Q.State the legal rules that govern a valid allotment of shares. What is meant by an "irregular allotment," and what remedy does an allottee have against one?
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Start your 14-day free trial to unlock the full solution →Allotment is a significant legal act — it is the moment an applicant, who has merely made an offer to take shares, becomes an actual shareholder of the company, bound by the company's Memorandum and Articles and liable for any amount unpaid on the shares. Because of this, the law surrounds allotment with both general contractual principles and statute-specific conditions.
At the level of ordinary contract principles applied to share allotment, four rules stand out. First, allotment must be made by a person or body with actual authority to make it — normally the Board of Directors acting at a validly convened and quorate meeting, or a committee to which the power has been properly delegated by the Board; an allotment purported to be made by someone without this authority does not bind the company. Second, allotment, being the company's acceptance of the applicant's offer, must be communicated to the applicant to take legal effect — an internal Board decision to allot, never actually conveyed to the applicant, does not complete the contract. Third, allotment must be made within a reasonable time of the application; if the company delays unreasonably, the applicant is entitled to treat the original offer as having lapsed and may refuse to take the shares even if the company later purports to allot them. Fourth, allotment must be absolute and unconditional, and strictly in accordance with the terms of the application — the company cannot allot a different number of shares, or shares of a different class, than what was actually applied for, and any allotment on materially different terms does not bind the applicant unless the applicant accepts the variation.
Layered over these general principles are the statute-specific conditions this chapter has already covered: Section 39, which bars allotment until minimum subscription and its associated application money are received, and Section 40, which requires the company to apply for, and (where the securities are to be dealt in on a stock exchange) obtain, permission for dealing on that exchange, failing which any purported allotment becomes void and the money received must be refunded with interest for delay. …
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