mightychurch.com

Hi lawyers and market experts,
how does this work?

You buy $500 of shares, and get a bill for a million bucks!

http://www.abc.net.au/news/stories/2009/04/14/2542750.htm

Can this happen with any shares? I’ve got super with MLC, can MLC have bought shares with that company. Could we effectively be bankrupt without even knowing it

Hey Dave;
I have to confess to being a lawyer but knowing very little about company law. But I think this is the way it works- mostly when you buy shares once you’ve paid your money that is it for what you owe. But I guess if you sign a contract at the time of purchase which has a clause that allows the company to come back later and slug you for more, then you have to pay up. I think they said on the news tonight that the shares were really really cheap, so maybe that was why. Lesson for the day- do NOT sign anything without reading the small print! (And that other oldy, if it seems to good to be true, it probably is…)
Neil F

I’m neither a lawyer nor a market expert and I’m not familiar wtih the details of the example you mention, but the basis of the market economy is the limited liability company, that is, legally you purchase a share for a set amount and you can’t be liable for any more than that amount of money you’ve invested in the shares.  So no, you can’t purchase and pay for shares and then be called to pay up more to cover the company’s liabilities. 

There are financial instruments in which you pay for shares in instalments or borrow money to buy shares etc but these are financiing contracts around how you get money to buy the shares not part of the actual buying shares to invest in a company, .  Shareholders’ liability is limited to the amount that they invest.

Hi Dave

I’ve not read that much about the brisconnection mess, but I don’t think they’re being called on to meet the company’s liabilities, the shareholders are being called upon to pay the full value of the shares they previously purchased - you can buy shares at less than their value, with an obligation to pay further amounts as time passes when the company makes a call on partly paid shares (think T2 instalments).  Moral of the story - if you buy partly paid shares, make very sure that you have the funds to meet any call for the full value of the shares you’ve “bought”.  it would be hard for the major institutional investors to be caught out by that one, as they would (one hopes) factor in the full cost of the shares into the equation when considering when to buy them, so it would be most doubtful your super manager would jump in to such a scheme and sign up for partly paid shares then fail to have the funds available to meet the call on the partly paid shares.  A company that is limited by liability cannot make a call on shareholders beyond the face value of the sahres - once paid, that’s it; but until the face value is paid, then you have to keep paying when the company asks until you’ve hit that level.  A company limited by guarantee is very different - then you’re in it till the bitter end no matter how much it costs, but no one uses that structure much any more these days.  So rest in peace Dave, what little of your super is left after the GFC wolves have been sated won’t be swallowed up in calls!

Kathryn Roach - 15 April 2009 12:13 PM

Hi Dave

  A company limited by guarantee is very different - then you’re in it till the bitter end no matter how much it costs, but no one uses that structure much any more these days. 

A Company limited by guarantee is the structure that a great many charities and NFPs use, so rest assured that it is used quite a lot.  It does not mean that members are “in till the bitter end no matter how much it costs”, what it means is that the Constitution or articles of association state that each member is required to contribute (ie gaurantee) a set amount towards any outstanding obligations of the COmpany if the company is wound up. I have been involved with the governance of a few charities constituted as Companies limited by gaurantee and the constitution usually puts the gaurantee required of the Directors at about $100 or less.

Kathryn pretty much has it right on the Brisconnections matter - there are liabilities attaching to the units in the unit trusts to pay two more installments of $1 each. 

The use of installments (or partly paId shares) in this way is not uncommon for the issue of new shares / units (the Telstra offerings are a good example), but what makes BrisConnections unusual is the fact that the level of debt that the company has taken on (including as a result of some ludicrous financial engineering) means that, in the current economic climate, the company will not be able to offer any financial return to its shareholders (at most, it will only be able to repay its debts in the very long term) and therefore that no one is willing to pay the additional $2.

As a trade practices lawyer, however, the more interesting question to me is whether anyone marketed the BrisCon units to investors in a way that led them into the error of thinking that no further installments were payable.