11. Shares and share capital

Question 1

What is the difference between a share’s nominal value and share premium

Answer 1

S. 542 provides that shares in a ltd must have a fixed nominal value attached to them. Shares are often allotted for for more than their nominal value, the excess is called ‘share premium’

Question 2

What is the difference between allotted share capital and its issued share capital?

Answer 2

The total nominal value of actually allotted shares is ALLOTED Share Capital. Once the shares have been allotted to a person, and the name is entered into the ROM, those shares have been issued.
The total nominal value of shares that have been issued is called ISSUED Share Capital.

Question 3

What is the difference between allotting and issuing shares?

Answer 3

Allotted: person acquires unconditional RIGHT to be included into ROM
Issued: when the person is ACTUALLY entered into RoM

Question 4

Do directors of ltds have authority to allot preference shares?

Answer 4

Directors can have authority to allot preference shares (if the company has allotted ordinary shares),

1. If permitted by Articles, or
2. By special resolution

Question 5

What is a minimum share capital?

Answer 5

s.761 - plc must have trading certificate
A Registrar cannot issue a tracing certificate unless the the nominal value of allotted share capital is not less than the auhorised minimum. Authorised minimum is £50,000 (or euro equivalent)

Question 6

What are pre-emption rights?

Answer 6

Where the pre-emption right apply, the company cannot allot equity securities unless it has offered them to existing shareholders to allow them to maintain their existing shareholding.

Question 7

What is the difference between fully paid, partly-paid and nil-paid shares

Answer 7

Fully and partly paid - self-explanatory

Nil-paid (nothing due on allotment, full price to be paid at some point in future).

Question 8

What limitations are placed upon PLC to accept non-cash consideration as payment for shares

Answer 8

Limited in several ways:

1. In exchange for work or services (s.585)
2. A PLC cannot accept an undertaking which is to be performed more than 5 years after the date of the allotment. s. 587
3. a PLC cannot accept NON-CASH consideration unless independently valued (and copy of valuation is is made available to the Co and the allottee), s.593

Question 9

What 2 functions does a share certificate fulfil?

Answer 9

1. Basic info on shares

2. That the holder has legal title to shares.

Question 10

What 3 rules are relevant to the public offering of shares?

Answer 10

Listing Rules
Prospectus Rules
Disclosure Guidance and Transparency Rules

Question 11

Identify the 4 types of public offering of shares.

Answer 11

1. Offer for subscription - offer to public a certain number of shares
2. An offer of sale - investment bank subscribes to all shares then offers them to public
3. A placing - investment bank places shares with selected purchasers (usually institutional investors
4. A rights issue - offer to existing shareholders in proportion to their shareholdings. (The shareholders can sell them on).

Question 12

What is the difference between a standard and premium listing?

Answer 12

Standard - comply with certain base obligations

Premium - subject to greater regulations (also CG Code)

Question 13

What info is mandatory for PROSPECTUS?

Answer 13

S. 85(1) and (2) of FSMA 200 provides that Approved prospectus must be published before the transferrable securities are offered to market.

Question 14

What separate documents make up the Prospectus?

Answer 14

Registration document
Securities note
Summary (in non-technical language and appropriate structure) the key info relevant to securities

Question 15

What is underwriting?

Answer 15

An underwriting agreement involves a company entering into an agreement with the underwriter (usually an investment bank), under which the underwriter agrees to subscribe for or purchase any shares that are not taken up by the public.

Question 16

What are class rights?

Answer 16

Each class of shares have different class right

Question 17

How can membership be acquired?

Answer 17

1. Subscription to memorandum.
2. Registration and agreement.
3. Director of public company signing undertaking to acquire qualification shares.
4. Rectification of Register (Sec. 125 Co. Act 2006).

Question 18

Key points relating to share capital

Answer 18

“Share” refers to a share in a company’s share capital. A share is personal property and cannot be converted into stock.

Colonial Bank v Whinney (1886), the court confirmed that the type of personal property that a share constitutes is a thing in action, meaning a share is simply an intangible asset other than land.

Co Act 2006 abolishes the need for companies formed after 01.10.2009 to provide “nominal” or “authorised” capital.

Also, the 2006 act relaxes the rules relating to private companies issuing shares.

All shares must have a fixed nominal value. Shares may be denominated in any currency.

When an application to register a Co is made, it must include a “statement of initial capital”.

Each time the Co’s share capital is altered an updated “return” must be filed with the Registrar.

Question 19

What are directors’ authorities in share allotment?

Answer 19

Can only allot if they are authorised to do so by the company’s articles or by a resolution of the company (s. 551(1)).
Authorisation can be given for a specific allotment only or it can be granted to the directors generally (s. 551(2));
Authorisation can be unconditional or subject to conditions (s. 551(2));
Authorisation must:
–– state the maximum amount of shares that may be allotted under it;
and
–– specify the date on which it will expire, which cannot be more than five years from the date the authorisation is granted (s. 551(3));
Authorisation can be renewed for a further period of up to five years by a resolution of the company (s. 551(4)(a));
Authorisation can be revoked or varied at any time by a resolution of the company (s. 551(4)(b)); and
A resolution to give, vary, revoke or renew authorisation may be an ordinary resolution, even though the effect of the resolution is to alter the company’s articles (s. 551(8)).

Question 20

What are pre-emption rights?

Answer 20

By s. 561 C.A. 2006, whenever directors are issuing shares, they must first offer them pro rata to existing equity shareholders.
The offer may be made by hard copy or electronically, giving the member at least twenty-one days to accept the offer.
If they do not wish to do this, the authority under s.549-551CA 2006 for them to issue shares may be given as a special resolution which precludes the need to offer them pro rata.
Pre-emption rights do not apply to:
Bonus shares
Shares held under an employee share scheme
Shares issued for a non-cash consideration.

Question 21

Variation of class rights

Answer 21

Secs 629/640 CA 2006
If the rights are set out in the memorandum, any change must be according to the procedure stated in the memorandum. If there is no such procedure, the rights may be varied if all members agree. In the alternative, an application must be made to the court under s.897 CA 2006.

If the rights are conferred otherwise than by the memorandum (e.g. by articles or terms of issue) without provision for alteration, the alteration may be obtained by:

a. written consent three quarters in nominal value of shareholders
b. special resolution at class meeting.

Question 22

Case law re Variation of class rights

Answer 22

White v Bristol Aeroplane Co [1953] - The issue of further preference shares would not be a variation of, or affect the rights attached to, the shares and therefore preference shareholder consent was not needed. The proposed issue would affect the enjoyment of existing rights not the rights themselves.

Re Mackenzie & Co Ltd [1916] - The reduction in share capital was not a variation of the preference shareholders’ rights. The right to a 4% dividend remained the same even if the enjoyment of the right was changed.

Scottish Insurance v Wilsons & Clyde Coal Co [1949] - As a matter of interpretation of the rights attached to the preference shares, they entitled the holder to priority return of capital but no further participation in capital on a winding up. The capital reduction was fair.

British America Nickel Corp Ltd v MJ O’Brien Ltd [1927]- the power to vote on the variation of a class right ‘must be exercised for the purpose of benefitting the class as a whole, and not merely individual members only’. Here, the respondant had supported the variation to benefit himself, and not the bondholders as a whole. The court therefore held that the resolution approving the variation was invalid.

Question 23

What is a nominal value?

Answer 23

A minimum value that a share can be allotted for

Question 24

What is allotted share capital?

Answer 24

The total nominal value of shares that have actually been allotted is called allotted share capital.

Question 25

Can shares be allotted at a discount?

Answer 25

S. 580 provides that the company shares must not be allotted at a discount (for less than nominal value).

If it happens, then the allottee is liable to pay the company the amount equal to the discount plus interest of 5%.
This is to protect creditors and existing shareholders.

Exception: commission payments (if authorised by AA) and does not exceed 10% may be authorised by AA.

There are, however, three possible ways under which shares may in practice be issued at a discount.

1. The issue of shares in a private company in exchange for over-valued property.
2. The issue of shares by a public company on which underwriting commission is paid.
3. The issue of shares in exchange for a convertible debenture issued below par.

Question 26

What is the procedure on issue of shares?

Answer 26

When taking the decision to issue shares, directors must check that:

• There is sufficient available capital in memorandum (if not alter under s.121)(Cos incorporated prior to October 2009).
• That they as a board have authority. This authority is given under s.549-551 CA 2006 by ordinary resolution which must state them maximum number of shares and a time period (not more than five years) within which the issue may be made.

Question 27

What steps need to be undertaken on issue of shares?

Answer 27

• Board meeting
• Notices to members of general meeting
• General meeting
  #s.121 resolution - increase share capital – if Co incorporated prior to 01.10.2009.
  #s.80 resolution - authority of board to issue shares (Sec 549-551 CA 2006).
  #s.89 - pre-emption rights (Sec 561 CA 2006).
• Reconvene board meeting
  #receive application for issue of shares.
  #authorise issue of shares.
  Secretary
• issues share certificates within 2 months
• makes up registers as soon as practicable
  completes minute books
• notifies Registrar of Companies within one month together with a statement of the company’s capital (form SH01).

N.B. The rules are much simpler for private companies with only one class of shares.

Question 28

Can shares be issued at a premium?

Answer 28

Sec 610 CA 2006
Shares may be issued at a premium. Such premium should be allotted to share premium account and can be used for the following purposes only:-
1. Pay up bonus shares issued as fully paid to members.
2. Write off preliminary expenses of any issue of shares.
N.B. The share premium account is taken as paid up share capital of the Co.

Question 29

What are Bonus Issues and Rights Issues?

Answer 29

A bonus issue is a capitalisation of profits. A bonus issue is paid for from the Share Premium Account or undistributed profits.

A rights issue is where shareholders are offered new shares in the company pro rata to their existing shareholding. If the Co is a listed Co then, in accordance with the Prospectus Rules, it must issue a prospectus.

N.B. An eligible shareholder can accept and subscribe for the right issue (in whole or in part) or renounce and sell them on. If he does not renounce or take up the right, then the shares may be sold by the Co in the market. Any surplus funds (after all fees etc) are returned to the member.

Question 30

What is the role of FCA?

Answer 30

FCA
Financial Services and Market Act 2000 as amended by the Financial Services Act 2013 and the Prospectus Rules issued by the FCA:
- Has power to impose penalties on company directors for breach of listing rules.

UK Listing Authority: Regulates through the listing rules admission of securities to the United Kingdom official list.
Companies with Stock Exchange listing are also required to comply with Stock Exchange Admissions and Disclosures Standards.
Second, the FCA is empowered to make rules in order to achieve its objectives (s. 137A(1)). These rules are found in the FCA Handbook. The Handbook is divided into a series of blocks, with block 7 being relevant for our purposes as it contains the following rules:
the Listing Rules, which set out the rules for listing shares and the rules that listed companies must comply with;
the Prospectus Rules, which set out rules regarding the preparation and publication of prospectuses; and
the Disclosure Guidance and Transparency Rules (DTRs), which impose a range of disclosure obligations on listed companies.

Question 31

What criteria companies must meet for listing eligibility?

Answer 31

Companies must meet the following criteria:
the company must be duly incorporated and operating in accordance with its constitution (Listing Rules, LR 2.2.1);
the shares to be listed must comply with the law of the company’s place of incorporation, be authorised under the
company’s constitution and have any statutory and other necessary consents (LR 2.2.2);
the shares to be listed must be freely transferable, fully paid and free from all liens and restrictions on the right totransfer (LR 2.24);
the expected aggregate of the shares to be listed must be at least £700,000 (LR 2.2.7(1)); and
an FCA-approved prospectus must be published (LR 2.2.10).