Capital and Financing of Companies - Essay Example

Company Shareholders Issuance of shares is one way through which companies raise capital. A share in this case refers to an interest of shareholders with respect to the portion of shares acquired in the company. Thus, when an individual or corporation buys shares in a company, they become shareholders. However, the interest of shareholders may vary in accordance with the number of shares held by the shareholder (Schneeman 2012, p.383). The position of shareholders in a company is that they are the real owners of a company. When one buys shares in a company, he immediately becomes a member of the company and acquires certain rights and obligations through shares bought. As members of the company, company Act, confers upon them certain rights and duties. One such is the responsibility to ensure that the company is effectively managed for the benefit of all the company stakeholders. The shareholders do this by appointing directors who act on their behalf to ensure that the company is effectively managed. They also have the right to remove directors by calling for an annual general meeting when they feel that the directors are not acting in good faith to safeguard their interest and those of other stakeholders (MacIntyre 2010, p.5-8). As members of the company, they also have the right to appoint company auditors during an annual general meeting to verify the company’s financial statements such as statement of financial position and income and expenditure statement to ascertain if they are properly kept and reflect the company’s true state of affairs. The work of auditors in a company is very vital considering that it helps in revealing any form of malpractices such as fraud and errors that may have occurred in the financial statements, which are used by company stakeholders for decision-making (Schneeman 2012, p.383). As a member of a company, a shareholder also has a right to vote during a general meeting where crucial a decision affecting the company is made. It is through their voting rights that they are able to exercise their management powers, which are delegated to directors and managers. It is worth noting that company Act protects shareholders from liabilities to third parties in case of liquidation. This is because they are required to be limited to the extent of capital contributed by members. This implies that in case a company is liquidated, then creditors of the company would only be required to part with the shareholders capital and not their personal property since they are a separate legal entity (Organization for Economic Co-operation and Development 2012, p.771-73). Shareholders main interest is to earn a return in a company from the shares capital contributed. This is because they contribute the capital as an investment and therefore, expect a return out of it. The return for shareholders always comes in the form of a dividend, which can be awarded as interim of final dividend. Nonetheless, there is no guarantee that shareholders must get dividend every financial year as this depends on the company’s performance. This implies that dividends are only awarded when the company is performing well and is making enough profit (MacIntyre 2010, p.9-11). Share capital Every corporation limited by share is required by the company Act to have a share capital. The share capital in this case is the money invested by shareholders in the company to enable the company to operate. However, the company has a right to either increase or alter the share capital issued depending on the prevailing condition. The share capitals are always divided into different categories with has certain rights attached as per the articles or memorandum of association of a company (Organization for Economic Co-Operation and Development 2012, p.74-75). Nature of share capital As earlier stated, a share is the interest of a shareholder in a company. However, the shareholder is a separate legal entity from that of the company according to Salmon v. Salmon (1967). However, the interest a shareholder has on the company confers upon them the right to participate on company affairs as long as the company is operating as a going concern. However, the right ceases when a company is wound up , and every shareholder is held liable for any amount not paid on the shares held (MacIntyre 2010, p.9-11). Company act also mandate directors of a company to issue shares to the public after receiving consent from the shareholders. In addition, the memorandum and articles of association also requires a company to keep a register of all the classes and shares held by each shareholder for inspection (MacIntyre 2010, p.9-11). Issuance of shares Basically, there are two types of shares that a company may issue; ordinary and preference shares. Of the two, ordinary shares are the most commonly issued share capital. These are the type of shares which have voting rights, attached and entitles shareholders to different rates depending on the amount of shares held (Organization for Economic Co-Operation and Development 2012, p.77). Preference shares are a type of shares that hold preferential rights, hence their name. The preference is usually administered with respect to dividend payment. This implies that when a company declares dividend payments, the preference shareholders would be paid first their dividend, usually at a fixed rate before distributing the remaining earnings to ordinary shareholders (MacIntyre 2010, p.13-15). All these shares may be issued through initial public offering, in which shares are sold at a given fixed rate to the public. The value rate during initial public offering is usually lower and attracts many people who purchase shares with the aim of profiting when the prices of the shares go up. Secondly, a company may opt to give rights issues by providing additional shares to already existing members in proportion to their share holding. Lastly, shares may also be issued as a bonus issue, which involves adding more shares to already existing shares (MacIntyre 2010, p.13-15). Transfer of shares Unless restricted by the memorandum and articles of association of a company, shares are generally transferable. The restrictions on the transferability of shares exist mainly in private and non-listed companies and not in publicly listed companies. As such, company directors usually have no right to resist any transfer of share unless clearly stated in the article of association. However, it is noted that where a company’s articles says so, then the directors are legally required to act in the company’s interest and in good faith and (Goyal and Goyal 2010, p. 51-58). Basically, the transfers involve transferring the legal title to the shares held usually done through execution and release of authentic instruments of transfer to the company. However, where the shares are traded on a stock exchange, such instruments are not needed because the shares are already registered in the central depository’s name (Goyal, and Goyal 2010, p. 51-58). References Goyal, A., & Goyal, M. 2010, Financial Market Operations, FK Publications, Upper Saddle River, NJ: MacIntyre, E. 2010 Business Law (6th ed.), Longman Publishing Group, London. Organization for Economic Co-Operation and Development 2012, corporate governance the role of institutional investors in promoting good, OECD Publishing, Hoboken, NJ. Schneeman, A. 2012, the law of corporations and other business organizations, Cengage Learning, New York. Stolowy, H., & Lebas, M. 2006, Financial Accounting and Reporting: A Global Perspective, Cengage Learning, New York. Read More