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Capital Structure Printable Version

What type of capital structure is permitted?

The shares which a company, by its articles, is authorized to issue may be divided into several classes having different attributes and a class may be issuable in series. All shares must be without nominal or par value. The essential features of such a share are that:

·       It represents a proportionate interest in the net worth and earnings of a company;

·       The articles do not attach to the share an arbitrary fixed dollar value (such as the par value system under the previous law);

·       The directors, acting in good faith, may determine the purchase price or consideration on the original issue of the share subject to the requirements laid down in the Act;

·       It avoids the potentially misleading impact of par value shares on unsophisticated investors the dollar value of which does not represent their current market value or liquidation value;

·       It permits greater flexibility in arranging the company structure of an entity.

·       Shares without par value may be issued at different prices per share from time to time depending on the market conditions at time of issue; and

·       The whole of the consideration becomes part of the stated capital of the company.


What is "stated capital"?

A company under the Companies Act (other than a public company) is required to maintain in its accounting records a separate "stated capital account" for each class and series of shares issued. On the issue of each share the full price/consideration must be added to the appropriate stated capital account with an exception for non-arm's length transactions (inter-company issues). A company may not reduce any stated capital account except for the purposes and in the manner specified in the Companies Act. The transitional provisions of the Companies Act permit a former-Act company to include in its stated capital account any consideration received by it for a share it issued and any amount it credited to a retained earnings or other surplus capital account.


Can a Company own its own shares?

At common law a company could not own or purchase its own shares, as this would constitute a reduction in capital. Under the Companies Act a company is permitted to purchase or otherwise acquire shares issued by it unless (subject to certain exceptions) there are reasonable grounds for believing that -

·       The company is unable, or would, after that payment, be unable to pay its liabilities as they become due; or

·       The realizable value of the company's assets would, after that payment, be less than the aggregate of its liabilities and stated capital of all classes.

In addition, redeemable shares may be purchased or redeemed by a company at prices not exceeding the redemption price as stated in or calculated according to the formula in the articles unless there are reasonable grounds for believing that:

·       The company is unable or would, after that payment, be unable to pay its liabilities as they become due; or

·       The realizable value of the company's assets would, after that payment, be less than the aggregate of:

§      Its liabilities; and

§      The amount that would be required to pay the holders of shares that have a right to be paid, on a redemption or in a winding up, rateably with or before the holders of the shares to be purchased or redeemed.


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