In most circumstances, when a company issues new shares to an existing or incoming shareholder, the shareholder will pay the full issue price of the shares. When the company receives the funds, it will issue the shareholder with ‘fully paid shares’. But sometimes, a company will issue ‘partly paid’ shares (also known as ‘contributing shares’). A ‘partly paid’ share means that the shareholder has paid part of the issue price upfront and will pay the remaining amount in the future.
Issuing partly paid rather than fully paid shares has consequences for both the company and shareholders, as discussed below.
What are Partly Paid Shares?
A company issues partly paid shares where the shareholder has not paid the full issue price.
For instance, a company issues its shares at $1.00 per share. The shareholder pays the full amount upfront to the company for the shares, and the shares are then ‘fully paid’. However, if the shareholder only pays a portion of the cost upfront (for example, $0.50), the shares will be ‘partly paid’. When filing with ASIC, partly paid shares are considered a class separate to fully paid shares.
For a proprietary company, the company constitution will usually provide that the company has a first right of refusal on each partly paid share. A first right of refusal gives the company the first opportunity to purchase or refuse the shares before other shareholders. The first right extends to all dividends and proceeds of the share sale. Directors can choose which of the partly paid shareholders it calls on.
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 has insufficient funds to 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 in the future.
What is a Shareholder’s Liability on a Partly Paid Share?
Section 254M of the Corporations Act 2001 sets out the general rule about a shareholder’s liability for partly paid shares. If a shareholder owns partly paid shares, he or she is legally obliged to pay some or all of the remaining issue price at the company’s request.
If the holder of the partly paid shares does not make payment at the required time, the company has the right to claw-back (i.e. take back) the shares from the holder in accordance with the company’s constitution.
Usually, the shareholder and the company agree at the time of issuing the shares when the company can call on payment. For instance, the subscription documents may include a payment schedule setting out the dates when the company will call for the shares. After the company receives the balance, the partly paid shares convert to fully paid shares.
What Are the Rights of Shareholders With Partly Paid Shares?
Shareholders with partly paid shares have the same rights as fully paid shareholders, including:
- right to dividend payments,
- right to vote at shareholders’ meetings, and
- right to participate upon winding up of the company.
Usually, a shareholder’s right to dividend payments is proportionate to the amount they have already paid. At a shareholders’ meeting where voting is by a show of hands, a shareholder with partly paid shares will have the same vote as a shareholder with fully paid shares (one vote per share).
As with any potential investment, an incoming shareholder should exercise care before subscribing for partly paid shares. Importantly, a partly paid shareholder should understand the dates and payment amounts the company will call on in the future. If you have any questions about partly paid shares or other share classes, get in touch with our commercial lawyers on 1300 544 755.
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