Shares and Business Law: Allotment and Registration

3155 words (13 pages) Essay

18th Sep 2017 Law Reference this

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Question 1

There are many things that Jim will have to consider but there are three main steps that he will have to follow. Most of the authority for issue of shares come from the articles of association (table A) with rest being contained in the Companies Act 1985. First he and the company would have to decide to issue the shares and set the terms of issue. Secondly, some person or persons must agree with the company to take the shares. Third, in implementation of that contract, those persons must take the shares and be made members of the company.

Section 80A of the Companies Act 1985 provides that direction shall not exercise any power of the company to allot shares in the company or rights to subscribe for, or convert into, shares in the company unless they are authorised by the company in general meeting or by the company’s articles. Any authority, whether given in the articles or by resolution must state the maximum number of securities which can be issues under it and the date at which the authority will expire. Contravention of the section does not affect the validity of any allotment made[1] but any director, who “knowingly and wilfully” permits it, is liable to a fine[2].

Jim will have a choice of various methods whereby the companies securities can be offered to the public. Here we can see that he has engaged the services of an issuing house.

The next thing Jim would have had to consider would have been whether or not there were any pre-emptive rights that is where there circumstances that existed that meant that existing shareholders rather than the general public should be offered the shares first[3]. This did obviously not arise here as Jim was a sole trader.

Jim will then have to make a decision as to the price at which the securities should be issued. This is a difficult decision to arrive at as if the shares are set to low so that the issue is heavily over-subscribed, the company (and holding house) will be unhappy were as if they are set too high so that much of the issue is left with the underwriters it is they that will be uhappy

Next Jim will have to deal with Allotment and Registration of the new share issue. The process of becoming a shares holder is a two-step one, involving fist a contract and then registration of the member. The processes of agreement and registration will be achieved with little formality and without the issue of allotment letters. If someone wants to become a shareholder and the company wants him to, he will be entered on the register and issued with a share certificate.

Allotment does not make a person a member of the company. Entry in the register of members is also need to give the allotee legal title to the shares. Section 22(2) says explicitly that a person “who agrees to become a member of the company and whose name is entered on the register of members is a member of the company[4]

Question 2

In addition to compliance with the detailed provisions that are contained in the listing rules, s80 (1) of the Financial Services and Marketing Act 2000, implementing Article 21 (1) of the Listing Directive, adds an important “sweeping up”, requirement that the prospectus submitted to the FSA “shall contain all such information as investors and their professional advisors would reasonable require and reasonably expect to find” for the purpose of assessing the financial position of the issuer and the nature of the securities on offer:

“Those who issue a prospectus, holding out to the public the great advantages which will accrue to persons who will take those shares… and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature, or extent, or quality of the privileges and advantages which the prospectus holds out as inducements to take shares[5]

To determine whether or not the information that a rival café chain had commenced legal proceedings against the company alleging that the design of its outlets and products infringed their intellectual property rights should have been disclosed in the prospectus to Zara s80(4)permits regard to be had not only to the nature of the issuer and of the securities but also to the nature of the persons likely to consider acquiring the securities, the knowledge which their professional advisers may be expected to have and to information already in the public domain by virtue of its publication under statutory or regulatory requirements. We are not made aware of any information about Zara’s advisers however the information is not information that is required to be in the public domain as a claim has been brought not actually heard. If the claim had been heard at court and been successful then it may fall in the public domain, therefore on this basis it is information that should have been disclosed in the prospectus.

The next question that falls to be addressed as to whether Jim and JZ Horgan were persons who were responsible for the prospectus and this can be determined by reference to regulation 13 of the Public Offers of Securities Regulations.[6] The persons responsible are:

  1. The issuer (the company)
  2. The directors of the Issuer
  3. Each person who has authorised himself to be named, and is named, as having agreed to become a director, whether immediately or at a future time:
  4. Each person who accepts , and is stated as accepting, responsibility for, or for any part of, the prospectus
  5. Each other person who has authorised the contents o f the prospectus or any part of it: and
  6. The offeror of the securities and its directors where It is not the issuer

It can therefore be seen that both Jim an JZ Horgan will be persons who are responsible to Zara and may therefore be required to indemnify her.

JZ Horgan and Jim are responsible for the prospectus and are liable to pay compensation to any person who has acquired any of the securities to which it relates and suffered loss as a result of any untrue or misleading statement in it or of the omission of any matter required to be included under the Act or regulations[7]. The provisions do not require Zara to show that she relied on the misstatement in order to establish a cause of action, but she must be able to show at least a casual link between the misstatement or omission and the loss will have to be proven. Zara has said that she would not have bought the securities had she known about the action brought by the rival company. The loss is of course the one million pound that has been paid by the company and the resulting decrease in the value of the shares. As regards the bank, irrespective of their knowledge they will still be liable. This is because the statute does not require the maker of the statement to have “assumed responsibility” towards the claimant. Therefore Zara will be entitled to be compensated for the loss that she has suffered from.

JZ Horgan and Jim could raise a defence. The defences that are available to them are contained in schedule 10 and regulation 15 and they provide persons responsible for the misstatement or omissions with “exemptions”. They will be able to escape liability if they can satisfy the court (a) that he reasonably believed that there were no misstatements or omissions and that he had done all that could reasonably be expected to ensure that there were not any and that, if any came to his knowledge, they were corrected in time or (b) that the plaintiff acquired the securities with knowledge of the falsity of the statement or of the matter omitted. Where the statement in question is made by an expert and is stated to be included with the experts consent, these rules are applied to the belief that the expert was competent and had consented to the inclusion of this statement. It is unlikely that JZ Horgan and Jim will be able to establish that either these exemptions apply and therefore will be considered to be liable to pay compensation to Zara.

It should be noted that if for any reason this action to recover damages failed for any reason then Zara would be able to seek compensation against JZ Horgan and Jim in three other ways. The first would be damages at common law. The common law provides civil remedies for misrepresentations which have caused loss to those who have relied upon them[8]. Zara may well also have the common law option of her right to rescind the contract. The common law allows , in certain circumstances , claimants to rescind a contract entered into as a result of misrepresentation whether that misrepresentation is fraudulent , negligent or wholly innocent. Such a right would be actionable against the company only as the company is the person with whom Zara entered the contract with. The final alternative option would be to make a claim for breach of contract. The advantage of establishing this would be that the misrepresentee would have a claim in damages to be established to be assess on the contractual basis, rather than the tortious basis. Therefore Zara may be able to claim for heads of damages such as the loss of the expected profit on the shares.

Question 3

Jim’s obligation under s80 (1) of the Financial Services and Marketing Act 2000, implementing Article 21 (1) of the Listing Directive, that the prospectus submitted to the FSA “shall contain all such information as investors and their professional advisors would reasonable require and reasonably expect to find” is a continuing obligation. Under s81, if after the preparation of a prospectus but before dealing in the securities begins there is any change significant for the purposes of making an informed assessment, the company must submit to the FSA a supplementary prospectus for approval. If the company is not aware of the change, it is not required to comply with the obligation, but any person responsible for the prospectus who does know of the change is under a duty to notify it to the company.

To determine whether or not the information that the company has just settled an intellectual property claim for £1million and that a profit warning is just about to be made should have been disclosed any purchasers of the securities s80(4)permits regard to be had not only to the nature of the issuer and of the securities but also to the nature of the persons likely to consider acquiring the securities, the knowledge which their professional advisers may be expected to have and to information already in the public domain by virtue of its publication under statutory or regulatory requirements. We are not made aware of any information about the purchasers advisers however the information is not information that is required to be in the public domain as a claim has been brought not actually heard. If the claim had been heard at court and been successful then it may fall in the public domain, therefore on this basis it is information that should have been disclosed in the prospectus.

The next question that falls to be addressed as to whether Jim and JZ Horgan and now the company were persons who were responsible for the prospectus and this can be determined by reference to regulation 13 of the Public Offers of Securities Regulations.[9] The persons responsible are:

  1. The issuer (the company)
  2. The directors of the Issuer
  3. Each person who has authorised himself to be named, and is named, as having agreed to become a director, whether immediately or at a future time:
  4. Each person who accepts , and is stated as accepting, responsibility for, or for any part of, the prospectus
  5. Each other person who has authorised the contents o f the prospectus or any part of it: and
  6. The offeror of the securities and its directors where It is not the issuer

It can therefore be seen that the company will be liable as the issuer of the securities.

The company is liable for the misleading and or omission of information and are liable to pay compensation to any person who has acquired any of the securities to which it relates and suffered loss as a result of any untrue or misleading statement in it or of the omission of any matter required to be included under the Act or regulations[10]. The provisions do not require the purchasers to show that she relied on the misstatement in order to establish a cause of action, but she must be able to show at least a casual link between the misstatement or omission and the loss will have to be proven. The loss is of course the one million pound that has been paid by the company and the resulting decrease in the value of the shares.

The Company could raise a defence. The defences that are available to them are contained in schedule 10 and regulation 15 and they provide persons responsible for the misstatement or omissions with “exemptions”. They will be able to escape liability if they can satisfy the court (a) that he reasonably believed that there were no misstatements or omissions and that he had done all that could reasonably be expected to ensure that there were not any and that, if any came to his knowledge, they were corrected in time or (b) that the plaintiff acquired the securities with knowledge of the falsity of the statement or of the matter omitted. Where the statement in question is made by an expert and is stated to be included with the experts consent, these rules are applied to the belief that the expert was competent and had consented to the inclusion of this statement. It is unlikely that the company will be able to establish that either these exemptions apply and therefore will be considered to be liable to pay compensation to the purchasers of the shares.

It should be noted that if for any reason this action to recover damages failed for any reason then the purchasers would be able to seek compensation against the companyin three other ways. The first would be damages at common law. The common law provides civil remedies for misrepresentations which have caused loss to those who have relied upon them[11]. The company may well also have the common law option of her right to rescind the contract. The common law allows , in certain circumstances , claimants to rescind a contract entered into as a result of misrepresentation whether that misrepresentation is fraudulent , negligent or wholly innocent. Such a right would be actionable against the company only as the company is the person with whom the purchasers entered the contract with. The final alternative option would be to make a claim for breach of contract. The advantage of establishing this would be that the misrepresentee would have a claim in damages to be established to be assess on the contractual basis, rather than the tortious basis. expected profit on the shares.

In consideration of whether or not Jim will be liable to those purchasers himself the principle of limited liability should be considered. The principle of limited liability stipulates that a director/shareholder will be limited in personal liability to there shareholding, therefore on the face of it would seem that Jim is not personally liable. However, it should also be considered whether or not Jim had the actual authority to issue the shares. The reason that this question arises as when he originally issued the shares he was acting a sole trader, this is of course no longer the case and reference should therefore be made to the companies articles. If he was acting outside of his authority and not as an agent of the company it could be that he could be held personally liable for any loss which these shareholders have suffered from.

Bibliography

Legislation

Companies Act 1985

Financial Services and Marketing Act 2000

Misrepresentation Act 1967

Public Offers of Securities Regulations

Cases

Derry v Peek (1889) 14 App Cass 337

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A C 465

New Brunswick and Canada Railway Co v Muggeridge (1860) 1 DR & SM 363

Re Nuneaton Football Club [1989] BC L C 454 CA

Books

Bailey E, Groves H, Smith C , (2001) “Corporate Insolvency Law and Practice”, 2nd Edition, Butterworths

Cheffins B, (1997) “Company Law: Theory Structure and Operation”, Clarendon Press

Davies P, (2002) “An Introduction to Company Law”, Oxford University Press

Davies P, (2002) “Gower and Davies Principles of Modern Company Law”, 7th Edition Sweet and Maxwell

Griffin S , (2000) “Company Law: Fundamental Principles”, 3rd Edition, Harlow Press

Hicks A & Goo, (2001) “Cases and Materials in Company Law”, 4th Edition,

Blackstone

1


Footnotes

[1] S 80 (10) The Companies Act 1985

[2] S80 (9) The Companies Act 1985

[3] See Ss89 to 96 The Companies Act 1985

[4] See RE Nuneaton Football Club [1989] BC L C 454 CA

[5] Per Kindersley V C in New Brunswick and Canada Railway Co v Muggeridge (1860) 1 DR & SM 363

[6] SI 1995/1537 as amended

[7] S90(1) and reg 14 (1)

[8] See Derry v Peek (1889) 14 App Cass 337 ; The Misrepresentation Act 1967; Hedley Byrne & Co Ltd

v Heller & Partners Ltd [1964] A C 465

[9] SI 1995/1537 as amended

[10] S90(1) and reg 14 (1)

[11] See Derry v Peek (1889) 14 App Cass 337 ; The Misrepresentation Act 1967; Hedley Byrne & Co Ltd

v Heller & Partners Ltd [1964] A C 465

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