Institute of Business Administration (JU)

BBA (17th Batch)

Session: 2007-08
Course: Legal Environment of Business
Course Code: BUS 211
CT: Rumana Islam

Lecture- 8

Share

The capital of a company is divided into small units of fixed vale. Such units are called
shares. According to section 2(14) of the Companies Act - “‘Share’ means share in the share
capital of the company.”

Share is not a sum of money but an interest measured by a sum of money and made up of
various rights contained in the contract.

Features of share:

1. Share is a small part of capital

2. Though share has monitory value, it is not money
3. Share in an interest measured by money
4. Share is a movable, intangible and transferable property
5. It is a bundle of rights and liabilities arising out of contract.

Classification of shares:

Shares may be broadly of two kinds—

1. Ordinary/ equity share
2. Preference share
3. Deferred share

1. Ordinary Share: The owners of ordinary shares enjoy the ordinary right of dividend and
get back their capital after the preference shareholders but they have greater responsibilities
in the management of the company. The features are--

i. They receive dividend after satisfying the preference shareholder

ii. During liquidation, their capital is returned after the preference shareholders
iii. They participate directly in the management

2. Preference Shares: Preference shares carry a preferred right to a certain minimum

dividend in a year and ordinary share carry the rest. So the features are—
i. They receive interest in priority to the ordinary shareholders
ii. Their interest is given in a fixed rate
iii. Their capital is repaid in priority to the ordinary shareholders at winding up
iv. Normally they do not participate in the management

1
Preference shares may be again of following kinds—
a. Cumulative and Non-cumulative preference share
b. Redeemable and Irredeemable preference share
c. Participating and Non-participating preference share

a. Cumulative and non-cumulative Preference share:

If there is no profit in one year and arrears of dividend are to be carried forward and paid out
of profits of subsequent years the preference shares are said to be cumulative. But if the
unpaid dividend lapses the shares are called non-cumulative preference shares.
Articles provide clarification I this regard and in case of no clear provision in the article, the
preference shares are presumed to be cumulative. According to law six years dividend may
be paid at best at a time for cumulative preference shares.

b. Redeemable and Irredeemable preference share:

The company may have the option to pay back to the holders of shares which is called
redemption. Such shares are called redeemable preference share. There are following
restrictions in this regard—
i. Shares to be redeemed must be fully paid
ii. Shares shall be redeemed out of profits or out of proceeds of a fresh issue
of shares made for the purpose of redemption, not otherwise.
iii. Where redemption is made out of profits, a sum equivalent to the amount
paid on redemption shall be transferred to a reserve fund known as capital
redemption reserve account.
The shares which are not redeemable and whose value is repaid only at the time of winding
up, is called irredeemable preference share.

c. Participating and Non-participating preference share

After paying dividend to the preference and ordinary shareholders out of profits or after
repaying the capital to ordinary and preference shareholder at liquidation, if there is any
surplus, a question will arise, whether preference shareholders are also entitled to a share in
the distribution of surplus. If they are so entitled, they are called participating preference
shareholder. Otherwise they are non-participating preference shareholders.

Generally preference shares are non-participating.

3. Deferred Shares: Deferred shares, which are sometimes called founder share or
management share, are usually of small nominal amount with a right to take the whole or
proportion of the profits after a fixed dividend has been paid on the ordinary shares. Their
rights depend on articles or the terms of issue.
Generally promoters buy these shares and thus they are also known as promoter share.

Bonus share: Company can issue bonus shares to the shareholders in following cases—
1. In spite of huge profit, if the company lacks cash, company can issue shares in
stead of dividend.
2. Where the company requires some working capital to enlarge its business or to
face some practical problems

2
. If the capital reserve exceeds the share capital of the company.

Allotment of share:
Offers of shares are made on application forms supplied by the company. When an
application is accepted, it is an allotment.

Nature of allotment:

Company can allot or issue shares in following manners—

i. Issue of shares at par -- When share is issued on its face value. Shares valuing Tk.
1000 is issued at Tk. 100.
ii. Issue of Share at premium – If shares are issued for value greater than face value.
If 100 Tk. Share is sold at Tk. 110.
iii. Issue of shares at discount – If shares are issued for a value less than its face
value. If 100 Tk. share is sold at Tk. 80.

According to section 152, the conditions for such allotments at discount are—
a. Such issue must be approved by resolution in the general meeting and High Court.
b. It must be issued within 6 months of courts approval.
c. Commission cannot exceed 10% of the face value.

Statutory restrictions on allotment:

1. Company must submit a prospectus or a statement in lieu of prospectus to the

Registrar before allotment.
2. No share can be allotted unless minimum subscription is collected which is required
to meet the preliminary expenses.
3. The application money which must not be less than 5% of the nominal value of the
shares must have been received in cash.
4. Shares cannot be allotted at once after the issue of prospectus. No allotment shall be
valid until the beginning of 5th day from date of issuing prospectus or of 3rd day of
issuing statement in lieu of prospectus.
In case of non compliance shares will be valid but directors will be personally liable.

General rules of allotment:

1. By Proper Authority: The proper authority for allotment of share is Board of

Directors. If permitted by article, power may be delegated to others.
2. Within reasonable time: Allotment must be made within a reasonable time. Otherwise
the application for share lapses.
3. Allotment must be communicated: An allotment must be communicated to the
applicant. Posting of properly addressed and stamped letter of allotment is sufficient
communication even if the letter is delayed or lost is the course of post.
4. Absolute and unconditional: Allotment must be absolute ad unconditional. Otherwise
it turns into a counter offer. In “Liquidator of Consolidated Copper etc Ltd. vs.

3
 Peddiec”, the defendant applied for 100 shares but he was allotted only 25 shares. It
was held that the allotment is not valid.

Effects of irregular allotment:

According to section 141 and 148 of the Companies Act, the remedies for irregular allotment
are as follow—
1. Allotment becomes voidable at the option of allotee
2. Directors will be personally liable for compensation but suit must be filed within two
years of allotment.

Return regarding allotment:

Section 151 of the Companies Act requires the company to submit a return to the Registrar
within 60 days of allotment which will contain the number of allotted shares, their value,
name and address of the allotees, paid and unpaid part of the money, etc.

In case of non- compliance directors will be liable for taka 1000 for each day of default.

Share Call:
The liability of a shareholder to pay the full value of the shares held by him is enforced by
making ‘calls’ for payment. A ‘call’ is a demand by the company on its shareholder to pay
whole or part of the balance remaining due and unpaid on each share made at any time during
the continuance of the company.

Company can require full payment of each share or require the shareholder to pay the amount
in some installment. For example, a share valuing 100 taka may be paid in the following way
—
On application – Tk 10
On allotment – Tk 40
On first call – Tk 25
On second call – Tk 15
On final call – Tk 10
Here except the amount paid on allotment and application and allotment (10+40) = 50, rest of
the amount may be paid by three installments. These three installments are called share calls.

Requisites of valid call:

1. A call must be made under a resolution of Board of Directors duly appointed and
qualified and meeting being duly convened and resolution, being duly passed in the
presence of proper quorum.
2. The resolution must state the amount of the call and time in which it is to be paid.
Otherwise the call is valid.
3. A call must be made bona fide only in the interest of the company and not otherwise.
4. Call shall be made on a uniform basis on all shareholders falling under the same class.
5. At least 21 days’ notice must be served to pay the called money.
6. Company can claim interest in case of delay in payment and can forfeit the share in
case of non- payment.
7. No call shall be for an amount exceeding one fourth of the face value of the share.

4
 8. At least one month shall be maintained between two consecutive share calls.

Share Calls in Advance:

The company can receive any kind of unpaid amount or part from the shareholder in advance
though no call is yet made, if permitted by the article of the company. This is called share
calls in advance. The shareholder will be entitled to an interest not exceeding 6% until the
amount becomes due.

Share Calls in Arrear:

If the shareholder fails to pay the call money the amount which remains arrear may be called
later if permitted by article. Such share is known as Share call in arrear. For example, A
company calls for 2000 shares 3 Tk each. 100 shares are not paid. So (100×3) = 3000 Tk is
share calls in arrear.
Company can claim 5% interest on arrears until it is duly paid.

Forfeiture of Share:

If a member, having been called upon to pay, defaults the company may, bring an action and
if article permits can forfeit such shares. Forfeited shares become the property of the
company and can be re-issued on new terms.

Rules regarding valid forfeiture:

1. Forfeiture can be made only on the grounds specified in the article.
2. A 15 days’ notice under the authority of Board of Directors must be served on
the shareholder in default.
3. The notice of forfeiture does not operate by itself. The directors must pass a
resolution to declare the forfeiture operative.
4. The power of forfeiture must be exercised in good faith for the benefit of the
company, not at the request of the shareholder to relieve him.
5. If the forfeited shares are re-issued the new allotee will not be liable for the
payment of previous calls.

Share Surrender:

If the shareholder, of his own, surrenders his shares to the company, then it is known as Share
surrender. There is no reference regarding share surrender in the Companies Act but the court
has admitted this in several cases.

Rules regarding share surrender:

1. It must by supported by article of association

2. There must be a valid call by the company to pay some amount of share
3. The shareholder must be in default in payment
4. Company can accept forfeiture in order to avoid formalities of forfeiture
5. The shareholder must be really unable to retain the shares and pay future calls
6. The shares can be re-issued on new terms
7. The shareholder can surrender his shares to receive the shares of same value as fully
paid shares.
8. No formalities are to be maintained by the company in case of share surrender.

5
Lien on Share:
Lien means the right to retain the property of debtor unless and until the debt is satisfied. If
permitted by article the company can deny the shareholders right to transfer his shares unless
his dues are paid. This is known as lien on share.

Rules regarding Lien:

1. It must be permitted by article
2. The shares must be partly paid
3. Right of lien cannot be exercised if the shares are already mortgaged and company is
aware of the fact.
4. In order to realize the dues, the company can sell the shares under lien and the
transferee gets good title.

Share Certificate:

Section 158 of the Companies Act 1994 provides that every company shall within 90 days of
allotment or registration of any transfer of share prepare ad keep ready for delivery a
certificate with the company’s seal. Such certificates are called share certificate.

Legal Effects of Share Certificate:

1. The company is liable to keep the certificate ready, not to deliver
2. Company cannot deny the authenticity of the share certificate
3. Company cannot deny the amount stated in the certificate
4. Company is not liable for a forged certificate
5. It is an evidence of ownership, therefore, with the transfer of share the the
certificate also is changed.

Share Warrant:

Section 46 provides that a company, if authorized by article, can issue share warrant in favour
of the holder or bearer with the interest specified in the instrument. The shares which are
fully paid can be transferred into share warrant.

Legal effects of Share Warrant:

1. Share warrant is a negotiable instrument and for this it is easily transferable,
2. Title of share warrant passes to the transferee with manual delivery only
3. As soon as the share warrant is issued, share holder’s name in removed from the
member’s list
4. Holder of share warrant has no voting right.
5. Holder is entitled to dividend by submission of a coupon attached with the share
warrant
6. The holder can, by surrendering the warrant for cancellation, re-issue the share
certificate and enter his name into the members’ list.

Share Transfer:

According to section 30 (1), share is a movable property and therefore, it is easily

transferable subject to the provisions of article. The transfer of a shareholder’s interest in a
company is called share transfer.

6
Procedure of share transfer:
1. Either the transferor or transferee shall submit an application to the company
regarding transfer of share. (Section 38) Application form is prescribed in the article;
otherwise it can be taken from Table ‘A’, Regulation 19.
2. With the application the following documents must be submitted—
i. Transfer deed signed by both parties
ii. Share certificate or the letter of allotment

3. The company, if the shares are not fully paid, give a notice to the transferee, regarding
the dues of the shares he is taking, and if, within two weeks receives no objection
from the transferee, shall enter his name into the Register of members.
4. Every transfer of share must be registered according to section 38 of the Companies
Act. The Company has the power to refuse registration on logical ground.
5. After registration, the name of the transferor shall be removed from the members’ list
and the name of the transferee shall be added. Otherwise the transferor shall remain
liable for future calls.
6. A new share certificate shall be issued in the name of the transferee.

In this way, the total procedure of share transfer is complete.