Understanding shares and share capital - Biztorials

Understanding shares and share capital


Profit making ventures are usually registered as companies limited by shares or unlimited companies. A company is limited by shares when the liability of shareholders of the company is limited to the amount, if any, unpaid on the shares held by them. In the case of unlimited companies, the liability of the shareholders is not limited to any unpaid amount for shares held by them. Thus the shareholders of an unlimited company are fully liable for the debts of the company no matter the amount involved. There are various ways a company can raise capital for its operations. Issuing shares is one of the ways capital can be raised.

What is a share?

A share is a unit of a company that defines the interest of a shareholder in the company measured by a sum of money. It represents a portion of a company’s share capital and confers certain rights and liabilities on the shareholder. The Nigerian Companies and Allied Matters Act defines shares as’ interests in a company’s share capital of a member who is entitled to a share in the capital or income of the company’. Thus a share represents a unit of a bundle of rights and liabilities which a member or shareholder has in a company as provided in the term of issue i.e. the articles of association of the company. A share is a chose in action (intangible property which gives the owner a right of action for possession) and it is a transferable property subject to any restrictions that may be provided in the articles of association or under the law.

Rights and liabilities attached to shares

A shareholder is entitled to vote in the proceedings of company meetings, receive dividend whenever dividend is declared, attend meetings and contribute to the affairs of the company, inspect company’s statutory books, protect proprietary interest in the management of the company. The Nigerian Companies and Allied Matters Act, 2004 prohibits issuance of shares with no right to vote or a right to more than one vote except in the case of preference shares. It is an offence under the law to issue a share with no vote or more than one vote. On the other hand, a shareholder is liable to pay for shares held and unpaid for upon winding up of the company where the company is limited by shares. In the case of unlimited company, the shareholder is liable for the full debt of the company. A shareholder is also liable to forfeit shares upon failure to honour a call to pay up in respect of any unpaid shares and suffer any penalties stipulated in the articles of association or term of issue.

How to acquire shares in a company

Shares in a company can be acquired by any of the following ways: subscription, allotment, transfer or transmission. Subscription refers to the signing of the memorandum and articles of association during the incorporation of the company whereby at least one share is taken up by each member or shareholder signing for a company to be formed. Upon registration of the company, the subscribers are deemed to have agreed to become members of the company and their names must be in the register of members.

Allotment is the allocation of a specific number of shares in a company to an applicant or intending member upon an application for such shares. The company may allot shares wholly or partly, the number of shares applied for and an applicant can withdraw his application by written notice to the company. Upon application, the company shall, where it wholly or partly accepts the application, allot shares to the applicant and notify the applicant of the allotment and the number of shares allotted within forty-two days. The company is not bound to allot the full amount of shares applied for but it is bound to write a letter of regret enclosing the balance for shares not allotted. Where shares have been allotted, the company is required to file a return on allotment of shares with the company’s registry within one month of allotment in the prescribed form and with the necessary supporting documents. If you have ever subscribed to a public offer for shares, this is what happens after the offer is closed.

Transfer of shares is the process of passing ownership from one person to another. It is executed by the delivery of a proper instrument of transfer and the share certificate to the company and the subsequent registration of the transferee in the company’s register of members. A company is required to file a notice with the company’s registry indicating transfer of shares. Shares in a company are transferable property subject to any restrictions by law or the articles of association. Every private company is required by law to restrict the transferability of its shares in its articles of association. This is done by including a pre-emptive right clause to the effect that any shareholder who wishes to transfer his shares should first offer such shares to existing shareholders.

Transmission of shares is the process of acquisition whereby a deceased person’s shares are transferred to a stated beneficiary in his will or to his estate for administration for the benefit of those entitled to the estate of the deceased. A company is required to file a notice of transmission of shares with the company’s registry under the Nigerian companies’ regulation.

Classes of shares

There are various classes of shares that could be issued by a company. These are ordinary shares, preference shares, deferred shares and founders’ shares. The nature of the shares would depend on the kind of rights attached to them. Ordinary shares are the basic shares of a company which have no special rights attached and which bear the main risk. They are sometimes referred to as equity shares. Preference shares are those shares that have additional rights attached to them and they could take various forms. Fixed preference shares entitle the holder to a fixed amount of dividend every year. Fixed right to participate in surplus profit entitles the holder of such shares to additional dividend after the fixed amount of dividend. Thus where there is surplus, they benefit further with the ordinary shareholders.

Cumulative preference shares entitle the holder to dividend every year whether or not profits are declared by the company. Where no profit is declared in a particular year, the dividend accumulates and adds up to that of the following year such that whenever there is profit and dividend is declared, this class of shareholders get their dividend that has accumulated over time in addition to what is currently due them. In the case of non-cumulative preference shares, where a dividend is not declared and paid in a particular year, such dividend is lost. Deferred shares are shares on which no dividend is payable until other classes of shares have received a minimum dividend. Preference shares could be stated as non-voting (holders would not be entitled to attend meetings or vote) and could also be expressed to be redeemable as a term of issue. The right of redemption would usually be set out in the articles of association of the company. A redeemable share is one issued on the terms that the company will or may buy them back at a future date. Founders’ shares and management shares are shares with special rights attached for the benefit of the original subscribers and management of the company respectively in order to retain some measure of control over the company. They are not popular in Nigerian corporate practice.

What is share capital?

Share capital refers to the funds raised by a company by issuing shares for cash or other considerations. At the time of incorporation of a company, the share capital would normally be stated in the memorandum of association and issued to the first subscribers. Further issue of shares can be made in future to raise more capital, provided it is within the stipulated maximum amount authorised by the articles of association. Thus the authorised share capital refers to the maximum value of the shares that a company can legally issue.

Authorised share capital of a company could be issued or unissued. Issued share capital is the portion of a company’s share capital that has been taken up by shareholders. The Dictionary of Company law describes issued share capital as the nominal value of shares actually issued. The shares may have been paid for in full, in instalments or unpaid for. Unissued share capital is the portion of a company’s capital that has not been issued to any shareholder. Where shares are unpaid for, the shareholder could be called upon to pay for those shares in accordance with the terms stipulated in the articles of association of the company. This is referred to as a ‘call on shares’ which is a formal request by a company to the shareholders to pay for shares they have taken up. Where a company goes into liquidation, the shareholders who have unpaid shares would be liable for the debts of the company to the extent of the amount owed for the shares taken up by them.

Reconstruction of share capital is the process of reconstituting the shares such that the value of each share is either increased or decreased. However, this does not affect the total value of the share capital. Reconstruction could either be by way of consolidation or subdivision. Consolidation of shares is the process of reconstituting shares of a certain denomination to a greater denomination so that the value of each share is higher than the original value. For example existing 10,000 shares of 10k each can be reconstituted into 1000 shares of N1.00 each. Consolidation is usually undertaken to reduce the number of shares in issue while increasing the nominal value. The purpose is to increase the share price of the company.

Consolidation could also be undertaken to meet the minimum trading bid size to ensure its listing status on the stock exchange (in the case of a listed public company). Subdivision is the opposite of consolidation where shares of a certain denomination are reconstituted into a lesser denomination. Example existing 10,000 ordinary shares of N1.00 each can be subdivided into 20,000 shares of 50k each. Subdivision is undertaken to increase the number of shares in issue while reducing the nominal value of each share .Subdivision would usually be embarked upon to improve liquidity and trading activity on the shares by making the shares more accessible and affordable and thereby increase shareholder base. Reconstruction applies to shares that have been issued.

The share capital of a company can be altered in various ways:

Cancellation of shares is the process of cancelling unissued i.e. shares that have not been taken up or shares that are yet to be issued. The effect is to reduce the authorised share capital by the amount of shares cancelled. Share capital could also be altered by an increase or decrease in the authorised share capital after the necessary amendments have been made to the articles of association of the company. An increase in authorised share capital requires the creation of new shares which will normally be issued to rank in similar status i.e. pari passu as the shares already in existence. In the case of reduction, the issued share capital of a company is decreased by any of the following means: extinguishing liability on any unpaid shares so that the holder of the balance is excused from paying. For instance, if a company has issued 1,000,000 ordinary shares of N1 each of which N750,000 has been paid up, the balance of N250,000 could be extinguished thereby reducing the share capital to N750,000.

Reduction could also take place by cancellation of any paid up share capital which is lost or unrepresented by available assets. For instance if the value of net assets of the company is N1m and the share capital is N750,000, the share capital could be reduced to reflect the realistic value of assets but nothing is returned to shareholders who have paid N250,000 more. The third form of reduction in share capital is the cancellation of any paid up share capital in excess of the company’s needs in a manner similar to the second form of reduction above. In all cases of reduction, the share capital must have been issued. It may be paid up or unpaid. Reduction of share capital must be distinguished from cancellation of share capital earlier mentioned. A company can only cancel part of its unissued share capital while in the case of reduction; it is the issued share capital that is dealt with.

Hope you learnt something from this. Let’s discuss in the comments.

About the Author

Teingo Inko-Tariah
Teingo Inko-Tariah is a Port-Harcourt based corporate commercial legal practitioner who is passionate about supporting the growth of small businesses and start-ups.