11 - Shares And Share Capital

Question 1

Explain the distinction between a share’s nominal value and the share premium.

Answer 1

Section 542(1) of the CA2006 provides that shares in a limited company must each have a fixed nominal value attached to them. Shares are often allotted for more than their nominal value, and the excess is known as the share premium.

Question 2

Explain the distinction between a company’s allotted share capital and its issued share capital.

Answer 2

The total nominal value of shares that have actually been allotted is known as the allotted share capital. Once shares have been allotted to a person and that person’s name has been entered into the register of members in respect of those shares, those shares have been issued (NATIONAL WESTMINSTER BANK PLC v INLAND REVENUE COMMISSIONERS (1995)). The total nominal value of shares that have been issued is called the share capital (s. 156(1)(a)).

Question 3

Explain the distinction between a company’s paid-up share capital and its called-up share capital.

Answer 3

A company’s paid-up share capital represents the combined total of the nominal value of shares that has actually been paid. A company’s called-up share capital represents the paid-up share capital plus the amount called for/instalment amount due (irrespective of whether this payment is actually made).

Question 4

What is the difference between allotting and issuing shares?

Answer 4

The distinction between when shares are allotted and when they are issued is:

• shares are allotted ‘when a person acquires the unconditional right to be included in the company’s register of members in respect of the shares’ (CA2006, s. 558); and
• shares are issued when the person’s name is actually entered into the register of members (NATIONAL WESTMINSTER BANK v INLAND REVENUE COMMISSIONERS (1995)).

Question 5

A private company that has allotted ordinary shares wishes to allot preference shares. Do the directors have the authority to allot these shares?

Answer 5

Where a private company that has allotted ordinary shares wishes to allot preference shares, then the directors will only have the authority to allot shares on behalf of the company if they are authorised to do so by the company’s articles or by a resolution of the company (s. 551(1)).

Question 6

Explain the concept of a minimum share capital.

Answer 6

A public company must not conduct any business until it has been issued with a trading certificate (CA2006, s. 761(1)). The Registrar should not issue a public company with a trading certificate unless the nominal value of the company’s allotted share capital is not less than the authorised minimum (s. 761(2)). This authorised minimum is £50,000 or the prescribed euro equivalent (s. 763(1)).

Question 7

What are pre-emption rights?

Answer 7

Where pre-emption rights apply, the company cannot allot equity securities unless it has first offered them to existing shareholders in a manner that allows them to maintain their existing shareholding.

Question 8

Explain the distinction between fully paid, partly paid and nil-paid shares.

Answer 8

A company can allot shares that are:

• fully paid (i.e. the full purchase price is payable on allotment);
• partly paid (i.e. part of the purchase price is due on allotment, with the remainder at a later date); or
• nil paid (nothing is due on allotment, with the with the full price to be paid at some point in the future).

Question 9

What limitations are placed upon a public company’s ability to accept non-cash consideration as payment for shares?

Answer 9

A public company’s ability to accept non-cash consideration as payment for shares is limited in several ways:

• a public company must not accept, in payment for its shares or any premium on them, an undertaking from a person that he or someone else will do work or perform services for the company (s. 585(1)).
• a public company cannot accept as payment an undertaking which it to be performed more than five years after the date of the allotment (s. 587(2)).
• a public company cannot generally accept non-cash consideration as payment for shares, unless the non-cash consideration has been independently valued and a copy of the valuation report is made publicly available to the company and the proposed allotted (s. 593(1)).

Question 10

What two functions does a share certificate fulfil?

Answer 10

1. It provides basic information about the shares to which it relates (what info is contained in the share cert is a matter for the company’s articles).
2. It provides evidence that the person names on it holds legal title to the shares related to the certificate.

Question 11

What three sets of rules within the FCA Handbook are relevant to the public offering of shares?

Answer 11

1. The Listing Rules - set out the rules for listing shares and the rules that listed companies must comply with;
2. The Prospectus Rules - set out rules regarding the preparation and publication of prospectuses; and
3. The Disclosure Guidance and Transparency Rules - impose a range of disclosure obligations on listed companies.

Question 12

Identify the four main types of public offering of shares.

Answer 12

1. An offer for subscription - involves the company offering to the public a certain amount of shares;
2. An offer for sale - involves an investment bank subscribing for all the shares being offered by the company, and the bank then offering those shares to the public;
3. A placing - usually involves an investment bank ‘placing’ its shares with selected purchasers (normally institutional investors), rather than the public at large. The bank is essentially identifying which persons may wish to purchase the shares. Once the placing is made, those persons can then decide whether to purchase the shares or not;
4. A rights issue - an offer made to existing shareholders of the company, under which each shareholder is offered shares in proportion to their existing shareholding. It is often the case that shareholders who choose not to take up the rights offer can sell the right to purchase the shares to another person (if the shareholder does not have this right, it is known as an ‘open offer’).

Question 13

Explain the distinction between a standard listing and a premium listing.

Answer 13

Companies with a standard listing are required to comply with certain base obligations. Companies with a premium listing are subject to greater regulation and the UK Corporate Governance Code applies to companies with a premium listing.

Question 14

When will a company be required to prepare and publish a prospectus?

Answer 14

Section 85(1) and (2) of FSMA 2000 provides that it is unlawful for transferable securities to be offered to the public, or request that shares be admitted to trading on a UK regulated market, unless an approved prospectus has been made available before the offer/request is made.

Question 15

If a company decides to divide a prospectus up into separate documents, what are these documents? Briefly explain what they cover.

Answer 15

If a prospectus is drawn up onto separate documents, then three separate documents are required (PR 2.2.2 (1)):

• the registration document, which contains information about about the company issuing the shares in question;
• the securities note, which contains information about the shares to which the prospectus relates; and
• the summary, which must convey concisely, in non-technical language and in an appropriate structure, the key information relevant to the securities which are the subject to the prospectus. When read with the rest of the prospectus, it must be an aid to investors considering whether to invest in the securities (FSMA 2000, s. 87A(6)).

Question 16

What is underwriting?

Answer 16

An underwriting agreement typically involves the company entering into an agreement with an 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 17

What are class rights?

Answer 17

Most companies with a share capital will have only one class of share, and most companies without a share capital will only have one class of member. However, as long as the articles so permit, companies may have multiple classes of share or member, with each class having different rights.

Question 18

What approach have the courts adopted in order to determine if an alteration of class rights amounts to a variation?

Answer 18

The approach adopted by the courts was set out in WHITE v BRISTOL AEROPLANE CO LTD (1953), where Evershed MR stated that ‘there is to my mind a distinction, and a sensible distinction, between an affecting of the rights and an affecting of the enjoyment of the rights, or of the stockholders’ capacity to turn them to account’. In other words, a distinction is drawn between an alteration that affects a class right and an alteration that affects the enjoyment of a class right, with only the former being capable of amounting to a variation.

Question 19

What are the two methods for varying class rights?

Answer 19

1. Where the company’s articles contain a provision stating how class rights are to be varied, class rights can be varied by complying with that provision (s.s 630(2)(a) and 631(2)(a)).
2. Where the articles contain no provision for the variation of class rights, then class rights can be varied as follows:
   - in order to vary rights attached to a class of shares, the consent of the holders of shares of that class will need to be obtained (s. 630(2)(b)).
   - in order to vary the rights of a class of member in a company without a share capital, the consent of members of that class will need to be obtained (s. 631(2)(b)).

Question 20

Explain the difference between the transfer and transmission of shares.

Answer 20

Transmission of shares occurs where a person acquires shares by operation of the law. Shares are transferred where they pass from one person to another and this is not by the operation of law.

Question 21

What document is required to transfer certificated shares?

Answer 21

A company will not register a transfer of certificated shares unless a proper instrument of transfer has been delivered (CA2006, s. 770(1)). A company’s articles may specify what amounts to a ‘proper instrument of transfer’, but this usually refers to the ‘stock transfer form’ found in Schedule 1 of the Stock Transfer Act 1963.

Question 22

In what three situations will the transmission of shares occur?

Answer 22

1. The death of a shareholder will cause their shares to be transmitted to their personal representative.
2. The shares of a shareholder who has been declared bankrupt will be transmitted to their trustee in bankruptcy (IA 1986, ss. 283(1) and 306).
3. The shares of a shareholder who becomes a patient under the Mental Health Act 1983 will be transmitted to a receiver appointed by the Court of Protection.