Approval of the Authority to Issue Shares
Section 161 of the Companies’ Act states:
Notwithstanding anything in a company’s memorandum or articles, the directors shall not, without the prior approval of the company in general meeting, exercise any power of the company to issue shares.
Therefore, unless prior approval in a general meeting has been granted, a company’s directors may not issue shares. Most business owners are familiar with the idea of an Annual General Meeting (“AGM”), but what if approval is required some time before or after the AGM has been held? In such situations, the company will hold an Extraordinary General Meeting (“EGM”). Depending on the composition of the company’s shareholders, different documentation will be prepared to hold the EGM. The two most common scenarios are:
- Company is wholly owned by another company or foreign corporate entity; or
- Company is owned by several shareholders, who are individuals or corporations
For (A), such companies are known as subsidiaries and their EGM will only have one participant, the parent company. The company secretary will prepare the following documentation:
- Directors’ Resolutions in Writing (“DRIW”) to convene the EGM
- Notice of EGM
- Certificate of Appointment of Corporate Representative (if this has not been done previously)
- Minutes of EGM by corporate representative of holding company
- Notice of Resolution
- Copy of Minutes by representative of holding company
- Lodgment with the Accounting and Corporate Regulatory Authority (“ACRA”)
- Preparation and Issuance of Share Certificate
Do note that the company secretary will need to lodge items (v) and (vi) with ACRA, within the stipulated deadlines.
For (B), the situation gets slightly more complicated when multiple shareholders are involved; and may prove challenging if there is difficulty in contacting the shareholders, or if they are situated overseas. Prior to holding the EGM, the company should either make sure that all its shareholders can be contacted, or ensure that the sufficient number of shareholders to constitute a quorum will be able to attend.
For those unfamiliar with the term, a quorum is the minimum number of members required to attend in order to conduct the business of the meeting. The quorum necessary is usually stated in the company’s Memorandum and Articles of Association (“M&AA”).
The company secretary will prepare the following documentation:
- DRIW to convene the EGM
- Notice of EGM
- Proxy Forms (if necessary)
- Attendance List
- Minutes of EGM
- Notice of Resolution
- Lodgment with the ACRA
- Preparation and Issuance of Share Certificate
Similar to (A), item (vi) will need to be lodged with ACRA within the stipulated deadline, failing which, ACRA will impose penalties on the company.
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Once Shareholders’ approval has been obtained, what next?
The next steps that the company should take are dependent on the circumstances under which the company is issuing shares. We look at two scenarios below:
- The company is entering into a joint venture partnership;
- Shares are being issued to a new investor
Joint Venture Partnership
When a business converts to a joint venture partnership, it is inevitable that the business ownership will be changed; and is typically apportioned according to the liability and responsibility that is agreed upon. While this can also be done by simply transferring the relevant apportionment of shares to the new joint partner, the reason why companies simply opt to allot new shares is because the existing number of shares is either too few or is an odd number that is not suitable.
Generally, all companies should pass a DRIW as a matter of proper book keeping when entering into agreements – this DRIW can also approve and note the following matters:
- Appointment of a corporate representative on behalf of the company to execute the agreement and negotiate all terms in relation to the agreement; and
- Appointment of a new director (e.g. the joint venture partner may wish to be a director)
The agreement to enter into the joint venture partnership should also be annexed to the said DRIW, for future reference, or the auditors’ reference when they inspect the company’s books during their annual statutory audit.
Do note that if a new director is appointed, the relevant lodgment with ACRA will have to be made to notify ACRA of the new director. In addition, the company secretary will prepare the Form 45, for the director to declare his or her consent to undertake the responsibilities of being a director of the company.
A new incoming investor may request for a certain number of shares be allotted to him or her, in exchange, or as part payment of, the investment. Particularly with many private venture capitalist firms, this is a popular way for investors to keep track of their investments and retain a certain level of power and authority when it comes to decision-making. More often than not, the investor will also wish to be appointed as a director as well.
If the company is required to enter into an investment agreement, it should similarly pass a DRIW to approve the agreement and may or may not appoint a new director, dependent on the terms and conditions agreed between the investor and the company.
Filing Allotment of Shares with ACRA
The filing of allotment of shares with ACRA was previously explained in brief above, but given its importance and its potential impact on the company, it certainly warrants a separate section explaining it in detail.
Since 2003, ACRA has launched its electronic portal known as Bizfile, through which companies can make almost all their submissions and applications to. Hence, to notify ACRA of an allotment of shares one would need to do so via Bizfile. To protect companies from unauthorized submissions, ACRA restricts access to a company’s Bizfile account; and only officers of the company, which includes its directors and company secretary, can make submissions on the company’s behalf.
In addition, as with all other government bodies such as the Ministry of Manpower (“MOM”) or Singapore Customs, one would need to possess a SingPass in order to access ACRA’s electronic portal. A SingPass is unique to each individual and grants access to electronic services of various government entities. All Singapore Citizens and Permanent Residents will have a SingPass, while foreigners who hold Employment Passes, Personalised Employment Passes, EntrePass, S-Pass, Dependent Pass, Long-Term Visit Pass-Plus and selected Work Permit Holders, may also submit an application to obtain a SingPass.
As part of the lodgment for the allotment of shares, the company would be required to declare the following information:
- Number of shares that will be allotted;
- Amount (if any) paid or deemed to be paid on the allotment of each share;
- Amount (if any) unpaid on each share referred to in (b);
- Where there exists different classes of shares, the class of shares to which each share in the allotment belongs; and
- Full name, identification (NRIC or Passport No), nationality and address of each of its members, as well as the number and class of shares held by each member.
Particularly when it comes to shares, any errors made in the lodgments submitted to ACRA (otherwise known as the Registrar), cannot be easily amended. In accordance with Section 32(1) of the Companies (Filing of Documents) Regulations, a company cannot simply lodge a notice of error to rectify errors relating to:
- Particulars of a charge; or
- Particulars of the company’s share capital
Instead, the company will have to obtain an Order of Court to obtain permission to rectify its register, before submitting the Order of Court to ACRA. In addition, there is no existing regulation that will grant compensation to those who suffer from loss arising to such mistaken entries. Hence, the onus is on the company and its shareholders to ensure that all lodgments in relation to the company’s share capitals are duly executed and valid.
As explained above, when done properly, the allotment of shares can protect shareholders, capital and businesses in regards to issues related to shareholding structure. Therefore, it is vital that companies ensure best practices when allotting shares to all parties and follow the procedures outlined by Singapore law.
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