Nature of Shares
The shareholders are the owners of the company. Their rights are property rights. Shareholders may usually exercise their rights, selfishly in their own interests. This differs from the position with directors, who owe duties to the company.
Shares are assets. They can be bought and sold in the same way as other assets. However, a private limited company will have restrictions on the sale and transfer of the legal and/ or beneficial ownership of its shares under its constitution.
Shares are intangible property rights. They do not give direct rights to the company’s assets and property. They entitle the holder to certain rights, such as voting rights, rights to receive dividends (but only if declared) and rights to receive monies on the ultimate winding up. Shares derive their value from the assumed future value of these rights.
A share can be enforced by a legal action against the company if it does not accord the shareholder his entitlements. The precise rights are dependent on the constitution/ memorandum and articles of association. Legal action can be taken to ensure that the voting rights are respected. The right to receive a dividend once declared is a debt. The company had no defence to the payment of a dividend which has been declared.
Shares in a limited company refer to a nominal value, often one Euro. This need bear no relationship to the value of the share. At the least, the nominal amount of the share must be paid or be payable to the company. Often, a greater amount is paid on its issue, which must be transferred to a share premium account.
The only obligation of a shareholder in a limited company (LTD) as such, is to pay the nominal amount and premium agreed to pay to the company on allotment of the shares. Once, the share price and any premium are paid in full nothing further is owed to the company. It is in this way the liability of the shareholder is limited.
Where a person buys fully paid up shares in a limited company from an existing shareholder, his sole obligation is to the seller. If the shares have outstanding calls, they are owed to the company and the successor is liable for them. In the case of an unlimited company, the shareholder may be required to contribute to a shortfall in winding up.
Limitations on Rights I
Shares are proprietary rights, which may be used selfishly. When a shareholder votes at a general meeting, he may generally have exclusive regard to his own interests. However, there are some limits to this general position.
There may be a shareholders’ agreement, which is a contract separate from the constitution between some or all shareholders, which regulates the manner in which the company is to operate. A shareholders’ agreement will commonly limit the freedom of a shareholder in the exercise of his shareholding rights.
There are limits on the extent to which the majority shareholder or shareholders, may disregard the interests of the minority.Where the majority asserts its interests at the expense of the minority, the court may look at the position. The court may grant relief where there has been “fraud” on the minority, misuse of power or oppression.
Limitations on Rights II
A shareholder may not exercise his rights so as to expropriate other shareholders. In some cases, the misuse of power is expressed as “fraud on the minority”. This is not fraud in the criminal or deliberate sense. It is “equitable” fraud in the sense of an illegitimate disregard of their property rights.
Where the majority is found not to have acted in the interests of the members or the company as a whole, they may be held to have acted in bad faith for an illegitimate purpose. The misuse of power may be restrained.
The actions of the majority may constitute oppression or the disregard of the interests of the minority, for which there is a special flexible statutory remedy. The requirements are less prescriptive than the above mentioned common law remedies. There is greater flexibility in relation to the remedies which might be granted. .
The constitution of the company defines the relative rights of the shareholders. The starting presumption is that all shares carry equal rights. However, shares may be issued with different rights in relation to voting, dividends, and to the return of capital in a winding up.
Equality applies relation to the rights attaching to each share, rather than the rights of each shareholder. The number of shares held by him determines the extent of the shareholder’s rights. Votes at shareholders’ meetings may be taken initially, by a show of hands. However, a vote based on shareholding can be requested so that the outcome is reckoned by the amount in value of the shares (and not shareholders) in favour or against the proposal.
It is possible to divide shares into different classes with different rights. For example, preference shareholders may have a right to receive a fixed payment of dividend before any dividend is paid to the ordinary shareholders.
The right may be cumulative or not. If cumulative, the ordinary shareholders cannot be paid until the arrears have been paid to the preference shareholders. Another variant requires only that the preference shareholders need be paid only the current year’s dividend before the ordinary shareholders can be paid for that year.
Classes of Shares
The constitution may provide for the division of the shares into classes. The rights attaching to a class of shares cannot be altered by special resolution of all shareholders. A special resolution of the particular class is required. Otherwise, other shareholders could simply deprive a group of shareholders of their rights, for their own selfish advantage.
In private companies, particular groups of shareholders may have different types of shareholding rights, sometimes labelled, for example, “A”,” B”, and “C” (etc.) shares. Commonly, the purpose is to ensure that particular company decisions require the consent of each of particular classes of shareholders. This is a common way of preserving the rights and interests of minority shareholders.
It is valid for shares to be granted weighted voting rights, generally or on a particular issue. This is notwithstanding the principle of one share, one vote. Such clauses may be used to protect a director from being removed, by giving him additional rights on a vote for his removal. This is so, notwithstanding the provision in the Companies Act that a director may be removed by a majority vote of the ordinary share.
“Preference” is a generic expression in relation to shares. The actual terms of the preference will depend on the exact rights attaching to the shares. Preference shares are often used in company investments and financing. There are advantages and disadvantages for preference shares, as compared with other types of finance. Unlike debt, preference shareholders are generally not entitled to payment of a dividend, unless there are distributable profits.
Generally, the ordinary shareholders are those without special rights. They may rank after the rights of those having particular preferences. They commonly hold the residual rights.
A preference may be subject to a limit on what the shareholder receives. This is often a percentage of the nominal share value (e.g. 6% Preference Shares). The preference shareholder may have a guarantee that a dividend will be paid where possible. However, his “upside” is correspondingly limited. In contrast, the ordinary shareholders typically have no guarantee, but potentially receive the entire “upside”. The ordinary shareholders are, in effect, the residual or equity shareholders.
Variation of Rights
Where the constitution of the company allows for the variation of rights, the default position is that the rights attaching to the shares may be varied by a special resolution (usually 75% in value) of the class of shareholders. The dissenting minority can apply to the court to have the variation cancelled. The variation of these terms can be undertaken, even where it is not so provided in the constitution.
The holders of 10% of the share capital (who have voted against the variation) may apply to the court to have the variation cancelled. They have 28 days to make their application.
If rights were entrenched in the constitution/ memorandum of association and there is no procedure for their variation, the rights may be varied, only if all shareholders agree. If another means of variation is provided, it must be complied with.
The rights of existing shareholders are not regarded as varied by the issue of new shares of the same class.
Register of Shareholders
Shareholders are furnished with shares certificates as proof of their shareholding. The certificate is issued by the company under its seal, usually with the signature of two directors and the secretary. In order to transfer shares, the share certificate together with the transfer form must usually be sent to the company secretary.
Subject to the transfer being approved by the directors (in the case of an LTD) and the transfer instrument being properly stamped, the new shareholder is written up in the register of members. The company secretary will issue a new share certificate. Where part only of the shareholding is sold, the old share certificate is cancelled, and new certificates are issued to the buyer and seller for their respective holdings.
The share certificate is proof of title. The registered owner of the shares (in the register of members) need not necessarily be the true or beneficial owner. The shares may be held in trust for somebody else.
If a company issues a certificate, which is wrong because, for example of a prior forgery, it may be liable to compensate a buyer who purchases shares in reliance on it.
Payment of Dividends
A dividend may be paid only if there are distributable profits. There must be a surplus on the profit and loss account or in the revenue reserves from past profits. The cumulative position is considered. If there have been losses there will not be a surplus until the cumulative profits exceed the cumulative losses.
The directors recommend a dividend (or not) at their discretion. The shareholders then approve the final dividend at the AGM, if the directors recommend it. The directors may pay an interim dividend without shareholders’ approval. The shareholders have no right to a dividend unless recommended by the directors
Preference shareholders usually have a preference if a dividend is declared. Preference dividends can be paid on preference shares, only where there are distributable profits. The directors may retain a discretion under the terms of the share issue, as to when a preference distribution is made, even it can be lawfully made.
Preference shareholders may have a preference as to both dividends and the return of capital in a winding up. Generally, the participation of preference shareholders in the capital is limited. In return for the priority in payment of income and capital over the ordinary shareholders, the ordinary shareholder usually takes the “up-side” of additional or surplus income and assets in a winding up.
Calls arise when the full price for the share (including any share premium) has not yet been paid to the company. A call may be made of all or some of the amount due to the company on the share. It might consist of the price, value or asset which the shareholder agreed to give for the share. It represents the balance outstanding and owing to the company.
It may be possible for a company to forfeit shares if calls are not paid. Standard articles so provided. When shares are forfeited, the person ceases to be a shareholder.
A company may be given a lien by its constitution over shares for all sums due by the shareholder to the company. The lien is a security for all monies due. It can usually be enforced by the sale of the shares. 14 days’ notice in writing must be first given to the shareholder, demanding payment due.
Restriction of Share Transfers
The shares in a private company cannot be freely transferred. There must be some restrictions. Otherwise, the company would not qualify as a private limited company. The restrictions must be imposed by the terms of the constitution/ memorandum and articles of association. Under the default constitution / common form articles, the directors have the discretion to refuse to register a transfer of shares in the company.
Where directors exercise their discretion to refuse to register a share transfer, the court will not interfere as long as they have acted in good faith for the benefit of the company. Sometimes, a refusal to register may be successfully challenged, where it can be shown that the directors have acted in bad faith; for example, for their own exclusive interest and not that of those of the company.
Private Pre-emption Rights I
It is sometimes provided that shares cannot be transferred unless they have been first offered to the existing shareholders. The “offer around” may be inserted or provided for in the constitution or in a shareholder’s agreement. The purpose is usually to preserve control of the company within a family or other group of owners.
By the terms of pre-emption rights, the shares are typically “offered around” to the other shareholders proportionately. If, but only if they refuse, the provision may (or may not) allow for a sale of the share to a third-party outsider. Invariably, the price must be not less than that offered around.
Where shares which have been offered around are accepted, there is usually a reference to some third-party expert to determine the price in the event of a dispute. Sometimes the company’s auditors or an independent expert are referred to, in order to determine a fair value.
Private Pre-emption Rights II
The determination of a value for private shares (which are intrinsically not traded) is particularly can be complex and controversial. There are several methods of valuation, which may be more or less appropriate to particular types of company business.
The value might be appraised on a number basis including, net asset value, discounted future expected cash flows, industry averages of multiples of earnings and/ or a comparison with a comparator.The most appropriate method may depend on the nature of the company’s assets and business.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.8 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 17 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law