Shares and companies

Company

An entity that has a separate legal existence from its owners, established under the Corporations Act 2001

Shareholders/Members

The owners of a company, who are not personally liable for its debts

Liability of Owners

Creditors can only claim against company assets, not shareholders' personal assets; owners can lose at most what they invested plus any money owing on shares

Number of Members and Directors (Proprietary)

Minimum of one director, maximum of 50 shareholders

Number of Members and Directors (Public)

Minimum of one member, must have at least three directors (two of whom must reside in Australia)

Continuity of Existence

A company has an indefinite life and continues even if its shareholders change; transfer of shares has no effect on this

Legal Entity

A company can buy and sell property, enter contracts, and sue or be sued in its own name; it is responsible for its own liabilities and pays income tax at a flat rate of 30 percent

Transferability of Ownership

Owners' equity is divided into shares; shares in public companies can be bought and sold through stock exchanges, letting shareholders convert investments into cash

Separation of Ownership and Management

Shareholders own the company but elect a board of directors to oversee administrative decisions, who then hire a CEO to manage daily operations

Australian Company Number (ACN)

A number allocated to a company on registration to help identify it, in addition to its ABN

Corporations Act 2001

Federal legislation that sets out the laws for business entities in Australia and regulates company formation and operation

Purpose of the Corporations Act

To provide consistent governance of companies, protect those involved with incorporated bodies, define incorporated entities, regulate formation and insolvency, and set audit requirements

ASIC

Australian Securities and Investments Commission; the federal body that enforces the Corporations Act

Proprietary Company

Formed by a minimum of one person, needs one director, maximum 50 shareholders, cannot raise funds from the public, must include "Proprietary Limited" or "Pty Ltd" in its name

Public Company

Minimum of one member, must have three directors and a secretary, must prepare and externally audit financial reports, must hold an AGM

Large Proprietary Company

A proprietary company that satisfies at least two of: consolidated revenue of $50 million or more, consolidated gross assets of $25 million or more, or 100 or more employees

Replaceable Rules

A table of rules in the Corporations Act covering matters such as directors' powers, remuneration, and meeting procedures, which apply unless replaced by a constitution

Company Constitution

A set of rules regulating a company's internal affairs, acting as a contract between the company, its members, and directors; can replace or add to the replaceable rules

Forming a Company

Involves deciding on a business structure, choosing a name, deciding on a constitution or replaceable rules, obtaining consent from directors/secretary/members, and lodging with ASIC

Certificate of Registration

Issued by ASIC once a company is successfully registered, along with an Australian Company Number

Prospectus

A document issued to the public inviting them to buy shares in a company, containing the information needed to make an informed investment decision

Information in a Prospectus

Includes past financial reports, future projections, business and industry information, director details, expert reports, and details of the share issue itself

Register of Members

A record containing the name and address of each company member, along with details such as date of allotment, number and class of shares, and amounts paid and unpaid

Director Eligibility

A person must be over 18 and not disqualified due to criminal offences, bankruptcy, or insolvency to be appointed as a director

Powers of Directors

Include managing the company's business, executing negotiable instruments, conferring power on a managing director, delegating powers, and inspecting company books

Duties of Directors

Include exercising care and diligence, acting in good faith, avoiding conflicts of interest, not misusing information or position, ensuring the company does not trade while insolvent, and protecting shareholders' rights

Duty to Not Trade While Insolvent

Directors must consider whether a company is or will become insolvent before incurring new debt

Duty to Keep Books and Records

A company must keep adequate financial records to correctly record and explain its transactions, financial position, and performance

Consequences of Insolvent Trading

Can include civil penalties, compensation proceedings, and criminal charges, with penalties of up to 15 years' imprisonment if dishonesty or recklessness is involved

Rights of Shareholders

Include receiving company profit, notice of meetings, attending and voting at meetings, receiving annual reports, and disposing of their shares

International Accounting Standards Board (IASB)

An independent standard-setting board that works with national standard-setters to achieve global convergence in accounting standards

International Sustainability Standards Board (ISSB)

An independent board that develops global sustainability-related disclosure standards for capital markets

Australian Accounting Standards Board (AASB)

An independent organisation that develops and issues accounting standards that have the force of law in Australia

Australian Securities Exchange (ASX)

Requires listed public companies to comply with listing rules, including providing regular financial reports

Shares

Units of ownership in a company that can be bought and sold, entitling holders to participate in decision-making and share in profits

Ordinary Shares

A type of share that can be issued by a company, representing standard ownership units

Bonus Shares

Shares issued by a company, distinct from ordinary shares, typically issued to existing shareholders

Listed Company

A company whose shares are traded on the share market; it must be large enough and have a successful operating history to qualify

Listing Rules

Rules a listed company must follow, including telling the public immediately about anything that could influence the decision to buy or sell its shares

Initial Public Offering (IPO)

When a company issues shares to the public for the first time, requiring a prospectus lodged with and registered by ASIC

Secondary Market

The market where shares already issued by a company can be sold to other investors after the initial offering

Primary Market

The initial offering of shares by a company, as recorded in the company's books

Access to Company Information

Any person and company member has the right to inspect the company share register; public company members must receive financial report information at least 21 days before the AGM

Returns to Shareholders

Include dividends, buy-back of shares, and distribution of remaining assets if the company is wound up

Dividends

Payments to shareholders out of the company's profit after income tax

Buy-back of Shares

When a company buys its own shares back from shareholders

Winding Up

If a company is wound up, any remaining assets after repaying creditors are distributed to shareholders according to their share rights

Ordinary Shareholders

Have voting rights and an entitlement to dividends that is not automatic or fixed; they rank last in any distribution of assets if the company is wound up

Offering Shares

Once registered, a company can raise money by issuing shares; only public companies can invite the public to subscribe, via a prospectus

Share Issue Price

For an initial share issue, the price is generally set at a convenient figure such as 50c, $1, or $2

ASIC's Role in Share Issues

A public company must tell ASIC about changes to its share structure as part of its annual statement

ASX's Role in Share Issues

Sets Listing Rules for companies to have securities quoted on the exchange, aiming to provide a fair, informed, and competitive market

Preliminary Expenses

Costs a company must pay to set up the business and commence trading, such as ASIC fees and legal consultation, classified as an expense

Share Issue Costs

Costs incurred directly because of issuing shares, such as prospectus printing, professional advisor fees, underwriting and brokerage; these are a deduction from equity, not an expense

Bonus Share Issue Purpose

To consolidate the capital of a company by moving value from reserves into share capital, without changing total shareholders' equity

Effect of Bonus Shares on Share Price

Has little overall effect on equity, though the market often responds by reducing the market value per share as the number of shares increases

Asset Revaluation Reserve

An equity account created when a company's assets are revalued upward, often used to fund bonus share issues

Dividend Declaration

When a company announces to the market its intention to pay a dividend and the amount, often advising shareholders by letter

Ex-Dividend Date

The date from which buyers of shares are no longer entitled to that period's dividend; the share price often falls by about the dividend amount on this date

Payment Date

The date a company actually pays a declared dividend to shareholders, typically four to eight weeks after the ex-dividend date

Final Dividend

A dividend that shareholders accept at the AGM, recommended by directors

Interim Dividend

A dividend declared and approved by directors partway through the year, separate from the final dividend

Retained Earnings

The cumulative net earnings or profits of a company, from which dividends are paid out

Use of Retained Earnings

Companies may retain earnings to finance expansion, increase production capacity, hire staff, launch new products, or fund share buybacks instead of paying dividends