ACCA F4 - Corp and Business Law (ENG)

Part E Capital and the financing of companies  15: Share capital 237

4.6 Bonus issues

A bonus issue is the capitalisation of the reserves of a company by the issue of additional shares to

existing shareholders, in proportion to their holdings. Such shares are normally fully paid-up with no cash

called for from the shareholders.

A bonus issue is more correctly but less often called a 'capitalisation issue' (also called a 'scrip' issue).

The articles of a company usually give it power to apply its reserves to paying up unissued shares wholly

or in part and then to allot these shares as a bonus issue to members.

5 Issuing shares at a premium or at a discount

In issuing shares, a company must fix a price which is equal to or more than the nominal value of the

shares. It may not allot shares at a discount to the nominal value.

Every share has a nominal value and may not be allotted at a discount to that.

In allotting shares every company is required to obtain in money or money's worth, consideration of a

value at least equal to the nominal value of the shares plus the whole of any premium. To issue shares 'at

par' is to obtain equal value, say, £1 for a £1 share.

Ooregum Gold Mining Co of India v Roper 1892

The facts: Shares in the company, although nominally £1, were trading at a market price of 12.5p. In an

honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p

already paid, so the purchasers of the shares were actually paying twice the market value of the ordinary

shares. When, however, the company subsequently went into insolvent liquidation the holders of the new

shares were required to pay a further 75p.

If shares are allotted at a discount to their nominal value, the allottee, if they agree to the issue, must

nonetheless pay the full nominal value with interest at the appropriate rate. Any subsequent holder of

such a share who knew of the underpayment must make good the shortfall.

Consideration for shares

Partly-paid shares The no-discount rule only requires that, in allotting its shares, a company shall not

fix a price which is less than the nominal value of the shares. It may leave part of

that price to be paid at some later time. Thus £1 shares may be issued partly-paid –

75p on allotment and 25p when called for or by instalment. The unpaid capital

passes with the shares. If transferred, they are a debt payable by the holder at the

time when payment is demanded.

Underwriting fees A company may pay underwriting or other commission in respect of an issue of

shares if so permitted by its Articles. This means that, if shares are issued at par

the net amount received will be below par value.

Bonus issue The allotment of shares as a 'bonus issue' is for full consideration since reserves,

which are shareholders' funds, are converted into fixed capital and are used to pay

for the shares.

Money's worth The price for the shares may be paid in money or 'money's worth', including

goodwill and know-how. It need not be paid in cash and the company may agree to

accept a 'non-cash' consideration of sufficient value. For instance, a company may

issue shares in payment of the price agreed in the purchase of a property.

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