Public Issue of Shares
The flotation of a public company involves the offer of its shares to the public at large or to clients of a financial institution such as a merchant bank. A private company might be converted into a public company and floated. Flotation involves the issue of the shares to the market. Flotation is normally accompanied by securing quotation on a recognised stock exchange.
An issuing house will usually offer the shares to the public. It may (or may not) underwrite the issue and agree to take it up, if not fully subscribed. Shares may be offered by tender. A minimum price may be fixed.
Alternatively, shares may be allotted to an issuing house, which places them with its clients in blocks. The issuing house may or may not purchase them. It may arrange to place them, without purchasing. It will use its connections in the financial markets to place the shares with appropriate investors, such as companies, insurance companies, pension funds and larger scale investors.
New shares may be issued by way of a rights issue to the existing shareholders. The default position is that the existing shareholders have a right of pre-emption. This is provided for by statute and may dis-applied. Stock exchange rules generally require the preservation of rights of pre-emption.
Private companies may not issue their shares to the public generally. A private company may have up to 149 shareholders. An offer may be made to a limited category of persons, in accordance with one of a number of exceptions to this general prohibition.
At common law, a company could not enter a contract before it was formed. This followed from the general principle that an agent may not act on behalf of a non-existent principal. In order to facilitate pre-incorporation contracts, the Companies Act allows certain pre-incorporation contracts to be ratified by the company after formation so that it thereby becomes bound by them.
The contract must be entered into by a person for and on behalf of the proposed company. The person who purports to act in the name of and on behalf of the company, shall in the absence of an express agreement to the contrary, be personally bound by the contract or other transaction and entitled to it.
Promoters, in common with the directors, are in a fiduciary position in relation to the company. This arises from their position of control and the potential for abuse. The imposition of fiduciary obligations seeks to ensure that promoters do not exploit their position, to the detriment of the company and the investors.
The classic example of a breach of fiduciary duties by a promoter arises where he fails to disclose a secret profit made on the transfer of assets to the new company. Because of the fiduciary relationship, promoters must at a minimum, make prior disclosure of profits made the company’s expense.
If the promoter breaches his fiduciary duties to the company, he must account for any secret profit made. Contracts between the director, and the company may be cancelled/ rescinded. Damages may be awarded to the company.
In the broader sense, a promoter is one who undertakes to form a company for a purpose and takes the necessary steps to do so. The fiduciary obligations apply, irrespective of whether monies are being raised from the public. The promoter must not exploit his position in relation to the newly formed company or proposed company.
The fiduciary issues are of little practical importance where a one-man company is involved, and there are no investors. However, fiduciary issues become of central importance where monies are being raised from third parties.
Duties and Liability
Apart from fiduciary duties evolved by the courts, the Companies Act places liability on promoters for misstatements made in the context of promotion. Persons who thereby suffer loss and damage by reason of an untrue statement in a prospectus or the omission of any information required by prospectus law may be awarded against persons involved in the issue. This is not limited to promoters but extends to various parties who approve or sign the prospectus or are deemed to do so.
Formerly, the Companies Act set out the format of prospectus required, for the offer of shares to the public. The legislation was updated in 2005 in the context of modern common EU European rules on prospectuses, market abuse and transparency. They are set out in the EU Prospectus Directive, Transparency Directive and Market Abuse Directive which have been transposed into Irish law by the Companies Act provisions and statutory instruments under The European Communities Act.
The legislative requirements are detailed and onerous in the case of an initial flotation /offer of shares. Later share issues require further disclosures and compliance. There are uniform criteria for the on-going disclosure obligations for companies which are listed on regulated markets/ stock exchanges.
Acquisitions from Subscribers
A plc shall not enter an agreement with the initial subscribers to the memorandum of association of a PLC to transfer a non-cash asset to the company or another, where the consideration is given by the PLC, of more than 10% of the nominal value of the issued share capital at the time of the transaction, unless certain conditions are complied with
The conditions are
- the consideration to be received by the PLC (that is to say, the asset to be transferred to the PLC or the advantage to the PLC of its transfer to another person) and any consideration other than cash to be given by the PLC have been valued
- a report with respect to the accordance with those provisions during the 6 months immediately preceding the date of the agreement;
- the terms of the agreement have been approved by an ordinary resolution of the PLC; and
- not later than the date of the giving of the notice of the meeting at which the resolution is proposed; or where a unanimous written resolution is used, 21 days before the date of the signing of the resolution by the last member to sign; copies of the resolution and report have been circulated to the members of the PLC entitled to receive that notice or sign the resolution and, if the relevant person is not then such a member, to that person, A report of an independent person equivalent to the above must have been furnished to the PLC within six months.
Acquisitions from Subscribers II
The report of the independent person shall
- state the consideration to be received by the PLC, describing the asset in question, specifying the amount to be received in cash and the consideration to be given by the PLC, specifying the amount to be given in cash;
- state the method and date of valuation;
- contain a note by the independent person, or be accompanied by such a note, as to the matters set out above in relation to independent reports above; and
- contain a note by the independent person, or be accompanied by such a note, that, on the basis of the valuation, the value of the consideration to be received by the PLC is not less than the value of the consideration to be given by it.
If a PLC enters into an agreement with any relevant person in contravention of the above requirement and either the relevant person has not received a report or there has been some other contravention of this requirement which he or she knew or ought to have known amounted to a contravention, then, the PLC shall be entitled to recover from the relevant person, any consideration given by the PLC under the agreement or an amount equivalent to its value at the time of the agreement. The agreement so far as not carried out, shall be void.
Where a PLC contravenes any of the above provisions, the PLC and any of its officer who is in default is guilty of a category 3 offence.
The court may grant relief to persons who in breach the above prohibitions, acquire shares or are subsequent holders of shares, who would otherwise become liable to the company to pay consideration by reason of the breach. The court may grant relief if it is just and equitable to do so.
In so deciding, a court must have regard to whether the applicant has paid or is liable to pay an amount in respect of any other liability arising in relation to shares under other provisions, whether any other person has or is likely to pay the requisite amount to the PLC and whether the consideration has been performed.
The court is to have regard to the overriding principles that the company shall receive fair payment in money or in kind for the allotment of the shares including sufficient to cover the nominal amount and the premium and that where there is more than one remedy, that it is for the PLC to determine, which remedy it shall take.
Persons who are liable to the PLC may seek contributions from others who have the same liability. Where a person brings any proceedings against another (the “contributor”) for a contribution towards any liability to a company arising above, and it appears that the contributor is liable to make such a contribution, the court may, if and to the extent that it appears, having regard to the respective fault of the parties that it is just and equitable to do so, exempt the contributor in whole or in part, or order the contributor to make a larger contribution than, that which he would be otherwise would be liable to make.
Where a person is liable to a PLC under the above provisions, the court may, on an application exempt that person in whole or in part from liability if and to the extent that it appears to the court just and equitable to do so having regard to any benefit accruing to the PLC by virtue of anything done by that person towards the carrying out of the agreement.
Undertakings to do work or services for a PLC, which constitute a breach of the above provisions are nonetheless enforceable by the PLC.
No allotment shall be made of the share capital of a PLC offered for subscription, unless that capital is subscribed for in full, or the offer states that even if the capital is not subscribed for, the amount of that capital subscribed for may be allotted in any event or in the event of conditions specified in the offer being satisfied.
Where a prospectus states a minimum amount which it must raise by the offering and that no allotment shall be made unless that minimum amount has been subscribed, then, no such allotment shall be made unless that minimum amount has been subscribed and the sum concerned has paid up.
Where shares have been allotted in contravention of the above requirements, or the conditions have not been satisfied, then on the expiry of 40 days after the date of the first issue of the prospectus, monies received from applicants for shares shall be repaid forthwith immediately or in the latter case, the expiration of the 40-day period, to the applicants without interest.
If the monies are not immediately paid when due, the directors of the PLC are jointly and severally liable to pay the money with interest at the appropriate rate from thereafter. A director shall not be liable if he proves that the default in the repayment was not due to any misconduct or negligence on his behalf.
An allotment made by a PLC in contravention of the above requirements is voidable by the applicant within 30 days after the allotment. Where the allotment is avoided, the PLC shall within 30 days after avoidance, register the variation in the allotment. Proceedings to recover loss or damage must be initiated within two years after the date of the return of allotments.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.31 Courtney
Keane on Company Law 5th Ed.Ch. 7 (2016) Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Gore-Browne on Companies
Palmer’s Company Law