Effect of a letter of allotment before acceptance and payment
Applying the principles laid down in these two authoritative definitions, we would say that at its very best, the interpretation of the letter, exhibit D, most favourable to the first defendant is, that it is either an offer by the company of shares to the first defendant, or an acceptance by them of an application for shares by the first defendant made in his letter referred to in the exhibit. In either case, it has to be accepted by the first defendant to create a binding contract between him and the company to issue shares to him, but until he pays for them, or fulfils any other conditions attached to it, no particular shares identified by number can be appropriated to him, consequently he would not be entitled to be recognised as owning more than the one share he is proved by the minutes of the company as holding, and his name cannot be entered on the register.
How a person becomes a shareholder: agreement and entry on the register
What then is meant by the use of the term “allotment” when used in company law with respect to shares? We find guidance on this in Gower’s Modern Company Law (2nd ed.) at p. 348. There the learned author, discussing the subject of how a person becomes a shareholder in a company, points out that the process involves two distinct legal operations: (a) an agreement and (b) entry of the name on the register. He says that “both must be present before the person concerned becomes a member and shareholder.”
“What is termed ‘allotment’ is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a less number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance. To my mind there is no magic whatever in the term ‘allotment’ as used in these circumstances . . . It is an appropriation, not of specific shares, but of a certain number of shares. It does not, however, make the person who has thus agreed to take the shares a member from that moment; all that it does is simply this—it constitutes a binding contract under which the company is bound to make a complete allotment of the specified number of shares, and under which the person who has made the offer and is now bound by the acceptance is bound to take that particular number of shares. In most cases the act of placing the person who has agreed to become a member on the register is a mere matter of form, and may be described as a mere ministerial act; but it appears to me that in point of law all that is done by the process I have just indicated, and all that was done in this case, was to make a complete and binding contract.”
