Our Companies Act provides that a company may only issue new shares against a consideration which consists of ‘assets capable of economic assessment’. This may consist of cash or other assets, whether tangible or intangible, movables or even immovables. This applies either during the incorporation of a new company or at a subsequent increase in share capital. However, not all assets which are capable of economic assessment are allowed by law to be a means of consideration for shares. In fact, future personal services and, in general, any undertakings to perform work or supply services may not be given by way of consideration.
In case of a non-cash consideration, a report needs to be drawn up by an expert who is independent of the company (such as an auditor). The report needs to contain:
- a description of each of the assets comprising the consideration;
- the methods of valuation which have been used;
- whether the values arrived at by the application of these methods correspond at least to the number and nominal value, and, where applicable, to the premium on the shares to be issued for them.
The law makes it quite clear that this report is to be approved by the Registrar of Companies before any shares are issued. Whilst it may have been common practice for practitioners to submit experts’ reports and documentation relative to the allotment of shares contemporaneously, this practice has now been righty rejected by the Registrar of Companies.
From a practitioner’s point of view, the process of putting in place such a detailed report may at times appear to be cumbersome, costly and lengthy for businesses. The nature of assets such as IP, shares in foreign entities and other complex assets may require a very detailed economic assessment carried out by competent and capable experts in the field and in multiple countries.
Once the new shares are allotted, the company must submit a return of allotment (Form H) within one month, together with a contract in writing between the company and the allottee.
Making a non-cash consideration does not affect the rule that at least 20% of the nominal value of the shares must be paid up in the case of a private company, and 25% in the case of a public company.
An interesting question is whether crypto assets (such a crypto currencies) may qualify as allowable contributions in kind. One must keep in mind the high volatility in the price of such assets as well as risks inherent in crypto assets. The fact that cryptocurrencies offer anonymity and have been the subject of a number of scams of course does not help.
My understanding is that the authorities are being quite prudent in such cases. A potential way forward is for regulators to put in place specific rules to cater for this particular asset class. This is very important especially for a jurisdiction which is seeking to attract businesses operating in the virtual assets. This would have the benefit of providing a balanced approach which safeguards companies and their shareholders, while at the same time providing for legal certainty.
Having said so, it is submitted that under the present law, legally there is no reason whatsoever why these contributions should not be allowed to go through. A crypto-asset is an asset just like any other, and provided that the procedure required by the law is adhered to, then these should be accepted as well.