Module 5

Capital

1. Capital - in lay man's meaning, the money or property used in business to earn profits.

2. Offering - the process by which a company finds a willing buyer to purchase new shares. An
offering may be on a private basis or a public offering.

3. Public offering - an invitation to the public at large to buy shares in the company described as the
primary market.

4. Procedure for private placement and public offering -

a. Underwriting - Investment bank, in exchange for an underwriting fee, promises to buy all the
shares that are not subscribed for by the investing public.

b. Promotion - investment bank markets the new securities to the public. The issue price for the
new shares is fixed by the insuring company. Dilemma: a) if the issue price is set too low -
the issue will be over-subscribed and the company will not receive as much as it should; b) if
the issue price is too high - the price may discourage investors and the offer will be under-
subscribed.

c. Issue of new securities

5. Issue of shares to raise capital

a. Capital Maintenance Doctrine - Package of measures designed to ensure that the capital of
a company is preserved within the company as a separate account to pay its creditors.
i. Capital structure of a company - capital is the money value of cash and assets
contributed to a company by those who acquire its shares. This monetary value of the
issued share capital must be credited to an account called the share capital account.
The share capital account must be maintained and cannot be reduced (i.e. can't be
used for payment of dividend). The share capital mist be maintained to ensure that the
monies are available to pay creditors.

ii. Share Capital - the amount raised by the company on the issue of shares. The
company must issue shares in consideration for the payment of price equal to their
par value or above. If the Company issues shares less than its price it is "watered
stock"

Example: The share capital of the company shall be $50,000 divided into 5,000
shares with par value of $10.00

Authorized share capital - $50,000

Par value - $10.00
Issued share - assuming it issued 100 shares at par value. Assuming that it also issued
50 shares at an issue price of $20.00
Share Capital - $1,500 (share capital raised by issuing shares at or up to their par
value)
Share premium - $500.00 (capital raised by issuing shares above their par value)
 iii. Classes of Shares - A company may issue different classes of shares, each class
conferring different rights upon holders of shares of such class. Example preference
shares a class that has economic superiority over the ordinary shares.

iv. Issue of shares - a) publicly traded company - makes formal offer to the public i.e.
underwriting; promotion; and issuance of new security (prospectus); b) private
company - by placing its shares with specific and identified investors. Terms of the
offer are set out in a subscription agreement between the company and the investors.

v. Two ways in which an offshore asset holding company may obtain finance:
(a) Allotment and Issue of Shares - Offshore management practice, nominee
holds the shares for the beneficial owner. The nominee, as a subscriber, does
not provide the capital or finance the offshore company. They act in an
administrative capacity to get the company incorporated.

(b) Shareholder loan - this may be at commercial rate, however for one-man-
company it is usually interest-free repayable upon demand. Shareholder loan is
not subject to capital maintenance rules as this is considered as a liability.

6. Dividends
a. Section 403 (1) [CA] - No dividend shall be payable to the shareholders of any company
except out of profits.

b. Dividends are discretionary

c. Regulation 127 of the Constitution - Dividends may be declared in general meeting or the
directors may declare dividend with the sanction of a general meeting.

d. Regulation 128 of the Constitution - the Directors may declare interim dividends from time to
time.

e. Retained earnings - profits of the company that are retained and may be used at any time to
pay current debts in the normal course of business, or may be used to pay out dividends, or
may be converted into capital.

f. Bonus shares (stock dividend) - Conversion of profits into capital - when instead of
declaring dividends the directors issue shares to the shareholder free-of-charge and they will
use the profits to pay the issued bonus shares.

g. Capital Maintenance Rule - Payment of dividends or other distributions to shareholders

cannot funded out of the company's capital. The Company's capital is reserved to pay
creditors' debt.

h. Profit - for justifying dividend distribution, it means trading profit earned by a company in
the current financial year or earned and accumulated in reserved or retained earnings in prior
financial year, unless profits have been capitalized by bonus issue.
 Example:
 Profit made out on sale of capital asset or out of an unrealized profit i.e. when the capital
asset appreciates in value and is revalued in the records of the company for accounting
purposes; and/or
 Money received by the company when it issues shares at a premium/money received in
excess of the par that would be allocated to capital surplus or share premium account.

i. General Rules in Declaring Dividends under English Companies Legislation

 Figures must represent profits;
 Dividends cannot be distributed out of profits earned in isolated year if the company has
made losses in previous years;
 Dividends can only be declared out of actual realized profits and not unrealized profits;
 Profits cannot be paid out of the share premium.
 A company must not pay dividend if by doing so the value of its net assets would fall
below the value of its issued share capital plus undistributed reserves.

j. Declaration of Dividend in an Offshore Perspective (Modifications to the English

Companies Legislation to allow unlimited access to the Company's capital)
i. Shareholder loan - the beneficial owner transfers money or assets to the company by
way of loan evidenced either by a loan agreement or a promissory note. The loan has a
market rate interest repayable on a specific date. It may also be interest-free and
repayable on demand. Hence, when the beneficial owner demands for payment of the
loan, the company must comply.

Administrative matters:
a. Directors' Resolution to authorize the company to enter into and execute a loan
agreement;
b. Enter the loan into the company's books. Current liability if the loan is repayable on
demand and non-current liability if the loan is repayable at a future date;
c. The beneficial owner may demand for repayment in writing and the Directors' would
resolve the payment of the loan.

ii. Amendment or abolition of capital maintenance rule

a. Amendment: no-par value shares - the company may issue shares without par
value.
 Offshore jurisdiction may simply state the maximum number of shares that
may be issued and that the distinction between share capital and share premium
is left at the discretion of the directors.
 Singapore there is no need to identify the maximum shares that could be issued
and there is no need to distinguish between share capital and share premium.
b. Amendment: Distributions from share premium (capital surplus) - Some
offshore jurisdiction preserve the distinction between share capital and share
premium bot allows the company to distribute dividends from the share premium
account. Subject to the rule that the company cannot make any distributions from
the share premium account unless, immediately following the distribution, the
 company is solvent and is able to pay its debts as they fall due. (i.e. Cayman,
Bermuda, private Companies in Jersey)

c. Repeal (BVI)
 Abandoned the concept of share capital.
 Authorised, in the discretion of the directors, to issue a maximum number of
shares but are not required to state in their memorandum an authorised share
capital, or par value of the shares, or even their currency.
 Concept of capital and dividends are no longer retained. Distributions can be
made by resolution of directors and the only limitation is that the directors must
be satisfied that the company will, immediately after distribution, satisfy the
solvency test and this must be states in the resolution authorizing the
distribution.
 Applies to any distribution to shareholder. Encompassing direct and indirect
transfer of cash asset to or for the benefit of a shareholder includes purchase of
assets and redemption of shares.

7. Singapore

Section 403 of CA - No dividend shall be payable except out of profits.

Dividends cannot be paid out of:

a. Profits applied towards the purchase or acquisition of the company's own shares;
b. Proceeds received as consideration for the sale or disposal of treasury shares which the company
applied towards the profits of the company;
c. Gains derived by the company from the sale or disposal of treasury shares.

Constitution

127. The Company may, in general meeting or by resolution by written means, declare dividends,
but no dividend shall exceed the amount recommended by the Directors. The Directors may, with the
sanction of a general meeting or of a resolution by written means, declare dividends.

128. The Directors may from time to time pay to the Members such interim dividends as may
appear to the Directors to be justified by the profits of the Company. Dividends shall not be paid
otherwise than out of profits or shall bear interest against the Company.

133. Any general meeting declaring a dividend or bonus may direct payment of such dividend or
bonus wholly or partly by the distribution of specific assets and in particular of paid-up shares,
debentures or debenture stock of any other company or in any one or more of such ways and the
Directors shall give effect to such resolution, and where any difficulty arises in regard to such
distribution, the Directors may settle the same as they think expedient, and fix the value for
distribution of such specific assets or any part thereof and may determine that cash payments shall be
made to any Members upon the footing of the value so fixed in order to adjust the rights of all parties,
and may vest any such specific assets in trustees as may seem expedient to the Directors.