AGREEMENT as to ISSUE of PAID-UP SHARES pursuant to another Form 19. CONTRACT not filed.

AN AGREEMENT made the

day of

between, &c. [as Parties.

in Form 2].

WHEREAS, by an agreement dated, &c., and made between the vendor Recitals. of the one part and A. B. on behalf of the company (then in course of formation) of the other part, it was agreed that the vendor should sell certain property known as the mines, and that the consideration

for the said sale should be the sum of --l., whereof 5,000l. was to be satisfied by the allotment to the vendor on or before the day

of- of 500 fully paid-up 107. shares of the company: AND WHEREAS the said agreement has been duly adopted by the company: Now THESE PRESENTS WITNESS that it is hereby agreed as follows:

1. The company shall forthwith cause this agreement to be filed with Filing the Regis. of J. S. Comp.

2. On the day of

agreement.

next [the time fixed by the agreement], Allotment of

the company shall allot to the vendor or to his nominees

up shares in the company.

fully paid

shares.

3. The said shares shall be numbered, &c., and shall be accepted by Numbers, &c. the vendor in full satisfaction of the said sum of 5,0007. AS WITNESS, &c.

Sometimes (supra, p. 12), it is not considered desirable to file the main contract for the acquisition of the company's undertaking, and accordingly a short contract as above is filed. This would seem to be a sufficient compliance with s. 25 of the Act of 1867.

AGREEMENT to ISSUE PAID-UP SHARES in SATISFACTION of DEBT Form 20. DUE by COMPANY.

AN AGREEMENT, made the

day of - between The A. Parties.

M. B. Company, Limited (hereinafter called the A. Company), of the

day of

one part, and the C. D. and E. Company, Limited (hereinafter called the C. Company), of the other part. WHEREAS by an agreement, dated Recitals. the and made between the C. Company, of the one part, and the A. Company, of the other part (being the agreement No. 1 referred to in the introduction to the articles of association of the A. Company), the A. Company agreed to pay the C. Company for the works and matters undertaken by the C. Company in connection with making and constructing a dock at the sum of 225,000l., whereof the sum of 75,000l. is payable by instalments in manner therein mentioned: AND WHEREAS an instalment of 10,0007., part of the said last-mentioned

Form 20. sum, will become payable to the C. Company on the

next:

day of

day of

next procure this

NOW IT IS HEREBY AGREED as follows:1. The A. Company shall before the agreement to be filed with the Registrar of Joint Stock Companies. 2. The A. Company shall, on or before the day of —— next allot to the C. Company or its nominees 1,000 shares of 107. each in the A. Company, which shares shall be deemed, for all purposes, to be fully fully paid up; paid up, and shall be numbered, in the books of the A. Company with the numbers

The A. Company to allot 1000 shares;

to be deemed

and to be

accepted by the C. Company instead of

cash,

to

inclusive.

3. The C. Company shall accept the said shares in full satisfaction and discharge of the said instalment of 10,0007., and of all claims and demands in respect thereof (a).

IN WITNESS, &c.

(a). As this instalment is not presently payable, this agreement requires to be filed under s. 25 of the Act of 1867. If the instalment were presently payable, the transaction would amount to a payment for the shares in cash, and in that case it would not be necessary to file the agreement. See supra, p. 14. But even then it would be expedient to file it for the benefit of transferees, who would thereby secure the preservation of evidence that the shares were in fact paid up in cash. See supra, p. 13. Where paid-up shares are to be issued in satisfaction of a debenture not yet due, a contract should be filed. Appleyard's case, 18 C. D. 587.

Recitals.

Filing agreement.

Allotment of shares.

part, and A. B., the company's secretary, on behalf of the several persons named in the schedule hereto (hereinafter called the applicants) of the other part.

In this case it is assumed that each application declared: "I hereby authorise the company's secretary to enter into a proper contract on my behalf to take any shares you may be willing to allot me," or that the prospectus contained an authority.

WHEREAS the company recently issued a prospectus inviting applications for 10,000 17. shares in the company at a discount of 2s. 6d. per share, and each of the applicants is willing to take at such discount the number of 17. shares set opposite his or her name in the schedule hereto, and has paid to company a deposit of 28. Gd. per share on such shares: NOW THEREFORE IT IS AGREED as follows:

1. The company shall forthwith cause one part of this agreement to be filed with the Registrar of Joint Stock Companies.

2. When and so soon as this agreement has been so filed, the company shall allot to each of the applicants the number of 17. shares in the capital of the company set opposite his or her name in the sd schedule.

3. In consideration of the sum of 2s. 6d. per share already paid as Form 21: aforesaid, and of the further sum of 15s. per share to be paid as to 5s. Repayment. per share on allotment and as to the balance when called for, each

of the shares so allotted shall be deemed for all purposes to be fully paid up.

Opinions differ as to whether shares in a company formed under the Companies Act, 1862, can validly be issued at a discount. According to Lindley (635), it is "to say the least, doubtful," and in Re Essex Brewery Co., 30 L. T. 862, Jessel, M.R., appears to have considered that an issue of shares at a discount of 80 per cent. was ultra vires though it was not necessary to decide the point. On the other hand, it was held by Chitty, J., in Re Ince Hall Co., 23 C. D. 545, that it was legal when the directors (having large powers) considered the issue beneficial to the company; their shares were issued at a discount of 10 per cent. But in Plaskynaston Tube Co., 23 C. D. 542, Chitty, J., expressed doubts whether an issue of shares at a discount of 80 per cent. was legal. It is conceived that in every case the circumstances must be regarded, and that if the issue at a discount is made bona fide with a view to the company's benefit, it is valid. Where a company is in want of funds it is obviously in the interest of its creditors that the amount should be raised by the issue of shares rather than by borrowing, for in the event of winding up, the shareholders can get nothing till the creditors are paid, whereas lenders are of course entitled to prove.

Suppose a company in need of £10,000. Which mode of raising the amount is most for the interest of its creditors?-(a) by the issue of shares at a discount of 50 per cent., or (b) by the issue of debentures? In case (a) the creditors get £10,000 additional security free from any claim by the contributors; whereas, in case (b), though the assets are increased, the liabilities are increased pro tanto. Moreover the debentures might be issued at a discount (infra, p. 261), and with interest at, say, 20 per cent. (ibid.) and as a first charge on the assets. It is submitted that the issue of shares at a discount does not in any way affect the creditors of a company. Before the Companies Act, 1867, there might have been ground for complaint, since a creditor might have said that, looking to the returns, he believed the shares issued to have been paid up in cash; but, since the Act of 1867, he can see from the contracts filed pursuant to s. 25, whether any shares have been issued at a discount, or otherwise than for cash.

Where a company arranges to acquire property in consideration of paid-up shares, the amount will of course be fixed with regard to the actual not the nominal value of the shares, e. g. where the shares are below par, say £1000 of shares for £500 of property. There is no question that such a transaction is

Form 21.

valid. And, if so, how absurd if the company could not issue the £1000 of shares for £500 cash. Whether the members of a company have any cause for complaint must depend on the regulations, but it would seem that the general powers usually vested in the directors are amply sufficient to authorize the issue of shares at a discount (see infra, p. 151). Of course the agreement must be filed pursuant to s. 25 of the Act of 1867 (supra, p. 11). And, if so filed, it would seem that, even if ultra vires, the allottees could not be held liable to contribute beyond the agreed amount. Anderson's case, 7 C. Div. 75; Ince Hall Co., ubi supra. And transferees without notice would be protected by Burkinshaw v. Nicholls, 3 Ap. Cas. 1016. Nevertheless, until the validity of the issue of shares at a discount has been settled, it must be admitted that such an issue is not entirely free from danger, and it may be found better to raise funds by the issue of profit debentures or debentures at a discount with power to convert into shares.

Bonus Shares.

Sometimes it has been considered desirable to create and distribute, gratis, among a company's members new shares, which are to be deemed fully paid up. Such shares, are generally called "bonus shares," and the issue of them is called "watering the capital."

Bonus shares have been issued by a considerable number of companies, and in one well-known case to the extent of nearly a million and a half of nominal value. However, since the dicta of the Court of Appeal in Re The Gold Co., 9 C. Div., 701, it is probable that the practice of issuing bonus shares will be discontinued. It seems doubtful whether directors issuing bonus shares might not, in some cases, be indicted for conspiracy to defraud. See further, British Seamless Co., 17 C. Div. 467.

Sometimes a company reconstructs for the purpose of effecting such an operation. See further, infra, "Reconstruction." There is no objection to such a scheme if the assets have really increased in value; but otherwise it might Savour of fraud. Re Gold Co., ubi supra; Ambrose Lake Tin Co., 14 C. Div. 390. Bonus shares issued gratis must be distinguished from shares issued by consent in satisfaction of a bonus or dividend duly declared and warranted on a bona fide balance sheet. See infra, pp. 158, 159. Such an issue may be quite valid.

Form 22. AGREEMENT for the ISSUE of PAID-UP SHARES by way of bonus to DEBENTURE HOLDERS.

Parties.

Recitals.

day of

between The

AN AGREEMENT made the Company, Limited (hereinafter called the company), of the one part, and the several persons whose names are subscribed hereto (hereinafter called the debenture holders), of the other part: WHEREAS the company recently issued a prospectus offering to receive applications for [1000] debentures of the company of 7. each, and stating (inter alia) that the company would allot to the persons who should take such debentures and pay the full amount thereof to the company, one fully paid-up

-7. share in the capital of the company in respect of every such debenture taken by them respectively: AND WHEREAS each of the debenture holders has taken up on the terms of the said prospectus the number of such debentures set opposite his name, and has paid to the company the full amount thereof :

NOW THEREFORE IT IS AGREED AS FOLLOWS:

1. The company shall, &c. [clause 1, Form 11, supra].

Form 22.

Filing agree

2. When and so soon as this agreement shall have been filed as afore- ment. said, the company shall allot to each of the debenture holders the Allotment of number of 7. shares in the company also set opposite his name.

in the schedule hereto.

shares.

3. Such shares shall be deemed for all purposes to be fully paid up, To be deemed paid up. and shall be numbered, with the numbers set opposite the names of the debenture holders respectively.

AS WITNESS, the common seal of the company, and the hands of the debenture holders the day, &c.

It is not uncommon to provide for the issue of paid-up shares to persons taking debentures; and, provided a contract is duly filed before the issue, it would seem to be a valid transaction. See In re Malaga Lead Co., Firmstone's case, 20 Eq. 524; and Uruguay Central, &c., Co., 11 C. D. 372.

Sometimes the agreement is made, as in Form 21, the letters of application having been framed, as there stated, or a paragraph having been inserted to the effect that applicants will be deemed to have authorised the secretary, &c. Occasionally, instead of a contract as above, the vendor agrees that as an inducement to persons to take up the debentures, he will, out of the fully paidup shares issued to him by the company, transfer one or more of the shares to the allottee of each debenture.

As to s. 25 of the Act of 1867, see supra, p. 12.

AGREEMENT with TRUSTEES to guarantee

DIVIDENDS on SHARES Form 23. about to be OFFERED for SALE.

AN AGREEMENT, &c. Parties: (1) the A. Company; (2) the Parties. B. Company:

WHEREAS the A. Company is entitled to 6000 fully paid-up preference Recitals. shares in the capital of the B. Company, numbered to inclusive,