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Redeem preferene shares and issue right share in Hong Kong
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Answer : In this case, Sandpiper is a private company. Its directors want to redeem the cumulative redeemable preference share (CRP) and then to issue the right issue to existing shareholders. There are a number of legislations governing these two issues. Only the rules related to private company will be discussed in detail in accordance with Companies Ordinance in Hong Kong and court cases. In this paper, it is organized as follows. Section 1 discusses the ruling of redemption of CRP and section 2 discusses the ruling of issuing of right issue. Section 3 is the comment. Section 1 Redemption of CRP Under the Companies Ordinance, there is a concept of maintenance of share capital. After a company issues shares, it is not allowed to reduce its share capital by purchasing its own share (s58 (1A)), providing financial assistance for the purchase of its own shares (s47A-G & 48) and paying dividend except out of distribution profit (s79A-P). The aims are to protect the interest of creditors and protect the company from abuses by the directors. Also, in Trevor v Whitworth case, the court held that the company could not purchase its own share even though it was authorized by its Articles. However, there are permissible exceptions to this restriction. In this part, we will discuss the exception rules of redemption and purchase of share. 1.1 Exception rule Exception to the above rules, Companies Ordinance gives power to the company to : * Redeem any shares (s49 & 49A); * Acquire any shares in a reduction of capital (s58); * Purchase any shares (s49B ?S); * Purchase any shares in pursuance of court order (s8(4),s47G(5), s168A); or * Forfeit any shares due to failure of paying any sum payable by shareholders (Table A art 34-40). Now, Sandpiper wants to redeem the CRP which falls within the exception rules and Sandpiper is allowed to do so. Next, we will discuss the redemption rule. 1.2 Redemption rule 1.2.1 Requirement According to s49, the shares can only be redeemed if : * They have been fully paid up; * They were issued at redeemable shares; and * The date on which, or dates between which, the shares are or may be redeemed is specified. The shares after being redeemed are treated as cancelled, only the issued share capital amount is reduced. The authorized share capital is unchanged. If the CRP is not fully paid, Sandpiper cannot redeem it. However, if the CRP is fully paid, then it can be redeemed. Here, we assume the CRP is fully paid. 1.2.2 Financing of Redemption s49A(1) stated that companies limited by shares or by guarantee are permitted to redeem or purchase its own shares out of distribution of profits or the proceeds of a fresh issue of shares. Any premium payable on redemption has to be paid out of the distribution profits. Under s49A(2), if the redeemable shares were issued at a premium, the premium payable on redemption may be paid out of the proceeds of a fresh issue of shares made for the purpose of the redemption. The maximum amount cannot exceed the total premium received by the company at the time of issuing the redeemable shares or the current amount of share premium account, whichever is the less. The redemption date is specified on January 1st 2005. If the directors want to redeem CRP earlier than stated in the agreement, this transaction amounts to the purchase of shares. Then, Sandpiper has to follow the rules under the purchase of its own shares. 1.3 Purchase of shares out of distribution profits or the proceeds of a fresh issue of shares under s49B to s49G According to s49B, the company must have a power to do so contained in the Articles, but a company may not purchase its own shares so as to leave only redeemable shares. The above rules applied to redemption apply to purchase of shares except that the share premium cannot be used. The payment made by a company must be made out of distribution profit. 1.3.1 Procedure of purchases of shares out of distribution profits It has to be authorized by the Articles. There must be distribution profits and a draft purchase contract is available. The procedures are as follows : * Convene and hold a board meeting; * Dispatch notice of the general meeting to those who are entitled to attend the meeting; * Hold the general meeting to pass the special resolution; * Execute the purchase contract; * Submit special resolution and Form SC2 (within 14 days beginning with the first date on which related shares were delivered to the company) to the Registrar (s48G(1)); * Update the register of members. 1.3.2 Procedure of purchases of shares out of the proceed of a fresh issue of shares The procedure is the same as above. However, it involves the issue of new shares, some additional procedures are needed to follow. If the new shares are issued other than the existing shareholders on a pro-rata basis, shareholders?prior approval must be obtained and a general meeting for this purpose must be held to determine the number and the issue price of the new shares.
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