5/18/2011 COMPANY LAW II Share Capital Part 2 Consideration for issue of shares ·Issue price. Issue at a premium:above par. Share premium account:see s 488. Issue at a discount:below par. Ooregum Gold Mining Co of India v Roper [1892] AC125 ■C0ss46,50 Partly paid and fully paid shares
5/18/2011 1 1 COMPANY LAW II Share Capital Part 2 2 Consideration for issue of shares • Issue price. • Issue at a premium: above par. Share premium account: see s 488. • Issue at a discount: below par. Ooregum Gold Mining Co of India v Roper [1892] AC 125 CO ss 46, 50 • Partly paid and fully paid shares
5/18/2011 Consideration for issue of shares Non-cash consideration. Re Wragg Ltd [1897]1 Ch 796(Court of Appeal) Lindley U:difference between two types of transactions Principle: Court's approach: Lindley U and Smith U's difference on "colourable" Cf:Re Bradford Investment plc(No 2)[1991]BCLC 688 Question:why is the ruling different from Wragg? Transfer of shares ·General procedure.. When does purchaser become member? International Credit and Investment Co(Overseas) Ltd.v Adham [1994]1 BCLC 66 2
5/18/2011 2 3 Consideration for issue of shares • Non-cash consideration. Re Wragg Ltd [1897] 1 Ch 796 (Court of Appeal) Lindley LJ: difference between two types of transactions Principle: Court’s approach: Lindley LJ and Smith LJ’s difference on “colourable” Cf: Re Bradford Investment plc (No 2) [1991] BCLC 688 Question: why is the ruling different from Wragg? 4 Transfer of shares • General procedure. • When does purchaser become member? • International Credit and Investment Co (Overseas) Ltd. v Adham [1994] 1 BCLC 66
5/18/2011 Transfer of shares What are the rights of the vendor and purchaser prior to registration? Hawks v McArthur [1951]1 All ER 22 (Chancery Division) 。AcArthur Hawks ■AcArthur→Roberts ■AcArthur→Fraser What rights Hawks,McArthur,Roberts and Fraser each has? Who ranks before whom? ■Vaisey J:why? Practical value of the ruling: Transfer of shares Cf:Re Rose [1949]Ch 78 and [1952]Ch 499 >Gratuitous transfer of shares Cf:Milroy v Lord (1862)4 De GF J 264 >A gift of shares by deed 3
5/18/2011 3 5 Transfer of shares • What are the rights of the vendor and purchaser prior to registration? • Hawks v McArthur [1951] 1 All ER 22 (Chancery Division) McArthur Hawks McArthur Roberts McArthur Fraser What rights Hawks, McArthur, Roberts and Fraser each has? Who ranks before whom? Vaisey J: why? Practical value of the ruling: 6 Transfer of shares Cf: Re Rose [1949] Ch 78 and [1952] Ch 499 Gratuitous transfer of shares Cf: Milroy v Lord (1862) 4 De GF & J 264 A gift of shares by deed
5/18/2011 Transfer of shares Can directors refuse registration of the transfer? ·Table A pt ll reg3. ■Re Smith and Fawcett Simon Fireman v Golden Rice Bowl Private companies and s 29. Fraudulent transfers. Maintenance of capital Requirement of maintenance of capital. ·Why? 4
5/18/2011 4 7 Transfer of shares • Can directors refuse registration of the transfer? Table A pt II reg 3. Re Smith and Fawcett Simon Fireman v Golden Rice Bowl • Private companies and s 29. • Fraudulent transfers. 8 Maintenance of capital • Requirement of maintenance of capital. • Why?
5/18/2011 Financial assistance for purchase of own shares Restriction imposed on company under s 47A. Consequences of breach. ·“Financial assistance”that is prohibited:s47B. Egs: Gifts. Loans. Guarantees. Meaning of financial assistance Any transaction for the purpose of financing the acquisition may involve provision of financial assistance:Belmont Finance Corp Ltd.v Williams Furniture Ltd.[1979]Ch 250 (Court of Appeal) 10 夕
5/18/2011 5 9 Financial assistance for purchase of own shares • Restriction imposed on company under s 47A. • Consequences of breach. • “Financial assistance” that is prohibited: s 47B. Egs: - Gifts. - Loans. - Guarantees. 10 Meaning of financial assistance • Any transaction for the purpose of financing the acquisition may involve provision of financial assistance: Belmont Finance Corp Ltd. v Williams Furniture Ltd. [1979] Ch 250 (Court of Appeal)
5/18/2011 Meaning of financial assistance Belmont Finance Corp Ltd.v Williams Furniture Ltd.[1979]Ch 250(Court of Appeal) Any transaction for the purpose of financing the acquisition may involve provision of financial assistance. Hoffmann J in Charterhouse:"the Belmont case indicates that the sale of an asset by the company at a fair value can properly be described as giving financial assistance if the effect is to provide the purchaser of its shares with the cash needed to pay for them." 11 Meaning of financial assistance Courts must examine commercial substance and reality to determine whether financial assistance has been given:Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986]BCLC1at10 6
5/18/2011 6 11 Meaning of financial assistance • Belmont Finance Corp Ltd. v Williams Furniture Ltd. [1979] Ch 250 (Court of Appeal) Any transaction for the purpose of financing the acquisition may involve provision of financial assistance. Hoffmann J in Charterhouse: “the Belmont case indicates that the sale of an asset by the company at a fair value can properly be described as giving financial assistance if the effect is to provide the purchaser of its shares with the cash needed to pay for them.” 12 Meaning of financial assistance • Courts must examine commercial substance and reality to determine whether financial assistance has been given: Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 at 10
5/18/2011 Meaning of financial assistance Charterhouse Investment Trust Ltd v Tempest Diese/s Ltd [1986]BCLC 1 at 10 Decided under the repealed CA 1948 s54 What type of transaction? Hoffmann J:"...There is no definition of giving financial assistance in the section,although some examples are given. The words have no technical meaning and their frame of reference is my judgment the language of ordinary commerce.One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company..." 13 Meaning of financial assistance Charterhouse Investment Trust Ltd v Tempest Diese/s Ltd [1986]BCLC 1 at 10 Hoffmann J:does it matter if the co's balance sheet is disturbed (or undisturbed)? How to understand"commercial realities"and to determine "financial assistance"? Nature of this type of transaction financial assistance? Hoffmann observed two elements in the commission of an offence under s.54: 14
5/18/2011 7 13 Meaning of financial assistance • Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 at 10 Decided under the repealed CA 1948 s54 What type of transaction? Hoffmann J: “… There is no definition of giving financial assistance in the section, although some examples are given. The words have no technical meaning and their frame of reference is my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company …” 14 Meaning of financial assistance • Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 at 10 Hoffmann J: does it matter if the co’s balance sheet is disturbed (or undisturbed)? How to understand “commercial realities” and to determine “financial assistance”? Nature of this type of transaction financial assistance? Hoffmann observed two elements in the commission of an offence under s.54:
5/18/2011 Meaning of financial assistance Cf:Schreiner J in Gradwell(Pty)Ltd v Rostra Printers Ltd 1959 (4)SA 419 at 425:"Unless what was to be done would amount to giving financial assistance within the meaning of the sub-section the purpose and the connection would not be important." 15 Meaning of financial assistance Chaston v SWP Group Ltd [2002]EWCA Civ 1999, [2003]1BCLC675 SWP was to acquire shares in DRCH. SWP was to fund the purchase through its own share issue. Accountants provided a report for that issue of shares Subsidiary of DRCH(DRC)paid for the report. Did DRC provide financial assistance for the purpose of SWP's acquisition of shares in the parent company? What's the first instance judge's opinion?Why? ■CA held:yes. 16 8
5/18/2011 8 15 Meaning of financial assistance Cf: Schreiner J in Gradwell (Pty) Ltd v Rostra Printers Ltd 1959 (4) SA 419 at 425: “Unless what was to be done would amount to giving financial assistance within the meaning of the sub-section the purpose and the connection would not be important.” 16 Meaning of financial assistance • Chaston v SWP Group Ltd [2002] EWCA Civ 1999, [2003] 1 BCLC 675 SWP was to acquire shares in DRCH. SWP was to fund the purchase through its own share issue. Accountants provided a report for that issue of shares. Subsidiary of DRCH (DRC) paid for the report. Did DRC provide financial assistance for the purpose of SWP’s acquisition of shares in the parent company? What’s the first instance judge’s opinion? Why? CA held: yes
5/18/2011 Meaning of financial assistance Chaston v SWP Group Ltd [2002]EWCA Civ 1999, [2003]1BCLC675 Arden U:the general mischief (of ss 151 and 152 of CA 1985(nows677CA2006) .The meaning of the words(financial assistance)... Was assistance given? Arden U's counter arguments to the points raised by the def. Is the value of the fees relevant? What test adopted by Chaston? Is this test satisfied? Practically,how to determine? 17 Meaning of financial assistance MT Realisations Ltd v Digital Equipment Co Ltd.[2003]EWCA Civ494,[2003]2BCLC117 Digital UK owned the shares in MTR. Digital UK provided loans(E8m)to MTR to support it financially.MTI to acquire shares in MTR from Digital UK: Sale of shares for f1. Arrangement of loan from Digital UK to MTI for f6.5m.(MTI to pay by installments). Rescheduling agreement:Amounts owed by Digital UK to MTR(under other transactions)would be used to discharge amounts owed by MTI to Digital UK. Liquidator of MTR:Rescheduling agreement led to MTR giving financial assistance to MTI to discharge MTI's liabilities incurred for the acquisition of shares in MTR. acquisition of shares in MTR. 。 CA held:No.Because MTI was already entitled to those amounts owing from digital UK to MTR as these were book debts subject to a charge in favour of MTl. Accordingly,MTR did not provide any assistance to MTI at all. 9
5/18/2011 9 17 Meaning of financial assistance • Chaston v SWP Group Ltd [2002] EWCA Civ 1999, [2003] 1 BCLC 675 Arden LJ: the general mischief (of ss 151 and 152 of CA 1985 (now s 677 CA 2006) The meaning of the words (financial assistance) … Was assistance given? Arden LJ’s counter arguments to the points raised by the def. Is the value of the fees relevant? What test adopted by Chaston? Is this test satisfied? Practically, how to determine? 18 Meaning of financial assistance • MT Realisations Ltd v Digital Equipment Co Ltd. [2003] EWCA Civ 494, [2003] 2 BCLC 117 • Digital UK owned the shares in MTR. • Digital UK provided loans (£8m) to MTR to support it financially. MTI to acquire shares in MTR from Digital UK: - Sale of shares for £1. - Arrangement of loan from Digital UK to MTI for £6.5m. (MTI to pay by installments). • Rescheduling agreement: Amounts owed by Digital UK to MTR (under other transactions) would be used to discharge amounts owed by MTI to Digital UK. • Liquidator of MTR: Rescheduling agreement led to MTR giving financial assistance to MTI to discharge MTI’s liabilities incurred for the acquisition of shares in MTR. • acquisition of shares in MTR. • CA held: No. Because MTI was already entitled to those amounts owing from digital UK to MTR as these were book debts subject to a charge in favour of MTI. • Accordingly, MTR did not provide any assistance to MTI at all
5/18/2011 Exceptions Financial assistance provided incidental to some other larger purpose:s 47C(1). Brady v Brady [1989]AC 755,[1988]All ER 617(House of Lords) Dispute between 2 brothers who controlled company. Management deadlock to be resolved by corporate reorganisation which involved company financing one of the brothers to buyout his share. Did the exemption apply? Held:No.Provision of financial assistance was essence of scheme and not incidental to some other larger purpose. What test adopted in this case? 19 Section 47C(1):do the following come within the exception? 1.X Co has been poorly managed,and a change of controller and management would be desirable.Y Co purchases shares in X Co to become the new controller and Y Co appoints new managers to X Co,for the benefit of X Co.X Co helps fund Y Co's purchase of shares in X Co. 2.Z Co provided security over its own assets to secure a loan taken out by P Co to acquire shares in Z Co.This assistance was "Whitewashed"under s 47E.Under the security arrangement with the lender,Z Co is not allowed to sell its assets without the lender's approval.Z Co now wishes to dispose of certain assets for commercial reasons.The lender agrees,subject to Z Co providing a further security over a portion of the proceeds of the sale of the assets,as security for the loan given to P Co. 20 10
5/18/2011 10 19 Exceptions • Financial assistance provided incidental to some other larger purpose: s 47C(1). • Brady v Brady [1989] AC 755, [1988] All ER 617 (House of Lords) • Dispute between 2 brothers who controlled company. • Management deadlock to be resolved by corporate reorganisation which involved company financing one of the brothers to buyout his share. • Did the exemption apply? • Held: No. Provision of financial assistance was essence of scheme and not incidental to some other larger purpose. • What test adopted in this case? 20 Section 47C(1): do the following come within the exception? 1. X Co has been poorly managed, and a change of controller and management would be desirable. Y Co purchases shares in X Co to become the new controller and Y Co appoints new managers to X Co, for the benefit of X Co. X Co helps fund Y Co’s purchase of shares in X Co . 2. Z Co provided security over its own assets to secure a loan taken out by P Co to acquire shares in Z Co. This assistance was “Whitewashed” under s 47E. Under the security arrangement with the lender, Z Co is not allowed to sell its assets without the lender’s approval. Z Co now wishes to dispose of certain assets for commercial reasons. The lender agrees, subject to Z Co providing a further security over a portion of the proceeds of the sale of the assets, as security for the loan given to P Co