AC2302 Company Law

2017/2018 Semester 1

Chapter 5&6 – Membership, Shares and Interest in Shares, Class Rights

Share Capital
Share capital – amount of money or assets contributed to the company by its members when they
subscribe for shares. The company’s power to issue shares is contained in S161CA.
Procedure to issue shares
Before Co issue shares, S161 shareholders must approve of the issuance of shares (>50% ordinary
shares).
1. Invitation
2. Apply/offer
3. Allot
4. X’s name appears on register of member / CDP account
Share
Share is a claim to rights set out in CA and Co’s Constitution, they are:
 Distribution rights – rights to receive dividends during the Co’s life, rights to repayment
of principal, and rights to share surplus assets of company in winding up
 Control rights – rights to exercise some control over management of Co’s affairs,
especially the right to vote on decisions of the company.
Shares are property that belongs to shareholders, S121 CA.
Whether a company has power to issue shares of different classes is determined by the power
granted in the constitution.
Why do companies issue different classes of shares?
Entrench control in the hands of particular SH or groups of SH. Issue shares with may
characteristics of debt (ie fixed distribution on preference shares that have priority). Establish
separate classes of shares to be issued to participants in joint venture. Issue shares that can
participate differently in Co’s profits.
Public Co shares with different voting rights (S64A)
Public company have lifted the 1 share 1 vote restriction and to provide safeguards to minority
shareholders, S64A adds additional procedures that need to be complied with for issuance of
shares of different classes.
S64A(1) Different classes of shares in a public company may be issued only if:
a) The issue of the class or classes of shares provided for in the constitution of the public
company; and
b) The constitution of the public company sets out in respect of each class of shares the
rights attached to that class of shares
These shares can only be issued after issuance is provided in the constitution with rights set out
in it.
S64A(2) Shares in a public company may
a) Confer special, limited, or conditional voting rights; or
b) Not confer voting rights
This allows a public company to issue shares which confer special, limited or conditional voting
rights or not confer voting rights, provided that the issue of such shares is addressed in the
company’s constitution, with specification of the rights of those shares.
S64A(3) A public company shall not undertake any issuance of shares with different voting rights
unless it is approved by the members of the public company by special resolution.
That means that shareholders must approve of issuance of shares with different voting rights only
by special resolution (75%). This acts an additional safeguard for issuance of class shares.
S64A(4) Information on the voting rights for each class of shares must accompany the notice of
meeting at which the resolution is proposed to be passed
A(3) & A(4) let shareholders decide on the issue on the rights of the newly issued class shares,
to which court does not intervene.
S64(3) Non-voting shares are entitled to vote on resolutions to wind up company and those that
vary rights of non-voting shares
This is to allow holders of non-voting shares to participate in the process on variation of rights
of their shares. To prevent multi-vote shares from “bullying” non-voting shareholders who can’t
vote in most cases.
Types of shares
Ordinary shares – shares which companies limited by shares ordinarily or usually issue at time
of incorporation.
Ordinary shares have:
 The right to share equally dividends (if they have been declared) with all other ordinary
shareholders, after all other claimants are paid
 The right to vote at GM of the company (including winding up)
 The right to be repaid their capital (or pro rated share of it) on a winding up after all
other claimants have been repaid
 The right to share pro rate in any surplus assets on winding up
Preference shares – shares that have special rights which give them preference in respect of
certain matters over ordinary shares
 The right to receive fixed dividend provided there are profits available for distribution
and a dividend is declared by the company
 The right to be repaid the principal sum invested on winding up in priority over ordinary
shareholders
 Common to have no voting rights, unless:
o Dividends are in arrears
o Except on resolutions to reduce the company’s capital or wind up Co
o At class meetings on matters affecting their class rights
o No right to share in surplus assets on a winding up
S75(1) Preference shares or conversion of issued shares into preference shares cannot be allotted,
until rights of preference share are set out in the constitution
Types of preference shares
Cumulative preference shares – allows entitlement of dividend distribution to be carried from
one year to the next if no dividend is declared in a particular year
Non-cumulative preference shareholders lose entitlement to dividend that is not declared or
paid in that relevant year
Redeemable preference shares – allow for repayment of principal at particular time or on
occurrence of particular event prior to winding up
S70(3) - shares shall not be redeemed unless fully paid up
S70(4) – provides that shares shall not be redeemed out of the capital of Co:
a) All the directors have made a solvency statement in relation to the redemption, and
b) Co has lodged a copy of the statement with the Registrar
Convertible preference shares – shares that carry right to a preferred, fixed dividend for a
particular term with option of conversion/or with conversion to ordinary shares at end of the term.
The conversion ratio reflects the value at time of conversion.
Preference Shares (Preference over Dividends)
 Preference to dividends (usually fixed)
o Normally in start-ups where investors want preference over dividends
 Redeemable preference shares S70
 Preference to return of capital upon winding up
 Usually issued with no voting rights for company meetings
 Usually with no ‘participatory rights’
o Convertible preference shares – allow for conversion into ordinary shares
 The company needs to state out the preference in the constitution
Why preference shares?
When Co is a going concern, preference shareholders typically have a priority over ordinary
shareholders to profits of the company.
However, this does not mean that they are guaranteed to receive annual dividends from the
company, as the financial position of the company may not allow dividends to be paid every year.
When company is liquidated, preference shareholders typically has a priority over ordinary
shareholders to proceeds from sale of assets of the company.
By the time all the company’s assets are distributed, there may be nothing left for ordinary
shareholders.
Why not preference shares?
Returns are limited. Even if the company expands exponentially the returns for the preference
shareholders will be fixed to what was agreed. This makes preference shares a lower risk
investment compared with ordinary shares but with little up-side.
Preference shareholders typically do not have a vote in the company and this will severely limit
that mount of control they have in the company.
Members and shareholders
Members
S19(6) The subscribers to the constitution shall be deemed to have agreed to become members
of the company and on the incorporation of the company shall be entered as members.
a) In the case of a public company, in the register of members kept by the public company
under section 190; or
b) In the case of a private company, in the electronic register of members kept by the
Registrar under section 196A
S19(6A) Apart from the subscribers referred to in subsection (6), every other person who agrees
to become a member of a company and whose name is entered:
a) In the case of a public company, in the register of members kept by the public company
under section 190; or
b) In the case of a private company, in the electronic register of members kept by the
Registrar under section 196A,
is a member of the company.
This means that either through subscription or agreement to be member after incorporation, with
name kept in register of members.
Why determine who are members?
Members have rights conferred to them by Companies Act, case law and constitution.
A person cease to be member of company if:
  They transfer their shares to another person
 They transfer their shares back to the company under a “buy-back”
 Their shares are cancelled by the company under a reduction of capital
 Their partly paid shares are forfeited when person fails to pay a call
 Company is dissolved and ceases to exist
Ownership of shares
“Legal ownership” – the law recognises the person whose name appears in the register of
members (or CDP register) (ie members) as the “legal owner” of the shares in question
“Beneficial ownership” (true owner) – the law recognises the person(s) who is lawfully able to
enjoy the rights and benefits attached to the shares as its beneficial owner. This may or may not
be a ‘member’. (eg ‘nominee’ accounts)
Legal owners are those that hold the stock certificate in their own name, while beneficial owners
have shares through other person, but still retain the interest.
Company will only deal with the legal owner of the share, but presence of trust deed, will address
how beneficial ownership is to be carried out, allowing the beneficial owner, to make
decision/receive dividend as though he is the legal owner. The trust deed, therefore protects the
beneficial owner, allowing him to sue a legal owner, if the legal owner to not abide by the trust
deed.
Member and Shareholders
The term member and shareholder are often used interchangeably.
Member is person identified as such in Co’s register of members.
Shareholder is person who, directly or indirectly owns or has interest in shares of Co.
“Shareholder” sometimes in a broader sense refers to someone who has “beneficial
ownership” in the shares in question.
Companies limited by guarantee have no shareholders, only members.
Members’ rights
 Voting rights
o Determined by the constitution
 Distribution rights
o Dividends
o Return of capital in specified circumstances
o Right to share in surplus assets on winding up
 Right to receive specified information
o Right to inspect company’s register
o Right to be notified of meetings
o Right to inspect minutes of general meetings
o Right to receive annual financial reports
 Member has statutory right of action to protect its own interests and interests of Co (see
S216, 216A, 254 CA)
Restrictions on exercise of voting power
Members have a duty to exercise vote bona fide in the company’s interests/in the interests of the
class of shares.
If majority shareholders exercise its rights in a way that is oppressive or unfairly prejudicial to
the minority, minority may seek remedy under S216 CA.
Approval of Company required for issue of shares (S161)
S161(1) Directors require the approval of company in GM, to exercise the power to issue shares
S161(2) Approval may be confined to particular exercise of power or may apply to the exercise
of that power generally
Class Rights
Co’s share capital may be divided into different classes (eg Class A/Class B/preference).
Class rights – rights attached to each class of shares
The existence of class depends on the commonality of interest between of interest between
different members, CL: Crumpton v Morrine Hall Pty Ltd
S75 CA requires terms of issue of preference shares to be set out in Co’s constitution
Where the rights are contained in the constitution, alteration is done by amendment of the relevant
regulation.
Amendment may be subject to the existence of a “modification of rights clause”. It sets out the
procedure to be complied with before a variation of class rights may be effected.
Eg rights attached to a particular class of shares may not be varied without the consent of the
specified percentage of holders of the class or unanimous consent of all holders of the class.
Protection of class rights
Variation of class rights
A distinction is to be drawn between an act which affects the rights and an act which merely
affect the enjoyment of the rights in question.
At common law, a corporate action that affects the value of shares in a particular class or the
enjoyment of rights attaching to shares in that class is not sufficient to constitute a variation of
rights.
CL: Greenhalgh v Arderne Cinemas Ltd – G has ‘2s’ shares with one vote each. This was
sufficient to give him ‘negative control’ to stop amendments to the company’s articles. Majority
shareholders had ‘10s’ shares also with one vote each. They arranged for a ‘share split’ for each
10s share to be converted into five 2s shares thus increasing their voting power.
Held: Court held that this did not vary any rights attached to G’s shares even though it had the
effect of reducing the voting power given to him. This is because they retained the same voting
rights (one vote for each share) as they had enjoyed before the resolution passed.
To determine whether a particular action varies or cancels class rights, it is necessary to decide:
 Whether what is being varied or cancelled is a class right, and
 Whether what is being done amounts to a variation or cancellation of the right
In other words, we want to see something like an amendment of the rights within the constitution,
to ask that the MOR kicks in.
Also, many companies try to provide for certain things to be regarded as variation in the
constitution so that it is immediately obvious.
Deemed Variation S74(6)
 The issue by a company of preference shares ranking pari passu with existing
preference shares issued by the company.
 Shall be deemed to be a variation of the rights attached to those existing preference
shares
 Unless the issue of the first mentioned shares
o Was authorised by the terms of issue of the existing preference shares or
o By the articles of the company in force at the time the existing preference
shares were issued.
“pari passu” – side to side, on equal footing
The issue of additional preference shares being put on equal footing with existing preference
shares dilutes their rights and reduces the extent of preferential treatment that these shareholders
enjoy.
Eg. Preference shareholders are entitled to 10% preferential dividends. Yet additional preference
shares issued at pari passu with new shareholders, Co will have to make more profits to enable
original preference shareholders to get their full entitlement of 10% preferential treatment.
Therefore, such actions to issue new preference shares is normally deemed to be a variation of
rights of existing preference shares.
Such actions are, however, allowed when they are authorised by the existing preference
shareholders through agreed upon terms of issue or when the company provided for such
scenarios in articles in constitution, when the existing preference shares were issued by the
company. This means either by provisions within constitution or by existing preference
shareholders authorisation, this was specifically allowed.
*All variation, whether deemed or not needs to comply with MOR.
Deemed variation S74(7) (Protects MOR)
 For the purpose of this section,
 The alteration of any provision in the constitution of a company
 Which affects or relates to the manner in which the rights attaching to the shares of
any class may be varied or abrogated.
 Shall be deemed to be a variation or abrogation of the rights attached to the shares of
that class.
The alteration of any provision in the memo or articles of the company, that affects the manner
of changing class rights (MOR) may be varied or abrogated, is essentially as good as a variation
or abrogation of the rights as well. There is a need to comply with the MOR before it can be
changed or removed.
“For the purpose of this section” suggests that the “deemed variation” under S74(7) should be
relied on where holders of class shares wish to make an application under S74 to cancel the
abrogation or variation.
Conversion of Shares: S74A
S74A(1) CA Subject to this section and sections 64A and 75, a company the share capital of
which is divided into different classes of shares may make provision in its constitution to
authorise the conversion of one class of shares into another class of shares.
S74A(2) CA A public company may convert one class of shares (A) into another class of share
(B) by special resolution only if the constitution of the public company
a) Permits B to be issues; and
b) Sets out the rights attached to B
Conversion of shares is only allowed by special resolution (>75%) if the constitution provides a
clause that allows the new class B shares to be issued and specifies the rights of these new class
B shares.
S74A(3) CA A private company may convert shares from one class to another by lodging a notice
of conversion in the prescribed form to the registrar.
S74A(5) CA Section 74 shall apply where a conversion of shares undertaken by a company
involves a variation or a abrogation (repeal/abolition) of the rights attached to any class of shares
in the company.
S74A(6) A share that is not redeemable preference share at issuance shall not be converted into
a redeemable preference share.
Modification of rights clause
 It is possible to insert a provision in the company’s articles which provides for a
particular procedure to be followed to amend class rights – a ‘modification of rights
clause’ (MOR)
 Where there is an MOR, the procedure must be followed in addition to any other
procedure necessary to effect the amendment.
  The purpose of MOR clause is to prevent shareholders of superior class with more
voting rights, to remove rights of minority against their wishes. The presence of the
MOR will ensure that the process of modifying class rights will be more equitable to
minority shareholders of the other class.
 MOR normally gives a say to class members only to have a say over their voting rights
 Here where there is a generic MOR which applies to all, we might need to get approval
from both classes that the MOR is trying to protect

How to vary rights of class shares?

Is the thing a variation?
 Yes
o Comply with MOR
o Comply with the procedure for doing the thing (such as EP)
 No
o Comply with the procedure for doing that thing (such as EP)
The MOR just adds additional procedure to be fulfilled, to protect class rights.
Where there is an alteration “the thing to be don”, S26 will kick in requiring special resolution
to be complied with.
Apply for relief under S74 (Rights of dissenting members) (Twin of 216CA)
S74(1)-(5) CA: Right of affected shareholder to apply to court for relief
 Min 5% of total number of issued shares of the relevant class (aggregate)
 There must be a MOR in article
 Court to consider whether variation unfairly prejudices shareholder of that class, setting
aside, if its unfair, and confirming, if not unfair, S74(4)
The effect is that court may have the variation or the cancellation set aside. Where such an
application is made, the variation or cancellation does not take effect until confirmed by the court.
*Realise that S74 only applies to Co with MOR in constitution. If there is no MOR, aggrieved
member can still obtain relief from S216 with S74(8) expressly allowing it.
Entrenching Provision
Class rights can also be entrenched by an entrenching provision. Refer to EP notes.
To modify rights within the article, the EP will help to entrench the article, such that there is a
need to comply with EP to be able to amend article.
Difference between EP and MOR clause
An MOR clause protects the rights while EP protects the article that provides for the rights.
Corporate Control
Absolute Control – all the voting rights in the company rest in one person, allowing him to pass
any resolution
Special Control – hold ≥75% of voting rights, can pass special resolutions. This allows control
of company in relation to areas such as amendment of constitution (except EP) & winding up
of company. However, the exercise of such control is subject to the interest of the rights of
minority shareholders.
Majority Control – hold >50% of voting rights, allowed to pass ordinary resolutions
“Controlling interest” is not defined, its determined by fact of the case (degree of shareholder
involvement in meetings, existence of significant blocks of shares, actual share ownership).
Whether, in fact, the person controls the company? Majority ownership (>50%), significant share
ownership with respect to other shareholders (already forms majority at meeting – can control).
To put it simply, it means you are easily able to pass all resolutions in the company.
Negative Control - >25% voting rights, can block special resolutions from passing
Deemed interest
The idea of deemed interest is to track who controls the company.
S190-198 CA – Register of members
S130A-P CA – CDP system
S135-137I SFA – substantial shareholders (for listed Cos only) to disclose interests and Co to
keep register (Co refers to corporation)
S135 Person who is or had been substantial shareholder in Co must give notice the particulars
of voting shares in which he has/had interest, the nature and extent of his interest
S136 Where there is a change in percentage level of interest of SS in voting shares, SS shall
give notice in writing in 2 biz days after he becomes aware of the change
S137 A person who ceases to be SS, shall give notice to Co within 2 biz days once he becomes
aware of it
S137A It is the onus of the beneficial owner to ensure that the legal owner notifies him within
2 biz days after any acquisition, disposal of voting shares/interests
S137B Legal Owner needs to give notification of acquisition or disposal of voting shares/
interests in 2 biz days
S137C(1) Co shall keep register and update immediately:
a) The names of persons from whom it received a notice from under S135
b) For each name entered, the information in notice, where notice was received, under
S136/137
S137C(2) Listed Co are required to maintain register of SS which is open to inspection to public
S137E(1) Where there is non compliance of SS with regards to S135/136/137, court may
a) Restraint SS from disposing shares
b) Restraint person/legal owner from disposing shares
c) Restraint exercise by any person of rights attached to share that SS has interest
d) Directing Co not to pay any sum due to SS
e) Directing sale of shares in Co that SS has interest in
f) Directing Co not to register transfer of shares
g) Directing depository or dep co not to register transfer of shares
h) Nullify exercise of voting rights of SS
i) To secure compliance, an order directing co or persons to do or refrain from doing any
act
S137F Co may give notice to member:
a) To inform whether he hold any voting shares as beneficial owner or trustee
b) If trustee, to indicate person he holds for (name and nature)
S137G Where Co has been notified in writing, by director, CEO or SS, Co shall disseminate
information stated to securities market by end of the next business day from day of receipt of
notice.
S137I Obligation to comply with this division extends to all natural persons and all entities.
This essentially means, interests, regardless of deemed or not, and any changes relating to it needs
to be disclosed.
S164-165 CA – Directors and CEOs of all companies to disclose interests and Co to keep register
S163 CA - Prohibits loan to director-related Co (which depends on director’s interests in
borrowing Co) (Co refers to Company here)
Approval of Co required for loans/credit transactions for benefit of persons connected with
directors of lending co
S163(1) It is illegal for Co (other than exempt pte co):
a) To make loan/quasi loan to another co/llp
b) Make guarantee/provide security on loan to another Co/llp
c) Enter a credit transaction as creditor to another Co/llp
d) Enter guarantee or provide security in connection of credit transaction for benefit of
another Co or llp
if director(s) of Co have ≥ 20% voting power in the other Co or LLP, unless there is approval
given in GM.
S163(4) Section shall not apply to
a) Anything done by a company where other company is a related company (subsidiary,
holding, subsidiary of its holding)
b) To a co whose ordinary business include lending money and giving guarantees
S163(5) For this section,
a) Interest of member of director’s family shall be treated as interest of director
b) Member of director’s family include, director’s spouse, son, adopted son, step-son,
daughter, adopted daughter, step-daughter
Register of director’s and CEO’s shareholdings
S164(1)/(1A) A company shall keep a register showing each director’s/CEO’s company
particulars of:
a) Shares in the Co
b) Debentures of or participatory interests held by the director (nature and extent)
c) Rights or options of director or of director and other person in respect to the
acquisition/disposal of shares in Co
d) Contracts to which the director he is entitled to a benefit (such as right to call for delivery
of shares, etc)
S164(15) For purposes of the application of this section
a) A director/CEO of Co shall be deemed to have interest if:
I. Wife or husband of director or CEO (not being himself/herself adirector or
CEO thereof) holds an interest in any shares or debentures
II. A child of less than 18 years of age of that director/CEO holds an interest in
any shares or debentures
b) Any contract, assignment or right of subscription shall be deemed to have been made
to/exercised/entered into by the dir/CEO if:
I. CAR was made to the wife/husband of dir/CEO
II. CAR was made to child of less than 18 years of that dir/CEO
General duty to make disclosure
S164(1) Every dir/CEO shall give notice in writing to Co:
a) Particulars relating to shares, debentures, participatory interest, rights, options and
contracts necessary for compliance with S164
b) Change of particulars
c) Events and matters that are necessary to comply with 173A duty to provide info on
directors, CEO, sec and auditors
S164(10) Subsection (1)(a) and (b) shall not apply to a person who is:
 a) CEO/dir of listed Co
b) Who is required to make disclosure of matters in relation to (1)(a) and (b) under section
133 of SFA
The blue provisions will be tested in exams. So need to type out them.
Deemed interest
Deemed interest is one which are not held in his own name but law regards it as attributable to
him. Section 7 will define deemed interest. Using the definition of the deemed interest, we will
be tested in context of definition in other provisions.
Take note having an interest that is deemed, the interest in the final company can be of any
percentage. Just that for the fulfilment of 7(4) to establish the link of “control”.
S7(6) Where a person
a) Has entered into a contract to purchase a share
This means that the person has an interest when he signs the contract when he purchase the share,
not when he becomes included in the register.
b) Has a right to have a share transferred to himself
There is enforceable right to get the share by contract.
c) Has the right to acquire a share under an option
Enforceable by option agreement.
d) Is entitled to exercise or control the exercise of a right attached to a share, not being a
share of which he is the registered holder,
Either by shareholders’ agreement to control shares or any other agreement, such that control is
extended to other registered holders.
that person shall be deemed to have an interest in that share.
Deemed interest through companies
S7(4) and (4A) – deemed interest via control of:
 Directors 7(4)
 General meeting (voting control/controlling interest) 7(4)
 Deemed control via 20% rule (>=20%) 7(4A)

S7(4) CA Where a company (Co. X) has or is deemed to have an interest in a share and:
a) Co. X or its directors act in accordance with the directions of a person; or
Can he tell directors what to do, by facts, then it shall be deemed that he have interest.
b) A person has a controlling interest Co. X,
then that person shall be deemed to have an interest in Co. X’s share.
There is a need to draw out relationships in the exam.
S7(4A) CA Where a company (Co. X) has an interest in or (apart from S7(4A)) is deemed to
have an interest in a share and
 A person is;
 The associates of a person are; or
 A person and his associates are
entitled to exercise not less than 20% of voting power in Co. X then that person shall be
deemed to have an interest in Co. X’s share.

“Apart from 7(4A)” prevents 7(4A) from being used consecutively to link the controller to the
target company which the person may be deemed to have interest in. This may diminish the
ability of the “controller” to have interest in the target company. Thus, 7(4A) cannot be stacked
up to fulfil condition of 7(4). With the link of 7(4) not being able to be fulfilled, the linked interest
link breaks apart.
If it is because of 7(4A), the deemed interest via 7(4A) cannot be applied.

S7(5) definition of associate for purpose of S7(4)A

S7(5) CA A person is an associate of another person if the first-mentioned person is:
a) A subsidiary of that other person;
The “lesser” is associate of the “greater”.
b) A person who is accustomed or is under an obligation whether formal or informal to act
in accordance with the directions, instructions or wishes of that other person in relation
to the share referred to in subsection (4A); or
Do not assume spouses are associates. Realise that the “obedience” here is in relation to the
matters of dealing with the shares
c) A body corporate that is, or a majority of the directors of which are, accustomed or under
an obligation whether formal or informal to act in accordance with the directions,
instructions or wishes of that other person in relation to the share referred to in
subsection (4A).
A company that listens to the controller with regards to shares matter.
Note: Family members (Husband/Wife/child less than 18) may constitute deemed interest under
directors S164(15) CA – Unlisted S133(4) SFA – Listed
Other rules on Interest in shares under S7
(1A) A person has interest in shares if he can dispose or exercise control of disposal of the
shares
(1B) It is immaterial whether the authority to dispose the shares may be restrained
(2) Where property held in trust consists of shares, and a person knows or believe, he shall
deemed to have interest in those shares.
(9) These are not an interest:
a) An interest in share where the interest is that of a person who holds the share as bare
trustee
b) An interest in share if the interest of person whose ordinary business includes the
lending of money if he holds the interest only be way of security
c) An interest of a person in share where the interest held by him by reason of his holding
of prescribed office (ie because of his position in the company)
d) An interest of a company in its own shares if that interest is purchased or otherwise
acquired in accordance with sections 76B to 76G including treasury shares
e) A prescribed interest in a share