Allotment of shares, Business Law and Ethics


An allotment, legally, is the company's acceptance of an offer to buy its shares. Thus we can say it is governed by the following rules of the common law relating to contract.

a)      Where a company issues a prospectus, the issue is an invitation to treat but not an offer. It is not regarded as an offer because of practical reasons: if it was regarded as an offer where each application made pursuant thereto would constitute an acceptance and the company would be contractually bound to allot all the shares applied for. If the issue was oversubscribed, the company would be sued by the applicants who were not given the shares they had applied for. As this appears to be unjust the English courts have avoided the eventuality by regarding the issue of the prospectus merely as an invitation to treat. Where applications are made that they will constitute offers. The company would then find out how many shares had been applied for and, if the issue is oversubscribed, accept applications which equal the shares available and reject the others. The company would not be sued by those to whom shares have not been allotted because there would be no contract between them and the company. They made offers which were not accepted by the company - and the company could not accept the various offers because it did not have shares to sell.

b)      The company's acceptance must be unconditional. If, therefore, the application was for 10 shares and only 5 were allotted, the allotment would be a counter-offer which the allottee could reject. But this might be the only reasonable or just thing for the company to do if the issue was over-subscribed. In order to overcome the legal problem, companies invariably prepare application forms which contain a clause to the effect that the applicant "agrees to accept" such number of shares as the company in its absolute discretion may allot to him.

c)      The acceptance must be communicated to the applicant. This means that the allottee must actually receive the letter of allotment so that he is aware of the allotment. Whether the letter of allotment is lost in transit there would be no binding contract. However, it was explained in Household Fire Insurance Co. Ltd v Grant (46) that, if the applicant expressly or impliedly authorised the company to communicate the acceptance by post, there would be a binding contract the moment the letter of acceptance is posted. It is irrelevant that the letter was delayed or, as in that case, was lost in transit. In such a case the Post Office would be regarded as the applicant's agent and delivery of the letter of allotment to the post office would legally be equivalent to its delivery to the applicant himself-in accordance with the principles of the law of agency.

d)      The allotment must be made within a reasonable time: Ramsgate Victoria Hotel Co v Montefiore (47).

Posted Date: 1/12/2013 3:11:43 AM | Location : United States

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