Corporate Finance

• Author: Suzanne Ffolkes Goldson
• Profession: Attorney-at-Law and Senior Lecturer in the Faculty of Law at The University of the West Indies, Mona
• Pages: 27-53

2. Corporate Finance

One of the main incentives for incorporation is to raise capital through either

equity or debt nancing. e Companies Act 2004, reects the modern approach

to facilitate nancing through the relaxation of the old rules relating to types of

shares, permitting a company to purchase its own shares or the giving of nancial

assistance for the purchase of its own shares, and the abolition of par value shares. e

amendments to the provisions on the registration of charges under the Companies

(Amendment) Act 2013, in order to provide for security interests in personal property,

and the repeal of the sections relating to the winding up of insolvent companies to

introduce the Insolvency Act 2013, have also facilitated nancing of companies, the

former to allow for the creation, registration, and enforcement of security interests of

most non-land property under the Security Interests in Personal Property Act, and the

latter, to facilitate debtor in possession nancing under the Insolvency Act 2013. e

relaxation of the old rules is balanced by provisions for the protection of shareholders

and creditors.

Shares and Classes of Shares

Shares are dened as a share in the share capital of a company and include stock

except where a distinction between stock and shares is expressed or implied.1 e basic

rights of shareholders include rights to vote in general meeting, income in the form of

dividends when declared, and a return of capital on a winding up.

At common law, rights carried by shares, rank pari passu.2 e presumption at

common law of equality of shares may be rendered inapplicable under the Companies

Act, which permits classes of shares, with varying rights, privileges, restrictions and

conditions.3 A class of shares is established where the shares have the same rights,

privileges, restrictions, and conditions aorded to a group of shareholders. Section

8(1)(c) of the Companies Act requires the Articles of Incorporation to set out the

classes of shares if any, and the maximum number of shares, if any, that the company

is authorized to issue.

Section 8(8) provides that a company having a share capital shall le a document

with the Registrar setting out the following:

1. Companies Act 2004, s 2.

2. Re Bridgewater Navigation Co. [1891] 2 Ch. 317 Eng. CA; Cumbrian Newspaper Group

Ltd. v Cumberland and Westmoreland Herald Ltd. [1987] Ch. 1 Eng. Ch. D.

3. Companies Act 2004, s 8(8).

a. If two or more classes of shares are issued, the rights, privileges, restrictions,

and conditions attaching to each class of shares; and

b. if a class of shares is issued in a series, outlining the authority given to the

directors to x the number of shares in, and to determine the designation

of, and the rights, privileges, restrictions, and conditions attaching to the

shares of each series.4

e most common classes of shares are ordinary shares and preference shares. ere

must always be a class of ordinary shares, to which all basic rights will attach (voting,

income where dividends declared and the return of capital on winding up), even

though there is no right to a xed income or return on capital. is may be contrasted

with the rights that attach to preference shares, which may have restricted voting

rights, a xed income and return on capital in priority to the ordinary shareholders.

It appears that the requirement that a company le a document outlining the rights,

privileges, restrictions, and conditions attaching to each class of shares under section

8(8) puts paid to the question, which has loomed large at common law,5 as to whether

the rights set out in the Articles are exhaustive. It appears that preference shareholders

may only participate, after satisfaction of their entitlements as to xed income, with

ordinary shareholders in surplus assets or further distribution of prots if outlined

in the Articles6 or the document required to be led with the Registrar in section

8(8). It appears that this provision also applies to cumulative dividends and that the

common law presumption that preference dividends are presumed to be cumulative,

no longer obtains.7 e Companies Act is silent, however, on the payment of arrears

of dividends. In the absence of a provision on payment of arrears of dividends on

liquidation, the common law provides that there is a presumption that they may not be

paid on liquidation unless rebutted by a provision in the Articles to the contrary. e

courts have placed a generous interpretation on provisions in Articles with reference to

payment of arrears on a winding up.8

e Act provides for the protection of shareholders, where the share capital is

divided into dierent classes of shares, in the event of the variation of their class rights.

Section 73(1) provides that a company may vary class rights where provision is made

in the Articles, otherwise known as a variation of rights clause. e variation is subject

to:

i. the consent of any specied proportion of the holders of the issued shares

of that class; or

4. McClurg v Minister of National Revenue [1990] 3 SCR 1020 SCC.

5. Birch v Cropper (1889) 14 App Cas 25 Eng. HL; Will v United Lankat Co. Ltd. [1914] AC

11 Eng. HL; Scottish Insurance Corporation v Wilson & Clyde Coal Co. [1949] AC 512 Sc

HL; and Re Isle of anet Electric Co. [1950] Ch. 161.

6. Companies Act 2004 s 8(1)(c) and 8(4).

7. Webb v Earle (1875) LR 20 Eq 556.

8. Re F De Jong Ltd. [1946] Ch. 211 Eng. CA.

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corporate business principles