Dover Shares Len Hing

Dover LTD, a manufacturing coma which has been experiencing some financial problems, is seeking your legal advice with respect to their current proposal to allot shares to Len hing Ltd, one of Dover's ltd's major suppliers of parts.

They have provided you with the following information concerning their proposal:

Dover Ltd has an authorised share capital of 350,000 divided into shares with a nominal value of £1 of which £270,000 has been issued. len hing Ltyd has indicated that it is prepared to make a loan to dover Ltd on very advantageous terms on condition that it (Len hing Ltd) is given opportunity to acquire shares in Dover Ltd.

The board is proposing that dover Ltd should make a new issue of 120,000 shares and that all these shares should be allotted to Len hing ltd. currently shares in dover ltd have a market value of only 70 p and thus the board proposes that the shares be issued at that price.

The board wants to offer len hing Ltd the option of either paying cash for the shares or supplying parts in return for the allotment of the shares.

Draft a memorandum for Dover ltd's board setting out the statutory constraints and the requirements, including the procedures, that will need to be satisfied in order to effect their proposal

MEMORANDUM

To:The Board of Directors, Dover Ltd

From: A N Solicitor

Date: 17 May 2005

Re:Share Allocation Proposal Re: Len Hing Limited

Introduction and General Analysis

Dover Ltd (“The Company”) wants legal advice for their current proposal to allot shares to Len hing Ltd (“LHL”), who are a supplier of parts. Information regarding their proposal is: Dover Ltd has an authorised share capital of 350,000 divided into shares with a nominal value of £1 of which £270,000 has been issued. Len hing Ltd is prepared to make a loan to Dover Ltd on condition that Len hing Ltd is given opportunity to acquire shares in Dover Ltd. The board is proposing that Dover Ltd should make a new issue of 120,000 shares and they should all be allocated to Len hing Ltd. The board is also proposing that the shares should be issued at the current market value, which is 70p. The board wants to give Len hing Ltd 2 options: pay cash for the shares or supplying parts in return for the allotment of the shares.

Legal Issues

1. Increase in share capital is required, as the company does not have enough authorised share capital

2. Changes in Capital, correct procedure followed? Application of provisions of Section 121 of Companies Act 1989.

3. Any pre-emption rights?

4. Implications of taking loan in return for shares

5. Cash or parts of equal value

Application

The Companies Act 1985, Section 1 requires every company to have a memorandum which sets out its name, registered office object clause etc and regulates its dealings with the outsiders. The Articles of Association regulates its internal affairs such as director’s powers, conduct of board meetings etc.

The Memorandum of the company specifies the amount of the nominal capital the company is authorised to issue to its members. If the need arises to issue more shares than the company is authorised then the share capital may be increased by an ordinary resolution of the members in general meeting, provided the articles of the company allow this. Table A that has been adopted by the company, allows it to increase its capital. The company has authorised share capital of 350,000 and issued share capital of 270,000. The company still has capacity to issue 80,000 shares without increasing its share capital. The proposed issue of 120,000 shares to LHL needs additional 40,000 shares to be issued however the company does not have enough nominal capital to issue extra shares. If the articles of the company give power to do so, the nominal capital may be increased by approval of the members by ordinary resolution in general meeting. It will be necessary to authorise the directors to issue shares by ordinary resolution and such an authority can be granted for up to five years.

The power bestowed up on the directors by section 80 of the Companies Act 85/89 would enable them to issue shares provided that the company has sufficient authorised share capital stated in the Memorandum of Association of the company. In addition to this clause 32 of the Table A authorises the company to increase its share capital by ordinary resolution of the members

Before the issue of shares it would be necessary to check if there are any pre-emption rights available to existing shareholder where by company has to offer new shares to its existing members first. This provision does not apply to non-cash consideration. The company has been offered parts as payment for shares and if the company accepts this, then pre-emption rights will not be affected.

Once the shares are issued and allotted, the members register needs to be amended to reflect LHL as new shareholders. Form 123 has to be filed at the Companies House with a copy of the resolution within 15 days. If the company decides to issue different class of shares then it will also have to file form 128 at the Companies House.

Issue of shares at discount: The nominal value of the companies shares is £1 although

the market value of the shares currently is 70p. However this does not allow the company to issue its shares at that price which is at 30p discount on a share. Pursuant to section 100 of the Act shares must not be issued at a discount, i.e. less than its nominal value. Full nominal value must be paid. One exception to the rule is: when shares are issued by a private company for an overvalued non-cash consideration, then this is a discount, as in Re Wragg Ltd, post.

LHL is willing to make a loan to the Company on very favourable terms although it is not clear from the question what those terms are or whether any assets of the company are required to be used as a collateral for the loan. This will also increase the company’s gearing and may cause problem if the company wish to raise further finance in the future.

The Memorandum of the company specifies the amount of the nominal capital it is allowed to issue to its members. If at a later stage, a company wishes to increase its share capital it may only do so by an ordinary resolution of the members in general meeting,

Provided the articles of the company allow this. Table A allows the company to increase its capital.

Conclusion

By issuing 120000 new shares the shareholding of the existing shareholders is going to be

diluted, which some members may not agree to, as their power to influence the decision will be reduced. If on the other hand company issues new shares then the equity finance, although it may demand dividend payments and other rights, it would not affect the company’s borrowing capacity.

If the company issues shares, it has to make sure the pre-emption rights which are granted under the provisions of Table A, have to be disapplied by application of section 91 of the Companies Act 1989. Although additional issue of share would dilute the control of existing shareholders and affect their ability to vote on resolutions, it will not affect company’s gearing. A way round this is to issue different types of shares such as Class A or Class B shares without voting rights or restricted voting rights which would retain company’s independence to make decisions regarding their business and at the same time raise finance from the LHL.

Bibliography and References

1. Business Law and Practice by Scott Slorach & Jason Ellis published by Blackstone press.
2. Business Law by Stephen Judge, second edition published by Macmillan law masters.
3. The Companies Act 1989, CCH
4. Guide to Company law/www.companyregistrations.com
5. Company Law by Charlesworth & Morse, 16^th ed, published by Sweet & Maxwell

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