Issuing shares at a discount - allotment of shares, Business Law and Ethics

Issuing shares at a discount:

In Ooregum Gold Mining Co of India Ltd v Roper (45) the House of Lords held that it is illegal for a limited company to issue its shares at a discount. This decision was made on the basis of what is now S.5 (4) of the Act which provides that the memorandum shall state the amount with which the company will be registered and "the division thereof into shares of a fixed amount". Since the nominal value of a share is fixed by the memorandum the company cannot issue the share at a discount.

After the above case was decided, s.59 of the Act was incorporated so as to permit a company to issue its shares at a discount if-

 a) The shares are of a class already issued.

 If the shares are of a class already issued, they will most likely have a market value. The market value would provide a basis upon which the company's directors would recommend, and the members resolve on, the amount of the discount. In the absence of such a market value any amount decided on as the new price for the shares would be as arbitrary as the original nominal value.

 b) The issue is authorised by a resolution passed in general meeting.

 This provision places upon the company's members ultimate responsibility for the issue at a discount.

c) The resolution identific the maximum rate of discount

It is the members who determine, to a large extent, the market value of the shares. They can therefore jointly decide on the amount below which they would not be willing to sell their shares in the market . The amount so decided on would guide the directors on the maximum amount of discount at which they would be willing to issue the remaining shares, or some of them.

Posted Date: 1/12/2013 3:19:11 AM | Location : United States

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