This article has been written by Mr. Hemant Kumar, a 2nd year LL.B student from Faculty Of Law, Delhi University.
A limited company is a type of business structure where the liability of the company’s members or shareholders is limited to the amount they have invested in the company. Limited companies can issue shares to raise capital, and the shareholders own a portion of the company’s assets and profits. The power of a limited company to alter its shares is an important aspect of its ability to raise capital and manage its finances. This article will explore the power of limited companies to alter their shares, including recent judgments, case laws, and examples.
What is the power of a limited company to alter its shares?
A limited company has the power to alter its shares in several ways. This power is usually set out in the company’s articles of association and can include the ability to issue new shares, buy back existing shares, or alter the rights attached to existing shares.
The power to issue new shares allows a company to raise capital by selling new shares to investors. This can be done through a private placement, where shares are sold to a limited number of investors, or through a public offering, where shares are sold to the general public.
The power to buy back existing shares allows a company to reduce its share capital by purchasing its own shares from shareholders. This can be done for a variety of reasons, including to return capital to shareholders, to increase the value of remaining shares, or to prevent a hostile takeover.
The power to alter the rights attached to existing shares allows a company to change the dividend, voting, or other rights associated with its shares. This can be done to adjust the balance of power between different classes of shares, to respond to changing market conditions, or to reflect changes in the company’s strategy.
Recent Judgments and Case Laws
There have been several recent judgments and case laws that have clarified the power of limited companies to alter their shares.
One such case is Re Dee Valley Group plc [2017] EWHC 184 (Ch), which concerned the power of a company to issue new shares without the approval of all its shareholders. In this case, the company had issued new shares to a third party without obtaining the approval of all its shareholders. The court held that the company did not have the power to issue new shares without the approval of all its shareholders, even if the articles of association did not explicitly require such approval. The court found that the articles of association must be read as a whole and that the power to issue new shares must be construed in light of the other provisions in the articles.
Another recent case is Burry and Knight Ltd v Knight [2020] EWHC 2809 (Ch), which concerned the power of a company to buy back its own shares. In this case, the company had bought back its own shares from a shareholder, but the transaction had not been properly authorized by the board of directors. The court held that the transaction was voidable, as the board had not properly authorized the buyback. The court found that the power to buy back
shares must be exercised in accordance with the company’s articles of association and that the board must follow the proper procedures set out in the articles.
Examples
There are several examples of limited companies exercising their power to alter their shares.
The power of a limited company to alter its shares is a crucial aspect of its ability to manage its finances and raise capital. In this article, we will explore various examples and case laws related to the power of limited companies to alter their shares.
Facebook, one of the world’s largest social media companies, has exercised its power to alter its shares multiple times. In 2012, Facebook went public and raised $16 billion through an initial public offering (IPO). After going public, the company has issued several rounds of new shares, including in 2016 when it announced a plan to issue new shares without diluting the voting power of its founder and CEO, Mark Zuckerberg. The plan involved issuing a new class of non-voting shares, which would allow Zuckerberg to sell some of his shares without reducing his voting control of the company.
Apple
Apple, one of the world’s largest technology companies, has also exercised its power to alter its shares. In recent years, the company has bought back billions of dollars worth of its own shares. In 2018, Apple announced a $100 billion share buyback program, which was one of the largest in history. The program was aimed at returning cash to shareholders and boosting the value of remaining shares. The buyback program was completed in 2020, and the company has continued to buy back its own shares in smaller amounts.
Tesla
Tesla, an electric vehicle company, has issued new shares multiple times to raise capital. In 2020, the company announced a $5 billion share offering, which was aimed at funding its expansion plans. The company has also issued new shares through its acquisition of SolarCity, a solar energy company, in 2016.
Case laws
Re Dee Valley Group plc [2017] EWHC 184 (Ch)
In this case, the power of a company to issue new shares without the approval of all its shareholders was challenged. The company had issued new shares to a third party without obtaining the approval of all its shareholders. The court held that the company did not have the power to issue new shares without the approval of all its shareholders, even if the articles of association did not explicitly require such approval. The court found that the articles of association must be read as a whole and that the power to issue new shares must be construed in light of the other provisions in the articles.
Burry and Knight Ltd v Knight [2020] EWHC 2809 (Ch)
This case concerned the power of a company to buy back its own shares. The company had bought back its own shares from a shareholder, but the transaction had not been properly authorized by the board of directors. The court held that the transaction was voidable, as the board had not properly authorized the buyback. The court found that the power to buy back shares must be exercised in accordance with the company’s articles of association and that the board must follow the proper procedures set out in the articles.
Re Duomatic Ltd [1969] 2 Ch 365
In this case, the power of a company to alter its articles of association was challenged. The company had held a general meeting where all the shareholders had agreed to a resolution, but the resolution had not been properly passed in accordance with the articles of association. The court held that the resolution was still valid, as all the shareholders had agreed to it, and it was not necessary to follow the formal procedures set out in the articles of association. The case established the principle of unanimous consent, which allows shareholders to bypass formal procedures if they all agree.
REFERENCES:
- www.icsi.edu
- www.ibclaw.in
- www.nirmalbang.com
- Re Dee Valley Group plc [2017] EWHC 184 (Ch)
- Burry and Knight Ltd v Knight [2020] EWHC 2809 (Ch)
- Re Duomatic Ltd [1969] 2 Ch 365