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Legal Requirements for Issuing More Shares

Please prepare a memorandum of advice on the following issues:

1. The important legal requirements that must be met in order for the
company to issue more shares.

2. The legal and financial issues involved in issuing dividends. In your
answer stress why a new share issue cannot be used to finance

3. What potential options the company has to ensure that the current
shareholders can retain of control of the company. Identify and describe
these options to allay Dr. Yao's fears.

The memorandum of advice stands to be the above mentioned content herein.

 A public limited company sells law books related to finance and investment in Asia. The main proprietors of the company are Ellinger, Davies and Yao. They have been running this company for the last 5years and they have a small office at sharing basis in Bloomsbury, London. It has quite a good reputation in the market. Company is basically a small scale business wherein the three of them namely Ellinger, Davis and Yao shares altogether 75% of the share capital in the company and the rest 25% is held by three outside investors who have been investing in the company since the birth of the company. 10,000 shares in total are fully paid up and thereby they meet all the requirements laid down by the Companies Act, 2006.

At a board meeting they raised a topic of expanding the business at large. Ellinger is also in support of the opinion and wants to expand the company by raising funds by issuing new shares. Yao on the other hand is also of the opinion of raising fund by issuing dividends and at the same time wants the business to get expanded.

It is a well adopted concept of Law that funds of a company can only be raised by issuing shares. In order to accomplish the issuance of shares, the following steps are required to be performed:

  • Issuing of prospectus
  • Receiving of application
  • Allotment of shares
  • Call on shares

 A prospectus is the document issued if a company wishes to raise its fund by issuing shares. It provides for the details of investment the company will be making. (Anon, c2015) It is documents used by a company to invite people for buying shares and thereby an application for shares. Before issuing the prospectus, a copy of it should be submitted to the Securities and Exchange Commission. A prospectus will provide for various details like name of the directors, number of shares to be sold, opening and closing date of the share issue, application fees, allotment and on-call dates and the details of bank in which the amount is to be submitted and minimum shares for application. (Arsalidou, 2012)

Legal and Financial Issues Involved in Issuing Dividends

Section 63 of the Company Act lays the various rules and aspects of issuing bonus shares in order to raise funds. A company may issue its fully paid up bonus shares to its member by any of the ways adopted either by its free reserves or by its securities premium account or by its capital redemption reserve account. Wherein there is an exception to this rule. It states that no issuing of bonus shares can be assessed by capitalizing reserves formed by the revaluation of assets. It is to be kept in mind, as provided by the law, that no company shall capitalize its profits or reserves for issuing bonus shares. (Cahn and Donald, 2010)Such a step can only be adopted by the company in certain circumstances which have been provided under the law. A company can capitalize its profit for issuance of the bonus shares only if it has been authorized to do by the articles of association framed. Again it can capitalize its profit or reserves to sell of bonus shares to raise funds only if such recommendations are made in the board general meeting of the company. If a company has not failed to pay its principal or interest in respect of any fixed deposits or debts securities, then a company may, if it wants capitalize its reserves or shares to issue bonus shares. (Cheffins, 1997)

In a circumstance where the company has not been in default in paying the statutory dues of the employees like gratuity or bonus or provident fund, may if wishes, can issue bonus shares by capitalizing profits or shares. A company can at any time issue any number of shares only if it abides by the rules laid down by the Company Law. (Chiu, 2010)

It is to be kept in mind that bonus shares cannot be issued in lieu of dividends.

Whatever shares are required to be offered shall be at any point of time be registered with companies account. A share without registering doesn’t stands to be valid. In order to offer shares for raising fund, at first a general meeting has to be arranged wherein the idea would be discussed and voting rights would be embedded therein. (Collison et al., 2014)Only after it passes through all this steps a resolution would be passed in that accordance and then such resolution would be implemented in the company. It has been held under Section 83 of the Company law, that every member of the company holding equity shares shall have the right to vote in that respect of capital to be raised depending on every resolution passed on that basis.

Options to Ensure Retention of Control

In the following issue that has been provided herein, all the three owners of the Company Ellinger, Yao and Davies have to at first arrange general meeting of board. In such a meeting all the shareholders would be called upon as all of them have voting rights in that respect. Hence the other three outsiders holding 25% of the share capital shall also be present in such meeting. After discussing of the agenda, voting rights should be polled and in accordance to the votes raised, the agenda would be passed as a resolution on the company’s board. If such a resolution is passed then at the very first prospectus has to be prepared in that respect so as to invite people to buy shares. In reference to that applications of shares would be accepted. It is after this that the allotment of shares would be done and utmost important parallel its registration is to be done in that respect. It is then that call of shares would take place and new members would be added to the company. (Crespi and Renneboog, 2010)

Paying a profit is the standard route for an organization to disperse an offer of its benefits among the shareholders. Under the laws of England and Wales, Scotland and Northern Ireland there are point by point statutory principles as to dispersions in CA 2006, section 829 to section 853. An itemized thought of these is past the extent of this database; however the principle reason behind these procurements is to deny organizations from making disseminations with the exception of out of benefits.(Dashwood and Ward, 2000)

In a public organization, the standard practice be intended for the principle people to pronounce and disburse an interval income taking into account the report intended for the initial six months of the organization funds related year. The executives will then prescribe a previous turnover to the Annual General Meeting in view of the reimbursement complete in the entire year, and the AGM then pass strength of mind proclaim that income.(Davies and Rickford, 2008)

Section 30 of the Company Act, 2006 talks about the procedures for the declaration of dividends. It says that, 30(1) the organization might by standard determination pronounce profits, and the chiefs may choose to pay between time profits. Section 30 (2) says that a profit should not be announced unless the chiefs have made a suggestion as to its sum. Such a profit should not surpass the sum suggested by the chiefs. Section 30 (3) says that no profit may be announced or paid unless it is as per shareholders' particular rights. Section 30(4) says that unless the shareholders' determination to announce or chiefs' choice to pay a profit, or the terms on which shares are issued, indicate else, it must be paid by reference to every shareholder's holding of shares on the date of the determination or choice to pronounce or pay it. section 30 (5), if the organization's offer capital is partitioned into diverse classes, no between time profit may be paid on shares conveying conceded or non-favored rights if, at the season of installment, any special profit is in arrears. Subsection (6) also says that the executives may pay at interims any profit payable at an altered rate on the off chance that it seems to them that the benefits accessible for appropriation legitimize the installment. Section 30 (7) says that if the chiefs demonstration in accordance with some basic honesty, they don't cause any risk to the holders of shares presenting favored rights for any misfortune they may endure by the legal installment of a between time profit on shares with conceded or non-favored right.(Dignam and Lowry, 2006)

The key manage in the Companies Act 2006 is that organizations might make dispersions just out of benefits accessible for the reason, which are fundamentally decided as collected acknowledged benefits less amassed acknowledged misfortunes. It is critical to recollect that not all that matters perceived in benefits is acknowledged, specificallywhere records are arranged under IFRS. For instance, an addition on revaluation of a speculation property, perceived in benefit on the other hand misfortune under IFRS, is not an acknowledged benefit. Specific complexities can likewise emerge with intra-bunch exchanges,which may prompt benefits perceived in the individual records of some gathering organizations not being dealt with as figured it out.(French, Mayson and Ryan, 2012)

Open organizations need to do an additional test to watch that their net resources won't tumble to not exactly the total of called-up offer capital and not distributable saves as a consequence of making a circulation. Samples of not distributable stores are the offer premium record, capital recovery saves and, in numerous cases, the revaluation saves. There are further principles for venture organizations, which are not secured in this factsheet.(Grier, Griffin and Capper, 1998)

Executives should likewise remember their trustee and other obligations, for instance their commitment to protect the organization's resources and make sensible moves to guarantee so as to the organization is thus in a place to settle its obligations as they drop due. Henceforth, chiefs will need to survey whether the organization will even now be dissolvable taking after a proposed appropriation.(Hannigan, 2003)

In regular law, an organization can't legally create a circulation out of assets. In this manner, the chiefs require to survey, together at the occasion they recommend the circulation and the moment it is complete, whether the organization has brought about misfortunes ensuing to the monetary record date to which the applicable records were arranged that have disintegrated its benefits accessible for circulation.(Hannigan, 2012)

Appropriations must be legitimized taking into account accessible benefits indicated in significant records. These are individual organization accounts, not gathering records. The fundamental principle for every constrained company is that the pertinent records are the organization's latest yearly records that were marked and coursed to individuals.

On the off chance that an organization's latest yearly records don't indicate adequate distributable benefits, then still anywhere administration know benefits contain been complete following the year end to which those records relate, for instance in light of the fact that profits have been gotten from backups, a profit can't be paid unless later between time records have been arranged for the organization independently that show adequate distributable benefits to bolster the profit to be paid. On the off chance that the executives wish to pay a profit before any yearly records have been flowed, at that point they will need to get ready starting records to bolster theproposed profit. This circumstance commonly emerges where the organization is recently fused.

For an open organization, the guidelines are much stricter. Between time accounts must be legitimately arranged under the Companies Act 2006what's more, documented at Companies House before making the conveyance. Nonetheless, these between times records require not be inspected. By contrast, if an open organization needs beginning records to legitimize a profit, those records do should be examined. In generally other regards, the necessities for introductory records are like those for between time records, including the need to record the accounts at Companies House preceding paying the profit.


The driving case on this issue was that of AvelingBarford Ltd v Perion Ltd (1989)(AvelingBarford Ltd v Perion Ltd, [1989]) where a possession was sold for fundamentally a smaller amount than its reasonable esteem by an organization with amassed misfortunes to another organization claimed by the scheming investor of themerchant organization. The Court apprehended that this added up to an illegal return of assets. The Explanatory Notes issued by the then Department of Exchange and Industry nearby the Companies Act 2006 made it clear that section 845, Companies Act 2006, did not exasperate the position in the AvelingBarford case, rather it elucidated more extensive issues emerging. The UK Supreme Court considered the issue further in 2010 on account of Progress Property Company Limited v Moorgarth Group Limited.(Progress Property Company Limited v Moorgarth Group Limited., [2010]) They noticed that the legitimacy of a circulation ought to be controlled by taking into consideration the genuine reason and matter of the exchange instead of the structure.

The privileges any shareholder have in every specific organization by and large rely on upon the procurements of the Companies Act 2006, the organization's articles of affiliation, the terms of issue of the shares and any shareholders' understanding. Formulating the right share capital structure is an intricate business.(Judge, 2010)

The general circumstance is that consequently for putting resources into an organization a shareholder gets a heap of rights in the organization which may shift as per the kind of shares gained. Most organizations just have one class of shares however the law in the UK is to a great degree adaptable and permits any classes of shares to be made. This is finished by setting out the diverse rights appended to the different classes. What rights are appended to the diverse classes of shares is basically a matter for the organization to focus.(Loughrey, 2013)

The shareholders have certain rights as:

  • To go to general meeting and vote

Commonly shares convey one vote each yet there may be non-voting imparts or shares to various votes. A few shares may convey the privilege to vote just specifically circumstances. See underneath for the statutory procurements on voting rights. Note additionally the statutory rights a shareholder needs to select an intermediary to go to and vote at a general meeting, to order a general meeting, to have a composed determination coursed to the individuals.(Olaerts and Schwarz, 2012)

  • To an offer of the organization's benefits

The dispersion of benefits is paid by method for a profit of a certain sum paid on every offer. A profit may be paid just if the organization has made benefits and to the degree that it chooses to disseminate them. Without any procurement in actuality, profits must be paid in extent to the shares held by every shareholder, except it is turning out to be progressively regular for articles to give that the organization's shares are isolated into distinctive classes and for the executives to have the capacity to fluctuate the profits assigned to these course.(Ottley, 2013)

  • To a last conveyance on twisting up

In the event that the organization is twisted up and all the leasers are paid, the remaining resources are accessible for division among the individuals. This may be in two stages: (1) an arrival of capital; (2) dissemination of surplus capital. A few shares may be given a need as to one or both of these, or barred from interest in any overflow.

  • Shareholder also has the right to take delivery of and get a copy of the company’s annual accounts so that they can keep a track of the financial records of the company and the organization.(Sadler, 2002)
  • That the organization be run legitimately

As per the Companies Act, the general law and the organization's constitution the shareholder can see the successful working of the company. By and large just the individuals from the organization will have the lawful right to sue to make the organization demonstration legally, and even they may be confined in their capacity to sue under the regular law govern in Foss v Harbottle.(Foss v Harbottle, [1843]) This is an unpredictable range past the extent of this database. Organizations may have distinctive classes of shares, and this is ruined a wide range of reasons.

The fundamental obligation of shareholders is to pass resolutions at general gatherings by voting through their shareholder limit. This obligation is especially vital as it permits the shareholders to practice their definitive control over the organization and how it is overseen. Shareholders can vote in one of two routes: on a show of hands or through a survey vote where every vote will be proportionate to the measure of shares held by every shareholder. A show of hands is generally the favored technique for voting that happens at general gatherings. There are two resolutions that can be voted on at a meeting: a common determination, or an uncommon determination.(Villiers, 2006)

The shareholders of an organization are its money related supporters; they give account to an organization by buying partakes in it, and through this get to be shareholders. This gives them certain rights as shareholders; they likewise have parts and obligations to hold fast to, which are situated out in the Companies Act 2006. As shareholders of an organization, they are shielded from liabilities as the organization seems to be 'restricted'. Shareholders could conceivably be chiefs of the organization moreover. Whilst executives are responsible for maintaining the everyday business of the organization and deciding, the shareholders have a couple of particular parts and obligations to guarantee they at last have control over the organization.(Zetzsche, 2005)


Significant choices which would have an impact on the shareholders' rights are typically needed, through the Companies Act 2006, to be endorsed by the shareholders at a general meeting called by the executives of the organization. Just certain demonstrations should be possible by the shareholders, for example, expelling an executive from office, changing the name of the organization, or approving an administration contract for a chief which gives him professional stability for over two years. As a rule, shareholders have little control over the chiefs and how they run the organization, yet their fundamental part is to go to meeting and examine whatever is on the motivation to guarantee the executives don't go past their forces.


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(2012). Shareholders and Corporate Scrutiny: The Role of the UK Stewardship Code. European Company and Financial Law Review,

9(3).AvelingBarford Ltd v Perion Ltd [1989] BCLC 626.Cahn, A. and Donald, D. (2010). Comparative company law. Cambridge: Cambridge University Press.

Cheffins, B. (1997). Company law. Oxford: Clarendon Press

Chiu, I. (2010). The foundations and anatomy of shareholder activism. Oxford: Hart Pub.

Collison, D., Cross, S., Ferguson, J., Power, D. and Stevenson, L. (2014). Financialization and company law: A study of the UK Company Law Review.

Critical Perspectives on Accounting, 25(1), pp.5-16.

Crespi, R. and Renneboog, L. (2010). Is (Institutional) Shareholder Activism New? Evidence from UK Shareholder Coalitions in the Pre-Cadbury Era.

Corporate Governance: An International Review, 18(4), pp.274-295.

Dashwood, A. and Ward, A. (2000). Cambridge Yearbook of European Legal Studies Vol 2, 1999. Oxford: Hart Pub.

Davies, P. and Rickford, J. (2008). An Introduction to the New UK Companies Act. European Company and Financial Law Review, 5(1).

Dignam, A. and Lowry, J. (2006). Company law. Oxford: Oxford University Press.

Foss v Harbottle [1843] 67 ER 189.

French, D., Mayson, S. and Ryan, C. (2012). Mayson, French & Ryan on Company Law. Oxford: OUP Oxford.

Grier, N., Griffin, S. and Capper, D. (1998). UK company law. Chichester: J. Wiley.

Hannigan, B. (2003). Company law. London: LexisNexis UK.

Hannigan, B. (2012). Company Law. Oxford: OUP Oxford.

Judge, S. (2010). Company law. Oxford [UK]: Oxford University Press.

Loughrey, J. (2013). Directors' duties and shareholder litigation in the wake of the financial crisis. Cheltenham, UK: Edward Elgar Publishing Limited.

Olaerts, M. and Schwarz, C. (2012). Shareholder democracy. The Hague, The Netherlands: Eleven International Pub.

Ottley, M. (2013). Company law. Abingdon, Oxon [UK]: Routledge.

Progress Property Company Limited v Moorgarth Group Limited. [2010] UKSC 55.

Sadler, P. (2002). Building tomorrow's company. London: Kogan Page.

Villiers, C. (2006). Corporate reporting and company law. Cambridge, UK: Cambridge University Press.

Zetzsche, D. (2005). Shareholder Interaction Preceding Shareholder Meetings of Public Corporations – A Six Country Comparison. European

Company and Financial Law Review, 2(1).

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