Company Law

Chapters 7 & 8: Maintenance of Capital; Membership and Control

Restrictions on Transfer and Disposition of Share Capital

Capital Maintenance and Reduction of Share Capital Rules
As equity capital belongs to the company, it must be kept for the company; may only be used in certain ways; and cannot be given back to shareholders until liquidation. Common Law Rationale:

Creditor Protection Shareholder Protection Separate Entity Logic

 If company issues share certificate, it must: Receive at least as much value for it as the nominal value of the share

Capital Maintenance and Reduction of Share Capital Rules

Issued share capital = fund to which creditors look for payment of debts. Therefore, capital must actually be raised. (Amount of issued capital is yardstick of companys worth.)

NOT provide the finance for the purchase of its own shares Not LOSE the value once received. Profits derived from using issued share capital may be distributed to shareholders, but the capital itself must be maintained.

Capital Maintenance and Reduction of Share Capital Rules

CO protection to ensure capital raised:
s46: no discount or commission for subscription unless within limits [court approval]; s58(1A): no purchase or subscription for the companys own shares may be made except as provided in CO ss47A-G and 48: no financial assistance may be given by a company for the purchase of its own shares except as provided in the CO s50: shares may only be issued at less than nominal value in limited circumstances s45: receipt of non-cash consideration must be disclosed by the company in its return of allotment

Capital Maintenance and Reduction of Share Capital Rules

CO protection to ensure capital not diminished: s48 B: limitations on the use of the share premium account; ss 49 & 49A: restrictions on redemption of redeemable shares; ss 49B-S: restrictions on buying back its own shares; ss 58-63: controls on reduction of capital; ss 79A-P: controls on payment of dividend; and s155A: restrictions on the disposal of fixed assets.

Maintenance Rules
Object = protection of authorized and issued capital from dilution and reduction. While the rules cannot protect capital from economic realities, they protect capital in that they restrict the ways it may be used.

Maintenance Rules: Common Law

Trevor v. Whitworth 1887 As a general rule, a company may not purchase or subscribe for its own shares. Facts: Even though express power to purchase its own shares existed in MOA, company not allowed to do so. Rationale of the court: to protect creditors.

Maintenance Rules: Common Law

Trevor v. Whitworth 1887 Paid-up capital may be diminished or lost in the course of the companys trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited company, naturally rely on the fact that the company is trading with a certain amount of capital and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.

Maintenance Rules: Companies Ordinance

Section 58(1A): company limited by shares cannot purchase or subscribe for any shares in the company except as provided in the ordinance.

Restrictions on a company financing the acquisition of its own shares

General prohibition. Exceptions for All Companies:
Payment of dividend; Allotment of bonus shares; Where ordinary course of business is to lend money and company lends to someone who acquires shares in the company; Company makes bona fide loan to employees (other than directors) to enable them to purchase shares in the company

Restrictions on a company financing the acquisition of its own shares

Rules relaxed somewhat for unlisted companies (see p138) Criminal offense: every officer involved is liable for fine and imprisonment [s 47A(3)] Loan and any security given are VOID

Restrictions on a company financing the acquisition of its own shares

Heald v OConnor (1971) [p140]: OConnor purchased 100% equity in company from H for $35,000. At same time, H lent $25,000 to the company. Company gave H a floating charge as security for the loan, and O gave a personal guarantee for the $25,000 if the company defaulted. The company defaulted and H tried to enforce Os guarantee. O argued that the loan had been made to enable him to complete the purchase of the shares and the floating charge was financial assistance given by the company in breach of the law. Held: The company had given unlawful assistance by issuing the charge. Charge was void, as was Os personal guarantee!

Restrictions on the Re-Acquisition of Issued Shares

Various reasons company may want to purchase its own shares:
Buy out dissenting shareholder; Maintain control; Buy shares of employees when they leave the company; Efficient means of using surplus cash resources.

Restrictions on the Re-Acquisition of Issued Shares: Restriction Rationale

Right of a company to reacquire its issued shares has traditionally been extremely limited right

Redemption/Repurchase amounts to a reduction of share capital, which contravenes Trevor v Whitworth and Companies Ordinance provisions regarding maintenance.

Restrictions on the Re-Acquisition of Issued Shares: Exceptions

See top p 142
Redemption (ss 49 & 49A); Reduction of capital (see textbook 7.3); Court order, and Purchasing shares in accordance with ss49B-S.]

Acatos & Hutcheson plc v Watson (1995): company can acquire another company (X Co) where the sole asset of X Co is shares in acquiring company. Court will not lift corporate veil to look at commercial realities. BUT: Directors of acquiring company must act with an eye solely to the interests of the acquiring company and have fulfilled fiduciary duties to safeguard interests of shareholders and creditors.

Restrictions on the Re-Acquisition of Issued Shares

s49B Rules: Repurchasing issued shares Shares must be fully paid; Buy-back must generally be financed out of distributable profits or the proceeds of a new issue of shares; Shares bought back must be treated as cancelled; Companys issued share capital will be reduced by the nominal value of the shares which are bought; and Buy-back does not reduce the companys authorized capital (company has power to issue shares up to the nominal value of the shares to be bought)

Reduction of Capital
Requires: (i) authorization from AOA, (ii) special resolution, and (iii) usually court approval.

Regulatory Bodies and Power Sharing

Registrar of Companies Stock Exchange of Hong Kong (SEHK) Securities & Futures Commission
Regulation of Company Affairs (CFD) Relationship with Registrar of Companies Relationship with Stock Exchange of HK