When a company gives shares to existing shareholders or incoming shareholders, the company will ‘issue’ those shares for a price. In most circumstances, the shareholder receiving the shares will pay the full issue price of the shares. The company will then issue the shareholder with ‘fully paid shares’. Sometimes, however, a company will issue ‘partly paid’ shares. A ‘partly paid’ share means that the shareholder has paid part of the issue price upfront but has not yet paid the remaining amount. Issuing partly paid rather than fully paid shares has consequences for both the company and shareholders. This article will explain the rights and obligations of partly paid shareholders.
What are Partly Paid Shares?
Partly paid shares (also known as ‘contributing shares’) are issued by a company when the shareholder has not paid the full issue price of the shares they now hold.
Usually, a company only issues partly paid shares to a shareholder if there are compelling commercial reasons. For example, a company may intend to issue shares to a strategic business partner who cannot pay for all the shares at the time of issue. The company may then issue partly paid shares with a payment schedule that sets out the remaining amounts the shareholder must pay.
A Shareholder’s Responsibilities for Partly Paid Shares
If a shareholder owns partly paid shares, they must pay the remaining issue price at the company’s request. Shareholders of partly paid shares must pay the outstanding share price for the issued shares.
The company constitution may also set out more information about the shareholder and the company’s responsibility with regard to partly paid shares, such as:
- that the company is able to ‘call on’ the shareholder to pay amounts owing on the partly paid shares with notice;
- that the company will develop the terms on which the partly paid shares are issued with the shareholder (e.g. that the amount owing must be paid at once or in instalments); and
- how many days’ notice the company must give if the company calls on amounts owing on the partly paid shares (e.g. the amount owing, the due date and the place of payment).
Alternatively, the shareholder and company can agree on when the company can call on payment at the time of issuing the partly paid shares. This will usually be in the form of a payment schedule. The schedule sets out the dates when the company will call for the amounts outstanding on the shares and the amount outstanding.
A company’s constitution will also state what happens if the holder of partly paid shares does not pay on time. Typically, the company will be able to:
- demand interest on the amounts owing on the partly paid shares;
- sue the shareholder to recover the money owing on the partly paid shares; or
- require that the shareholder forfeits their partly paid shares and retake ownership of the shares.
A Shareholder’s Rights Over Partly Paid Shares
Shareholders with partly paid shares have the same rights as fully paid shareholders, including the right to:
- dividend payments,
- vote at shareholders’ meetings, and
- participate upon winding up of the company.
At a shareholders’ meeting, a shareholder with partly paid shares will have the same votes as a shareholder with fully paid shares if they hold the same class of shares. All holders of ordinary shares will typically have one vote per share, regardless of whether those shares are fully paid or partly paid.
Partly paid shares may also be sold or transferred like any other share. However, the obligations of payment will carry on to the new shareholder.
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Key Takeaways
Companies are required by ASIC to keep up-to-date members registers. A members register should record the class and payment status of each of their shareholders. It is important for both the company and shareholders to correctly record whether shareholders have paid the full issue price of their shares. ASIC must also be updated if any shareholder changes from having fully paid to partly paid shares or vice versa.
A shareholder should exercise care before subscribing for partly paid shares. In particular, they should understand the:
- payment amounts they owe to the company;
- dates on which the company will call on those amounts; and
- consequences if they are unable to pay.
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Frequently Asked Questions
A company constitution is a critical corporate governance document that governs the management of your company. Specifically, it details rules which govern the relationship between the company’s directors and its shareholders. When issuing partly paid shares, ensure that you check your company constitution for the correct process.
There are two different options available to become a company shareholder. Firstly, the company may issue shares to you when it registers itself with ASIC or when the company creates new shares at a later date. Secondly, an existing shareholder may transfer their shares to you.
A company must keep a record of all of its shareholders, including the dates they acquired their shares, the class of shares, payment status (such as paid or partly paid) and the total balance of their shareholding. This record is not submitted with ASIC but can be called upon at any time.
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