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Guidance Note: Issuing New Shares

Guidance Note: Issuing New Shares

Guidance Note: Issuing New Shares

We look at key areas concerning a company raising finance through issuing new shares.

A company can raise capital by selling off ownership stakes in the form of shares to investors who become shareholders This is known as equity financing. 

Equity capital, is generated, not by borrowing, but by selling shares of company. This maybe a sale of new shares to existing shareholders, or to new shareholders through private placement. 

For example, the owner of Company ABC might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for equity capital.

A company could require finance for capital investments, such as:

    1. to expand business, including, buying a new factory, acquiring capital assets (ships and aircrafts); or
    2. entering new markets;
    3. research and product development; or
    4. acquiring new businesses. 

Raising capital by issuing shares

In the United States, United Kingdom, British Virgin Islands, the Cayman Islands and many other jurisdictions, the power to issue new shares is primarily entrusted to the board of directors. Directors should exercise great care when deciding whether to issue new shares. When a company issues new shares, it dilutes the ownership of its existing shareholders. The law provides many forms of protections to shareholders to curb the risk of unfair dilution.

Pre-emptive rights

By default, it gives preemptive rights to existing shareholders to buy new shares. If pre-emption rights exist, shares must be offered to the current shareholders before being offered to potential new investors. In this case, shareholders who want to avoid the dilution of their participation can acquire pro-rata the new shares.

The fiduciary duty to issue shares for ‘proper purpose’ 

Directors’ fiduciary duties are a powerful instrument to limit directors’ discretion in issuing shares.In the context of new share issue, the law imposes a duty on directors:To act in good faithThe directors’ authority must be exercised in good faith and in what the directors consider to be the best interests of the company.  The directors must be able to demonstrate that before deciding to issue new shares they applied their minds to the question of whether issuing new shares is in the best interests of the company.   

To issue the shares for a proper purpose. Directors should not issue additional shares in such a way as to affect the balance of power in the company. If the result of new shares issue will destroy an existing majority and create a new majority with new controlling power, the directors should be extra careful to document their reasons for issuing new shares. Otherwise, it will give an appearance, that the issue of new shares was for the improper purpose of altering the majority shareholding and could be construed by the courts as such. This can be achieved by incorporating, in sufficient detail, the directors’ reasons for issuing new shares in the:

  • the minutes of the board meeting at which the decision to issue shares is taken.
  • the pre-emptive offer letter to existing shareholders. 

Directors must be able to demonstrate a good reason for making share issue, especially if they know that the other shareholders will not be able to take up their rights of participation.

Will the shares be of an existing share class or should a new class be created?

Usually, companies will issue further shares in an existing share class. However, if new shares are to have different voting or other rights to existing shares, they will need to form a new class of shares.

What will be the share price?

What will be the payment terms?

Directors can only issue the number of shares authorized by the Articles of Association. Though it is quite uncommon for English companies to have a limited authorised share capital, check the AOAs of companies in the BVI or Cayman Islands and whether it contains a limit on authorised share capital.

Will shareholders’ approval be required?

Once, all things considered, the directors have resolved to issue new shares, directors must check the articles of association for any pre-conditions and limitations to the power of the board to issue new shares. 

The authorized share capital

Directors can only issue the number of shares authorized by the Articles of Association. Though it is quite uncommon for English companies to have a limited authorised share capital, check the AOAs of companies in the BVI or Cayman Islands and whether it contains a limit on authorised share capital.

Will shareholders’ approval be required?

 

The process of issuing shares

Board Meeting
  •  

Shareholders need certain protections at the point when new shares are issued. 

The offer letter

there is no specific provision prescribing the detailed contents of the offer letter for rights issue. However, the board shall make necessary disclosures to the shareholders. The contents of the offer letter under rights issue may be similar to an offer letter under private placement of securities, with a specific reference to offer on proportionate basis, right of renunciation and offer period.

After receipt of share application money, the board of directors shall pass a resolution for allotment of shares and refund of share application money, if any. The board shall also authorise directors for completing post-allotment compliances. In case of unlisted public companies, the demat account of the shareholders shall be credited with requisite number of allotted shares.

Hold a board meeting

Items to discuss at the board of director’s meeting:

  • Need for the requirement of funds, 
  • Need for offering shares to existing shareholders of the company,
  • Preemptive Offer Details:
    • Cut-off date,
    • Offer Price
    • Approving and signing the offer letter,
  • Authorising and officer or director for issuing offer letter to existing shareholders of the company.
Offer Letter

Prepare the offer letter to tell the shareholders:

  • the specific number of shares they have the right to subscribe
  • the time during which the offer may be accepted.
  • Dispatch the offer letter to MLG through the medium specified under the Shareholders Agreement.  
Board Meeting

There will be a second meeting of the board to approve allotment of shares.

What you will need:
  1. Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.

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Board Meeting

Items to discuss at the board of director’s meeting:

  • Need for the requirement of funds, 
  • Need for offering shares to existing shareholders of the company,
  • Preemptive Offer Details:
    • Cut-off date,
    • Offer Price
  • Approving and signing the offer letter,
  • Authorising officer or director for issuing offer letter to existing shareholders of the company.

Shareholders need certain protections at the point when new shares are issued. 

The offer letter

there is no specific provision prescribing the detailed contents of the offer letter for rights issue. However, the board shall make necessary disclosures to the shareholders. The contents of the offer letter under rights issue may be similar to an offer letter under private placement of securities, with a specific reference to offer on proportionate basis, right of renunciation and offer period.

After receipt of share application money, the board of directors shall pass a resolution for allotment of shares and refund of share application money, if any. The board shall also authorise directors for completing post-allotment compliances. In case of unlisted public companies, the demat account of the shareholders shall be credited with requisite number of allotted shares.

On Key

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Guidance Note: Issuing Shares to Raise Capital

We look at key areas concerning a company raising finance through issuing new shares.

Raising capital by issuing shares

A company can raise capital by selling off ownership stakes in the form of shares to investors who become shareholders This is known as equity financing. 

Equity capital, is generated, not by borrowing, but by selling shares of company. This maybe a sale of new shares to existing shareholders, or to new shareholders through private placement. 

For example, the owner of Company ABC might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for equity capital.

A company could require finance for capital investments, such as:

    1. to expand business, including, buying a new factory, acquiring capital assets (ships and aircrafts); or
    2. entering new markets;
    3. research and product development; or
    4. acquiring new businesses. 
A company can raise capital by selling off ownership stakes in the form of shares to investors who become shareholders This is known as equity financing. Companies issue shares to raise money from investors, gives them a portion of a company’s equity in return for equity capital.Equity capital is funds paid into a business by the investors.Equity capital, is generated, not by borrowing, but by selling shares of company. This maybe a sale of new shares to existing shareholders, or to new shareholders through private placement.

Types of equity and shares a company can issue

Companies established under the common law can issue one or more classes of shares. These can be either ordinary shares or preferred shares.

While founders mostly own ordinary shares, private equity investors subscribe for preferred shares which have liquidity preference, a fixed dividend, and anti-dilution rights.

Active vs. Passive Investor

When you take in an active investor you are most likely forming a business partnership. 

While founders mostly own ordinary shares, private equity investors subscribe for preferred shares which have liquidity preference, a fixed dividend, and anti-dilution rights.

Deciding to Issue New Shares

Legal Considerations

In the United States, United Kingdom, British Virgin Islands, the Cayman Islands and many other jurisdictions, the power to issue new shares is primarily entrusted to the board of directors. Directors should exercise great care when deciding whether to issue new shares. When a company issues new shares, it dilutes the ownership of its existing shareholders. The law provides many forms of protections to shareholders to curb the risk of unfair dilution.

Pre-emptive rights

By default, it gives preemptive rights to existing shareholders to buy new shares. If pre-emption rights exist, shares must be offered to the current shareholders before being offered to potential new investors. In this case, shareholders who want to avoid the dilution of their participation can acquire pro-rata the new shares.

The fiduciary duty to issue shares for ‘proper purpose’ 

Directors’ fiduciary duties are a powerful instrument to limit directors’ discretion in issuing shares.In the context of new share issue, the law imposes a duty on directors:To act in good faithThe directors’ authority must be exercised in good faith and in what the directors consider to be the best interests of the company.  The directors must be able to demonstrate that before deciding to issue new shares they applied their minds to the question of whether issuing new shares is in the best interests of the company.   

To issue the shares for a proper purpose. Directors should not issue additional shares in such a way as to affect the balance of power in the company. If the result of new shares issue will destroy an existing majority and create a new majority with new controlling power, the directors should be extra careful to document their reasons for issuing new shares. Otherwise, it will give an appearance, that the issue of new shares was for the improper purpose of altering the majority shareholding and could be construed by the courts as such. This can be achieved by incorporating, in sufficient detail, the directors’ reasons for issuing new shares in the:

  • the minutes of the board meeting at which the decision to issue shares is taken.
  • the pre-emptive offer letter to existing shareholders. 

Directors must be able to demonstrate a good reason for making share issue, especially if they know that the other shareholders will not be able to take up their rights of participation.

Practical Considerations

Will the shares be of an existing share class or should a new class be created?

Usually, companies will issue further shares in an existing share class. However, if new shares are to have different voting or other rights to existing shares, they will need to form a new class of shares.

What will be the share price?

What will be the payment terms?

Directors can only issue the number of shares authorized by the Articles of Association. Though it is quite uncommon for English companies to have a limited authorised share capital, check the AOAs of companies in the BVI or Cayman Islands and whether it contains a limit on authorised share capital.

Will shareholders’ approval be required?

Preparatory Considerations

First the company must decide to offer shares and prepare the terms of the offer.  

Once, all things considered, the directors have resolved to issue new shares, directors must check the articles of association for any pre-conditions and limitations to the power of the board to issue new shares. 

The authorized share capital

Directors can only issue the number of shares authorized by the Articles of Association. Though it is quite uncommon for English companies to have a limited authorised share capital, check the AOAs of companies in the BVI or Cayman Islands and whether it contains a limit on authorised share capital.

Will shareholders’ approval be required?

 

The process of issuing shares

Board Meeting

Items to discuss at the board of director’s meeting:

  • Need for the requirement of funds, 
  • Need for offering shares to existing shareholders of the company,
  • Preemptive Offer Details:
    • Cut-off date,
    • Offer Price
  • Approving and signing the offer letter,
  • Authorising officer or director for issuing offer letter to existing shareholders of the company.

Shareholders need certain protections at the point when new shares are issued. 

The offer letter

there is no specific provision prescribing the detailed contents of the offer letter for rights issue. However, the board shall make necessary disclosures to the shareholders. The contents of the offer letter under rights issue may be similar to an offer letter under private placement of securities, with a specific reference to offer on proportionate basis, right of renunciation and offer period.

After receipt of share application money, the board of directors shall pass a resolution for allotment of shares and refund of share application money, if any. The board shall also authorise directors for completing post-allotment compliances. In case of unlisted public companies, the demat account of the shareholders shall be credited with requisite number of allotted shares.

Post-Allotment Administrative

Update the capitalization table

A capitalization table is a summary of equity ownership in a corporation. 

First HeadSecond HeadThird Head
Column #1Column #2Column #3
Column #1Column #2Column #3
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  Developing and negotiating term sheets to establish agreement on key business terms such as contributions, ownership and control Advising on detailed legal issues, such as mechanics of dispute resolution Negotiating contracts that secure commitments, provide options, and align incentives Preparing legal documentation as needed to form entities and establish ownership rights

Renegotiating terms as roles and interests change Establishing employee benefits and agreements Helping to protect, license and exploit developed IP Negotiating customer, supplier, real estate and other contracts Advising on local and international regulations Cybersecurity and data privacy advice

  Advice on ongoing governance Helping to define and resolve disputes informally Advising and assisting in mediating disputes Litigating for parties if necessary Evaluating IP rights inside and outside venture Resolving employment disputes and commercial disputes

  Going public Adding new partners Buying out a partner’s interest Selling all or part of a JV or its assets to new investors Winding down and distribution of assets Bankruptcy and restructuring

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Services

Litigation: United Arab Emirates

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Overview

We are the “go-to” firm for foreign clients who have litigation in United Arab Emirates, either as defendants or claimants.

We work together with our clients, ahead of and throughout the dispute, to devise and implement a strategy that meets their objectives and leads to the optimal resolution of their thorniest legal problems.

Urgent Orders, Injunctions

We are lauded for our strength in handling enforcement proceedings relating to foreign judgments and arbitral awards, obtaining injunctive relief and freezing orders.

Injunctions are not granted lightly by the courts. They are draconian measures.

Real Estate disputes

In the aftermath of financial crises, our lawyers represented over six hundred investors to recover their claims for cancellation of sale and purchase agreements, seek compensation and recover the monies. We have also defended and handled high-value claims for developers of real estate projects in Dubai and Abu Dhabi.

Offshore, multi-jurisdictional

When disputes arise offshore, they are often complex, international and high value.

We frequently represent clients facing multiple, related legal proceedings in several jurisdictions. In these situations, coordination and consistency of strategy are essential – and so is the ability to understand and manage the complex procedural issues that arise from the multiple, potentially different laws and rules that may apply. We pursue and defend various parallel legal proceedings, including arbitrations, national court lawsuits and international court proceedings.

Shareholder Litigation

We regularly act on contentious shareholder matters, as well as shareholder disputes, particularly those arising out of breach of shareholder agreements/minority oppression situations.

Enforcement and Recovery

Our aim is to ensure that a victory is converted into a commercial success. A positive judgment or arbitral award is of no direct monetary worth if not enforced successfully. In order to achieve that, we innovate novel strategies, 

Fareya Azfar

Fareya Azfar

Managing Partner

f.azfar@fareyaaraoui.com

Our thinking

“In the corporate world predictability is prized, mistakes tolerated, and surprises abhorred”
Henry W. Ewalt, Andrew W. Ewalt

Services

Early Case Assessments

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What is an early case assessment?

Before you commence legal action, you must know the pros and cons and take into account a much wider range of factors and implications than just the question of whether you will win or lose. There are many methodical variations of this exercise and commonly referred to as Early Case Assessment, Early Case Evaluations, etc.

The goal of Early Case Assessment is to estimate the risk (cost of time and money) of bringing or defending a legal case, develop an early understanding of the case and begin formulating a strategy.

Who needs it?

Depending on the complexity of the case, the money at stake, and your own unique circumstances, the firm may recommend clients to conduct an early case assessment, before significant sums of monies are spent pursuing or defending a legal action.<br>

...and why?

A pyrrhic victory (a victory won at too great a cost to have been worthwhile for the victor) is a very common phenomenon in the world of litigations and arbitrations. A commercially literate and astute lawyer would help you take into consideration the direct and indirect potential monetary costs and any identifiable collateral damage that might occur in the course of the legal proceedings.

With Early Case Assessment clients make an informed and assertive decision whether launching the legal case would serve their business and financial purpose, whilst bearing in mind the legal costs which they will incur.

What we do

To provide the most effective representation possible, it is pertinent to evaluate data very early in the game to determine the merits of every potential case.

We invest the time and energy to do an early strategic case assessment evaluating strengths and weaknesses to devise a strategy that will achieve a client’s goal as quickly as possible.

Key steps in a typical ECA

Early case assessment, as a managed process, requires customization to each case and client involved. Notwithstanding, some of the prevailing steps that we take during an ECA include:

  1. Examination of the key facts;
  2. Examine jurisdictional Issues
  3. creating a comprehensive story and timeline of the case.
  4. Consider non-economic factors and historical information regarding the opposing party;
  5. Legal analysis of the claims;
  6. Assessment of relevant commercial interests and relationships;
  7. Consideration of how the dispute impacts the organization’s wider objectives and goals;
  8. Review of the potential dispute resolution processes that could be used including negotiation, ADR, arbitration, litigation or any combination thereof; 
  9. anticipate staffing of the case.
  10. prepare a case budget estimating the total projected fees and costs.
  11. Settlement Range / Non-Monetary Solutions
  12. recommendations for settlement strategy, and an evaluation of the settlement value of the case.
  13. create a plan, which consists of a strategy to get to the finish line of the case.

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Companies issue shares to raise money from investors, gives them a portion of a company's equity in return for equity capital.
Step

1

Description

Board Meeting

What you need
  • Amount of funding needed
  • Need for offering shares to existing shareholders
  • Offer price and pro-rata calculations
  • Approving and signing offer letter and its terms
  • Prepare and finalize the minutes of the meeting.
Shareholders Disputes: Common Causes and Protective Measures

Shareholders Disputes: Common Causes and Protective Measures

Shareholder litigation is very common.

Shareholder dispute claims are typically classified as either dissenting shareholder actions or minority oppression actions. Some of the most common events triggering shareholder disputes include:

  • Deceptive practices
  • Diversion of income
  • Involuntary dissolution of a business
  • Non-payment of distributions
  • Breach of contract.
  • not invited to general meetings or otherwise squeezed out of management anticipation
  • allotments of share For no discernible purpose or otherwise resulting in unfair dilution of minority share value
  • a failure to consult the complainant or to provide information;
  • misappropriation of company business or assets;
  • mismanagement of internal company affairs;
  • failure to pay reasonable dividends.

Protective measures

Shareholders in private companies often endeavour to protect themselves from future abuses and oppressions through shareholder’s agreement.

Theoretically, shareholders who feel stiffled by their majority counterparts or the management of the company have many statutory protections which provide a vast array of remedies.

―it would be impossible and wholly undesirable to define the circumstances in which the application of equitable principles might make it unjust or inequitable (or unfair) for a party to insist on legal rights or to exercise them in a particular way ― 

Lord Hoffmann in O‘Neill vs Phillips, (1999) 2 BCLC 1

Ex-ante protections

Minority shareholders can seek to protect themselves against misuses of majority rule by bargaining for express protections in the articles of association or in separate shareholders’ agreements.

With experience, many shareholders disputes become identifiable as recurring instances. With our advice, shareholders can contemplate and agree in advance how the business will be conducted and conflicts will be resolved in future, and seek to anticipate and address likely problems insofar as these can be foreseen.

Carefully drafted incorporation agreements, partnership agreements, articles of association, and shareholder agreements can go a long way towards avoiding problems. Some of the rights that could be protected ex-ante in your shareholders’ agreement are:

  • preemption rights
  • tag-along rights
  • observer rights 
  • entrenchment of management
  • reserved matters, veto rights
  • information rights

Ex-ante contracting even addresses detailed exit provisions giving rise to a contractual right to exit on fair terms in defined events.