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Section 99

This section contains the rules on payment for shares on allotment.

Subsection (1). States the general rule that shares must be paid up in money or money’s worth, (including goodwill and know-how). In the case of public companies, it implements the first sentence of Article 7 of the Second Directive. In the case of private companies; this provision is believed to reflect the position under common law. There is no proposal to abandon this rule.

(Exceptions are set out in later provisions.) But for private companies, the rule would need to be reformulated as a rule that the consideration for the shares allotted, less any commission or discount, must be paid up in money or money’s worth.

Subsection (2). Provides that a public company may not accept in payment up for shares an undertaking that a person will undertake services. It implements the second sentence of Article 7 of the Second Directive. The added provision that undertakings by third parties are covered by the prohibition is not in Article 7, but is probably implicit in it. It is not proposed to extend the restriction in this subsection to private companies.

Subsection (3). Provides a sanction for breach of subsection (2). The principle that the holder of the shares at the time of the allotment should pay, in money and with interest at the “appropriate rate”, the amount treated as paid up by the undertaking should stand. (The position of subsequent holders is covered in section 112.) The reference to nominal value and premium are inappropriate to an NPV environment. (It would be necessary to reformulate for an NPV environment the rule on the minimum proportion of the value of a share to be paid up, but this is dealt with under section 101 below.) But here it would seem to be enough to provide simply for an obligation to pay in money and with interest an amount equal to that treated as paid by the undertaking; a provision in those terms seems to fit equally well a par value and an NPV environment. The

“appropriate rate” of interest is defined in section 107. It is proposed to replace “the appropriate”

rate of interest with a reference to a reasonable commercial rate of interest or some similar wording (see below under section 107). It is also proposed to make clear that if a public

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company accepts an undertaking in payment up for shares, in contravention of subsection (3), the allotment nevertheless stands. (cf. section 101(3)).

Subsection (4). Preserves the right of companies, public and private, to issue bonus shares, and to pay up “with sums available for the purpose” (ie from distributable reserves, or from capital reserves in the case of bonus shares) amounts unpaid on any of its shares whether by way of nominal value or premium. The substance of these rights should be preserved. But the parenthesis referring to nominal value and premium would be inappropriate for an NPV environment.

Subsection (5). Makes clear that the reference to a holder of shares includes a person with an unconditional right to be included in a company’s share register or to have a transfer executed in his favour. A provision to this effect should be retained. (The terms in which it is expressed may need to be reviewed in the light of work elsewhere in the Review on the definition of a

shareholder and on company registers.)

Section 100

This section prohibits the allotment of shares at discount to nominal value. For public companies, it implements Article 8.1 of the Second Directive (though it has been part of our law since 1900), which provides that “shares may not be issued at a price lower than their nominal value or ....

accountable par”; the concept of “accountable par” is relevant only to no-par value shares, in the restricted form in which they are permitted by the Second Directive. (The exception in Article 8.2 for commissions to those placing shares is covered in sections 97 and 98.) The extension to private companies is believed to reflect the common law position.

This provision appears to have two objectives. The first is to ensure that the liabilities

represented by the increase in nominal capital are (at least) matched by the assets represented by the consideration received or due; the second – subject to the permitted discounts and

commission – is to ensure against discrimination between shareholders in the price at which shares in a given issue are allotted. There is no equivalent provision for share premium. Because (we believe) share premiums are by definition equal to the difference in value of the

consideration received and the nominal value, there is no need for such a provision in relation to

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premiums to address the first objective in that context. But that would not prevent shares being issued at different premiums. For public companies, on the assumption that par values must be retained, it is proposed to retain the substance of the present provision. For private companies, and for public companies if par values need not be retained, there is a choice. One option would be to replicate the present position as closely as possible by providing that (subject to the exceptions for commissions and discounts) all of the shares comprised in an issue of shares must be issued at a single price; this would have the effect of applying both objectives to the whole of the consideration received. The alternative would be a looser provision that the consideration received or due for an issue of shares must equal the amount credited to the combined share capital account (net of any commission or discount), leaving open the possibility that not all the shares comprised in the issue would be issued at a single price, thus achieving only the first objective. This rule would really be merely an aspect of the definition of a no par value share.

We prefer the latter approach, leaving the issue of equality of treatment of shareholders (required for public companies by Article 42 of the Second Directive) to the general law.

Subsection (2). Provides a sanction for the breach of the prohibition. The allottee is obliged to pay up the amount of the discount, plus interest at the “appropriate rate”. It is proposed to retain this provision (apart from the reference to the “appropriate rate” – see on section 99(3) above) for public companies if nominal values are retained; and to make clear that if a public company accepts an undertaking in payment up for shares, in contravention of this section, the allotment nevertheless stands (cf. section 101(3)).

So far as the equivalent rule proposed for NPV shares is concerned, a decision by the company to represent no par value shares in stated capital account at more than the consideration received is not a matter of which the allottee of the relevant shares is likely necessarily to be aware. It is for consideration whether any additional sanction is required in this context beyond the requirements relating to the proper preparation and maintenance of the company’s accounts and accounting records and the law as it relates to participation in breach of duty by company directors, etc. On balance we believe that no further provision is justified.

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Section 101

This section applies to public companies only. It implements the requirement in Articles 9 (for shares issued on incorporation) and 26 (for shares issued on an increase of capital) of the Second Directive that shares must be paid up to at least 25% of the nominal value (or accountable par, in the case of the limited form of no par value shares permitted by the Directive). There is no comparable requirement for private companies.

Subsection (1). Enacts the basic rule, and adds that the whole of any share premium must also be paid up. This is a requirement of Article 26 of the Second Directive but not of Article 9. This requirement should remain for public companies if par values must be retained. If NPV becomes available for public companies, it will be necessary to reformulate a rule on minimum payment up.

Subsection (2). Exempts from the payment up requirement shares issued in pursuance of an employees’ share scheme. This takes advantage of the Member State option in Article 41 of the Second Directive. It is proposed to retain this exemption.

Subsection (3). Provides that if shares are issued in contravention of the rule on payment up, they are to be treated as if 25% of the nominal value, plus the whole of the share premium, had been paid up. The effect is to ensure that the shareholder has a right to be registered as a shareholder in the absence of payment up, and has the same rights eg to dividends as would apply in the case of properly paid-up shares.

Subsection (4). Provides that the allottee in such circumstances is liable to pay up the minimum amount which should have been received, plus interest at the “appropriate rate”. It is proposed to retain this provision (apart from the reference to the “appropriate rate” – see on section 99(3) above).

Subsection (5). Exempts the allotment of bonus shares from subsections (3) and (4), unless they have been allotted in contravention of subsection (1) – ie they have not been paid up by the company. This is in line with the terms of Article 9 of the Second Directive, which refers to shares “issued for a consideration” – ie excluding bonus shares. If the allottee of bonus shares knew, or ought to have known, that the bonus shares had not been paid up, he has a right to be registered as a shareholder but must pay up the shares himself. It is proposed to retain this. The

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position if the allottee did not know that the bonus shares had not been paid up appears obscure.

As an allottee, the shareholder presumably retains the right to be registered as such, but has neither such benefits as are conferred by subsection (3) nor the burdens imposed by subsection (4).

It is proposed to clarify the law by providing that in these circumstances the allotment is void.

Section 102

This section applies to public companies only. It implements Article 9.2 of the Second Directive, which provides that where shares are issued for a consideration other than cash at the time the company is incorporated or is authorised to commence business, the consideration must be transferred in full within five years; and the similar requirement in Article 27 where shares are issued for a consideration other than in cash in the course of an increase in subscribed capital. As noted below under section 106, payment in cash is given a broad definition in the Act, and at present includes an undertaking to pay cash at a future date.

Subsection (1). Implements the basic rule.

Subsection (2). Provides as a sanction for breach of the rule that the allottee is liable to pay the whole of the nominal value and premium, plus interest. This should be retained – but if NPV becomes available for public companies, this will need to be reformulated in terms of the whole amount payable.

Subsections (3)-(7). Add precision to subsection (1). They cover the case where it is a variation of a contract which breaches the rule (3); where the original contract was signed when the company was a private company (4) (NB: The case where a contract concluded by a private company did not comply with the rule in subsection (1), and the private company subsequently reregistered as public, but the contract was not varied, is dealt with in the reregistration provisions – section 45(4)); where the contract was compliant with the rule but the undertaking was not performed within the five years (5) and (6); and where the undertaking was contained not in the contract for allotment but in an ancillary contract relating to payment (7).

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It is proposed to retain the substance of this section. But subsections (3) – (7) anticipate possible variations on the most straightforward case, arising either in the ordinary course of events or as a result of deliberate avoidance. It is for consideration whether, if those subsections did not exist, the courts could be relied on to reach conclusions on the matters covered in them consistent with the purpose of subsection (1) and Article 9.2; and whether there are means, other than detailed statutory provisions of this kind, which could ensure that they did.

Section 103

This section provides for the valuation of non-cash consideration for the allotment of shares in a public company. It implements the requirements in Article 10 of the Second Directive, (where shares are issued when a company is incorporated or commences business) and in Article 27 (where the shares are issued in the course of an increase in capital); and sets out several exceptions to the valuation requirement. The details of the valuation procedure are set out in sections 108ff (qv).

Subsection (1). Sets out the requirement for independent valuation where shares in a public company are allocated for non-cash consideration. It is not limited to the case where shares are issued when a company is incorporated or commences business (cf. s102(1)). It also provides that allotment must take place within six months of receipt of the valuation report; and that a copy of the report must be sent to the proposed allottee. Neither of these requirements is in the Directive, but both seem sensible.

Subsection (2). Makes an exception to the valuation requirement where the payment up (or part of it) is by the company in the form of the application of reserves or of the profit and loss account. Arguably, payment up from reserves etc is not “for consideration” for the purposes of Articles 10 and 27.

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Subsections (3) and (4). Read with subsection (7)(a) make an exception from the valuation requirement for shares issued as part of a share exchange under a company’s compromise with its creditors or members (section 425), provided that the shares issued are available on equal terms to the shareholders of the other company; and for the issue of shares to a liquidator in return for the assets of a company being wound up (section 110 of the Insolvency Act).

Subsection (5). Makes an exemption from the valuation requirement for shares allotted in connection with a merger with another company by share exchange. This takes advantage of the Member State option in Article 27.3 of the Second Directive.

Subsection (6). Provides the necessary sanction for breach of subsection (1). As with section 102, the allottee is liable to pay the whole of the nominal value and premium, plus interest at the

“appropriate rate”. Here too, if NPV becomes available, this will need to be reformulated in terms of the whole amount payable.

Subsection (7). Defines an arrangement for the purpose of subsection (3) and makes clear that the company in subsections (3) and (5) other than that allotting shares need not be a public company.

Given the basic requirement in Article 10, all of the above provisions seem to be good policy.

But it is for consideration first, whether by legislating expressly to ensure a purposive

interpretation of Article 10 and subsection (1), the need for the detail in subsections (2), (3), (4), (5) and (7) could be avoided altogether; and second, whether the effect of those sections could be achieved by shorter and plain language statements of the purpose of each provision, placing more reliance on the discretion of the courts to deal with hard cases and evasions.

Section 104

This section implements Article 11 of the Second Directive, which imposes a valuation requirement where a public company, within two years of incorporation or commencement of business, acquires from a signatory of the document of incorporation an asset for a consideration of at least one tenth of the subscribed capital. This is aimed at the purchase by the company of property from the promoters at an inflated price. It should be noted that the statutory provision, like Article 11, refers to the subscribers, who may or may not be the true promoters.

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Subsection (1). Prohibits, for a public company, such an acquisition unless the conditions in the following subsections are fulfilled.

Subsection (2). Provides for the two year duration of the prohibition.

Subsection (3). Extends the rule, mutatis mutandis, to the case of a private company re-registering as a public company.

Subsection (4). Sets out the conditions relating to the valuation. There must have been an independent valuation under section 109 of the consideration for the asset; the valuation report must have been made to the company no more than six months before the agreement to the transaction; the agreement must have been approved by an ordinary resolution of the

shareholders (a requirement of Article 11); copies of the resolution must have been circulated.

Subsection (5). Adds two elements of precision:

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the case is covered where the asset is transferred to a third party but an advantage accrues to the company; and

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the requirement for a valuation report is without prejudice to any requirement for a valuation report required for the purposes of section 103.

Subsection (6). Exempts agreements in the following circumstances:

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where it is part of the company’s ordinary business to acquire assets of the kind in question. (This exemption is provided in Article 11.2); and

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where the agreement is entered into under the supervision of the court for the purpose of transferring an asset from one company to another.

Given Article 11, it is intended to retain the provisions of this section in substance.

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Section 105

This provides the sanction for breach of section 104.

Subsection (1). Provides that the breaches covered are:

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failure of the person entering into an agreement with the company to receive a valuer’s report; and

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certain defects in the preparation of the report which that person was or ought to have been aware of.

Subsection (2). Provides that the sanction is recovery by the company of the consideration for the asset or of an amount equal to the value of the consideration.

Subsection (3). Covers the case where the agreement is, or includes, an agreement for the allotment of shares as well as the transfer of an asset to the company. In that case, the provision for the recovery of consideration does not apply to the allotment of shares; but the person concerned is liable to pay the nominal value of the shares and any premium.

It is intended to retain provision on the lines of this section.

Section 106

This provides that shares taken by a subscriber to a public company’s Memorandum in pursuance of an undertaking in the Memorandum, and any premium, must be paid up in cash. The point of this is not that payment up must be in full, but that the consideration must be cash. Payment up in cash includes, in addition to the handing over of actual cash, the giving of a cheque which the directors have no reason to think will be dishonoured, the release of a liability of the company and a promise to pay cash at a future date (section 738(2)).

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The provision made by this section will need to be reformulated in terms of the founder shareholders and the shares of each recorded in the new Registration Form (see analysis of company

formation). It would also need to take account of any move to an NPV environment. The inclusion in the definition of payment up in cash of a promise to pay at a (possibly far distant) future date may open the door to evasion. More generally, the definition of “cash”, as it applies in all these provisions relating to payment up in cash and non-cash consideration, may require review in the light of the requirements of the Second Directive.

Section 107

This defines the “appropriate” rate of interest for the purpose of the preceding provisions as 5%

or such other rate as the Secretary of State by Order provides. No orders have been made under this section despite wide fluctuation in commercial rates over the period, and the need for a statutory provision is unclear. It is proposed to delete this provision and to qualify the rate of

or such other rate as the Secretary of State by Order provides. No orders have been made under this section despite wide fluctuation in commercial rates over the period, and the need for a statutory provision is unclear. It is proposed to delete this provision and to qualify the rate of

In document PROJECTE DE MILLORA DE LA INTERSECCIÓ DELS CARRERS LLUIS COMPANYS, PASSADA I RAMON TURRÓ A PALAFOLLS (Maresme) Juliol 2017 (página 90-93)