06. shares Flashcards
what are the incentives for investing in a share?
- receipt of income (by way of dividend)
- capital gain (by way of the growth in the value of the company, and therefore the individual shares)
what does the nominal or par value represent?
a unit of ownership rather than the actual value
often 1p, 5p or £1
what are the rules wrt issuing a share at more or less than its nominal value?
- must not be issued at a discount to its nominal value
- can be issued for more than its nominal value (premium)
what is the issued share capital?
the amount of share capital in issue at any time
shown in the company’s balance sheets
made up of:
- subscriber shares; and
- further shares issued after incorporation, to new or existing shareholders
what is the paid-up share capital?
the amount of nominal capital paid by shareholders already
when can a company demand the amount outstanding on a member’s shares?
any time
what is the difference between allotment and issue of shares?
a share is only issued once:
- the shareholder has actually been registered in the company’s register of members
- only then will their legal title be complete
various classes of share
✅Ordinary shares
✅Redeemable shares
✅Preference shares
✅Non-voting shares
✅Employees’ shares
✅Cumulative shares
✅Convertible shares
✅Deferred shares
do preference shares have voting right attached?
no, normally they are non-voting
what is a cumulative preference share?
unless the share is expressed to be non-cumulative:
if a dividend is not declared for a particular year, the right to the preferred amount on the share is carried forward and will be paid, together with any other dividends due, when there are available profits
what is a participating preference share?
‘Participating’ preference shareholders may participate, together with the holders of ordinary shares, in:
(a)Surplus profits available for distribution after they have received their own fixed preferred dividend; and/or
(b) Surplus assets of the company on a winding up. As with preference shares, participating preference shares are almost always issued with a fixed dividend and can be cumulative if stated as such in the Articles. Participating preference shares with these characteristics are generally called ‘fixed rate participating cumulative preference shares’.
what is a deferred share?
- carries no voting right
- no ordinary dividend
- but are sometimes entitled to a share of
surplus profits after other dividends have been paid (presuming there is a surplus)
OR
more usually ‘deferred’ shares carry no rights at all and are used in specific circumstances where ‘worthless’ shares are required.
what are redeemable shares?
shares issued with the intention that the company will, or may wish to, at some time in the future, buy them back and cancel them, usually on specified terms.
what are convertible shares?
Such shares will usually carry an option to ‘convert’ into a different class of share according to stipulated criteria
when are dividends payable?
only if the company has sufficient distributable profits
(accumulated realised profits
less its accumulated realised losses)
what are the two types of dividend?
- final
- interim
what is the difference between allotment and transfer of shares?
allotment - contract between company and existing shareholder under which the company agrees to issue new shares in return for the subscription price
transfer - contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares (with the exception of a sale out of treasury of treasury shares).
does a private company need to publish a prospectus on every offer of shares?
usually no, but the rules should be checked each time
what is transmission of shares?
an automatic process in the event of death or bankruptcy of a shareholder.
- If a shareholder dies, their shares will automatically pass to their PRs.
- If a shareholder is made bankrupt, their shares automatically vest in their trustee in
bankruptcy.
what are the two most common restrictions on transfer of shares?
(a) Directors’ power to refuse to register
Section 26(5) MA states: ‘The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent’.
Under s771 CA 2006, a company must give reasons if it refuses to register a transfer.
(b) Pre-emption clauses (rights of first refusal)
Here we are looking at pre-emption rights on a transfer of shares (which should not be
confused with pre-emption rights on allotment under s 561 CA 2006). Such rights are usually set out in the Articles. CA 2006 and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the Articles of any company wishing to establish them.
Pre-emption rights on transfer will often require that a shareholder wishing to sell shares must offer them to the other existing shareholders before being able to offer them to an outsider.
how must shares be transferred?
- stock transfer form, signed by the transferor
- submitted to the new shareholder with a share certificate in the new shareholder’s name within 2 months
- must be stamped (0.5% of the consideration rounded up to the nearest £5, unless consideration is £1000 or less; if more than £1000, £5 minimum payable)
when does legal title to the shares pass?
registration of the member as the owner of those shares in the register of members by the company
what is the procedure for the buy back shares out of profits / proceeds of a fresh issue?
Initial steps:
- check there is no limit in Articles on s690 power to buyback shares;
- prepare accounts to check there are sufficient distributable profits;
- confirm shares are fully paid.
Board Meeting:
- BR to approve the draft contract;
- BR to call a GM and approve form of notice/propose a WR
- Contract to be made available to shareholders. (If GM: must be available for inspection at the company’s registered office for at least 15 days prior to and at GM. If WR: circulate contract with WR.)
GM/WR:
- Shareholders pass OR to approve contract.
- Holders of shares being bought may not be eligible to vote.
Board Meeting:
- BR to enter into the contract.
- BR to appoint a director(s) to sign the contract.
Post-meeting matters:
- File return, notice of cancellation and statement of capital within 28 days
- Keep copy of contract for 10 years.
- Cancel shares, update register of members (and PSC register if applicable).
procedure for buyback of shares out of capital
Initial steps:
- Check there is no limit in the Articles on s690 power to buyback shares on s709 power to use capital to fund the buyback
- No earlier than three months before the directors prepare the statement of solvency, prepare accounts to ascertain available distributable profits
- Confirm shares are fully paid
Board Meeting:
- BR to approve the directors’ statement of solvency (DSS) and the auditors’ report (AR)
- BR to approve the draft contract
- BR to call a GM and approve form of notice/propose a WR
- Contract to be made available to shareholders (If GM: must be available for inspection at the company’s registered office for at least 15 days prior to and at GM. If WR: circulate contract with WR.)
- DSS and AR must be signed no earlier than one week before the GM or the passing of the WR.
WR ALTERNATIVELY:
- Circulate WR with contract, DSS and AR.
- SR to approve payment out of capital and OR to approve contract.
- Holders of shares being bought back may not be eligible to vote.
GM
- Shareholders pass OR to approve contract.
- Shareholders pass SR to approve payment out of capital.
- Holders of shares being bought may not be eligible to vote.
- Contract, DSS and AR must be available at the meeting.
Following GM/WR:
- Within 7 days: place notices in Gazette and national newspapers and file DSS and AR at Companies House.
- Within 15 days: file SR at Companies House.
- For five weeks after date of SR: creditors and shareholders have right of object. Copies of DSS and AR must be available for inspection at company’s registered office.
Board Meeting:
- BR to enter into the contract
- BR to appoint a director(s) to sign the contract
- Payment out of capital must take place between 5-7 weeks after SR passed.
Post-meeting matters:
- File return, notice of cancellation and statement of capital within 28 days.
- Keep copy of contract for 10 years.
- Cancel shares, update register of members (and PSC register is applicable).
