Maintenance of share capital and the payment of dividends
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Maintenance of share capital and the payment of dividends. Corporate Law: Law principles and practice. Maintenance of share capital The principle under common law and the Corporations Act 2001 ( Cth ) is that a company should preserve the capital of the company.

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Maintenance of share capital and the payment of dividends

Maintenance of share capital and the payment of dividends


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Maintenance of share capital

The principle under common law and the Corporations Act 2001 (Cth) is that a company should preserve the capital of the company.

A company should therefore not give away capital, should not buy overvalued assets, nor buyback shares where that reduces company capital.

The preservation of capital is important to members who have invested in the company, and to creditors who provide lending and credit to the company based on its financial viability.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Reduction of share capital

A company can reduce its capital and give financial assistance if it complies with the strict procedures of law.

Any reduction of capital must have the approval of members and be fully disclosed.

The directors will be personally liable if a reduction of capital or financial assistance leaves the company insolvent.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Reduction of share capital cont …

The principle that a company should not reduce its capital is from the case of Trevor v Whitworth (1887) 12 App Cas 409.

There are now many exceptions to this rule.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of capital reduction

  • Under legislation there are a number of types of capital reduction:

  • share capital reductions

  • share buybacks

  • self-acquisitions schemes

  • financial assistance


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Reasons for reducing capital

  • The company may reduce its share capital if it:

  • wishes to extinguish or reduce its liability on partly paid share capital by buying them back

  • wishes to return capital to members

  • has accumulated losses and wishes to bring the amount of its issued capital in line with the value of its net assets

  • wishes to swap shares for debentures or some other security instruments

  • has capital in excess of its needs and decides to return some of the excess value to members.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Returning capital

If a company does decide to return capital, any such action must be done in a fair and equitable manner.

Fowlers Vacola Manufacturing Company Ltd [1966] VR 97


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Reduction of share capital cont …

  • Section 256A of the Corporations Act 2001 (Cth) states the purpose and rationale of the rules behind share capital reductions and buybacks as being designed to protect the interests of shareholders and creditors by:

    • a) addressing the risk of these transactions leading the company’s insolvency

    • b) seeking to ensure fairness between the company and the company’s shareholders

    • c) requiring the company to disclose all material information.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Reduction of share capital cont …

  • Under s 256B of The Corporations Act 2001 (Cth) a company may reduce its share capital provided it satisfies the following three requirements. The reduction of share capital:

  • must be fair and reasonable to the company’s shareholders as a whole

  • must not materially prejudice the company’s ability to pay its creditors

  • must be approved by shareholders under s 256C.

  • A share for no consideration is a share capital reduction. Section 256B does not apply to this reduction.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • ‘Fair and reasonable’ share capital reductions

  • A company must consider such matters as:

  • the price paid for the shares by the company

  • whether the practical effect is that shareholders are treated equally according to the company’s constitution, and this is fair and reasonable to each individual shareholder

  • whether the reduction is being used to facilitate or prevent a takeover bid

  • whether the reduction involves an arrangement that should more properly proceed as part of a scheme of arrangement.

  • Winpar Holdings Limited v Goldfield Kalgoorlie Ltd [2000] NSWLR 728


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Material prejudice against creditors

Any reduction in the share capital reduces the funds available to creditors so the company must ensure that creditors are not put at any further risk.

Assets must exceed liabilities after a capital reduction.

Directors may be personally liable if a reduction leaves the company insolvent (Corporations Act 2001 (Cth) s 588G).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Equal and selective reduction of share capital and shareholder approval

  • The reduction of share capital is achieved by cancellation of shares and a payment made to those shareholders whose shares are cancelled.

  • There are two basic types of reduction of capital:

  • equal share capital reduction

  • a selective share capital reduction (sCorporations Act 2001 (Cth) 256B(2)).

  • Both types of share capital reduction require shareholder approval (s 256C).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Types of buyback listed under s 257B

Equal access schemes: allow all members to offer for sale their shares in equal amounts

Selective buybacks: offering to purchase the shares of a particular class

Minimum holding: buybacks designed to buy out small holdings of shares

Employee share schemes: allow employees who have participated in an employee share participation scheme to sell their shares back to the company

On-market: a purchase of shares by a company, by making an offer on the ASX


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Shareholder approval of reduction of share capital

  • A selective reduction of share capital can be approved in two ways:

    • by a special resolution of shareholders where no votes are cast in favour of the resolution by any person who is to receive consideration as a part of the reduction or whose liability to pay any unpaid amounts on shares is reduced, or by any of their associates.

    • through approval by all ordinary shareholders, that is, a unanimous resolution (Corporations Act 2001 (Cth) s 254C(2)).

  • If a reduction involves a cancellation of shares, then the selective reduction must also be approved by a special resolution of shareholders whose shares are to be cancelled, as well as a special resolution passed at the general meeting (s 256C(2)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Information about selective buybacks

Information about selective buybacks must be given to shareholders .

To ensure that shareholders make an informed decision, the company is required to disclose all material information on how to vote on the resolution in the notice of the meeting to shareholders (Corporations Act 2001 (Cth) s 256C(4)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Information about selective buybacks cont …

  • Under s 256C(5) of the Corporations Act 2001 (Cth), before the notice of meeting is sent to shareholders, the company must lodge with ASIC a copy of:

  • the notice of the meeting

  • any other document relating to the reduction of share capital.

  • Resolutions approving the reduction must be lodged within 14 days after they are passed, and the company cannot make any reduction until after that 14-day lodgement (s 256C(3)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Capital reductions not otherwise authorised (s 256B)

A share capital reduction must comply with s 256B of the Corporations Act 2001 (Cth).

The contravention of law is not an offence and does not invalidate the transaction (s 256D(2)).

A civil penalty may apply under s 1317E against directors who promote a capital reduction.

Directors may be liable for insolvent trading under s 588G.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Capital reductions not otherwise authorised cont …

Directors may be liable for a share capital reduction that leads to insolvent trading under s 588 of the Corporations Act 2001 (Cth).

The liquidator of the company may bring an action against directors for insolvent trading (s 588M) and penalties may be imposed on directors under s 1317E.

Directors may commit a criminal offence if their conduct is found to be dishonest (s 256D(4)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Capital reductions not otherwise authorised cont …

The injunction power under s 1324 of the Corporations Act 2001 (Cth) provides a remedy for breach of s 256B (s 1324(1A)(b)) if the reduction is not fair and reasonable to shareholders, or where it prejudices the creditors.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Other share capital reductions

  • Other share capital reductions are provided for in ss 258A –258F of the Corporations Act 2001 (Cth) and they fall outside the requirements of s 256B. These reductions include:

  • share capital reduction by unlimited companies (s 258A)

  • the company having the right to grant a lease or right of occupy property belongs to the company.

  • the company paying brokerage or commission to a person in respect of that person or another person agreeing to take up the shares in the company (s 258C).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Other share capital reductions cont …

  • cancellation of shares forfeiture under the terms on which they were issued (s 258D)

  • the redemption by a company of a redeemable preference share out of the proceeds of a new issue of shares made for this purpose (s 258E(1)(a)). This is governed by ss 254J and 254K

  • cancellation of paid up shares capital that is lost or not represented by available assets: (s 258F). This reduction does not apply to trading losses incurred in the usual course of business, but applies to unusual losses.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Company self-acquisitions of shares

Direct acquisition by a company of its own shares

Corporations Act 2001 (Cth) s 259A–259D

A company is prohibited from acquiring shares in itself, except as provided by the Act.

Trevor v Whitworth (1887) 12 App Cas 409

Companies cannot acquire their own shares directly or indirectly except as permitted by s 259A.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Company self-acquisitions of shares cont …

  • There are some exceptions to the rule against a company acquiring its own shares:

  • the buyback is conducted under the share buyback rules (Corporations Act 2001 (Cth) s 257A).

  • no consideration has been given for their acquisition by the company or an entity it controls

  • the buyback has been ordered by a court

  • the acquisition is exempt (s 259B(2)(3)): e.g. an employee share scheme approved under s 259B(2)

  • the company’s ordinary course of business includes providing finance on ordinary commercial terms (s 259B(3)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Taking security over shares

A company must not take security over its own shares or over the shares of another entity it controls except under ss 259B(2) and (3) of the Corporations Act 2001 (Cth).

The prohibition is aimed at preventing a company from taking security over its own shares.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Taking security over shares cont …

  • The exceptions to this rule are:

  • under an employee share scheme approved under s 259B(2) of the Corporations Act 2001 (Cth)

  • if a company’s ordinary course of business includes providing finance on ordinary commercial terms (s 259B(3)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Share buybacks

  • While there is a first-instance prohibition on a company purchasing its own shares, this can be done under a number of exceptions, and for good reasons. For example:

  • giving small companies the ability to buy back the shares of a major shareholder who wishes to leave the company

  • allowing the operation of employee share acquisitions schemes

  • permitting a company to buy its shares on the market to stabilise its share price

  • allowing a company protect itself from a takeover bid by creating a more competitive price for the company’s shares.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Permitted share buybacks

A company can buy back limited percentages of their own shares each year.

A company can buy back 10% of its shares in a 12-month period.

If the buyback is to exceed the 10%/12 months limit, then some form of shareholder approval will be required.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Permitted share buybacks cont …

The power to buy back shares is set out in s 257A of the Corporations Act 2001 (Cth) and states that a company can buy back its own shares only if:

the buyback does not materially prejudice the company’s ability to pay its creditors; and

b) the company follows the procedure set out in this Division.

Section s 257A also stipulates that a company cannot buy its own shares if its constitution imposes restrictions on it buying its own shares.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Permitted share buybacks cont …

Notice of an intended buyback must be lodged with ASIC within 14 days of passing the relevant resolution approving the buyback (Corporations Act 2001 (Cth) s 257F).

Within one month of the registration of the shares back to the company, it must lodge a notice with ASIC with all details (s 254Y).

A company must include with the offer to buy back shares a statement setting out all information known to the company that is material to the decision whether to accept the offer (s 257G).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of share buyback

  • Equal access scheme

  • a buyback of shares with the same percentage for each shareholder and on the same terms

  • shareholders should be given reasonable time to accept a buyback, and be advised of the time of acceptance set (Corporations Act 2001 (Cth) s 257B(2))

  • if the 10/12 rule is exceeded, the company must pass an ordinary resolution

  • members must have adequate notice of the meeting, and all relevant information (s 257C)

  • ASIC must be informed of all details (s 257F)


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of share buyback cont …

  • Selective buybacks

  • a buyback where different members are treated differently

  • the 10/12 rule does not apply

  • requires approval by a special resolution

  • members who own the shares cannot vote (Corporations Act 2001 (Cth) s 257D(1)).

  • the usual notification of the meeting and adequate information must be given to members

  • ASIC must be notified and documents lodged (s 257D(3)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of share buyback cont …

  • On-market buyback

  • The shares of a listed company are repurchased by the company in the ordinary course of trading on the securities exchange.

  • An ordinary resolution is required and relevant documents must be filed with ASIC if exceeding 10/12 rule. 


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of share buyback cont …

  • Employee share buyback

  • a buyback of employees’ shares that have been approved by the directors and a general meeting

  • An ordinary resolution is required and relevant documents must be filed with ASIC if exceeding the 10/12 rule.

  • Minimum holding buyback

  • a buyback of all of a holders shares in a listed company where the shares are less than a marketable parcel


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Types of share buyback cont …

  • Creditor protection

  • s 257J of the Corporations Act 2001 (Cth) deals with the signposts and warnings of consequences for companies.

  • If directors enter into a buyback, this amounts to insolvent trading, or if the buyback causes the company to become insolvent under s 588G, then the director may be liable for insolvent trading.

  • Other remedies:

  • voidable transaction (s 588FF))

  • injunction or damages (s 1324(1A))


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Financial assistance for acquisition of shares

A company may indirectly reduce its share capital when it financially assists a person to purchase shares in the company.

Provisions exist to maintain creditor and shareholder protection (Corporations Act 2001 (Cth) ss 260A–260D).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Financial assistance for acquisition of shares cont …

  • A company may financially assist a person to acquire shares in the company or its holding company provided it satisfies the following requirements (Corporations Act 2001 (Cth) s 260):

  • the assistance does not materially prejudice the company, its shareholders or the company’s ability to pay its creditors

  • the shareholders’ approval is obtained under s 260C

  • the assistance is exempted under s 260C, which covers both general and specific exemptions.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • What is financial assistance?

  • ‘Giving financial assistance’ includes actions such as:

  • making a loan (Corporations Act 2001 (Cth) s 260)

  • giving a guarantee

  • being released from an obligation or forgiving a debt

  • the company providing its own assets as security for a person’s loan to buy shares in the company.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

No material prejudice

Section 260A(1)(a) of the Corporations Act 2001 (Cth)permits a company to give financial assistance as long as it does not materially prejudice the company, its shareholders or the company’s ability to pay its creditors.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Shareholder approval

  • Shareholders may approval the giving of financial assistance to a person to acquire shares in the company or in a holding company under s 260B of the Corporations Act 2001 (Cth) by the following:

  • a special resolution passed at a general meeting (with no vote being cast in favour of the resolution by the person acquiring the shares, or associates of those persons)

  • a unanimous resolution agreed to by all ordinary shareholders.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Giving of financial assistance

  • A special resolution to allow financial assistancemust be approved by special resolution passed at a general meeting of the holding company (Corporations Act 2001 (Cth) s 260B(2)(3))

  • A special resolution put to a general meeting must accompany the notice of meeting setting out all known information material to the decision on how to vote on the resolution (s 260B(4)).

  • A notice of the meeting and the accompanying documents must also be lodged with ASIC before being sent to members (s 260B(5)).

  • A special resolution giving the financial assistance must be lodged with ASIC within 14 days after being passed (s 260B(7)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Giving of financial assistance cont …

Note: improper giving of financial assistance

ASIC v Adler [2002] NSWSC 171


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • General and specific exemptions to giving financial assistance

  • Section 206C of the Corporations Act 2001 (Cth) sets out a number of exemptions to the giving of financial assistance under s 260A, including financial assistance:

  • given during the ordinary course of commercial dealing that consists of:

  • acquiring or creating a lien on partly paid shares (s 260C(1)(a))

  • entering into an instalment agreement for the purchase of shares (s 260C(1)(b)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • General and specific exemptions to giving financial assistancecont …

  • given in the ordinary course of business of a financial institution on ordinary commercial terms (Corporations Act 2001 (Cth) s 260C(2))

  • in the form of a guarantee or other security given by a subsidiary of a borrowing company in the ordinary course of commercial dealing (s 260C(3))

  • given under an employee share scheme approved by a general meeting of the company and, in the case of a subsidiary, approved by a general meeting of the holding company (s 260C(4)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Other exemptions

  • Other exemptions include:

  • permitted reduction of share capital (s 260C(5)(a))

  • permitted share buybacks (s 260C(5)(b))

  • assistance given under a court order (s 260C(5)(c))

  • a discharge on ordinary commercial terms of a liability incurred by a company in relation to a transaction entered into on ordinary commercial terms: (s 260C(5)(d)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Consequences for failing to comply with s 260A

Failure to comply with s 260A of the Corporations Act 2001 (Cth) does not affect the validity of the transaction and the company is not guilty of an offence.

Contravention of s 260A attracts a civil penalty under s 1317E.

Directors are not relieved from having to comply with their statutory and common law fiduciary duties because the giving of financial assistance is authorised by the provisions of the law or approved by the company’s shareholders (s 260E).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • The legal nature of a share

  • Shares are a form of personal, intangible property that, together with debentures and options, are included in the definition of as a ‘security’ under s 92

  • Shares are a form of personal property s107A,

  • shares are a collection of personal rights and obligations -a ‘chose in action’.

  • Shares possess the significant features of being:

  • transferable ( through sale and purchase)

  • capable of transmission to a personal representative in the event of death, mental incapacity of bankruptcy

  • capable of being used as security.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Share capital

Directors have the power to issue shares in terms of their broad powers under s 198A of the the Corporations Act 2001 (Cth).

Directors must issue shares for a proper purpose.

A company may issue shares for any amount. In fact, shares can be issued for different amounts at different points of time.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Share capital cont …

  • Issued shares may be partly paid (Corporations Act 2001 (Cth) s 254A(1)(C)).

  • Different members may owe different unpaid amounts according to when the share was paid.

  • A company may limit its ability to issue shares under its constitution.

  • If shares are partly paid, the member will still be liable for the unpaid amount on a call up (s 254M).

  • A member need not pay any more if the share is fully paid up.

  • Different classes of shares may have different rights according to the company constitution.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Different classes of shares

  • The application for registration of a company must include the class of shares that members agree to take up (Corporations Act 2001 (Cth) s117(2)(k)).

  • A company must lodge a notice with ASIC setting out details of shares divided into different classes (s 246F(1)).

  • A public company must lodge with ASIC a copy of a document or resolution that attaches rights, or varies or cancels rights attaching to shares (s 246F(3)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Issuing of shares

    The issuing of shares follows normal contract law principles of offer and acceptance:

  • an investor makes an offer;

  • the company must determine if they will accept the offer and make an allotment, the confirmation of which forms the contract;

  • the company must then establish and maintain a register of members (Corporations Act 2001 (Cth) s 168 and 169) and represent proof of membership, unless there is contrary evidence (s 176).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Classes of shares

  • Ordinary shares

  • The shareholder:

  • is entitled to a dividend (subject to dividend rules concerning directors’ powers, and obligations relating to capital maintenance)

  • has voting rights at company meetings

  • has the right to repayment of capital on winding up

  • has the right to participate in distribution of capital on winding up.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Classes of shares cont …

  • Preference shares

  • The rights set out in the company constitution or otherwise approved by special resolution must be specified in relation to:

  • repayment of capital

  • participation in surplus assets and profits

  • cumulative or non-cumulative dividends

  • voting

  • priority of payment of capital and dividends in relation to other shares or other classes of preference shares (Corporations Act 2001 (Cth) s 254A(2) & s 254G(2)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Preference shares cont …

  • Shareholders have a preferential right to:

  • payment of any dividend ahead of ordinary shareholders (the payment of a dividend is usually calculated as a fixed percentage of the issue price of the shares)

  • repayment of capital on winding up.

  • Shareholders have restricted voting rights relating to proposals for reductions of capital, variation of class rights, or the winding up of the company.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Specific classes of preference shares

  • Participating preference shares: bestow the right to receive additional dividends as well as preferential dividends and the presumed right at common law to receive surplus capital after repayment of capital contribution.

  • Cumulative preference shares: presumed to be so at common law; bestows the right to be paid arrears of dividends in later years ahead of ordinary shareholders if the dividend is not paid in a particular year.

  • Redeemable preference shares: these may be issued under s 254A(1)(b) of the Corporations Act 2001 (Cth). The company can pay back (‘redeem’) the issue price to the shareholder out of profits or proceeds of a new share.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Variation of class rights

  • Members with special rights attached to their shares can invoke the protection of ss 246B–246G of the Corporations Act 2001 (Cth).

  • Procedures set out in s 246B provide for two possible courses of action:

  • If the constitution sets out the procedure for varying or cancelling class rights, those rights may be varied or cancelled only in accordance with the procedure.

  • If there is no constitution, there needs to be a special resolution by the company to change the rights attached to shares. This must receive 75% of the votes of the members in that class.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Variation of class rights cont …

The company must give written notice of the variation or cancellation to the members of the class within seven days after the variation or cancellation is made (Corporations Act 2001 (Cth) s 246B(3)).

Members of a class holding at least 10% of the votes of the class concerned may apply to court to set aside the variation, cancellation or modification to the constitution, if the members in the class do not all agree to the measures being taken (s 246D(1)).


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Remedies

  • A court may:

  • set aside the variation, cancellation or modification if it is satisfied they would unfairly prejudice the applicants (Corporations Act 2001 (Cth) s 246D(5))

  • enforce the statutory contract under s 140(1) and seek an injunction

  • apply for a remedy under s 232 if the variation, cancellation or modification is unfair or oppressive.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Issuing or transferring shares to a controlled entity

A company is not permitted to purchase shares within an entity it controls (Corporations Act 2001 (Cth) s 259C).

Determination of control is defined in s 259E as the capacity of a company to determine the outcome of decisions about the entity’s financial and operating policies.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Issuing or transferring shares to a controlled entity cont …

There are some exemptions to the prohibition in s 259C(1) of the Corporations Act 2001 (Cth) whereby the issue is void unless:

 (a) the issue or transfer is to the entity as a personalrepresentative; or

 (b) the issue or transfer is to the entity as trustee and neither the company nor any entity it controls has a beneficial interest in the trust, other than a beneficial interest that satisfies these conditions:

(i) the interest arises from a security given for the purposes of a transaction entered into in the ordinary course of business in connection with providing finance; and


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

Issuing or transferring shares to a controlled entity cont …

(ii) that transaction was not entered into with an associate of the company or an entity it controls; or

(c) the issue to the entity is made as a result of an offer to all the members of the company who hold shares of the class being issued and is made on a basis that does not discriminate unfairly, either directly or indirectly, in favour of the entity; or

(d) the transfer to the entity is by a wholly-owned subsidiary of a body corporate and the entity is also a wholly-owned subsidiary of that body corporate.


Maintenance of share capital and the payment of dividends

Corporate Law: Law principles and practice

  • Issuing or transferring shares to a controlled entity cont …

  • Under s 259C(2) of the Corporations Act 2001 (Cth), ASIC may exempt a company from the operation of this section. The exemption:

  • must be in writing

  • may be granted subject to conditions.


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