UNVEILING SHARE AND ITS NATURE

UNVEILING SHARE AND ITS NATURE <!--[if gte mso 10]> UNVEILING SHARE AND ITS NATURE By Nasir Majeed (LL.M), Lahore The concept of share is of vital importance to a proper understanding of company law. It is also necessary for discovering the distinction between individual trader and partnership on the one hand and incorporated company on the other hand. "Share" is a word, which can be viewed from different angles and is used loosely to describe different concepts at different times. Interestingly, many different meanings can be attributed to "share" in the legal, economic and accounting senses, although, its users do not always recognize this fact. This Article, first of all, aims at discovering a workable definition of share after analyzing the different definitions prevailing in different jurisdictions and then the nature of share in Law will be seen in the light of statutory law and decided cases by the Courts. The word share is derived from the law of partnership and is a direct translation of the Latin "pars" from which the corresponding European terms "part" (French), "Anteial" (German) and quota (Italian) were also derived.1 Dictionary has an entry on "share" as a fixed and indivisible section of the Capital of a company.2 It may be said that Share capital is the amount contributed by the share-holders to the company's resources.3 An examination of the legal antecedent of shares helps to ascertain the rule of law and equity which are applicable to them at the present time but it provides little material for an abstract definition.4 In order to reach a cogent and workable definition, it is better to examine variety of definitions propounded in different jurisdictions. 1. R.R Pennington, Company Law, (Butterworth London, 1990, 7th edition) 78. 2. Chamber's Twentieth Century Dictionary. 3. R.R Pennington, Company Law, (Butterworth London, 1990, 7th edition) 78. 4. Robert R Pennington "Can share in companies be defined." (1989) 10 Co Law 140. In America, a share is considered to be a profit sharing contract, one of a series of units of interest and participation, authorized by the charter of a corporation by which capital is obtained in consideration of a proportional right to participate in dividends and their distribution.5 The French description of share is the rights of a share-holder in a company with a share capital as opposed to his economic interest in it'.6 In Germany, a share is branded as "the collective proprietary anti membership rights inherent in a member's participation in a company.7 In India "share" has been held as "an interest measured by a stint of money and made up of diverse rights in the contract evidenced by the Articles of Association of the company.8 In Pakistan share means share in the share capital of a company.9 Sometimes, a share is thought about an intelligible properly constituted by a complex of rights and duties defined by the relevant companies Act and by the Memorandum of Association and Articles of Association.10 5. Ballantine, Ballantine on corporations revised edition. 1916 Para 198; see also Henn and Alexender Law of corporations, 3rd edition. 157. 6. Rebert and Rohlat, Traite Elententaire De Droit commercial, 12th edition Para 1147. 7. Godin-welhelmi, Aktiengeslez. 3rd edition vol. 1 p12. 8. Commissioner of Income Tax v. Standard Vacuum Oil Company (AIR 1966 SC 1393). 9. Section 2(35) of The Companies Ordinance, 1984. 10. Archibald Honice (Pvt) Ltd. v. Commission of Stamp Duties (NSW) (19481 77 CLR 143 at 156. The above-mentioned definitions arc not comprehensive. For example American description of shares is not wider in its scope. The definition only visualizes shares as something which is only for earning profit. But as we know that this is not: the situation in reality. Apart from sharing/earning profit, a share-holder has some other obligations. So, this is not a comprehensive definition of share. The French description of shares is also very narrow in its scope. This definition is vague as its spells out a share in economic terms only. Again, we know that in modern Company Law a person becomes share-holder after purchasing shares and when he purchases shares, he is entitled to certain rights and with this some duties as well. These rights and duties may not be in the nature of economic terms only. So, these definitions are not comprehensive and do not provide all the essentials of a share as understood in modern company law. Perhaps the best and the most discussed definition of "share" is found in "Borland's" Trustee v. Steel Brothers & Company Ltd.11, wherein Farwell J defined share as:-- " to my mind a share is the interest of the share-holder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the share-holders inter se in accordance with section 16 of the companies Act 1862 - - - . A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract including the right to a sum of money of a more or less amount." Although Farwell J's decision provides a useful description of the nature of share and a guide to the manner in which they must be treated in applying legal principles to them, the decision does not supply an abstract definition, which encapsulates all the distinctive features of shares and excludes every thing, which is not true of them.12 This is because the Courts have usually been able to solve their practical questions which have come before them without feeling the need to base their decision on definition and it has usually sufficed for the Courts to refer to the substantive rules of law or equity, which provides the solution to these problems.13 11. (1901) ICH 279. 12. "Can shares in company be defined" (1989) 10 Co law 140. 13. Ibid. So, in brief, the truth of the matter is that for practical purposes, Farwell J's description of shares suffices and it is more important in applying the law to ascertain the legal rules governing the rights and liabilities of a holder of shares and the nature and formalities of transaction in shares which the law recognizes than to devise an objectionable definition of share. Now, let's unearth the exact juridical nature of share which is very important aspect of our study. Some writers are of the view that at present, this is a question more easily asked than answered.14 They even maintained that the juridical nature of share was remained foggy even in the old deed of settlement companies because the members could not lay claim to the assets while the business was a going concern.15 There was a time when it was thought that company held the assets as the trustee of the members16 but this conception has become a thing of the past. Share-holders have ceased to be regarded as having equitable interest in the company's assets. Share-holders are not in the eyes of law, part owners of the undertaking" and the undertaking17 is something different from the totality of the share-holders.18 The House of Lords in Macaura v. Northern Assurance Co Ltd.19 held that a share-holder has no property in the company's assets and he has no insurable interest therein. The Companies Ordinance, 1984 describes that shares are moveable property and transferable in the manner provided by the articles of the company20. The Indian Companies Act of 1956 describes the nature of share in the same fashion.21 14. L.C.B Gower. Gowers Principles of Modem Company Law (Sweet and Maxwell, International Students edition 1992) 357. 15. L.C.B Gower, Gower's Principles of Modern Company Law (Sweet and Maxwell, International Students edition 1992) 357. 16. Child v. Hudson Bay Company (1723) 2p.Wms 207. 17. Short v. Treasury Commissioner (1948) 1 K.B p122 C.A. 18. 1960 Mad. 43(49). 19. (1925)AC619. 20. Section 89. 21. Section 82 of Indian Companies Act. From this discussion, sonic common characteristics of the nature of share arrest our attention; shares are property, shares are moveable property and shares are transferable property. In order to grasp the nature of share, it is better to study the nature of shares under the following heads; * Share As Moveable Property The Companies Ordinance, 1984 provides that shares are moveable properly.22 Shares are not only moveable property but also it is tangible property.23 Shares are peculiar kind of moveable property, which cannot pass from hand to hand like bales of cotton. The property in these shares belonged to the registered share-holders and could not be transferred to another except according to the articles of the company.24 22. Section 89. 23. SNDP Yogam Re. ILR (1969) Ker. 516. 24. Norman McLeod CJ in Vadilal Sarabhai v. Manekji Pestonji Bharucha AIR 1923 Bom. at 423. A man's moveable property is of two kinds namely, choose-in-possession and choose-in action. Choose-in- possession means property of which one has actual physical possession but choose-in-action means property of which one does not have immediate possession but has a right to it which can be enforced by a legal action.25 Under the English law a share is choose-in-action but in India a share is not a choose in-action.26' The same point of view is takers in our country where share is not a choose-in-action.27 One thing is clear; shares are recognized in law as well as in fact as object of property, which is bought, sold, mortgaged, and bequeathcd.28 They are indeed the typical item of property of the modern commercial era and particularly suited to its demands because of their exceptional liquidity.29 A share in a company is the expression of proprietary relationship. Share-holder is the proportionate owner of the company but he does not own the company's assets, which belong, to the company as a separate and independent legal entity.30 A share has become a symbol of passive property.31 (Passive property means the interest of the share-holder in the company). The active property is in the control of the corporate managers. (Active property means control of the corporate wealth).32 The ownership of the shares belongs to the company and not to the members.33 Share-holders are not, in the eyes of law, part owner of the undertaking.34 Similarly it was held that a share-holder has no property in the company's assets and he has no insurable interest therein.35 25. Dr. Avtar Singh, Company Law (Eastern Book Company. Silver Jubilee Edition) 42. 26. ILR (1954) 1 Cal. 27. See Shaukat Mehmood, Company Law (Legal Research Center 2 Vol. Vol.14th Edition, 2001) 158. 28. L.C.B Gower, Gower's Principles of Modern Company Law (Sweet and Maxwell. International Students Edition, 1992) 360. 29. Ibid. 30. See L. Sealy, Cases and Material in Company Law (Oxford University Press. 8th Edition, 2007) 375. 31. Proof-Berle and Means, Modern Corporation and Private Property (1932) 279. 32. Proof-Berle and Means, Modern Corporation and Private Property (1932) 279. 33. L. Sealy, Cases and Material in Company Law (Oxford University Press, 8th Edition, 2007) 375. 34. Short v. Treasury Conunissiouer (1948) 1 IC.B p122 C.A. 35. Mecura v. Northern Assurance Company Ltd. 119251 AC 619. * Share as Goods Shares are within the ambit of the definition of goods. The Sale of Goods Act, 1930 defines goods as36 Goods mean every kind of moveable property other than actionable claims and money and include electricity, water, gas, stock, and shares. In India a share is also regarded as goods.37 Indian Supreme Court has carried the analysis of the "share" in terms of goods in LIC v. Escorts Ltd..38, wherein the court held that shares are goods and rules relating to passing of ownership in goods would apply on shares. Section 19 of the Sale of Goods Act says that property in the goods sold passes when it is intended to pass. Shares are specific goods and section 20 of the Act says that ownership in specific goods passes when the contract is made. Thus a purchaser of share becomes the owner of the property in the shares when he contracts to buy them. * Share As Bundle of Rights And Obligation A share-holder of a company has a number of rights and obligations. But this will be incorrect to presume that all such rights and liabilities are the product of the contractual relationship between company and its members. It is important to note that most of the significant rights have been bestowed upon the share-holders by the Companies' Ordinance, 1984. Shares are simply collection of contractual and statutory rights, which each share-holder can assert against the company and his fellow share-holders. The share-holders acquire these rights by paying or agreeing to pay for the shares which he takes.39 36. S.2(7). 37. Anjum Prasad v. Central Bank of India AIR1956 Pat. (sic) 38. (1986) 1 SCC 264 at 321. 39. R.R Pennington, Company Law, (Butterworth London, 1990, 7th edition) 178. A share is a right to a specific amount of the share capital of a company carrying with it certain rights and obligation while the company is a going concern and in the winding up it represents the interest of the holder measured for purpose of liability and dividend by a sum of iuoney.40 The same view has been taken in Hindustan Investment Corporation v. CIT41 where it was held that shares carry certain rights and obligation. Pennington42 is also of the view that Share-holder's right were purely contractual at common law and in equity and a share today is simply the bundle of contractual rights conferred on the share-holders by the companies Act . As already discussed that shares are transferable property and may be transferred to any person.43 When the shares are transferred, the rights and the obligation are also transferred to the transferee.44 Such rights and liabilities are deemed to be transferred on the clay when the shares are transferred.45 Owning an ordinary share confers on its holder a complex bundle of rights and benefits including generally a right to vote46, a right to dividend when declared47 and a return of contributed capital and of any surplus assets on swindling up.48 40. Borland's Trustee v. Steel Brothers & Company Ltd. (1901) Ch 279. 41. (1955) 25 Corn Cases 57, 66, 67 (Cal). 42. R.R Pennington, Company Law, (Butterworth London, 1990, 7th Edition) 87. 43. See L. Sealy, Cases and Material in Company Law (Oxford University Press, 8th Edition, 2007) 375. 44. National Bank of Wales Re, 66 LJ Ch. 222 (1895-1899). 45. Ibid. 46. See section 160 of The Companies Ordinance, 1984. 47. See section 250 of The Companies Ordinance, 1984. 48 Andrew Hicks and S.H. Goo, Cases and Material 1 on Company Law (Blackstone Press Limited 1997), 270. * Share As A Contract A person who becomes an original holder of shares necessarily acquires the shares as a result of the contract between himself and company and the ordinary principles of law of contract apply to such a contract in the same way as to other kinds of contract.49 The contract to take shares may be either express or implied and may be made either orally or in writing and no formal agreement being necessary.50 Pennington is also of the view that a "share" is a statutory contract between the company and the share-holders. He is also of the view that share-holders rights were purely contractual at common law and in equity and a share today is simply the bundle of contractual rights51. This was made clear by Farwell J in the following passage.52 49. John H. Farrar, Company law (Butterworth London, 6th Edition, 1985) 134. "A share is the interest of the share-holder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the share-holders inter se in accordance with section 16 of the Companies Act, 1862. The contract contained in the Articles of Association is one of the original incidents of the share. A share is not the sum of money but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to sum of money of a more or less amount." A share-holder's claim arises out of the contract under which he agreed to become a member of the company if he was an applicant for shares to be issued by the company he would normally give a written acknowledgement that he would take the shares subject to the Memorandum and Articles.53 50. Resto's Case (1877). 51. R.R Pennington, Company Law, (Butterworth London, 1990, 7th edition) 68. 52. Borland's Trustee v. Steel Brothers & Company Ltd. (1901) Ch 279 at 288, 53. Chortler (1976) 12 West Aust L Rev 333. It will be observed that Farwell J lays considerable and perhaps disproportionate stress on the contractual nature of the share-holder's rights. The theory seems to be that the contract constituted by the Articles of Association defines the nature of rights.54 But the contractual rights, which make-up a share are of a peculiar nature.55 They were transferable at common law at a time when, even other chooses-in-actions were not legally assignable.56 54. L.C.B Gower, Gower's Principles of Modern Company Law (Sweet & Maxwell, international students edition 1992) 359. 55. R.R Pennington, Company Law, (Butterworth London, 1990, 7th edition) 68. 56. Pinket v. Wright (1842 2 Hare 120. Finally, it is important to remember that many of the most significant rights as right to vote57, right to get dividend58, right to participate in the meeting59 etc. attached to shares are conferred by the Companies Ordinance, 1984 and are not the only result of the contract between the company and its members. It is important to distinguish the rights conferred by the Companies Act from contractual rights arising under the statutory 'contract because in general, rights conferred by the Act cannot be abridged by agreement whereas rights under the statutory contract only exist, of course, so far as the Memorandum and Articles spell them out.60 57. See section 160 of The Companies Ordinance. 1984. 58. See section 250 of The Companies Ordinance. 1984. 59. See section 160 of The Companies Ordinance, 1984. 60. R.R Pennington, Company Law, (Butterworth London, 1990, 7th Edition) 109. At the end of this writing, the reader may conclude that share is the interest of the share-holder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the share holders61. In law, similarly, a share is sometimes understood as goods62 and sometimes it is viewed as contract with certain rights and obligations.63 There is no debate on the point that that share is not only a moveable property64 but also it is tangible property.65 Share is also a contract between the share-holders inter se on the one hand, and between company and its share-holders on the other hand. The ordinary principles of law of contract apply to such a contract in the same way as to other kinds of contract.66 61. Borland's Trustee v. Steel Brothers & Company Ltd. (1901) Ch. 279. 62. S.2(7) of the Sale of Goods Act, 1930. 63. R.R Pennington, Company Law, (Butterworth London, 1990, 7th Edition) 68. 64. Section 89 of The Companies Ordinance, 1984. 65. SNDP Yogam Re, ILR (1969) Ker. 516. 66. John H Farrar, Company Law (Butterworth London, 6th Edition, 1985) 134.