CAPITAL & FINANCING OF

COMPANIES
Introduction
All companies need finances to run their businesses.
There are several sources of financing companies
They include:
1) Issuing of shares(capital markets)
2) Retained earnings
3) Issuing of debentures
4) Bank borrowings(long& short term bank loans)
5) Government sources
6) Leasing
7) Franchising
8) Business expansion schemes funds
9) Hire purchase
SHARES
 Any company limited by shares, its capital must be
divided into shares
Definition of a share
 According to Lord Farewell in the case of Borland’s
Trustee v Steel (1901) “ a share is the interest of the
shareholder in the company measured by a sum of
money , for the purpose of liability in the first place,
and of interest in the second , but also consisting of a
series of mutual covenants entered into by all the
shareholders inter se’ .
Key points in the definition
The share must be paid for(liability). The nominal
value of the share fixes this liability. The nominal
value is a unit of account/monetary value for
measuring a member’ interest in a company.
It gives a proportionate entitlement to dividends,
votes and any return on capital
It is a form of a bargain (mutual covenant) between
shareholders which underlies such principles as
majority control and minority protection
Once again, a share’s nominal value is its face value.
For example , a K2 ordinary share has a nominal
value of K2.
No share can be issued at a value below its nominal
value.
A share is a transferable form of property, carrying
rights and obligations by which the interest of a
member of a company limited by shares is measured
A person or a firm that holds one or more shares is a
shareholder.
Subscribers to the memorandum are deemed to be
members of the company, and logically its
shareholders.
Other persons or firms may acquire shares and
become members of the company:
 By applying and being allotted shares
 By presenting to the company for registration a
transfer of shares to them
 By applying as personal representative or trustee of :
 Deceased member
 Bankrupt member
Eight ways in which a shareholder
ceases to be one
 He transfers all his shares to another person and the
transfer is registered
 The member dies
 The shares of a bankrupt member are registered in
the name of his trustee
 A member who is a minor repudiates his shares
 The trustee of a bankrupt member disclaims his
shares
 The company forfeits or accepts the surrender of
shares
 The company sells them in exercise of a lien
 The company is dissolved and ceases to exist
 Sources of information about special rights attached
to shares are the following:
 The Articles, which are the normal context in which
share rights are defined
 A resolution or an agreement incidental to the
creation of a new class of shares
 A statement of capital given to the within one month
of allotment, together with the return of allotment
TYPES OF CAPITAL
 The term capital is used in several senses in company
law, to mean issued, allotted or called up share capital
or loan capital.
1) Authorised share capital
 A company indicates in its memorandum its
maximum share capital. This is what is called
authorised share capital or registered share capital or
nominal capital. Say K50m or K100m
 In normal cases this is not issued all at once by the
company.
2) Issued and allotted share capital
 This is the aggregate nominal value of the share which
the company issues to the public
 It is the type, class ,number and amount of the shares
issued and allotted to specific shareholders , including
shares taken on formation by the subscribers to the
memorandum.
 Unissued share capital on the other hand, is the
remaining nominal share capital after the issued share
capital.
3) Called up share capital – this is the amount of
money which the company has required shareholders
to pay now or in the future on the shares issued. It may
also mean the aggregate amount of the calls made on
the share.
4) Paid up share capital - this is the amount which
shareholders have actually paid on the issued and
called up shares
5)Loan capital – this comprises of debentures and other
long-term loans to a business . Loan capital unlike
what has just been said above, is the term used to
describe borrowed money obtained usually by the
issue of debentures. It has nothing to with shares.
Share certificate
As already stated, an allotment of shares will be
accompanied by a share certificate within two months
A share certificate is evidence of the fact that the allot
tee holds specified shares in that company.
The contents of the share certificate are the name ,
address and occupation of allot tee, number and class
of shares and whether they are fully paid for or not.
Share warrant v Share certificate
A company limited by shares is prohibited from
issuing a share warrant in respect of any of its
shares.(Sec 45 of the Act)
There are two differences between a share certificate
and a share warrant.
 A warrant will state that the holder(bearer) and not the
person named in it, is entitled to the shares specified in
it
 A share certificate on the other hand ,is a negotiable
instrument just like a cheque. This makes it an easy
target for fraud
Classification of shares/Types of shares
A company is allowed to classify its shares according
to the mode of payment and entitlement to dividends;
voting rights and return of capital etc(Sec 47)
Shares of the same class rank pari passu, meaning
they are at the same level , with the same rights or
restrictions.
Companies issue shares that are authorised by memo
or articles of the company and not any how.
1) Ordinary shares(main type)
 They are the most basic type of shares which a
company can issue
 If a company has one class of shares ,these will be
ordinary shares
 Where a company has more than one type of shares ,
it will have at least one ordinary share.
 The ordinary shares are at times referred to as a
residual class because they consist of rights that
remain after the rights of other classes of
shareholders have been satisfied
 They are sometimes described as equity capital
because they represent the owners’ stake in the
company and always carry the right to vote
 Ordinary shareholders control resolutions at general
meetings because they are usually in a majority.
2) Preference shares(main type)
 Holders of these shares have priority in the receipt of
dividends in any financial year
 The articles may also state that holders shall have
priority in the return of capital on the company’s
winding up
 If this is not stated, the assets of the company will be
distributed pari passu between the shareholders.
 Although these shareholders have priority in receiving
dividends when they are declared, they cannot compel
the company to declare them
 As a general rule, the right of a preference shareholder
to a dividend is cumulative for example, if given
nothing this year , then the following year he will be
given twice as much. Articles may provide that
preference shares are non-cumulative , and the right to
accumulation may cease to exist where the company is
going into liquidation.
 The right to vote is usually restricted except in class
meetings
 Preference shares are designed to appeal to investors
who want a steady return on their capital with high
level of safety.
3) Redeemable shares
 Generally a company may not buy back its own shares
from its members , it can only do so if the shares are
redeemable
 These are shares allotted , paid up and redeemable at the
company’s option or at the end of a specified period
4)Deferred shares
 These are shares issued to the founders of the company
 No dividend can be paid to deferred shareholders unless
ordinary shareholders are paid a certain amount of dividend in
that financial year.
Offering of Shares
 The Act states that shares must be offered to Shareholders first
 This right is called rights of issue or pre-emption rights.
Without this right the shareholders right to vote would be
reduced by outsiders
On the part of the company the pre-emption right
offers to the company the advantage of cutting paper
work and other expenses when offers are made to the
public.
Articles or a resolution may also offer shares to
directors, senior officers and employees of the
company to motivate them to work harder.
In the case of employees , it is referred to as
Employees Share Ownership Plan-ESOP
The articles or the resolution on ESOP must consider
a number of aspects for it to be credible
 Some aspects of ESOP/Scheme
a) To state if there are any restrictions on the number of
shares being offered
b) To state the method of administering the scheme
c) To the terms and conditions of payment for the shares
d) To state if there is any limitation on the transferability
of the shares
e) To state the voting and dividend rights of the would be
shareholders.
Note that the prohibition on transferring shares by a plc
is not imposed on shareholders of plc(sec 50 (3) but
certainly on directors, officers and employees.
Transfer of shares
It is important to note that transferring of shares by a
member is one of his rights and duties, as shares are part
of his estate just like motor vehicles and clothes.
A company can not therefore restrict the transferability of
shares.
Situations where restrictions are applicable
a) Where shares are not yet fully paid up for
b) Where the buyer is a minor or persons of unsound mind
c) Where shares are owned by directors , employees and
other officers of the company
d) Where the company is a private limited company
Shares transfer procedure
 It is transferred by a written instrument in the prescribed
form called share transfer form
 it can also be transferred in other form approved by the
directors
 The instrument must be executed by both the transferor and
the transferee.
 It must be executed by the transferor or someone acting on
his behalf
 Until the instrument is registered and a share certificate
bearing new owners is issued within two months by the
company ,the transferee does not enjoy any rights on the
shares.
Conditions for transmission of shares
under sec.54(4) of the law
1) Death-where a shareholder dies, his survivor, where
he was a joint share holder or legal representative
can be registered as a shareholder in his place.
2) Bankruptcy- Under the Bankruptcy Act , where a
member is declared bankrupt, ownership devolves to
his trustee in bankruptcy
3) Receivership or Liquidation -where a company
goes into liquidation, ownership of shares which the
company holds in another company will be sent to
its receiver or liquidator as the case may be.
Offering shares to the Public
Section 164 of the Act allows a public company to
issue shares to the public , and any other company it is
illegal to do so.
Shares are offered to the public voluntarily or
involuntarily
The most common practice is voluntarily-where a
company issues the shares freely to the public
In rare cases , the company may be forced to do so
(involuntarily) by the minister of finance in the
economic interest of the country so that the locals
should take part in the company’s capital
structure(Sec.3).
The prospectus
 This is the document which provides information to the public
about the company, highlighting the benefits of investing in this
company.
Contents of the Prospectus
1) Full name of the company
2) The situation of the company’s registered office
3) The nature of the company’s business and its brief history
4) Details of the company’s directors
5) The company’s authorised capital
6) Full description of the securities which the public are invited to
acquire
7) Auditors report on the company’s profits, losses, assets and
liabilities.
8) Details of the company’s auditors
9) Details of the company’s bankers, stockbrokers and
legal practitioners.
10 Details of the underwriter if any
Invitation to the Public
 Once again , only plcs are allowed to invite the public
to buy shares from them. For others , this is a crime.
 An invitation to the public is acceptable in the
following conditions/instances:
a) Publishing through newspaper, broadcasting or other
means
b) Can be made to any section of the public comprising
of more than 15 persons
c) Can be made to any person that he may renounce or
assign the benefit of his shares to another person
d) The issue of any form of application for shares or
debentures will be deemed to be an invitation to
acquire those shares
Liability for Misrepresentations in the
prospectus
 The liability for misrepresentations in prospectuses by
companies may either be criminal or civil. The
following are some of the liabilities for
misrepresentations in the prospectus
1) Civil liability under the Act(sec 173)
 It occurs where a person suffers loss because of
acquiring shares in a company in reliance on false or
misleading information in a prospectus.
 In that case , he is entitled to compensation from the
directors or anyone who made the invitation.
2) Civil liability under common law
 This occurs where an innocent party is affected by a
misstatement in a prospectus
 It has two remedies
 He may claim damages where the statements are made
fraudulently. Eg Derry v Peek (1899) when directors cheated
that they had acquired a licence to operate a train run by steam
power at a time when they were all run by animals/horses
 The innocent party may just rescind from the contract eg Re
Pacaya Rubber& Produce [Link] (1924) where a company
invited subscribers for shares for the purpose of buying a rubber
estate. The prospectus contained extracts from the report of an
expert on the value of the estate. The report ended up being false.
3) Criminal liability under the Act(sec 176)
 This arises where any person authorizes publication of a
prospectus containing a false statement, that person
commits a crime.
 it is also a crime to deceptively induce any person to offer
or accept shares .
 These crimes attract a seven year imprisonment and a fine.

The Capital Market Development Act(1990) - in respect

to publicly trading company securities, this Act requires
certain disclosures and prohibits a number of activities.
 This Act also establishes the Malawi Stock Exchange
Market, which is controlled by regulations called Listing
rules.
Examples of disclosures
 Every issuer of securities eg shares, stocks , treasury bills
etc must disclose all material information to the public and
the capital market
 The issuer must disclose his business and must provide
periodic reports to the stakeholders eg brokers, dealers,
underwriters etc
Examples of prohibited activities- bribery, pegging and
inside dealing
Consideration for Shares
 No company shares can be allotted free.
 The company ought to receive some consideration
from the allot tee
 Consideration must be in the form of cash, property,
goodwill or the entire business undertaking
 Where consideration is not paid, the allot tee will be
liable to pay the full nominal value of the shares and
any premium payable on them
 There are a number of differences in payment for
shares between a public and private company, because
the public company has strict regulations.
Public & Private company differences in
paying for shares
1) A public company must not accept as payment for its shares an
undertaking to do work or perform services for the company
2) There is no minimum payment for a private company
3) In case of payment by non cash asset , the asset must be transferred to
the public company within the minimum period required
4) For non cash asset transfer to the public company, the asset must be
independently valued by an expert and report made to the company
5) A public company cannot acquire non cash assets from its subscribers
in the two years following registration unless such assets were
independently valued by an expert and a report made to the company
6) The subscriber to the memo of the public company must pay cash for
shares taken in pursuance of an undertaking in the memorandum.
Maintenance of capital share
 Capital share must be maintained at all cost as it enables the
company to run its business.
 It also enables the company to discharge its debts and
liabilities at the time of liquidation.
 Because of the need to maintain capital share the law
provides rules so as to protect it, some of them are the
following:
1) Prohibition of the return of capital while the company is
a going concern– while the company is a going concern it
is not allowed to return its paid up capital to its members or
reduce their liability. Capital can only be paid up at winding
up the company and only after the creditors have been paid.
 However , there are two exceptions to the said
prohibition
1) The company can legally redeem its redeemable
shares leading to reduction of capital
2) The company can reduce its capital in an authorised
manner under the Act. It is important to note that the
only allowed payment by the company to its
members is through dividends.
2) Prohibition of financial assistance by a company
for the purchase of its shares
 It is unlawful for a company to give financial assistance by
means of a loan or guarantee or provision of security to any
person for the purposes of purchasing its shares or those of
its holding company(Sec 72(1).
 It is therefore very clear that a subsidiary company is not
allowed to assist financially any person to buy the shares of
its holding company. This is so because the holding
company will have advanced money to the subsidiary
company in exchange for its shares.
Exceptions to Section 72(1)
 That is, it will not be an offence under sec 72(1) for a
registered company to:
1) Lend money in the course of its business where money
lending is part of that business.
2) Provide money as part of a scheme for the purchase of
fully paid-up shares in the company by the employees
3) Grant loans to its employees to enable them purchase
fully paid up shares
3) Prohibition of the acquisition by a company of its own
shares
 Section 73(1) prohibits a registered company which is
limited by shares from holding an interest in its own
shares.
 The example case of this is that of Trevor vs Whitworth(1887)
where a shareholder sold his shares to his company and
received part of the payment . When the company went into
liquidation, he brought an action to claim the balance. In court,
it was held that he could not recover the money because a
company is not allowed to buy its own shares except where the
law allows [Link] where the company is redeeming redeemable
shares.
 Redemption of redeemable shares
 Once redeemable shares are redeemed, they are cancelled and
their nominal value is deducted from the company’s share
capital account. No redeemable share can be redeemed unless
it is fully paid up
 Once again , remember that a company can bring its capital
back to amount authorised by its memo in two ways
a) By raising more share capital
b) By retaining profits which should have been declared
dividends
Payment of Commission or Discount on shares
 A company is considered to have offered its shares at a
discount if the consideration it receives is less than the
shares ‘ nominal value.
 Once again, a company is not allowed to offer its shares
at a discount
 It is also not allowed to use its contributed capital for payment
of a commission or allowance to any person because he has
subscribed to the company’s shares.
 There is indeed temptation to give a discount or allowance to
new allot tees because the shares market value at that point is
high than its nominal value.
An allowable commission – this can only be paid where a
company does not want to sell its shares own its own. In that
case they engage an Underwriter to sell the shares on its
behalf. So the underwriter agrees to sell remaining shares of the
company for a certain commission which should not exceed
10% of the nominal value. The rate of the commission should
be communicated to the Registrar before payment.
 A company is also allowed to pay a reasonable brokerage for its
shares.
 A brokerage is a fee paid to a person or a company which
introduces your company to potential shareholders. The brokerage
is only paid to a person who is registered as a broker and not any
other person.
Application of share premiums
 Section 61 of the Act allows a company to issue shares at a
premium as long as it is allowed by its memo or articles.
 The premium must have its on account and not combined with that
of the share capital- now to be called Share premium account. It
is treated as the company’s paid up share capital and dividend can
be declared from it
Special procedures that may reduce hare
premium account
a) To pay for unissued shares of the company to be
issued to its members as fully paid-up bonus shares
b) To write off the company’s preliminary expenses
c) Writing off expenses incurred in the issue of any of
its shares or debentures
d) To provide the premium(interest) payable on the
redemption of redeemable shares
e) To provide the premium(interest) payable on the
redemption of any debentures of the company
Payment of dividends
A company is formed with the sole purpose of making
profits for its members
The profits are then distributed as dividends
A company by guarantee cannot pay dividend as it is
not a trading company but a charitable organisation in
nature
A dividend is that portion of a company’s profit
legally available for distribution to its members.
A dividend my be interim or final
An interim dividend is the one paid between annual
general meetings by directors
A final dividend on the other hand is declared at a
general meeting and usually it is at the close of the
financial year. The general meeting declares the final
dividend following recommendations from the
directors
To ensure that the distribution does not involve
unauthorised reduction of share capital, dividend can
only be made out of profits
Section 74 prohibits a company from dealing with
unrealized capital profits in its Profit and Loss account
Reduction of share capital
It is certainly important to maintain share capital,
however it should also be noted that the law allows a
company to reduce its capital by a special resolution
The legal reduction of the capital can be allowed in
three ways:
a) Extinguishing or reducing outstanding liability on
partly paid up shares( similar to bad debts)- in other
words to decrease the share capital in the amount of
issued share capital. In other words it means that the
company will no longer make further calls on wholly
unpaid or partly paid shares
2) Cancelling paid up share capital which is lost or not
represented by available assets, otherwise the company
will be overstating its liquidity. This is also called
diminution of capital. This is also understood as the
decrease in the nominal capital of the company

3) Paying off paid-up share capital which is excess of the

wants of the company. That is, refunds. Where a private
company converts into a public company, and makes an
initial public offer(IPO) its may be oversubscribed and
it will need to reduce its capital by making refunds.
Once again, the procedure for the share capital
reduction is that:
a) Reduction must be authorized by the memo or
articles
b) The reduction is effected by a special resolution ;
then the capital clause of the memo is altered
accordingly, and the company must apply to the
High Court for an order of confirming the reduction
 The court does not simply endorse the reduction but
also looks at whether procedures have been complied
with or not.
The Court Order must be sent to the registrar
together with a Minute containing:
a) The company’s new share capital
b) The number of shares into which it will now be
divided
c) The amount to be deemed paid up on each share as at
the date of registration
In principle, the Court Order and the Minute
marks the reduction of the share capital.
Protection of creditors in the event of
reduction of capital
 If the reduction of share capital affects creditors, the court will
not give its confirming order unless the court first settles the
list of creditors who are objecting to the reduction
 The court will not make the confirming order unless the
creditors:
1) Agree or consent to the reduction of capital; or
2) Are paid off; or
3) Are given adequate or acceptable security

THE END