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Shareholder’s Preferential Rights to New Shares

Author: Dr Adel Al Maqdadi

 A general joint stock company may start operation with a capital that is just enough to run its business. But after a period, the company may find that it needs additional funds either to expand its business, or because it has insufficient capital to cover its needs. To secure such additional funds the company may seek loans from banks or from the public by offering loan bonds. However, borrowing is an expensive solution in view of the interest the company has to pay. Instead, the company may issue new shares and give the present shareholders the preference to purchase themi. In this article I’ll explain the justifications of giving shareholders the preference to the new shares, the procedures necessary for the public to purchase new shares, and how these shares are distributed to the present shareholders.
 
 
Why Preference to New Shares is offered to Present Shareholders?

Floating new shares for public subscription will bring new shareholders into the company with these new shareholders sharing profits with the existing shareholders whose dividends will fall accordingly.

Entry of new shareholders into the company through public subscription to increase the company’s capital will give them a right to the company’s legal or optional reserve, which was formed by present the shareholders’ efforts. This will also change the structure of the ordinary and extraordinary general meetings, or may lead to the transfer of the company’s management to other people.

In view of the above reasons, the Omani legislator by Article 83 of the Commercial Company Law (CCL) No 4, of 1974, offered each shareholder, who wishes to purchase new shares a preferential right to subscribe to a number of these shares in proportion to the number of shares they already own2.

Procedures of Offering Older Shareholders Preferential Right

By Article 83 of the Law, when new shares are to be floated for public subscription, the company must send a notice in writing to each shareholder at their domicile registered in the shareholders’ register informing them of such preferential right. The notice must be accompanied by a prospectus attested by the Public Authority of the Capital Market3. It must be published after approval of the authorities concerned in two dailies for at least two consecutive days. It must indicate the period during which the preferential right must be used provided that this period shall not be less than 15 days from the date of publishing of the notice. A shareholder may waiver their preferential right according to procedures and rules as issued by the Ministry of Commerce and Industry4.

Normally, the new shares are issued in the same nominal value as the original ones. To cover the expenses of their issuance, the company may add to the new shares’ price an issuance allowance of 2% of the nominal value. When new shares are issued kiers at more than the original price, the excess amount new after covering the issuance expenses shall be added the to the account of the legal or the agreed reserve of the ends company5.

Distribution of New Shares to Present Shareholders

New shares should be offered to the present interested shareholders in proportion to their existing shareholdings. This limit should not be exceeded; however, if new shares remain unsubscribed to by the present shareholders, they may be offered to those who require new shares in excess of the proportion of what they already own.

Where the new shares offered to the present shareholders for preferential right remain in whole or in part unsubscribed to during the specified period of 15 days, the board of directors shall, by Article 83 of the CCL, offer these shares to public subscription in accordance with the public subscription rules and procedures6.

Nevertheless, by Article 83, instead of offering new shares to public subscription, the board may opt to reduce the increase in the capital equally to the value of the shares unsubscribed to by the present shareholders7.

This takes place when new shares are offered to the present shareholders for preferential right, but they subscribe to only part of them. Where the value of the shares subscribed to by preferential right is sufficient to cover the fund the company needs, the board, by Article 83, may reduce the increase in the capital to the limit subscribed to by the present shareholders and cancel the remaining shares without offering them to the public. The Public Authority of the Capital Market must be informed of such procedure.

Endnotes

  1. See my article: “Increasing General Stock Company’s Capital by Shares Allotted for Certain Persons” p. 62, Al-Am Asssahira Issue No 104, March 2004,
  2. This is stated in Article 83 as follows:” ... each shareholder shall have the preferential right to subscribe a number of the new shares in proportion to the number of shares he owns.
  3. The prospectus should include: the name of the stock company, its capital, reference to the extra-ordinary general meeting, or the decision of the board on the increase of the capital, amount of the increase, number of shares offered, nominal value of the shares and the allowance of issuing.
  4. This is stated in Article 83 as follows: “A written notice must be sent to each shareholder at his domicile registered in the shareholders register informing him of such preferential right. Such notice must be accompanied by a copy of the prospectus attested by Public Authority of the Capital Market, and this notice must be published in two daily newspapers for two consecutive days, at least after approval by the authority concerned. It must indicate the specified period during which the period shall not be less than fifteen days from the date of publishing.”
  5. According to Article 78 of the CCL.
  6. This is stated in article 83 as follows: “ Shares not subscribed for by the present shareholders shall be re-offered for public subscription pursuant to the rules of prescribed for the capital of a joint stock company under formation, and all that refer to the promoters shall be deemed as referring to the board of directors.”
  7. It states as follows: “... instead, the board may reduce the increase in the capital equally to the value of the shares not subscribed.”