Rights of shareholders Companies Act 2016
A basic business necessity is having an effective way to obtain adequate funding whenever needed for operations and growth. A frequent method used to raise capital injection is by way of allotment of new shares in the company, and another method is to obtain a loan from a financial institution.
Allotment of new shares
According to Section 75 and 76 of the Companies Act (CA), 2016 governed the power to allot new shares in the company. There is another section of the act that provides default pre-emptive rights to new shares issued by a company, in which the new shares rank equally to existing shares as to voting or distribution rights.
This means that any allotment of new shares must first be offered to the existing shareholders. The company is only allowed to offer to any third party to subscribe to the new share if the existing shareholder rejected such offer.
The reason for such pre-emption rights is to protect the existing shareholder to ensure the shareholder is aware of any potential movement in shares to avoid any dilution of their voting or distribution rights.
Is there any solution that allows the company to offer the allotment of new shares directly to a third party? The answer is yes.
Section 85 (1) of CA, 2016 stated that “Subject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders”.
Therefore, the company’s constitution would need to be amended to waive the default policy and allow for this approach.
In conclusion, the company must decide whether to remain the default rights stated in the act without amending the constitution. This decision is crucial as any policy adopted in the constitution shall be most beneficial to the company.
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Published : 4-May-2022