Economy Departmental Store Limited was incorporated in December 1970 with an authorized share capital of 5,000,000 shares of Sh. 10 each. The share capital is fully issued and fully paid. The original articles of association gave the directors authority to issue the initial authorized share capital.
The directors are proposing to purchase a small shop from Jijenge Holdings for Sh. 3,000,000 and to finance the purchase a fresh issue of 2,000,000 shares of Sh. 10 each to Jijenge Holdings. In order to re-equip the shop they propose to raise additional capital issuing a further 2,000,000 shares of Sh. 10 each. The directors propose that 1,000,000 of these shares should be offered to existing shareholders and 1,000,000 to the general public. All the additional shares are to be offered at Sh. 15 for each Sh. 10 par value share.
(a) What preliminary information must the directors check and what steps must they follow in order to effect these proposals?
(b) What are the rights of the existing shareholders in respect of the proposed additional issue of 4,000,000 share?
(c) What limitations are there on the uses to which the premium on the shares can be put?
This problem is based on raising of capital companies and acquisition of assets in this case directors:
• Must in the first instance ensure that the company has the necessary power to increase its capital.
• Such power is embodied in the articles and requires an ordinary resolution of members in general meeting.
• If the power exists they must convene an extra ordinary general meeting to pass the requisite resolution to authorize the increase.
• Notice of the increase of capital must be submitted to the registrar in a prescribed form. The notice must set out the particulars of the new shares.
• A copy of the ordinary resolution and the memorandum of association as amended must accompany the notice.
• Must check and confirm if they are empowered to allot shares.
• This power is conferred the articles or an ordinary resolution of members in general meeting. If the authority required is conditional or insufficient a special resolution is necessary to authorize the increase of authorized share capital. A copy of the resolution must be delivered to the registrar for registration.
• To dispense with pre-emption rights to issue shares to the public shareholders must pass a special resolution. Notice of the meeting to pass the resolution must be given.
• Must obtain an independent valuation of the business of Jijenge Holdings. The report must be made a qualified person to an auditor of the company and submitted to the company within 6 months of allotment.
• Allotment of shares for cash requires that they must in the first instance be offered to existing members in proportion to their current holding.
• The shares may be offered on the same terms or more favourable than to non- members.
• These pre-emption rights do not apply to equity security for non cash consideration.
• Existing shareholders are entitled to a written offer of the shares.
• In the event of contravention of their rights they are entitled to compensation for the resulting loss, damage, costs and expenses.
• These rights exist unless dispensed with the afore-mentioned special resolution.
• Reduction of the share premium account is subject to the same rules as they relate to the reduction of capital.
• If a company issues shares at a premium for cash or otherwise it must create the share premium account which consists of the aggregate amount of those premiums.
• It cannot be distributed as dividend.
• It can only be applied to:
Write off the preliminary expenses of the company
Write off the expenses of or commission paid or discount allowed on any issue of shares or debentures of the company
Pay up unissued shares of the company to be issued to members as fully paid bonus shares
Provide for the premium payable on redemption of any redemptable preference shares or debentures of the company.
Otherwise the share premium account is treated as part of the paid up share capital of the company.