CL Tutorial 5&6

1(a)

Share Capital

• Shareholder is a member of company
• Derived from allotment of shares
• Has right to vote
• Has right to attend meetings
• Has right to receive notice of meeting
• Receive dividend when company makes profits. The rate of dividend is not fixed
• Dividends paid are not tax deductible
• Protection under Section 33(1), (3) Companies Act, 1965, and Section 181 Companies Act, 1965, and Section 21(2)(a),(b) Companies Act, 1965

Loan Capital

• Debenture holder is an external creditor
• Derived from debt financing
• No right to vote
• No right to attend meeting
• No right to receive notice of meeting
• Entitled to fixed rate of interest
• Interest on loan is tax deductible
• Protection under Section 181 Companies Act, 1965 and Section 20 Companies Act, 1965
  

1(b)

Shares issued at premium

General rule – can issue shares at a premium

Shares are issued exceeding nominal value

Section 60(2) Companies Act, 1965 requires company, which has issued shares at a premium to transfer the premium to a “ Share Premium Account”

Section 60(3) Companies Act, 1965 sets out the ways in which the company may apply the share premium account. This includes:

• to pay up unissued shares to be issued to members as fully paid bonus shares
• to pay up in whole of in part the balance unpaid on shares previously issued to members of company
• to pay dividend if declared in the form of bonus shares
• to write of preliminary expenses

Section 67(A)(3) Companies Act, 1965 states that the company can use the share premium account to purchase its own shares

Shares issued at a discount

General rule – cannot issue shares at a discount

Shares are issued at a price below nominal value

Company can issue shares at a discount provided it satisfied the conditions under Section 59 Companies Act, 1965:

• the shares must be a class already issued
• the shares must be passed by an ordinary resolution
• the court must confirm the issue at a discount
• the resolution must set out the maximum rate of discount
• at the date of issue, at least one year must have elapsed since the date on which the company was entitled to commence business
• the discounted shares must be issued within one month of the court order confirming the discount or within such extended time as court allows
• the shares must first to be offered to the existing shareholders of that class proportionately to their shareholdings – Section 59(4) Companies Act, 1965.
• The holders are given not less than 21 days to accept the offer – Section 59 (5) Companies Act, 1965.

1(c)

Ordinary shares

• Main risk bearer of company
• No fixed rate of dividend
• Has voting rights
• Get surplus of assets unless preference shareholders hold participation in dividends or surplus assets

Preference shares

• Regarded similar to external creditors
• Dividends paid at fixed rate
• No voting rights unless Section 66 Companies Act, 1965 gives them the power to do so
• No not get surplus asset unless MA and AA allow them to do so

2. According to Section 65(6) Companies Act, 1965, when the company issues new shares to particular class, there is considered variation. However, it is considered no variation of class right when the Article of Association allows the company to issue new preference shares and the existing shareholders consent with the issuance of new shares.

According to Section 65(7) Companies Act, 1965, when the company alters MA or AA to affect the particular shareholders, then it is considered as variation. Without getting the consent of the existing shareholders then the company cannot change MA or AA.

Article 4 of Table A states any class right may be varied with the consent in writing of three- fourth of whose rights are affected. Beside that, the class right can also be changed by a Special Resolution, which in under Section 152 Companies Act, 1965. The company must give 21 days notice to members before general meeting and 75% of members must agree with the variation of class right.

Section 65 Companies Act, 1965 lays down the procedures:

1. MA or AA must allow the company to have variation of class right
2. The company must get the consent of three-fourth of the shareholders agree or get Special Resolution at a separate meeting of the holders of those shares
3. According to Section 6591) Companies Act, 1965, if minority with not less than 10% of issued share capital want to object, they must object within one month after passing the Special Resolution. Section 181 Companies Act, 1965 states the minority with less than 10% of issued share capital can apply to object.
4. The court will look whether the rights of the shareholders is affected. If the right of shareholders is affected, the court will disallow the variation.
5. The court decision is final according to Section 65(4) Companies Act, 1965.
6. The company must within 14 days after making of an order by the Court lodge an office copy pf the order with SSM.

3. Section 100(1) Companies Act, 1965 states the moment you have full name, IC number, and say that you are the owner of certain amount of shares, it is conclusive evidence that you own the certain amount of shares in the company.

4(a) Section 365(1) Companies Act, 1965 states that no dividends shall be payable except out of profits.

Rules regarding payment of dividends

1. Dividend must be declared before it becomes payable.
2. According to Art 98 of table A, the company is general meeting may declare dividend but cannot exceed the amount recommended by directors.
3. Once a dividend has been declared, it is a debt owed by company to its shareholders. If the dividend is not paid when due, a member can sue the company.
4. A shareholder cannot force the company to pay dividend

4(b) Shares are freely transferable unless Section 15(1) Companies Act, 1965 applies. According to Section 15(1) Companies Act, 1965, private companies restrict the right to transfer its shares. The company gives to the existing members a right t have any shares offered to them first before they can be transferred. Besides that, its gives the discretion to the directors to refuse to register a transfer. It depends on AA whether the members can challenge the decision when the directors refuse to register the transfer.

If the AA says that the directors must give reasons for their refusal then, the members can challenge if the directors do not give reasons. If the AA is quiet about it, then the members cannot question the directors.

5(a) According to Section 69D Companies Act, 1965, substantial shareholders are the people who hold not less than 5% of the aggregate amount of all voting shares in the company.

Preference shareholders cannot be substantial shareholders because they do not have voting rights unless Section 66 Companies Act, 1965 applies.

5(b) & 5(c)

Section 69E Companies Act, 1965 states that a person must give notice in writing to the company within 7 days after becoming a substantial shareholder.

Section 69F Companies Act, 1965 states that if any change to interest, notice in writing must be given to company within 7 days.

Section 69G Companies Act, 1965 states that when a person ceases to be a substantial shareholder, he must notify within 7 days.

Section 69K Companies Act, 1965 states that SSM may extend the time for giving notice but there must be a good reason.

Section 69M Companies Act, 1965 states that a person who fails to comply with the above sections shall be guilty of an offence. The penalty is RM1 Million.

6. To safeguard the interest of the creditors.

7. According to Section 67(1) Companies Act, 1965, a company cannot give, whether directly or indirectly, any financial assistance to any person to purchase shares in the company. However, there are 3 exceptions:

1. if the ordinary business of the company is money lending for example, bank – Section 67(2)(a) Companies Act, 1965
2. where there is a scheme that allows you to take loan from company tio buy shares for the benefit of employees including executive director under Section 67(2)(b) Companies Act, 1965. The executive directors are considered as employee of the company because they are paid salaries and have the contract of empoyement. Therefore, this section applies to them.
3. where the company gives financial assistance to its bona fide employees excluding directors, in order that may purchase fully paid shares in the company under Section 67(2)(c) Companies Act, 1965

Under Section 67(1)Companies Act, 1965, the company cannot buy back its own shares. However, the public companies may purchase its own shares under Section 67A Companies Act, 1965 provided:

1. AA allows you to do so
2. It is solvent at the date of purchase
3. The purchase is made through Stock Exchange on which the shares of the company are quoted
4. The purchase is made in good faith and in the interests of the company

Section 67A(3) Companies Act, 1965 states that the company may use its share premium account to buy back its own shares.

8(a) According to Section 67(1) Companies Act, 1965, the company cannot purchase its own shares. However, Unfortunate Bhd can purchase its own shares when the exceptions apply, which is governed by Section 67A Companies Act, 1965. This section states that Unfortunate Bhd can buy back its shares provided:

1. AA allows Unfortunate Bhd to do so.
2. Unfortunate Bhd is solvent at the date of purchase
3. The purchase is made through Stock Exchange on which the shares of Unfortunate Bhd are quoted
4. The purchase is made in good faith and in the interests of Unfortunate Bhd

Unfortunate Bhd can use its share premium account to buy back its shares under Section 67A(3) Companies Act, 1965.

8(b) General rule says that Unfortunate Bhd is prohibited from returning the assets to the members, but there are exceptions, which are governed by Section 64(1) Companies Act, 1965. Unfortunate Bhd can return the assets to members if:

1. AA allows that reduction of share capital
2. Unfortunate Bhd passes a Specia Resolution under Section 152 Companies Act, 1965 where the company needs to give 21days notice about the general meeting and gets the consent of at least 75% of issued share capital
3. Unfortunate Bhd gets the confirmation of the reduction of share capital from court

Procedures to reduce share capital are:

1. The reduction of share capital is allowed by AA of Unfortunate Bhd
2. Unfortunate Bhd passes Special Resolution under Section 152 Companies Act, 1965
3. Unfortunate Bhd applies to the court to confirm the reduction
4. The court will take necessary steps to safeguard creditors to make sure the creditors rights are protected.
5. The court may confirm the reduction after it is satisfied, by making an order on such terms and conditions as it thinks fit.
6. After the confirmation, the company must lodge with SSM Form 11 and a copy of court order within 14 days.
7. all creditors are given opportunity to object under Section 64(2) Companies Act, 1965

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*Thanks to Yet Ling for her contribution .