238 15: Share capital Part E Capital and the financing of companies
5.1 Private companies
Private companies may issue shares for inadequate consideration provided the directors are behaving
reasonably and honestly.A private company may allot shares for inadequate consideration by acceptance of goods or services at
an over-value. This loophole has been allowed to exist because in some cases it is very much a matter of
opinion whether an asset is or is not of a stated value.
The courts therefore have refused to overrule directors in their valuation of an asset acquired for shares if
it appears reasonable and honest. However a blatant and unjustified overvaluation will be declared invalid.5.2 Public companies
There are stringent rules on consideration for shares in public companies.More stringent rules apply to public companies.
(a) The company must, at the time of allotment, receive at least one quarter of the nominal value of
the shares and the whole of any premium.
(b) Any non-cash consideration accepted must be independently valued.
(c) Non-cash consideration may not be accepted as payment for shares if an undertaking contained in
such consideration is to be, or may be, performed more than five years after the allotment. This
relates to, say, a property or business in return for shares. To enforce the five year rule the law
requires that:
(i) At the time of the allotment the allottee must undertake to perform their side of the
agreement within a specified period which must not exceed five years. If no such
undertaking is given the allottee becomes immediately liable to pay cash for their shares
as soon as they are allotted.
(ii) If the allottee later fails to perform their undertaking to transfer property at the due time
they become liable to pay cash for their shares when they default.
(d) An undertaking to do work or perform services is not to be accepted as consideration. A public
company may, however, allot shares to discharge a debt in respect of services already rendered.
If a public company does accept future services as consideration the holder must pay the company
their nominal value plus any premium treated as paid-up, and interest at 5% on any such amount.
(e) Within two years of receiving its trading certificate, a public company may not receive a transfer
of non-cash assets from a subscriber to the memorandum. This is unless its value is less than
10% of the issued nominal share capital and it has been independently valued and agreed by an
ordinary resolution.5.2.1 Valuation of non-cash assets
When a public company allots shares for a non-cash consideration the company must usually obtain a
report on its value from an independent valuer.
The valuation report must be made to the company within the six months before the allotment. On
receiving the report the company must send a copy to the proposed allottee and later to the Registrar.
The independent valuation rule does not apply to an allotment of shares made in the course of a takeover
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