Introduction
One of the ways that a company raises finance is by issuing shares. When a person purchases shares he or she becomes a shareholder or member of that company.
What is a share?
Farwell J, Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279
One of the ways that a company raises finance is by issuing shares. When a person purchases shares he or she becomes a shareholder or member of that company.
What is a share?
Farwell J, Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279
“A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place and interest in the second, but also consisting of a mutual set of covenants entered into by all the shareholders inter se”
s.182 (1) CA 1985:
“Shares…
(a) are personal estate…
(b) are transferable in a manner provided by the company’s articles, but subject to the Stock Transfer Act 1963… and… s.207 of the Companies Act 1989”
If you hold a share in a company it means that you own a piece of that company. Your reasons for purchasing shares would normally be that:
- the shares could appreciate in value and you would therefore make a profit when you sell them (although of course shares can just as easily lose value);
- if the company makes a profit it may reward you for your investment by giving you a share of the profit – otherwise known as a dividend;
- share ownership allows you to vote at general meetings thereby giving you a say in how the company is run.
Your power as a shareholder will depend on how many shares you hold in proportion to the other shareholders.
Terminology
Table B Companies Act 1985 provides a sample memorandum of association, which is as follows:
1 The company’s name is…
2 The company’s registered office is in Wales.
3 The company’s objects are to [carry on business as a general commercial company].
4 The liability of the members is limited.
5 The company’s share capital is £50,000 divided into 50,000 shares of £1 each… we agree to take the number of shares as shown [below]:
Thiery… 1 share;
Marlon… 1 share
Authorised share capital
This is the total nominal value of shares that may be issued. In the example above, the authorised share capital would be 50,000 shares.
Issued share capital
This is the part of the authorised share capital that has actually been issued to shareholders. In the example above, the issued share capital would be 2 shares (1 each to Thiery and Marlon).
Unissued share capital
The remaining authorised share capital that has not been issued. In the example above, the unissued share capital would be 49,998 shares (i.e. the authorised share capital of 50,000 minus the two shares already issued).
It should be noted that the capital clause does not really reflect the true value of the company. If, in the example above, all of the shares were issued the company would receive £50,000. However, soon the company would start trading and so spend some of this on wages, and equipment. This may cause the true value of the company’s assets to be less than £50,000. Soon after, the company may become profitable, and so it becomes worth more than £50,000. In addition, it can get more complex if not all of the authorised share capital is issued, or indeed paid for, at the same time.
Classes of shares
Prima facie, all shares rank equally [Birch v Cropper (1889) 14 AC 525]. However, a company may wish to issue different types of shares, for example to protect the voting power of the initial shareholders, or to make the new shares more attractive to investors.
The company has the power to issue different classes of shares, provided that the articles authorise it (Andrews v Gas Meter Co [1897] 1 Ch 361). Often, these shares are divided into ‘ordinary’ and ‘preference’ shares (see below).
Art.2 Table A states that “subject to the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine”.
These rights may be contained in the memorandum of association, the articles of association or even in a separate shareholders’ agreement (Harman v BML [1994] 2 BCLC 674).
See further, textbook
