Short Notes-Shares DADA AFA

Write short notes on the following:

Shares
A share is the measure of interest in a company. For instance, if company
A is registered with 500 shares, and Mr. Banku (a member) owns 100 of
the company’s total shares, Mr. Banku has 20% share interest in company
in its loose sense.
Shares are the primary means by which a company raises capital and
long-term funds. Shares constitute equity. Shareholders contribute to the
working capital of the company, and can in loose terms own a fraction of
the company.
Section 3 of the First Schedule to Act 179(Companies Code), defines
shares as the interest of members in a body corporate who are entitled to
share in the capital or income of such body corporate.
The definition of a share was beautifully outlined in Borland’s Trustee v
Steel Brothers.
Farwell J, held obiter dictum that;
“A share is the interest of the shareholder in the company,
measured by the sum of money for the purpose of liability in the
first place, and interest in the second, but also consisting of a
series of mutual covenants entered into by all shareholders inter
se, in accordance with the relevant sections of the company’s
code’’.

Preference Shares
They refer to shares by whatever name, which does not entitle the holder
any right to participate beyond a specific amount in any distribution,
whether by way of dividend or on redemption in the winding up or
otherwise. (section 48)
These type of shares are entitled to a preferential treatment when
dividends are declared. Example; a 5 % preference shareholder must
receive dividend of 5% of the of the contribution of the preference
shareholder (5/100x1,000,000 shares= Ghc5000) dividend, before
anything can be paid to the ordinary shares.
A preference share relates to a specified participation in respect of
distributions. Under section 51(4) of Act 179, preference shares do not
have a right to participate in profit sharing, which is more than a
percentage of their preference share, unless expressly stated in the
regulations. In other words, a preference shareholder as to dividends, gets
paid for his specified dividends when declared. After being paid such
Short Notes-Shares DADA AFA

amount, the preferential shareholder as to dividends, cannot participate in

any excess profits that are being distributed as dividends to other
shareholders.
Preference shareholders do not have any right to participate in the share
surplus of the company. Case in point; Will v United Lankat Plantation
Company

The same principle applies to preference shares that relate to winding up,
save that the distribution is not of the company as going concern but it is
of the return of capital shareholders after creditors have been paid off. In
construing provisions of a company’s regulations, if any class of shares is
expressed to have preferential rights to payment out of the assets of the
company in the vent of winding up, then, unless a contrary intention is
expressed, such a preferential shareholder as to repayment on winding up
has no further right to participate in the distribution of assets in the
winding up (section 51(5)). In other words, in the event of winding up, a
preferential shareholder as to repayment of capital on winding up has his
capital returned to him first, after creditors have been paid and thereby
gets paid off for his investment in the company.
Unless otherwise stated, a right to preferential shares is deemed a right to
cumulative dividend. A cumulative preference share, entitles its holder to
receive to receive full dividends when declared and also for previous
periods before share dividends are payable on other share types.
Example; if a 10% preference shareholder receives 5% dividend in 2010,
5% in 2011 and NIL in 2012, then when dividends are declared in 2013, a
shareholder will be entitled to 30% total dividends before ordinary
shareholders can have any.
It may expressly provide that; by the terms of issue, that preference
shares are to non-cumulative or they also be deemed to be non-
cumulative by implication.
Case for reference is Staples v. East Man Photographic Materials.
The regulations of the company or the terms of issue may allow
preference shareholders to convert their shares into equity shares or non-
preferential shares.
Preference shares are deemed convertible if there is an option to convert
and inconvertible if there is no such option.
Where the terms of issue allow the company to require back the shares,
they are called redeemable preference shares (section 60) or
Non-Redeemable preference shares cannot be acquired back by the
company. Section 56(1)
Short Notes-Shares DADA AFA

Because of the relative security of preference shares, the regulation may

limit the rights of preference share in terms of voting and attending
meetings. Section 49(1)

Cumulative and Non-Cumulative Preference Shares

A cumulative preference share is one which entitles its holder to receive
his full dividends as declared for that and previous periods before
dividends are payable on other classes of shares. With respect to
cumulative dividends, “no dividend shall be payable on any shares
ranking subsequent thereto until all arears of the fixed dividend have
been paid” (section 51(b)).
A cumulative preference share contains a “dividend-arrear-payment
feature”. However, it does not mean that the cumulative preferential
dividends are payable every year and if not paid accumulate for every
that they are not paid. Rather, dividends are only payable when declared,
and “unless a contrary intention appears, no dividend shall be payable on
any shares unless the company shall resolve to declare such dividend”
(section 51(1)).
Convertible and Non-Convertible Preference Shares
Because of the relative advantages and disadvantages of preference
shares regarding risk and return, the company’s Regulations or the terms
of issue of the shares may permit preference shareholders to convert their
preference shares into equity shares. If a preference share contains an
option to convert, it is convertible, if not, it is non-convertible.
Redeemable and Non-Redeemable Preference Shares
A non-redeemable preference share, cannot be so acquired back by the
issuing company, whether at the instance of the company or the
shareholder. Redeemable on the other hand, can be so acquired, but only
in strict compliance with sections 59 to 63 of the Act.
Suspension of voting rights of preference shareholders
Because of the relative security of preference shares, the regulation may
limit the rights of preference share in terms of voting and attending
meetings-Section 49(1)
Short Notes-Shares DADA AFA

This will usually apply when there are no arrears of dividends payable to
the preference shareholders or when they have not fully paid for the
shares which they hold. The rationale is that since preference
shareholders will be entitled in any event to participate up to a specified
amount, their pecuniary interests are well-secured and it should be the
risk-takers and the profit-drivers who should be given the privilege to
participate in meetings.
Note: the code preserves certain rights of preference shareholders which
cannot be taken away by the regulations of the company (section 49(2)).
The preference shareholder shall have a right to attend general meeting
and when the poll is called, is entitled to one vote on the following
resolutions:
1. When after the due date of dividends, the whole or part of the
preferential dividends are in arrears and unpaid, preference
shareholders have the right to attend and vote upon any resolution-
section 49(2)(a). The Regulations may stipulate that the period may
start from a date up to or less than 12 months after the due date of
the dividend. A dividend shall be deemed to be due on the date
appointed in the Regulations for payment for any year or other
period-section 49(4)
2. On a resolution which varies the right entitled to the preference
shareholder-section 49(2)(b). Audi Alteram Partem: hear the other
side. In accordance with this legal maxim, no move can be made to
vary the rights of a preference shareholder without affording the
class concerned the opportunity of stating its case or opposing such
a move at a general meeting.
3. On a resolution to remove or change an auditor or appoint one-
section 49(2)(c). As a class of members, the auditors cannot be
removed or a new one appointed in when preference shareholders
have been excluded from such a meeting. To permit such an
arrangement will conduce to defrauding members.
4. On a resolution for the winding up of the company.
5. During winding up, the preference shareholder will have the
preference in terms of the return of the share capital, after creditors
have paid off.
The common feature of preference shares is that, they assume less risk
than equity shares, and they create more security and certainty as to
the returns on them, although they do not necessarily generate a
larger distribution.

Equity Shares
Any other share by whatever name called in the regulation which is not a
preference share is an equity share. It is also called an ordinary share. A
Short Notes-Shares DADA AFA

disadvantage is that its shareholders are entitled to dividends only after

the dividends of the preference shareholders have been distributed.
Equity shareholders rank behind preference shares for repayment of
capital upon winding up. They are entitled to the remaining assets of the
company after creditors and preferential holders have been paid their
dividends. Dividends of ordinary shareholders are not fixed & they go up
considerably with the profitability of the company.
Rights of Equity Shareholders
Fully paid-up equity shareholders shall have the right to attend any
general meeting of the company and to speak and vote on any resolution
before the meeting (sections 31 and 50).
Equity shareholders who are not fully paid up do not necessarily enjoy this
right. The company’s Regulations may provide that a member shall not be
entitled to attend and vote unless all calls or other sums payable by him
in respect of shares in company have been paid-Section 31.