Chapter 10
Membership, shares & capital
Chapter Summary
1
MEMBERSHIP
A person may agree to be a member of the company on its registration: s 231(a), but most become members after
registration, namely when their name is entered on the register of members: s 231(b).
1.1
Register of members
A company is required to keep a register of members which contains each member’s name and address and the
date on which the entry of the member’s name is made in the register: s 169(1). Where the company has more
than 50 members, the company is required to keep an up-to-date index of members’ names: s 169(2).
Only members can exercise certain remedies. Thus the question as to whether a person is a member can be very
important. For example, see cases such as: RE INDEPENDENT QUARRIES PTY LTD (1994) 12 ACLC 159, (1994)
12 ACSR 188; COSHOTT V PRINCIPAL STRATEGIC OPTIONS PTY LTD (2001) 38 ACSR 547, [2001]
NSWCA 110.
2
NATURE OF SHARES
Shares are personal property (s 1070A), and thus are transferable or transmissible, as provided for in the
company’s constitution. A share is capable of devolution by will or by operation of law: s 1070A.
For historical reasons, s 1070B requires that each share is distinguished by an appropriate number. Share
certificates are optional (s 1070C) and less common than in the past because under modern electronic clearing
house rules (e.g. Clearing House Electronic Subregister System (‘CHESS’)) the holders of shares are issued with
statements which list their share entitlement. In any event, a share certificate is only prima facie evidence of
ownership: s 1070C(2). Shares used to, but no longer, have a par value: s 254C.
3
ISSUING SHARES
3.1
Power
A company has power to issue and cancel shares: s 124(1)(a). This power includes the right to issue bonus shares
(shares for whose issue no consideration is payable); preference shares (including redeemable preference shares)
and partly paid shares: Corporations Act, s 254A(1). The company can determine the terms of issue of shares,
including the price of the shares: Corporations Act, s 254B. Shares can be issued for a non-cash consideration:
Corporations Act, s 254X. A company does not have the power to issue bearer shares or issue stock or convert
shares into stock: s 254F.
The directors exercise this power: s 198A(2). Listing Rules may require member approval (eg Listing Rule 7.1).
3.2
Validation by court
The court may validate or confirm the terms of a purported issue of shares if the issue is invalid for any reason: s
254E. For discussion of when it will exercise this power, see cases such as RE ONSLOW SALT PTY LTD (2003)
21 ACLC 1113, (2003) 45 ACSR 322, [2003] FCA 429; RE GOLDEN GATE PETROLEUM LTD (2004) 22
ACLC 1292, (2004) 50 ACSR 659, [2004] FCA 1119.
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3.3
Pre-emptive rights provisions
Companies issuing shares should take care to comply with any pre-emptive rights provisions (eg s 254D, a
replaceable rule applying to proprietary companies only).
3.4
Converting shares
A company can convert all or any of its shares into a larger or smaller number of shares by resolution passed at a
general meeting: s 254H.
3.5
Shares must be issued for a proper purpose
Shares must be issued in order to obtain capital which is needed by the company and not for any other ulterior
purpose, such as to enable directors to entrench their control over the company: WHITEHOUSE V CARLTON
HOTEL PTY LTD (1987) 162 CLR 285, (1987) 5 ACLC 421; LORENZI V LORENZI HOLDINGS LTD (1993)
12 ASCR 398.
3.6
Notice of issue or cancellation
A company must lodge a notice of the issue of shares in the prescribed form with ASIC within 28 days of the
issue of the shares: s 254X(1) and within 1 month of cancellation of shares: s 254Y(1).
4
CLASSES OF SHARES
A company may determine the rights and restrictions attaching to shares: Corporations Act, s 254B. Thus the
company may have different classes of shares. Particulars of different classes must be given to ASIC in the
prescribed form: s 246F(1).
4.1
Preference shares
A company is empowered to issue preference shares: Corporations Act, s 254A(1)(b), but can only issue
preference shares if its constitution (if any) or a special resolution of the company deals with matters such as the
repayment of capital, participation in surplus assets and profits, cumulative and noncumulative dividends, voting,
and priority of payment of capital and dividends in relation to other shares or classes of preference shares: s
254B(2).
Cumulative preference shares confer an entitlement to a dividend to the next year if no dividend is payable in a
particular year, because none or insufficient profits have been declared in that particular year.
The company may convert an ordinary share into a preference share:, s 254G(1). Ordinary shares may be
converted into preference shares only if the holder’s rights with respect to certain matters are provided for; these
matters being the repayment of capital, participation in surplus assets and profits, cumulative and non-cumulative
dividends, voting, priority of payment of capital and dividends in relation to other shares or classes or preference
shares. These rights will be set out in the company’s constitution (if any) or approved by a special resolution: s
254G(2).
Often, preference shares will revert to ordinary shares after the payment of a preferred dividend for a certain
period. A share that is not a redeemable preference share when issued cannot be converted into a redeemable
preference share: s 254G(3). The listing rules of the ASX stipulate that preference shares which are quoted will
confer a dividend at a commercial rate and payment of capital in preference to ordinary shareholders.
4.2
Redeemable Preference Shares
Preference shares are issued on the terms on which they can be redeemed. The shares may be redeemed at a fixed
time or on the happening of a certain event; or at the company’s option or at the shareholder’s option: s 254A(3).
On redemption, the shares are cancelled: s 254J(1). However, shares may be cancelled under a reduction of
capital or a share buy-back under Part 2J.1: s 254J(2).
A company may only redeem preference shares if the shares are fully paid up and the redemption is made out of
profits or the proceeds of a new issue of shares made for the purpose of the redemption: s 254K. If a company
redeems shares in contravention of s 254J or s 254K, the contravention does not affect the validity of any
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redemption or contract, and the company does not commit an offence: 254L(1), but any person who is involved
in the contravention is liable to penalties: s 254L(2) (a civil penalty provision: s 1317E(1)(c)) and if their
involvement is dishonest, they commit an offence: s 254L(3). If a company fails to redeem redeemable preference
shares on the due date the court may order the winding up of the company.
4.3
Partly Paid Shares
A company can issue partly paid shares: s 254A(1). Holders of partly paid shares are liable to pay calls, in
accordance with the terms on which the shares are on issue, and will become “contributories” if the company is
wound up. This does not apply to a no-liability company: s 254M.
A call on a share in a no-liability company is not effective unless it is made payable at least 14 days after the call
is made: s 254P(1). The share in a no-liability company is immediately forfeited if a call is made on the share and
the call is unpaid at the end of 14 days after it became payable: s 254Q(1). The forfeited share must then be
offered for sale by public auction: s 254Q(2). If a person’s shares have been forfeited, the person may redeem the
shares before they have been sold: s 254R(1).
5
DIVIDENDS
5.1
Profits
A dividend may only be paid out of the profits of a company: s 254T. The Corporations Act does not contain a
definition of the term ‘profits’. The determination by a court of whether a profit has been derived is a question of
fact. Cases such as RE SPANISH PROSPECTING CO LTD [1911] 1 CH 92 discuss what constitutes “profits” for
this purpose.
A company may declare a dividend from an unrealised capital gain, if is clear that a capital gain is permanent in
character and does not arise from a temporary fluctuation in value of a capital asset: DIMBULA VALLEY (CEYLON
TEA) CO LTD V LAURIE [1961] CH 353. A company may also include in its profits that are distributed by a dividend
any gains earned by the sale of capital assets of the company, provided there is no diminution of the paid-up capital of
the company.
The Australian Accounting Standards Board (‘the AASB’) may make accounting standards for the purposes of the
Corporations Act: s 334. In preparing the financial report for a financial year, a company must comply with
accounting standards. An exception is made in the case of a small proprietary company where there is a
shareholder direction not to comply with those standards: s 296. In determining the profit made in a particular
year by a company, the court will have regard to accounting standards in use by the profession: QBE
INSURANCE GROUP LTD V AUSTRALIAN SECURITIES COMMISSION (1992) 8 ASCR 631, (1992) 10
ACLC 1490; SUN ALLIANCE INVESTMENTS PTY LTD V COMMISSIONER OF TAXATION (2004) 134 FCR
102, [2004] FCAFC 11.
If profits are capitalized under s 254S, they are no longer available for the payment of a dividend.
5.2
Directors to determine
The directors may determine whether a dividend is payable, the amount of the dividend and the time and method
of payment (including cash, the issue of shares, the grant of options and the transfer of assets: s 254U(1)
replaceable rule). Interest is not payable on a dividend: s 254U(2).
A company does not incur a debt to a shareholder until the time fixed for the payment. The decision to pay the
dividend may be revoked at any time before then: s 254V(1). However, if a company has a constitution and it
provides for the declaration of dividends, the company incurs a debt when the dividend is declared: s 254V(2).
5.3
Same dividend rights
Each share in a class of shares in a public company has the same dividend rights unless the company has a
constitution and the constitution provides for the shares to have different dividend rights, or special dividend
rights are provided for by special resolution of the company: s 254W(1). In the case of a proprietary company,
the directors may pay dividends as they see fit, subject to the terms on which the shares were on issue: s 254W(2).
Shareholders in no-liability companies are entitled to the payment of any dividend, irrespective of the amount
paid up on the shares: s 254W(4). However, a dividend is not payable if a call has been made on a share and the
call is due and unpaid: s 254W(3).
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6
TRANSFER OF SHARES
6.1
Instrument of transfer
Except where a right to securities has devolved by will or by operation of law, shares are only be transferred upon
the completion and delivery of an instrument of transfer. A company must register a transfer of securities if a
proper instrument of transfer has been delivered to the company: s 1071B(2). An instrument of transfer of
securities, if signed by a person, need not be witnessed: s 1071D. (A company can register a person to whom a
right to securities has devolved by will or by operation of law: s 1071B(5)).
6.2
Refusal to register transfer
If a company refuses to register a transfer of a security, the company must, within two months of the date on
which the transfer was signed, give the transferee notice of the refusal: s 1071E. The court may make an order for
the transfer of the security in the case where there is a refusal or failure to register a transfer or transmission of
securities: s 1071F.
6.3
Transferor remains owner until registration of transfer
A person transferring shares remains the holder of the shares until the transfer is registered and the name of the
transferee is entered in the register of members in respect of the shares: s 1072F(1). Consequently, the person will
not have standing to bring action as a “member”: NIORD PTY LTD V ADELAIDE PETROLEUM NL (1990) 8
ACLC 684, (1990) 2 ACSR 347.
7
VARIATION OF CLASS RIGHTS
If it is proposed to vary the rights attached to shares of a particular class or members in a class of members, then
the procedure which is contained in the company’s constitution for varying or cancelling rights must be observed:
s 246B(1). If the company does not have a constitution or the company’s constitution does not set out the
procedure for varying or cancelling the rights attached to shares of a particular class or members in a class of
members, then the rights may be varied or cancelled only in the manner set out in s 246B(2).
It is necessary that the variation or cancellation is approved by a special resolution of the company, as well as a
special resolution of the class of members of the company or by the written consent of members with at least 75%
of the votes in that class: s 246B(2).
The following are deemed to vary class rights because of the operation of s 246C:
 If shares in a class of shares are divided into further classes, and after the division the rights attached to
all of those shares are not the same (s 246C(1))
 If the rights attached to some of the shares in a class of shares are varied (s 246C(2))
 If the members in a class of members in a company without share capital are divided into further classes
of members, and after the division, the rights of all of those members are not the same (s 246C(3))
 If the rights of some of the members in a class of members in a company without a share capital are
varied: (s 246C(4))
 If a company with one class of shares issues new shares, the issue is taken to vary the rights attached to
shares already issued if the rights attaching to the new shares are not the same as the rights attaching to
shares already issued (s 246C(5))
 If a company issues new preference shares that rank equally with existing preference shares, unless the
variation is authorised by the terms of issue of the existing preference shares or the company’s
constitution (if any), as in force when the existing preference shares were issued (s 246C(6)).
If members in a class do not agree to a variation or cancellation of their rights, or a modification of the
company’s constitution to allow their rights to be varied or cancelled; members having at least 10 per cent of the
votes in the class may apply to the court to have the variation, cancellation or modification set aside: s 246D(1).
The court may set aside the variation, cancellation or modification if it is satisfied that it would unfairly prejudice
the applicants. However, the court must confirm the variation, cancellation or modification if the court is not
satisfied of unfair prejudice: s 246D(5).
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Within one month of the issue of cancellation of shares, a company must lodge a notice in the prescribed form of
the particulars of the shares issued or cancelled: ss 254X and 254Y.
8
SHARE CAPITAL REDUCTIONS
8.1
Common law
The common law used to prohibit share capital reductions because these would contravene the principle that
capital in a company ought to be maintained & not paid out except in the legitimate conduct of its business:
Trevor v Whitworth (1887) 12 AC 409. The principle applies today, except to the extent it has been modified by
Part 2J.1: INDUSTRIAL EQUITY LTD V BLACKBURN (1977) 137 CLR 567, (1977) 3 ACLR 89.
8.2
Part 2J.1
Under Part 2J.1, a reduction is allowed if the reduction satisfies three tests, namely that it:
 is fair and reasonable to the company’s shareholders as a whole.
 does not materially prejudice the company’s ability to pay its creditors.
 is approved by the shareholders under s 256C.
All three tests must be satisfied before the reduction of capital can occur: s 256B(1). Examples of reductions are:
RE ALLGAS ENERGY LTD (1998) 16 ACLC 1098, (1998) 27 ACSR 729, [1999] 1 QD R 472 and QUATRO
LTD V ARGO INVESTMENTS LTD (1999) 32 ACSR 239.
An equal reduction applies only to ordinary shares and applies to each holder of ordinary shares, and the terms of
the reduction are the same for each holder of ordinary shares. If the reduction is an equal reduction it must be
approved by a resolution passed at a general meeting of the company: s 256C(1).
If the reduction is not an equal reduction, it is a selective reduction: s 256B(2) and must be approved by either of
two meetings. It must be approved by a special resolution passed by a general meeting of the company, with no
votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction
or whose liability to pay amounts unpaid on shares is to be reduced or by their associates: s 256C(2)(a).
Alternatively, the selective reduction must be approved by a resolution agreed to at a general meeting by all
ordinary shareholders: s 256C(2)(b). If the reduction involves the cancelling of shares, the reduction must also be
approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled: s
256C(2). See for example: RE TIGER INVESTMENT CO LTD (1999) 18 ACLC 62, (1999) 33 ACSR 438,
[1999] NSWSCA 1220; RE ETRADE AUSTRALIA LTD (1999) 17 ACLC 695, (1999) 30 ACSR 516, [1999]
NSWSC 254; WINPAR HOLDINGS LTD V GOLDFIELDS KALGOORLIE LTD (2001) 20 ACLC 265, (2001)
40 ACSR 221, [2001] NSWCA 427.
A company must lodge with ASIC a copy of any resolution to approve a capital reduction within 14 days after it is
passed. A company must not make the reduction until 14 days after such lodgment: s 256D(3).
8.3
Other permitted share capital reductions
Division 3 contains other capital reductions that are authorised: see ss 258A, 258B, 258C, 258D, 258E and 258F:
o An unlimited company may reduce its share capital in any way: s 258A.
o The constitution may permit members to have rights to occupy or use property: s 258B.
o A company may pay brokerage or commission to a person in respect of that person or another person
agreeing to take up shares in the company: s 258C.
o A company may cancel shares that have been forfeited under the terms on which they are issued. This
must be authorised by a resolution passed at a general meeting: s 258D.
o Other share cancellations are authorised under s 258E:
o Redemption of redeemable preference shares (s 258E(1)(a))
o Share buy-backs under ss 257A to 257J if shares are paid out of share capital (s 258E(1)(b))
o Cancellation or shares because of takeover or fundraising (s 258E(2))
o Reduction or share capital by order of the court under s 1325A (s 258E(3)).
A company may reduce its share capital by cancelling any paid-up share capital that is lost or is not represented
by available assets. This power does not apply if the company also cancels shares: s 258F.
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8.4
Share buy-backs
A ‘buy-back’ is the acquisition by a company of shares in itself: see definition of ‘buy-back’ in s 9. Buy backs
were likewise prohibited at common law because of the rule in Trevor v Whitworth. Part 2J.1 now enables share
buy-backs to occur in accordance with rules that are contained in Part 2J.1.
The tables in ss 257B and 257J specify the steps required for different types of buy-back: for example, minimum
holding, employee scheme, on-market, equal access scheme, selective buy-back.
See for example BATEMAN V NEWHAVEN PARK STUD LTD (2004) 22 ACLC 943, (2004) 49 ACSR 597,
[2004] NSWSC 566.
Before a general meeting is convened to consider whether to approve a selective buy-back, the shareholders must
be provided with a notice of meeting (in accordance with ss 249H or 249HA) containing all information that is
known to the company that is material to the decision on how to vote on the resolution: s 257D(2). In RE
GEORGE RAYMOND PTY LTD (2000) 36 ACSR 381, (2000) 19 ACLC 553, [2000] VSC 531, the court had
regard to the fact that at because of a previous general meeting, the parties would have been aware of the relevant
issues and the rival contentions. The court ruled that s 257D(2) relieves a company from having to make
disclosure of matters where this would be unreasonable because it has previously disclosed them. Another case
example is VILLAGE ROADSHOW LTD V BOSWELL FILM GMBH (2004) 49 ACSR 27, (2004) 22 ACLC
388, [2004] VSCA 16.
ASIC will, under certain conditions, give an exemption to allow a company to purchase small holdings (for no
more than $500) of its own shares without convening a general meeting: s 257D(4). Each parcel bought must be
the whole of a person’s holding. ASIC will only grant an exemption if the directors determined that the price is
fair to all shareholders, and there is no secondary market in the shares: ASIC PS 110.16.
Once a company has entered into an agreement to buy back shares, all rights attaching to the shares are
suspended.
The suspension is lifted if the agreement is terminated: s 257H(1). Once the shares are transferred to the company
they must be cancelled: s 257H(3). The company cannot sell or dispose of them: s 257H(2).
9
SELF-ACQUISITION AND CONTROL OF SHARES
A company must not acquire shares or units of shares in itself except:
o in buying back shares under s 257A; or
o in acquiring an interest (other then a legal interest) in fully paid shares in the company if no consideration is
given for the acquisition by the company or an entity it controls; or
o under a court order; or
in circumstances covered by s 259B(2) (employee share scheme) or (3) (security taken in the ordinary course of
business of financial institution) – and if the Company relies on these exceptions, it must must cease to hold the shares
after 12 months (or such later period as permitted by ASIC: s 259B(4)) and must not vote the shares.
10
FINANCIAL ASSISTANCE
A company can now give financial assistance for the acquisition by issue, or transfer, or any other means: s
260A(3) in it or its holding company, if permitted by s 260A. (A person who breaches s 260A is liable to a
declaration for a contravention of a civil penalty provision: s 1317E. The dishonest breach of this provision would
render a person liable to five years’ imprisonment or a penalty in excess of $200 000).
The Corporations Act does not define what is meant by ‘financial assistance’. The courts will examine the
substance of a transaction to determine whether or not there has been the provision by a company of financial
assistance. See eg STERILEAIR PTY LTD V PAPPALLO (1998) 29 ACSR 461; WAMBO MINING
CORPORATION PTY LTD V WALL STREET (HOLDINGS) PTY LTD (1998) 28 ACSR 654, (1998) 16
ACLC 1601.
The financial assistance may be given before or after the acquisition of shares and it may take the form of the
payment of a dividend: s 260A(2): LAW SOCIETY OF NEW SOUTH WALES V MILIOS (1999) 33 ACSR
396, (1999) 18 ACLC 23, [1999] NSWSC 1272.
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The financial assistance must not materially prejudice the interests of the company or its shareholders, or the
ability of
the company to pay its creditors: s 260A(1)(a). See for eg, ASIC V ADLER (NO 3) (2002) 41 ACSR 72, (2002)
20 ACLC 576, [2002] NSWSCA 171.
Financial assistance may be given where the assistance is approved by shareholders under s 260B, which requires
advance notice of 14 days to ASIC: ss 260A(1)(b) and 260B(6). Shareholder approval may be given by a special
resolution of the company being passed, with no votes being cast in favour of the resolution by the person
acquiring the shares or their associates or a resolution agreed to at a general meeting by all shareholders.
Financial assistance may be given if the assistance is exempted by s 260C: s 260A(1)(c). Some exemptions are:
o assistance given in the ordinary course of commercial dealing by a company and consists of acquiring or
creating a lien on partly paid shares in the company for amounts payable to the company on the shares,
or entering into an agreement with a person under which the person may make payments to the company
on shares by instalments: s 260C(1)
o assistance given by a financial institution which in the ordinary business includes providing finance: s
260C(2). ‘Providing finance’ is defined in s 9.
o Approved employee share schemes are also exempted: s 260C(4).
o a reduction of share capital in accordance with Div 1 of Part 2J.1;
o a share-buy back in accordance with Div 2 of Part 2J.2;
o assistance given under a court order; and
o a discharge of a liability that the company incurred as a result of a transaction entered into on ordinary
commercial terms: s 260C(5).
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