Share capital is a major and essential source of financing for companies. Under the Corporations Act 2001 (Cth), a company has the power to issue and cancel shares, including ordinary shares, bonus shares, preference shares (including redeemable preference shares) and partly paid shares. A company does not however have the power to issue bearer shares.

See Part 2H.1: Issuing and converting shares.

The main types of shares issued are ordinary and preference shares. Share classes are created based on their commercial function, so within these two categories there can be many variations.

The issue of shares is a two-step process. The intending shareholder submits an application to the company. The issue is complete once the board approves the issue of shares and enters the shareholder's name on the share register. A share certificate may also be provided to the shareholder in respect of those shares.

It is a replaceable rule that before issuing shares of a particular class, the directors of a proprietary company must offer them to existing shareholders of that class on a pro rata basis.

See Part 2H.1: Issuing and converting shares.

If the terms of issue of shares are challenged by someone whose interest may be affected, the Court has a discretionary power to validate or confirm the issue of shares, even if the shares may be invalid under the law.

See Part 2H.1: Issuing and converting shares.

A company may convert an ordinary share into a preference share (subject to certain restrictions) and vice versa. Conversion of an ordinary share into a preference share is only allowable if certain rights are set out in the constitution or have been approved by special resolution.

A company can also convert all or any of its shares into a larger or smaller number of shares by a resolution passed at a general meeting.

See Part 2H.1: Issuing and converting shares.

Redeemable preference shares are shares that according to their terms of issue, may be redeemed at:

• the company’s option;

• the shareholder's option; or

• a fixed time or on a specified date.

A company has the power to redeem shares provided certain criteria are met. These restrictions are in place to prevent redemption being used to the disadvantage of creditors by reducing the company's capital.

See Part 2H.2: Redemption of redeemable preference shares.

Generally, a shareholder is required to pay the full amount of the share's value when they decide to invest in a company.

A company may offer partly-paid shares, where only a portion of the value of the share is paid up front. One of the terms of the issue must be that the company will set a "call up date" where the shareholders are obligated to pay the remaining balance when the company requests it to be paid.

With respect to no liability companies, there are rules which govern how a company is able to make a call on a partly paid share and the procedure for the sale of the share following a failure to meet a call.

For a company limited by shares, the rules which apply following a failure to meet a call are usually set out in the company's constitution.

See Part 2H.3: Partly paid shares.

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Different dividend rights are prescribed by the Corporations Act 2001 (Cth) for different types of companies.

Before 2010, a dividend could only be paid out of profits. However, a new test was introduced by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth). Although some confusion and uncertainty remains, the new test is generally considered to allow a company to pay a dividend other than out of profits, provided certain requirements are met (including a balance sheet test).

Subject to a company's constitution, when a company decides to pay a dividend, it will only incur a debt when the time fixed for payment of the dividend arrives.

See Part 2H.4: Capitalisation of profits and Part 2H.5: Dividends.

ASIC must be notified if a company issues or cancels shares.

See Part 2H.6: Notice Requirements.