Apr 19, 2016

Shares: What does it mean in a Company? By Teingo Inko-Tariah

Profit making ventures are usually registered as companies limited by shares or unlimited companies. A company is limited by shares when the liability of shareholders of the company is limited to the amount, if any, unpaid on the shares held by them. In the case of unlimited companies, the liability of the shareholders is not limited to any unpaid amount for shares held by them. Thus the shareholders of an unlimited company are fully liable for the debts of the company no matter the amount involved. There are various ways a company can raise capital for its operations. Issuing shares is one of the ways capital can be raised.

What is a share?

A share is a unit of a company that defines the interest of a shareholder in the company measured by a sum of money. It represents a portion of a company’s share capital and confers certain rights and liabilities on the shareholder. The Nigerian Companies and Allied Matters Act defines shares as’ interests in a company’s share capital of a member who is entitled to a share in the capital or income of the company’. Thus a share represents a unit of a bundle of rights and liabilities which a member or shareholder has in a company as provided in the term of issue i.e. the articles of association of the company. A share is a chose in action (intangible property which gives the owner a right of action for possession) and it is a transferable property subject to any restrictions that may be provided in the articles of association or under the law.
Rights and liabilities attached to shares
A shareholder is entitled to vote in the proceedings of company meetings, receive dividend whenever dividend is declared, attend meetings and contribute to the affairs of the company, inspect company’s statutory books, protect proprietary interest in the management of the company. The Nigerian Companies and Allied Matters Act, 2004 prohibits issuance of shares with no right to vote or a right to more than one vote except in the case of preference shares. It is an offence under the law to issue a share with no vote or more than one vote. On the other hand, a shareholder is liable to pay for shares held and unpaid for upon winding up of the company where the company is limited by shares. In the case of unlimited company, the shareholder is liable for the full debt of the company. A shareholder is also liable to forfeit shares upon failure to honour a call to pay up in respect of any unpaid shares and suffer any penalties stipulated in the articles of association or term of issue.
How to acquire shares in a company
Shares in a company can be acquired by any of the following ways: subscription, allotment, transfer or transmission. Subscription refers to the signing of the memorandum and articles of association during the incorporation of the company whereby at least one share is taken up by each member or shareholder signing for a company to be formed. Upon registration of the company, the subscribers are deemed to have agreed to become members of the company and their names must be in the register of members.

Allotment is the allocation of a specific number of shares in a company to an applicant or prospective shareholder upon an application for such shares. The company may allot all or part of the shares applied for by a prospective shareholder. A prospective shareholder can also withdraw his application by written notice to the company any time before allotment is done. Upon application, the company shall, where it wholly or partly accepts the application, allot shares to the applicant and notify the applicant of the allotment and the number of shares allotted within forty-two days. The company is not bound to allot the full amount of shares applied for but it is bound to write a letter of regret enclosing the balance of money paid for shares not allotted. Where shares have been allotted, the company is required to file a return on allotment of shares with the Corporate Affairs Commission within one month of allotment in the prescribed form and with the necessary supporting documents. If you have ever applied to buy shares of a public companies through public offer, this is what happens at the close of the public offer.

Shares of a company can also be acquired by transfer. Transfer of shares is the process of passing ownership from one person to another. It is executed by the delivery of a proper instrument of transfer and the share certificate to the company and the subsequent registration of the transferee in the company’s register of members. A company is required to file a notice with the Corporate Affairs commission indicating transfer of shares. Transfer of shares in a company are subject to any restrictions by law or the articles of association. Every private company is required by law to restrict the transferability of its shares in its articles of association. This is done by including a ‘pre-emptive right’ clause to the effect that any shareholder who wishes to transfer his shares should first offer such shares to existing shareholders before any other person who is not a shareholder.

Transmission of shares is the process of acquisition whereby a person becomes entitled to the shares of another in consequence of death or bankruptcy of that other person who was the original shareholder. In the case of death, the shares could either be transmitted by a will or where there is no will, letter of administration of estate of the deceased original shareholder. A person who takes up shares of another by transmission would be required to communicate same to the directors of the company showing evidence of such transmission and could either choose to have the transmitted shares registered in his own name or in the name of a nominated person. Registration of the name of the person to whom shares have been transmitted in the register of members after all requisite formalities, grants such a person full rights as a member of the company.

Classes of shares

There are various classes of shares that could be issued by a company. These are ordinary shares, preference shares, deferred shares and founders’ shares. The nature of the shares would depend on the kind of rights attached to them.Ordinary shares are the basic shares of a company which have no special rights attached and which bear the main risk. They are sometimes referred to as ‘equity shares’. Majority of the shares in most companies are ordinary shares which have the basic rights attached to a share.

Preference shares are those shares that have additional rights attached to them and they could take various forms.  Fixed preference shares entitle the holder to a fixed amount of dividend every year. Fixed right to participate in surplus profit entitles the holder of such shares to additional dividend after the fixed amount of dividend. Thus where there is surplus, they benefit further with the ordinary shareholders.

Cumulative preference shares entitle the holder to dividend every year whether or not profits are declared by the company. Where no profit is declared in a particular year, the dividend accumulates and adds up to that of the following year such that whenever there is profit and dividend is declared, this class of shareholders get their dividend that has accumulated over time in addition to what is currently due them.

In the case of Non-cumulative preference shares, where a dividend is not declared and paid in a particular year, such dividend is lost. 

Deferred shares are shares on which no dividend is payable until other classes of shares have received a minimum dividend. Preference shares could be stated as non-voting (holders would not be entitled to attend meetings or vote) and could also be expressed to be redeemable as a term of issue. The right of redemption would usually be set out in the articles of association of the company.

Redeemable share is one issued on the terms that the company will or may buy them back at a future date. Founders’ shares and Management shares are shares with special rights attached for the benefit of the original subscribers and management of the company respectively in order to retain some measure of control over the company. They are not popular in Nigerian corporate practice.

Ed's Note: Culled from www.tennygee.wordpress.com 
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