations Act 2001 (Cth) s 254A(2)) and the contract
for the issue of shares.
Corporate Law: Law principles and practice
Different types of shares cont …
A company can amend its constitution to change the rights
attaching to shares (Corporations Act 2001 (Cth) ss 246B–
G).
The company constitution may identify different types of
shares, including:
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ordinary shares with rights as designated by the Act
preference shares
redeemable shares (shares that may be repurchased later)
redeemable preference shares (shares that receive a
preferential dividend in the future)
deferred shares (shares that receive a dividend only after
other shareholders).
Corporate Law: Law principles and practice
Ceasing to be a member
A person ceases to be a member under the following
circumstances:
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forfeiture and sale for non-payment of a call
transfer of their shares, which is duly registered
death of the shareholder, resulting in transmission to
the personal representative
under the Corporations Act 2001 (Cth), compulsory
acquisition through selective capital reduction (ss
256B)
deregistration of the company
sale of shares under company lien.