Issue, buy-back and assistance

1. The board may issue the shares

Tamarind Advisory Ltd still has 100 ordinary shares, all fully paid, issued at Rs 1,000. Meera holds 60 and Ravi holds 40. Stated capital is Rs 100,000. There is no constitution. Asha wants 20 further shares at the same price of Rs 1,000 each.

Section 52 lets the board issue shares at any time, to any person, and in any number, subject to the Act and the constitution. Tamarind has no constitution, so the Act’s default applies. The new shares will carry the same rights as the existing ordinary shares. They do not need a separate terms-of-issue resolution under section 52(2), because that step is for shares that confer different rights or impose an obligation on the holder.

Within 14 days of the issue the company gives the Registrar notice of the number of shares, the consideration, the stated capital after the issue, and the person who took them.

If Asha were a non-citizen, the board would have to see the certificate under the Non-Citizens (Property Restriction) Act before the shares were issued. The same certificate rule applies to a transfer. Asha in this chapter is a Mauritian resident, so that certificate is not the question on these facts.

Companies Act, sections 52 and 55.

2. Meera and Ravi are offered the new shares first

The 20 shares will rank equally with the existing shares for votes and dividends. Section 55 then requires the company to offer them first to the holders of the existing shares, in a way that keeps those holders’ relative voting and distribution rights, unless a constitution says otherwise. Tamarind has none.

Meera’s 60 shares are 60 per cent of the 100 already issued. Ravi’s 40 are 40 per cent. An offer that keeps those proportions is 12 shares to Meera and 8 shares to Ravi. Twelve is 60 per cent of 20. Eight is 40 per cent of 20.

The offer stays open for a reasonable time, and that time is not less than 14 days. If Meera and Ravi do not take the shares, the board may issue them to Asha. If Meera takes her 12 and Ravi declines his 8, only the declined shares are free for Asha. The board does not skip the offer because Asha is ready to pay.

Asha cannot take the shares this afternoon

Asha offers Rs 20,000 today and asks the board to issue all 20 shares to her this afternoon. The board must not do that. The equal-ranking issue has to be offered to Meera and Ravi for at least 14 days, in the 12 and 8 split. Stated capital moves only when the shares are actually issued. Twenty shares at Rs 1,000, fully paid, would add Rs 20,000 to stated capital, taking it from Rs 100,000 to Rs 120,000.

3. Buying the shares back

A company must not purchase its own shares except on a route section 68 allows. Those routes include a purchase under sections 69 and 70, a shareholder’s buy-out under sections 108 to 110, a unanimous approval under section 272 for a private company, a unanimous resolution under section 106, or a court order. Redemption of a redeemable share is the separate route in sections 76 to 80.

Before any payment to acquire or redeem, the board must not have reasonable grounds to believe the company is, or would after the payment be, unable to satisfy the solvency test. The payment also must not leave the company with no shares on issue other than convertible or redeemable shares.

Tamarind may hold shares in itself only where section 72 is met. The constitution must expressly permit it, the board must resolve that the shares will not be cancelled, and, except for a private company holding a Global Business Licence or an Authorised Company, the shares held must not exceed 15 per cent of that class previously issued. Tamarind has no constitution and holds neither permission. It cannot park a buy-back in treasury. If it acquires shares on a permitted route, they are cancelled, and stated capital of the class is reduced to reflect the amount that leaves stated capital.

Companies Act, sections 68 and 72.

4. Lending Asha the price

Asha asks Tamarind to lend her the Rs 20,000 so that she can buy the new shares. That loan is financial assistance: help given in connection with the acquisition of the company’s own shares. Section 81 includes a loan, a guarantee and security.

The board may give the assistance only if it has already resolved three things. The assistance is in the interests of the company. The terms are fair and reasonable to the company and to any shareholder who is not receiving the assistance. Immediately after the assistance, the company will satisfy the solvency test.

There is a further gate when the amount is large. If the assistance, together with any other assistance still outstanding, exceeds 10 per cent of stated capital, the company must first obtain a certificate from its auditor or, where it has no auditor, from a person qualified to act as its auditor. The certificate says the person has inquired into the company’s affairs and that nothing indicates the board’s solvency opinion is unreasonable.

The Rs 20,000 loan is above 10 per cent

Stated capital is Rs 100,000 before the loan. Ten per cent of Rs 100,000 is Rs 10,000. The loan is Rs 20,000. No other assistance is outstanding. Rs 20,000 is more than Rs 10,000, so the certificate is required even though both directors are willing to sign the board resolution. The assistance is not a dividend. Section 81(4) says the amount is not a distribution for sections 61 and 63. The solvency opinion is still required.

A subsidiary of Tamarind must not hold shares in Tamarind. An issue of Tamarind shares to that subsidiary is void, and so is a transfer of Tamarind shares to it. Asha is not a subsidiary. The loan to her is the section 81 question, not the section 83 question.

Companies Act, sections 81 and 83.

What you should now be able to explain

The board may issue the 20 shares, and it must first offer 12 to Meera and 8 to Ravi for at least 14 days. A buy-back needs a route in section 68, the solvency test, and, on these facts, cancellation rather than treasury. A loan of Rs 20,000 to fund the purchase needs the board resolution and the auditor’s certificate, because it is above 10 per cent of stated capital.

Next: the charge Tamarind gives when it borrows, and the 28 days for filing it. The shareholder vote this chapter has used is counted in the decisions chapter.