Membership of a company Corporate Law: Law principles and practice What are shares? Shares are one of the securities that a company can issue. Shares are a form of personal property (Corporations Act 2001 (Cth) s 1070A) and are protected by ‘chose in action’, a right that can be enforced in a court of law. Shares are in the form of an intangible right (s 1085(1)). Corporate Law: Law principles and practice Shares cont … A share represents a division of capital within a company and designates each holder as a member of the company. Different shares may carry different rights according to the company constitution. A member, once on a company’s register of members, is an owner of the company, with rights granted by the Corporations Act 2001 (Cth) and contractual requirements of the company’s internal management rules. Corporate Law: Law principles and practice Becoming a member Members of a company limited by shares are its shareholders. Shareholders are company members and are in a legal relationship with the company (something akin to a contract). Members names must be entered on a register (Corporations Act 2001 (Cth) s 231(b)). Corporate Law: Law principles and practice Becoming a member of the company A person can become a member in various ways, including: • • • • • being identified as a member on the company’s application for registration (Corporations Act 2001 (Cth)s 231(a)) applying for and receiving an issue of shares pursuant to a disclosure document (under ch 6D) receiving a transfer from another member receiving shares by transmission through death or bankruptcy converting debentures into shares or exercise of options. Corporate Law: Law principles and practice The liability of a member The liability of a member depends on the type of company that issues them, and the type of share actually issued. In a limited liability company, the shareholder’s liability is limited to the unpaid amount, if any, on the shares (Corporations Act 2001 (Cth) s 516). Corporate Law: Law principles and practice Register of members The Corporations Act 2001 (Cth) requires a company to maintain a register of members that contains details of such matters as the member’s name, address, number of shares held, unpaid amounts on shares and date of acquisition of shares (ss 168(1)(a) and 169). Corporate Law: Law principles and practice The register of members is significant It is proof of matters shown in the register, unless there is evidence to the contrary (Corporations Act 2001 (Cth) s 176). A person does not become a member until the person’s name is entered into it. Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104 Corporate Law: Law principles and practice Trustee shareholders In relation to trustees appointed on death or bankruptcy of a shareholder, the Corporations Act 2001 (Cth) generally prohibits notice of a trust being entered on the register of the company (s 1072E(10)). Note: companies may maintain a register in such a way that it identifies shares held by a trustee (s 1072E(9)). Corporate Law: Law principles and practice The register The register must be kept at the company’s registered office, its principal place of business (Corporations Act 2001 (Cth) s 172(2)). Anyone is permitted to inspect a share register (s 173(1)). Shareholders can inspect without charge (s 173(2)). The right to inspect is limited by privacy considerations imposed by s 177. Corporate Law: Law principles and practice Correction of the register A correction of the register can be ordered by a court on application by an aggrieved company or person, including a shareholder (s 175(1)). A court may order a register to be corrected and the company compensate the applicant for loss or damage suffered (s 175(2)). Corporate Law: Law principles and practice Share certificates A share certificate is prima facie evidence of the shareholder’s title to the number of shares specified s 1070C(2) of the Corporations Act 2001 (Cth). Once a company issues a certificate, those dealing with the certificate are entitled to rely on the truth of its contents. Corporate Law: Law principles and practice Share certificates cont … If a company wrongly issues a share certificate, the company will be liable to compensate the true owner of the share or restore them to their rightful position. Re Bahia and San Francisco Rail Co Ltd (1868) LR 3 QB 584 Transfers of shares without the permission of the owner may mean the company must restore the true owner to the register. McLaughlin v Daily Telegraph Newspaper Co (No 2) (1904) 1 CLR 243 Corporate Law: Law principles and practice Share certificates cont … The share certificate: • • • allows a company to identify its members is required to state the name of company, the jurisdiction of registration, the class of shares, and the amount (if any) unpaid on shares (Corporations Act 2001 (Cth) s 1070(1)) must be ready for delivery within two months of allotment of shares, or within one month after transfer of shares lodged with company (ss 1071H(1) and (2)); non-compliance is an offence s 1071H(6). Corporate Law: Law principles and practice Transfer of shares A transfer of shares means ownership is transferred and the transferee is entered on the share register. A transfer requires a contract of sale and a proper instrument of transfer (Corporations Act 2001 (Cth) s 1071B(2)). Section 1072F(2) provides that directors are not required to register the transfer unless the executed transfer document and accompanying share certificate are lodged at the company’s registered office: s 1071D. Shares are presumed to be freely transferable, unless the constitution states otherwise (Corporations Act 2001 (Cth) s 1070A(1)). Corporate Law: Law principles and practice Transfer of shares cont … The directors of proprietary companies have the discretion to refuse to register a share for any reason (s 1072G). If a company’s constitution does not require the directors to give reasons or grounds for refusing a transfer, any challenge to their decision requires proof of bad faith or improper purpose on their part. Re Smith and Fawcett Ltd  Ch 304 Corporate Law: Law principles and practice Refusal to register If there is a refusal to register, a party can apply to a court on the grounds of unjustness or unreasonableness (Corporations Act 2001 (Cth) s 1071F). A court may order that the transfer be registered or make such other order as is just and reasonable. Any time there is a refusal, the company is required to send notice of the refusal to the transferee within two months (s 1071E). Corporate Law: Law principles and practice CHESS The Clearing House Electronic Subregister System (CHESS) allows settlement of transactions that involve a diverse range of financial products, including shares of listed companies. Corporate Law: Law principles and practice Transmission of shares The transmission of shares occurs by the operation of the law in the event a shareholder dies, becomes bankrupt, or lacks mental or physical capacity. In such cases, the shares vest in the personal representative of the shareholder (Corporations Act 2001 (Cth) s 1072A). The personal representative is entitled: • • to be registered as the holder of the shares—in which case the company must register them as such (s 1072A(3)) to transfer the shares to another person—s 1072A(4). Corporate Law: Law principles and practice Death If a shareholder who owns shares jointly dies, the company will recognise only the survivor as being entitled to the deceased shareholder’s interest in the shares (the estate is still liable for unpaid amounts) (Corporations Act 2001 (Cth) s 1072A(5)). Under the Bankruptcy Act 1966 (Cth), the property of the bankrupt shareholder vests in the trustee in bankruptcy. Corporate Law: Law principles and practice Different types of shares Shares can be issued with different rights attached (in different classes). Classes of shares means that a member has more or less rights than other members (e.g. a member may or may not have a right to vote, or may or may not have a right to a dividend). A preferential shareholder may receive dividends before any other member. If a company issues shares with different rights attached, these rights must be set out in both the company constitution (Corporations Act 2001 (Cth) s 254A(2)) and the contract for the issue of shares. Corporate Law: Law principles and practice Different types of shares cont … A company can amend its constitution to change the rights attaching to shares (Corporations Act 2001 (Cth) ss 246B– G). The company constitution may identify different types of shares, including: • • • • • ordinary shares with rights as designated by the Act preference shares redeemable shares (shares that may be repurchased later) redeemable preference shares (shares that receive a preferential dividend in the future) deferred shares (shares that receive a dividend only after other shareholders). Corporate Law: Law principles and practice Ceasing to be a member A person ceases to be a member under the following circumstances: • • • • • • forfeiture and sale for non-payment of a call transfer of their shares, which is duly registered death of the shareholder, resulting in transmission to the personal representative under the Corporations Act 2001 (Cth), compulsory acquisition through selective capital reduction (ss 256B) deregistration of the company sale of shares under company lien.