The potential for conflict to arise in the dealings of a company are wide. One particular area where such conflicts may arise is where transactions through which share capital flows in or out of a company, more particularly those giving a return on share capital. A Such conflicts are likely to arise between creditors and shareholders, between controlling and minority shareholders, and between management and shareholders.
Share capital refers to the consideration paid to, or due to, a company in exchange for the shares that it issues. A It is important to note that the share capital need not be equal to the consideration received for such shares. It is also important to note that shareholders do not have a legal claim to the return of the capital that they have contributed.
Share capital is important as it should ensure that shareholders have an interest in the fortune of the company and its continued success, the share capital of a shareholder should therefore be sufficiently high in order to achieve certain such results. In addition thereto, the legal function of share capital is to create rights, duties and legal relationships. Share capital furthermore organises the rights of shareholders in relation to creditors as well as amongst shareholders themselves.
It must also be noted that although shareholders contribute share capital to a company, they have no legal right to the return of that capital. The company, as a separate legal entity, owns its assets. What shareholders do acquire in return for their contribution to the company is property in the form of shares.
A potential conflict can also arise when a company’s share capital structure is changed, either through the issuing of further shares, the reorganisation of existing share capital, or the reduction or return of capital. A further conflict can arise in the issuing of further shares in a company, as such an instance can significantly dilute the interests of existing shareholders.
The price at which a company issues further shares can also lead to conflict. When shares are issued at a price below the present value of the existing shares, the value of existing shareholders’ shares may dilute. In such an instance, the holders of new shares may obtain an unfair advantage and the new shareholders who pay too much do so to the advantage of existing shareholders.
Distributions to shareholders represents a further example which can potentially disturb the rights and expectations of shareholders. As do share repurchases as they combine a distribution to the selling shareholders with an increase in the shareholding of the remaining shareholders.
Companies should therefore exercise caution when dealing with share capital as it may lead to an instance of arising conflict. Shareholders too should familiarise themselves with their rights relating to share capital to ensure that they are adequately protected.