Brokerage - raising of capital, Business Law and Ethics

Brokerage:

Brokerage is a payment made by a company to a broker, or brokers, in consideration for "placing" the company's shares. It differs from underwriting commission in that it is a payment made to an agent who is selling the company's shares on its behalf without undertaking to buy the shares which he fails to sell. In Andreae V Zinc Mines of Great Britain Ltd (45) Bailhache, J. explained that a payment is brokerage only if it is made to "stockbrokers, bankers and the like that who exhibit prospectuses and send them to their customers and through whose mediation the customers are induced to subscribe" as. Consequently, a payment which was made to a lady of a percentage on the amount of capital which she induced third parties to subscribe for shares in the defendant company was held not to be brokerage. The lady could not be regarded as a "broker" on the basis of such an isolated transaction. The person to whom the payment is made must be one who carries on the business of a broker, either exclusively or as part of his general business, as in the case of a banker.

Subsection (3) provides that nothing in Section 55 "shall affect the power of any company to pay such brokerage as it has heretofore been lawful for a company to pay". It was previously held in Metropolitan Coal Consumers' Association V Scrimgeour (1895) that brokerage of a reasonable amount paid by a company in the ordinary course of its business was legal. In that case the brokerage was 2 1/2%. The usual brokerage varies between 1/4% - 1/2%. The reasonableness of the commission does not depend on mere percentages but on what it would cost the company to sell the shares by itself. If, by paying the brokerage, the company would spend less money in selling the shares then the payment would be regarded as a reasonable one. Although the payment of brokerage is a derivation from mercantile usage it is usual for companies to incorporate in their articles a clause which expressly authorises the company to pay brokerage. For example, Article 6 of Table A provides that "the company may also on any issue of shares pay such brokerage as may be lawful".

Although payment of brokerage means that the company will ultimately receive less money for the shares it has issued the payment is not prohibited by the Act. It is essentially an expense which is incidental to the issue of the shares and a company cannot avoid incurring such an expense.

Posted Date: 1/12/2013 4:12:45 AM | Location : United States







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