LEGAL VIEWPOINT: Subscription in public joint stock companies by Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel Bahrain

In Bahrain and other Gulf Countries, as the company law provides, there are 8 or 7 types of companies. Potential investors, in this sector, are free to choose any of available types. Each type has got its own features and characteristics. Among available types we find the “Public Joint Stock company”. To incorporate a public joint stock company, there is certain process to be started by the group of investors interested therein. This group, normally called ‘founders’ of the company, as they “found” and ignited the idea.  The first step for founders is to call and invite the public -at-large to join forces for the purpose of establishing new public joint stock company. The invitation shall be addressed to all the public and therefore it is called, “Public” company.

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Details of the invitation to the public to join forces, shall take the form of, an initial public offering (IPO), and shall be expressed in a certain document known as the prospectus. Eligibility of subscription and other conditions are normally decided by founders as enumerated in the law. The prospectus shall be published in local (or foreign) newspapers and shall contain and reflect all required information, in full transparent disclosure, to subscribers who will act in good faith according to what has been reflected and disclosed in the prospects, in other words, initial public offering (IPO). Legally speaking, founders are jointly responsible for all information disclosed in the prospectus. Likewise, they are liable if they had intentionally omitted the disclosure any material info or as requested by any potential investor.

Each subscriber shall provide all necessary information about himself and the number of shares he\ she intends to acquire. Subscription shall be unconditional otherwise, legally speaking. it should be discarded and becomes of no value and void. The subscriber shall clearly indicate that he has seen the A o A and the M o U of the company and he agrees to what he includes. This means that in addition to the prospectus, the subscriber will have the right at any time to peruse and study the legal docs of the company.

After deducting shares acquired by founders, the other or balance shares shall be offered to the public for subscription. We need to mention, the founders, according to the Company Law, shall acquire certain number of shares for themselves i.e. not less than 20% and not to exceed 45% of the shares of the company under establishment.  This works, as a sing of commitment from them and, also, a sign of continuity and sustainability for the newly born company.

Offer to the public regarding the balance shares shall remain valid and open for not less than 30 days and not exceeding 90 days. I believe this extra allowable time is more than enough to enable many interested persons to subscribe. In fact, there are many new companies, which have been totally subscribed in a few days. The company, in all cases, shall not be incorporated unless all offered shares are properly taken and subscribed by potential investors.

In case all shares are not subscribed for any reason, the above period, could be extended for 3 more months after obtaining approval of the competent authorities.  As a matter of fact, and practice, in some cases there are lot of problems that could arise regarding subscription of shares. One of such practical problems is the expiry of subscription period before having subscribers to take all shares. This is normally known as under-subscription. Ironically, in some cases, the opposite could happen wherein the number of subscribers exceed the number of available shares i.e. over-subscription. The second option normally happens when potential investors are aware and ready to join a new company that meets their expectations.

We need to answer a very important issue, what are we supposed to do in case of under-subscription or over-subscription? If the subscription period expires before having enough subscribers, particularly in case of other subscriptions, the founders may decline or rescind incorporation of the company or reduce the capital of the company (subject to approval), or the founders to subscribe the balanced shares after obtaining approval of the competent authorities. In case of over-subscription there are few possible alternatives, including, the shares must be proportionately persisted to the subscribers. Each subscriber would be given new shares proportionate to his shareholding. A location shall be to the nearest complete share provided that all shareholders to participate in the company irrespective of number of shares originally subscribed by them. The competent ministry, upon proposal from the founders and approval of other competent authorities, may decide to allocate to all shareholders an initial number of shares not exceeding certain amount (to be agreed upon) and thereafter the balance to be distributed according to what has been explained above.

Under-subscription or over-subscription basically depends on the objectives of the company to be incorporated and the market needs. In case there is good opportunity for the company to prosper and flourish and there is money in hand or good financing, potential investors will immediately take all shares offered for subscription and even look for more in a way that ultimately, at the end, leads to over-subscription. Also, the reputation of the founders and their goodwill will have direct impact on over-subscription of shares. In the absence of what has been mentioned above the outcome, of course, will be under-subscription of shares. To open the door to start good reputable company that attracts many interested potential investors, the founders shall study all possibilities that could enable subscriptions of all the new companies to finish smoothly within the required permissible time. Of course, the timing for the investment and the general climate of investment in the country and around would play great role in incorporating new companies qualified to groom good potential successful future…

Dr. AbdelGadir Warsama Ghalib is Founder and Principal Legal Counsel at Dr. AbdelGadir Warsama Consultancy

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