SHARE CAPITAL CONTINUED

NB:

 At any time a company’s capital may consist of nominal/authorized capital. Capital stated
in the MOA and represents the nominal or book value of shares into which the company
is divided.
 It is called authorized because once the company is registered the company can take steps
to raise capital from the public without seeking authority for the collection of such
moneys.

Types of capital

Issued capital – this is the portion of nominal capital constituted by the nominal value of the
shares issued by the company.

Paid-up capital – this is constituted by the aggregate of the amount of money that is paid upon
each issue by the company. It may be equal to or less than the issued capital but it cannot exceed
it.

Called-up capital – constituted by the amount due in respect of calls made by the directors on
issued shares.

Uncalled-up – amount not called up, or shares which a company has issued and it is the nominal
capital minus called up capital.

Reserve capital – portion of the issued but uncalled capital which the company members by a
special resolution have agreed that the company will not call up unless/until company goes on
liquidation. Directors are not allowed to issues them unless company is being wound up.

Reserve capital – company has reserved from profits for expansion of its business operations,
pay dividends or bonus issue.

Issued capital – capital which remains from nominal/authorized when the other portion is
issued.
 Methods of public issue

1. Prospectus issue
The company sells shares directly to the public rather than through intermediaries as a
precaution against an unsuccessful issue. The company may underwrite the issue with an
institution which agrees to take up the shares in the event that some shares could be paid
for or applied for but usually unapplied for.
2. Placing
These occurs in the company, instead of selling directly with the company, it arranges
with a broker to sell on its behalf in return for commission. There may be a private
placing where the broker places the shares with his clients privately rather than public
placing where broker publicly offers the shares.
3. Offer for sale
This is where a company sells all of its shares to an issuing house. The issuing house
resells the shares to the public usually at a profit.
4. Offer by tender
It occurs if the company invites tenderers for its shares and sells them to the highest
bidder done with a view of obtaining the best price for the shares.
The company will fix minimum price but the maximum price will be competitive.
5. Rights issue
Where a company is already trading and makes an offer to existing members to buy
shares of a new issue, this is a right issue.
Shares are sold in proportion to the number of shares they hold.
The existing shareholders are given a right to sell their rights in the rights issue where
they do not intend to take up their rights at the right’s issue.
Sale is usually done at a discount.
6. Bonus issue
Where a company instead of paying cash for its members, retains the cash but issues new
shares to its members. Nominal value of share will be equal to retained cash company,
therefore increases its nominal capital and acquired the cash it needs for its business
instead of borrowing.
They are given proportionate to the shareholding.
CAVEAT EMPTOR
 Company shares are like goods and buyers can be duped and the rule of caveat
emptor applies since the company has no legal duty to disclose the information
which provides some protection for buyers of shares by requiring company to
disclose info about their shares to the investor. So that investor makes an analysis
before making a decision to buy.
 Such disclosure is contained in the company Act and capital market authority Act,
under Company’s Act, regulations are contained prospectus regulations.

Prospectus
 This is a document which invites members of the public to subscribe for shares or
debentures of a public company.
 It sets out the advantages of investing in the company. Act defines a prospectus as
any notice, circular, advertisement or other invitations offering to the public for
subscription or purchase of any shares or debentures of the company. The
definition is flexible and will accommodate any form of document whose effect
on the reader will be to draw conclusion that the company is offering shares or
inviting him to apply for shares of the company.
Who may issue a prospectus?
1. The company
2. Promoters
3. Brokers
4. Issuing houses/investment banks
5. Directors
Registration of prospectus
The following rules govern;
i. A copy must be signed by every person named as director.
ii. A prospectus issued by a company must be dated. The date will be taken as the
date of its publication.
iii. Prospectus must be delivered to the registrar of companies for registration on or
before the date of publication.
iv. Prospectus submitted for registration must be attached with a copy of material
contracts contained in every prospectus
v. Every prospectus must state on the face of it that a copy has been delivered to the
registrar of company’s for registration.
vi. Registrar must not register a prospectus until it is signed, sealed and endorsed.

Content of prospectus

 The objects of the acts are to compel the company to provide the necessary info to
enable investors to make a decision as to whether or not to subscribe to share or
debentures.
 The statutory requirements are; designed to provide info that would enable
investors to make a decision on whether or not to subscribe for shares or
debentures.
 The statutory requirements are designed to provide the following info;
i. Who are the directors of the company
ii. What are the company’s obligations under contract
iii. What is the nature of the company’s business
iv. What are the company’s financial position
v. What is the amount of capital requirement of the company
vi. What are the preliminary expenses of the company

The act provides that a prospectus must contain specific matters in part I of the 3rd
schedule and must include specific report in part ii of the same schedule.

1. Matters specified
I. The number of shares to be issued including founder shares and the extent of the
interests of shareholders in the property of the company.
 II. The number of shares fixed as qualification shares of directors and how they will
be remunerated.
III. The minimum subscription where shares are offered to the public. This is the
amount in directors’ opinion that is required to be raised to cover expenses of cost
of property, preliminary expenses and working capital.
IV. Names, addresses and particulars of the directors
V. Time of the opening of the subscription list.
VI. The amount required as working capital and preliminary expenses
VII. The amount payable on application and allotment of each share.
VIII. Names and addresses of vendors of the property or business to the
company
IX. Amount of the underwriting commission for the shares
X. Rights of the members in the various classes of shares and terms of voting.

2. Report to be attached

Auditor’s report showing;

i. Profit or loss in the company in the last 5 years

ii. Rates of dividends, pardin diff classes of shares
iii. Assets and liabilities as at the last date of the account

Where the proceeds of the issue are to buy a business;

i. A report by a named accountant for the profits and losses for each of the last
5years
ii. A report by a named accountant on the profit/loss of the company over the last
5yrs
iii. Assets and liabilities of the company as at the date to which the accounts were
made.

Material contracts
  The prospectus must accompany the material contract, a contract is material when it is
likely to influence the judgment of an investor.
 They include; purchase price of a major property, contracts that enforce obligation on the
company, underwriting contracts, employee bills/administrative costs.

When a prospectus may not be issued

The following are cases where a form of application will be issued in place of a prospectus;

a. Where shares or debentures are issued to existing shareholders or debenture holders

b. Where shares or debentures relate to shares and debentures uniform with the previously
issued.
c. Where a person is invited to agree to underwrite the whole issue of shares or debentures
of the company.
d. Where shares or debentures are not issued to the public

Liability on prospectus

 To enforce compliance with the provisions of the Act. The Act provides for liability
based on duty to disclose material facts where statements are given and in cases of untrue
statements or statements that are a misrepresentation or non-disclosure of information.
 The liabilities are twofold.
I. Civil Liability
A person who has been induced to take shares in a company on the strength of untrue
statements or based on omitted information have civil remedies against the following;
a. The company, promoters, directors, experts
Their liability is on non-disclosure or omission. Omission is when the prospectus
fails to disclose a material fact which is relevant to the allotment of shares there
will be liability in such a case
Coles vs. Whitecity Greyhound Association.
A prospectus stated that the land acquired by the company was suitable for
Greyhound racing no mention was made of the fact that approval of the local
council was required to build stands and kennels. The council did not approve, it
 was held that the prospectus omitted a key element in the contract that would
result in the cancellation of the contract.
b. Untrue statement
Liability is based on the general principle of the contact in terms of
misrepresentation of information. The liability depends on if the statement was
fraudulent, innocent or negligent.

Fraudulent and negligent misrepresentation.

Where the statement is untrue and the maker knows it is untrue and does not care that it is untrue
is negligent and recklessly gives it without caring if it’s true and believing it is true with the
intention that the maker benefits from it and in fact benefits from it.

In such case liability will accrue based on this statement the person may rescind the contract and
sue for damages.

R vs. Kysant (1932)

A prospectus indicated that the company was paying dividends even during depression they
failed to disclose that the dividends were being paid from reserves of previous years and that
they were not making profit during this period of recession it was held that this resulted in
fraudulent misrepresentation and the contract would be cancelled.