legal aspects of business

1. Reconstruction and Amalgamation
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

2. Reconstruction and Amalgamation (Sec.394)
 Reconstruction- ‘Reconstruction’ occurs when a company transfers the
whole of the undertaking and property to a new company under an
arrangement by which shareholders of the old company are entitled to
receive some shares or other similar interests in the new company. A
reconstruction is effected, for example, to bring about material
alteration of the rights of a class of shareholders or creditors.
 Amalgamation- ‘Amalgamation’ takes place when two or more
companies combine into one company, the shareholders in the
amalgamating companies becoming substantially the shareholders in
the amalgamated company. There may be amalgamation either by the
transfer of one or more undertaking to a new company or by the
transfer of one or more undertakings to an existing company.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

3. Procedure
1. Approval of scheme by holders of three fourths in value of the
shares.
2. Courts sanction- The transfer of the undertaking, property, and
liabilities of the transferor company to the transferee company.
 The allotment of appropriation by the transferee company of any
shares, debentures, policies, or other like interests in that company
which are to be allotted or appropriated under the contract.
 The continuation by or against any transferee company of any legal
proceedings by or against any transferor company;
 The dissolution, without winding up, of any transferor company;
 The provision to be made for any persons who dissent from the
compromise or arrangement;
 Such incidental, consequential, and supplemented matters as are
necessary to secure that the reconstruction or amalgamation shall be
fully and effectively carried out.
3. A certified copy of the Tribunal order to be filed with the registrar.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

4. Acquisition of shares of dissenting shareholders
(Sec. 395)
 Scheme may involve transfer of shares.
 Approval of holders of not less than 9/10ths in value of the shares
required within 4 months.
 Right to acquire the shares of dissenting shareholders.
 Notice to dissenting shareholders- within 2 months after the expiry of
the 4 months (the period for the approval of offer to take shares), the
transferee company shall give notice to the dissenting shareholders that
it desires to acquire their shares. Within 1 month of the notice any
dissenting shareholder may apply to the Tribunal.
 Registration of transferee company as holder of shares in transferor
company.
 Deposit of money received into a separate bank account.
 Amalgamation of companies in national interest (Sec. 396)
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

5. Share Capital
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

6. INTRODUCTION
Share Capital means the capital raised by a company by the issue of
shares. The word capital in connection with a company is used in
several senses.
 Authorized or nominal capital- this is the nominal value of the shares
which a company is authorized to issue by its Memorandum of
Association.
 Issued and subscribed capital- issued capital is the nominal value of
the shares which are offered to the public for subscription. The issue
capital can never exceed the authorized capital.
 Called- up capital- This is that part of the issued capital which has
been called up on the shares.
 Paid –up capital- This is that part of the issued capital which has been
paid up by the shareholders or which is credited as paid- up on the
shares.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

7. Contd..
 Uncalled capital- This is the remainder of the issued capital which has
not been called. The company may call this amount any time but this is
subject to the terms of issue of shares and the provisions of the Articles.
 Reserve capital- This is the part of the uncalled capital of a company
which can be called only in the event of its winding up. A limited
company may, by a special resolution , determine that a portion of its
uncalled capital shall not be called up, except in the event and for the
purposes of the company being wound up(Sec. 99) ; and such capital is
known as ‘reserve capital'. Reserve capital cannot be turned into
uncalled capital without the leave of the court.
 Publication of capital(sec. 148)- Where any notice, advertisement, or
other official publication, or any business letter paper, of a company
contains the statement of the amount of the authorized capital of the
company, such document shall also contain a statement of the
subscribed and the paid up capital.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

8. Kinds of share capital
 Equity share capital-
a) With voting rights, or
b) With differential rights as to dividend, voting or otherwise in
accordance with such rules and subject to such conditions as
may be prescribed.
 Preference share capital
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

9. Alteration of capital
 Power to alter capital (Sec.94).A limited company having a share
capital may, if so authorized by its Articles, alter its share capital as
follows, that is to say, it may-
a) Increase nominal share capital by issuing new shares;
b) Consolidate and divide all or any part of its share capital into shares
of larger amount;
c) Convert fully paid up shares into stock or vice-versa
d) Sub-divide its shares, or any of them, into shares of smaller amount;
e) Cancel shares which have not been taken up and diminish the amount
of its authorized capital by the amount of the shares so cancelled.
 Ordinary resolution required- the power of alteration shall be
exercised by the company in general meeting and shall not require to
be confirmed by the Tribunal
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

10. Reduction of capital
 The general principle of law founded on principles of public policy and
rigidly enforced by Courts is that no action resulting in a reduction of
capital of a company should be permitted unless the reduction is
effected-
a) Under a statutory authority or by forfeiture, and
b) In strict accordance with the procedure, if any , laid down in that
behalf in the articles of association. Any reduction of capital contrary
to this principle is illegal and ultra vires.
 Reduction of capital with the consent of the court(Sec.100)-
 It may extinguish or reduce the liability on any of its shares in respect
of share capital not paid up.
 It may, either with or without extinguishing or reducing liability on any
shares, cancel any paid up share capital which is lost, or is
unrepresented by available assests.
 It may, either with or without extinguishing or reducing liability on any
shares, pay off any paid-up share capital which is in excess of the wants
of the company
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

11. Procedure for reduction of share capital
 Special resolution
 Application to the court
a. Conflict of interests
b. Interest of creditors
c. Interest of shareholders
 Registration of order of court with registrar
a. When reduction takes effect
b. Certification of registration by registrar.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

12. Reduction of capital without the sanction of the court
The reduction of share capital of a company, without the sanction
of the court, can take place by-
1. Forfeiture of shares-The company may, if authorized by its
Articles, forfeit shares for non-payment of calls. This results in
reduction of capital if the forfeited shares are not re-issued.
2. Surrender of shares- The company may accept surrender of
partly paid shares to save it from going through the formalities
of forfeiture.
3. Cancellation of shares- The company may, if so authorized by
its Articles, cancel shares which have not been taken or agreed
to be taken by any person and diminish the amount of its share
capital by the amount of the shares so cancelled.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

13. Contd..
4. Purchase of shares by the company under Sec. 402 (b).The court
may order the purchase of the shares of any members of the company
by the company.
5. Redemption of redeemable preference shares.-the company may
redeem redeemable preference shares in accordance with the
provisions of Sec. 80
6. Buy-back of shares- a company may purchase its own shares, subject
to fulfillment of conditions laid down in Sec. 79-A(2), purchase its
own shares.
 Liability of members in respect of reduced shares (Sec.104).-in
consequence of reduction of capital of a company, the liability of a
member of the company, past or present, shall not exceed in amount the
difference between paid-up value of the share and the reduced value of
the shares.
 Penalty(Sec.105). Imprisonment for a term which may extend to 1 year
or fine both
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

14. Further issue of capital or rights shares (Sec. 81)
1. Allotment of further shares [Sec. 81 (1) to (3)]: object of Sec.
81 is to prevent-
a) Discrimination amongst shareholders by ensuring equitable
distribution of shares among them, and
b) Directors from offering shares to outsiders before they are
offered to the shareholders.
 Right of pre-emption- The right of the shareholders to be
offered new shares to them before they are offered to the public
is known as shareholders’ right of pre-emption. Section 81
deals with the issue of a public company to the existing
shareholders.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

15. Contd..
The provisions of sec. 81 are as follows :
1. Offer to existing shareholders-Sec. 81 provides that if , at any time
after the expiry of 2 years from the formation of the company or after
the expiry of 1 year from the first allotment of shares, whichever is
earlier, it is proposed to increase the subscribed capital by the
allotment of further shares, it should offered to the existing equity
shareholders of the company in proportion to the capital paid up on
those shares.
2. Notice of offer- The notice shall give at least 15 days for the
acceptance of the offer specifying the number of shares offered.
3. Shareholder’s right of renunciation-Unless the Articles of the
company otherwise provide, the notice also inform the shareholders
that they have the to renounce all or any of the shares offered to them
in favour of their nominees.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

16. Contd..
4. Refusal by shareholders-After the expiry of the time specified in the
notice aforesaid or on receipt of earlier intimation from the person to
whom such notice is given that he declines to accept the shares
offered, the Board of directors may dispose them of in such manner
as they think most beneficial to the company. They may offer new
shares to outsiders.
 Exception to provisions of sec. 81:
1. To a private company.
2. To the increase of the subscribed capital of a company caused by the
exercise of an option attached to debentures issued or loans raised by
the company, to convert such debentures or loans into share in the
company, to subscribe for shares in the company. But the terms of
issue of such debentures or the terms of such loans should include a
term providing for such option and such term-
a) Either has been approved by the Central Government or is in
conformity with the rules, made by the Central Government in this
behalf;
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

17. Contd..
b) Approved by a special resolution passed by the company in
general meeting before the issue of the debentures or the raising
of the loans.
 Conversion of debentures or loans into shares [Sec.81 (4) to
(7)].
 Reorganization of share capital of a company take place-
1) By the consolidation of shares of different classes, or
2) By the division of shares of one class into shares of different
classes, or
3) By both these methods [Sec. 390 (b) ].
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

18. Voting rights (Sec. 87 and 88)
 Equity shareholders rights- An equity shareholder of a company
limited by shares has a right to vote on every resolution place before it.
His voting right on a poll is in the proportion to his share of the paid up
equity capital of the company.
 Preference shares- a preference shareholder has a right to vote on
those resolution which directly affect his rights. Any resolution for
winding up the company or for the repayment or reduction of its share
capital is deemed directly to affect the rights of the preference
shareholders. But holders of cumulative preference shares have a
further right to vote on all resolution of the company at meeting if their
dividend remained unpaid for an aggregate period of not less than 2
years preceding the date of commencement of the meeting.
 Variation of shareholder’s rights (Sec. 106)-these rights may be set out
in the articles of association and memorandum of association.
 Variation may be challenged (Sec. 107)
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU