lesson 5 shares and stakes

basic concept

shares (SA) and stakes (SL) are both forms of share capital but follow different legal regimes

• SA shares= reflecting open and market orientated nature of the company

  • traditionally classified as securities= can circulate in financial markets (stock exchange)

  • they representing ownership in the company

  • confer shareholder status ie voting rights dividends

  • freely transferable with minimal restrictions to facilitate investment and liquidity

  • usually electronic book entries not paper certificates

• SL= stakes reflecting closed and personal nature

  • cannot be securities reinforcing non market character

  • must be recorded in a register no book entries

  • cannot be called shares

  • transfer is restricted often requiring approval from existing members or compliance with pre emption rights

functions

• capital raising= enable companies to raise finance by issuing units of share capital to investors without incurring debt

• governance and rights= confers shareholder status allowing holders to exercise rights such as voting dividends and participation in decision making

• trasnfer and ownership= allow trasnfer of ownership in the company

  • sa= freely transferable promoting liquidity and investment

  • sl= limited reinforcing closed personal character

legal perspective

• part of share capital= represent a fraction of the companys share capital contributing to its financial structure

  • as a financial unit

• an expression of shareholder status= embody the legal position of the member conferring a bundle of rights and obligations (voting dividend information)

  • as a legal relationship with the company

• IN SA as a moveable asset= nature as transferable securities enables easy circulation and trasnfer through electronic book systems

  • as autonomous economic value separate from the identity of the shareholder

    • by contrast in sl stakes do not have this status reinforcing their closed non market nature

proportionality rule

sa= a strict capital based proportionality with only limited policy driven exceptions

• voting rights are proportional to the nominal value/number of shares held

• as a Principe multiple voting shares are prohibited preserving equality between shares of the same class

• EXCEPTIONS

  • vote caps= limits on the maximum number of votes a single shareholder can exercise

  • loyalty shares= in listed companies long term shareholders may receive double voting rights rewarding stable investment

SL=flexible proportionality reflecting the personal and contractual nature of the sl allowing members to design governance

• by laws may allow:

  • multiple voting rights (shareholders have more than one vote per share giving greater control over decisions compared to others who may only have 1 vote per share)

  • non proportional voting strucutres

  • tailored arrangements separating capital contributions from control

participation and control

SA= strong proportionality principle between capital contribution ownership and control

• larger contribution= more shares= more voting power and rights

  • reflects the capital based nature where influence is primarily determined by investment

SL= weaker flexible proportionality principle

• the distribution of voting rights and profit participation can be adapted in the by laws

  • flexibility highlights the sl is more personal and partnership like prioritising relationship between members over capital investment

• possible to design non proportional arrangements including

  • different voting rights per stake

  • unequal profit sharing structures

  • per capita systems= equal voting rights regardless of contribution

value of shares/stakes

have 2 distinct types of value

• nominal value (par value)= fixed value assigned to each share/stake in the companys bylaws

  • represents the fraction of share capital attributed to each unit

  • must be expressly stated in the bylaws

  • can only be altered through a formal legal procedure (capital increase or reduction)

    • serves a legal/accounting function ensuring certainty in the companys capital structure

• real/fair value (market value)= the actual economic worth of the share/steak at a given time

  • fluctuates depending on

    • company performance

    • assets and liabilities

    • market conditions (especially in open sa)

      • plays a key role in transfers, valuation and investor decision making

• nominal value is stable and legally defined while real value is dynamic and economically driven

expression of value

the value of shares/stakes must be expressed as a fixed monetary amount eg 10 pound per share

• it is not permitted to express value as a percentage of share capital= undermines legal certainty and capital structure

• SA= shares must have the same nominal value within the same class or series

  • different classes/series may exist allowing variation in rights (voting dividends) while maintaining equality within each class

  • reflecting standardised nature

• SL= stakes may have different nominal values offering flexibility in structuring capital

  • there is no division into classes or series in the same formal sense as in sa

  • reflecting personalised nature

capital protection rules

strict rules on share/stake issuance to protect creditors and maintain the integrity of share capital

• prohibition on issuing bellow nominal value art 59.2= shares/steaks cannot be issued for less than their par value

  • ensures that the companys stated capital is actually backed by real contributions safeguarding creditors who rely on that capital (thinking the company has more funds than it does)

• prohibition on fictitious or non existent contributions art 59.1= shares/steaks issued without a real and effective contribution are void

  • prevents the creation of waterd capital which would mislead creditors about the companys financial position (thinking the company has more funds than it does)

• issue premiums= it is permitted to issue shares above their nominal value

  • reflects the true economic value of the companys an avoids undervaluation of shares

these rules prevent dilution of existing shareholders as new investors must pay a fair price relative to the companys value

shareholder status

ownership of shares/stakes= shareholder status

• holding a share establishes a legal relationship with the company conferring both rights (voting) and obligations

• shareholder stats is generally transferable meaning it can pass from one person to another through the trasnfer or shares/stakes

  • sa= transfert is free and unrestricted in principle

    • facilitates marketability and investment allowing shareholders to enter and exit easily

    • shareholder identity is largely fungible (easily changeable and not central)

  • sl= transfert more restricted often subject to approval by other members and preemption rights

    • preserves the closed personal nature of the company

    • who the shareholders are matters more reflecting a relationship based structure closer to a partnership

shareholder rights art 93

shareholder rights are divided into economic and political (corporate governance)

• economic rights=

  • right to profits/dividends

  • right to liquidation quota

  • preemptive (subscription) rights

• political rights=

  • attend general meetings

  • vote

  • right to information

  • right to challenge corporate decisions

rights to profits

two levels

• abstract right= a fundamental right of all shareholders to participate in company profits

  • cannot be excluded or removed in the bylaws

  • a conditional right= not a right to immediate payement

• concrete dividend= a specific enforceable right to payement which only arises once the general meeting declares a dividend

role of the gm= discretion over profit allocation

• may distribute dividends

• it may retain profits for reinvestment or reserves

• there is no automatic right to dividends each year

minority protection= protects shareholders from systematic profit retention

• shareholders may exit the company if the company fails to distribute at least 25% of legally distributed profits over a 5 year period

• acts as a pressure mechanism on majority shareholders (there gonna stay longer and benefit)

once profits become a declared dividend

• creates a credit right against the company (an enforceable debt)

• payable within 5 years

• irrevocable ie cannot later be withdrawn by the company and used for reinvestment

disitrubtion of dividend

• to prevent creditors by preventing unlawful disitrubtions, divided can only be paid if :

  • net assets exceed share capital (company if successful)

  • and legal reserves are satisfied

• SA= must be strictly proportional to shareholding (standardised nature)

• SL= can be flexible if the by was provide ( eg unequal distributions)

balances shareholders interests of returns, company interests in retention and growth with creditor protection

liquidation quota

shareholders right to receive a portion of the companys remaining assets once the company is wound up

• arises only upon liquidation of the company after all debts and liabilities have been paid

  • creditors paid first= priority over shareholders

• shareholders are entitled to a share of the residual assets in proportion to shareholding

  • this distribution can be modified in the bylaws ie preference shares with priority rights

  • this right is renounceable by the shareholder

  • this right cannot be removed by a majority decisions protecting shareholders from abuse by controlling members

preemptive rights

protect shareholders from dilution of their ownership and control when new securities are issued

• give existing shareholders the first opportunity for subscription of new shares allows them to maintain their % ownership and voting power

  • in a capital increase (issue of new shares)

  • convertible bonds in an SA as these may later turn into shares

• pro[ortional allocation= rights are granted in proportion to existing shareholdings

• trasnferable= can sell their rights on the market to other shareholders

• waivable= can choose not to exercise when new shares are released

• pre emotive rights can be excluded by a resolution of the general meeting requiring justification in the companys interest

  • strictly controlled to prevent abuse especially against minority shareholders

balances companys need to raise capital and shareholders interest in preserving their economic stake and control

voting attendance an participation

political rights that allow shareholders to influence and control company decisions through the gm

• voting rights= a fundamental shareholder right central to corporate control and governance

  • sa= voting is proportional to capital ie 1 share= one vote

  • sl= default 1 steak=1 vote but can be modified in the bylaws for felxibile structure

  • voting is excluded when

    • shareholders has not fulfilled their capital contrbituin

    • treasury shares= shares held by the company itself so has no voting or economic rights attached

• attendance/particpation= shareholder have right to

  • attend gms

  • speak and participate in discussions

  • vote on resolutions

restrictions

• sl cannot restrict attendance or voting rights (fewer parties

• sa can restrict attendance and voting rights (more holders to manage so more flexibility )

  • may require a minimum number of shares to attend meetings

  • may impose caps on voting rights per shareholder

right to information

allows shareholders to stay informed and participate effectively in decision making

• before the meeting= shareholders can make written requests for information

• during meeting= shareholders can ask oral questions

• must be exercised in good faith ie cannot be used to harass or abuse the company

right to documents= shareholders are entitled to access key company documents like

• annual accounts

• amendments to the bylaws

• structural changes ie mergers and acquisitions

refusal=

• sl= can refuse if discolsure would be harmful to the company (ie asking for a confidential client list could expose sensitive info to competitors for small nature)

• sa= they can refuse if

  • the information is not necessary for the shareholders purpose ie internal payroll records

  • a risk of misuse of the information ie customer client list

  • EXCEPTION= cant refuse if shareholder holds 25% or more of capital ie too important

ifa company breaches a shareholders info rights the shareholder may challenge resolutions passed at a gm

• this right to challenge is not absolute and depends on timing and purpose of the info request

  • pre meeting request= shareholders can seek annulment of resolutions only if the info was essential to exercise their voting rights effectively

  • during meeting request= cannot annul resolutions if info is denied during the meeting

    • can claim damages for any loss suffered due to lack of info

protect shareholders participation while balancing companys confidentiality and commercial interests from abuse by controlling shareholders

other shareholder rights

strength of rights

• sa= genera;;y strong enforceable and well defined to protect both minority and majority shareholders

  • reflecting open nature and large shareholding

• sl= more restricted with trasnfer and exit rights requiring approval by other shareholders

  • reflecting closed closely held nature of these companies

types of riights

• challenge gm resolutions= requires holding 1 or more % of capital

  • ensures minority protection against abusive/unlawful decisions

• obtain certifications= can request proof of ownership rights or shares held

  • for legal or admin purposes

• exit/withdrawal rights= shareholder may leave the company under certain cinrcumstances

  • significant changes to company structure ie mergers or by law ammendments

  • minority protection rules for low dividends

• trasnfers= right to sell or assign their share

  • more flex in sa and more restricted by bylaws for sl

minority rights

designed to protect smaller shareholders against abuse by controlling shareholders so they have a real influence over key coproate matters

• usually require 5% or less of capital

  • threshold may be reduced to 3 in listed companies (stronger protection for minorities because stock market )

• call a gm= allows minority shareholders to bring issues to companies attention

• challenge resolutions= protects from unlawful or abusive decisions

• appoint directors (proportional system)= allows participation in management usually proportionally to their shareholding

• bring liability actions against directors= hold accountable fr mismanagement or breaches of duty

• request an audit= ensures transparency and accountability

• require a notary at the gm= formal recordings of proceedings safeguarding minority interests

• SA ONLY= add itsemds to the gm agenda

  • ensures matters important to minorities are discussed in big company

• SL ONLY= examine accounts

  • right to review financial statements to check company performance (personalised nature so everyone should see)

special shares/stakes

modify the rights of ordinary shareholders to provide flex in financing gov or investor incentives

• privileged shares= grants extra rights eg higher dividends or priority in profit disitrubtion

  • rewards certain shareholders ie founders or key investors

  • attracts investment providing incentives

  • cannot pay a fixed interests= maintains equity in nature not a debt

  • cannot remove pre emotive subscription rights of other shareholders

  • SA= cannot break proportionality of voting rights within the same class ie multiple votes

• non voting shares= no voting rights so shareholders cant influence governance

  • maximum of 50% os share capital can be non voting

  • receive a minimum preferential dividend as compensation ( guaranteed minimum payout before ordinary shareholders )

    • trade control rights for economic rights

  • special protection rights:

    • may regain temporary voting rights if preferential dividends are unpaid

    • have priority over ordinary shares in asset disitrubtion during liquidation

    • if profits are insufficient dividends accumulate for up to 5 years

• LISTED SA COMPANIES ONLY= redeemable shares= company can buy back from shareholders under pre agreed terms

  • maximum of 25% of share capital can be redeemable

  • must be fully paid at issuance (not 25% )

  • remdeption terms must be fixed at issuance ie pricing timing method

  • provides a fexlible financing tool for listed companies (short term quick investment)

    • redemption (company buying back share) reduces the share capital amount which mayaffectf proportional ownership of remaining holders

forms of representation of shares/ stakes

sa= shares

• represented by securities (paper certificates) or by book entries (electronic)

  • designed for market circulation and liquidity

  • Listed companies= must be electronically for stock market

• bearer shares= owner is anonymous

  • possession= ownership

  • rights attach to whoever holds the certificate

  • facilitate fre cirkulation but reduce transparency

• registered shares= owner is named and recorded in company register

  • so rights/obl are linked to the registered holder not mere possession

  • increase legal certainty and traceability

sl= stakes

• cannot be securities (paper)

• cannot be book entires (electronic)

• must be registered in the companys share register

  • reflects non trasnferable and personalised nature

securities= SA

a perfect security gives full rights automatically to whoever owns it (full control and economic benefit)

• automatic interest

• can sell freely

• ownership itself carries all economic and legal rights

shares in an sa are considered securities but they are imperfect securities

• rights depend on the bylaws = ownership of the share doest guarantee all shareholder rights

  • some rights may require additional conditions ie voting rights only if shares are fully paid

• possession doesn’t guarantee full rights= for registered shares just holding the certificate doesn’t make you the shareholder

  • the company register decides who has the rights

• obligations attach to the share = certain obligations like payement of unpaid share capital follow the security

  • so buying the share may also trasnfer financial liabilities unlike a perfect security

book entry shares sa

dematerialised shares that exist only in electronic form and are not represented via paper certificates

• trasnfer occurs through accounting entries rather than physical delivery updating the ownership ledger instantly

  • facilitates efficient trading and settlement especially in listed companies on stock exchange

• no physical doc is issued as proof of ownership

  • certificates can still be issued as evidence of ownership if requested but they are not necessary for legal validity

  • reduces risk of loss theft or forgery associated with paper

registration

• ownership is proven by registration in the companys internal or central registry

• registration is managed by financial institutions ie brokers and custodians or banks

  • listed companies= central depository are necessary

• registration provides legitimacy of the shareholders rights

  • a person recorded in the registry is the lawful owner for all purposes

• ownership through registration allows

  • pledging shares as collateral for debts without transfer of physical certificates

  • creating usufruct rights= third party use of rights (dividends voting) without ownership transfer

enhance liquidity and efficinciency especially in listed companies while maintaining certainty and enforceability of rights