16.Shares, share capital, share register and debt capital

Question 1

Who are the five interacting bodies of the regulatory structure who regulate the securities industry?

Answer 1

• Bank of England
• The Treasury
• Financial Policy Committee
• Financial Conduct Authority
• Prudential Regulation Authority

Question 2

Why do we need the securities industry to be regulated?

Answer 2

To ensure that all participants, whether providing funding or trading in the company shares, do so based on the same information.

Question 3

What are Offers or Fully listed securities governed by?

Answer 3

FSMA2000 and the Listing Rules

Question 4

What is a regulated investment activity?

Answer 4

Financial promotion and investment activity includes giving any form of investment promotion and advice and investment management, as well as undertaking securities transactions as broker-dealer and/or principal within the UK.

Question 5

How does a person become authorised or exempt to carry out regulated investment activity?

Answer 5

The status of being an authorised or exempt person is conferred on application to the FCA by an individual or firm. Members of professional bodies such as solicitors and accountants may be authorised by their relevant professional body (FSMA2000 ss. 325–333)

Question 6

What is Senior Managers and Certification Regime?

Answer 6

SM&CR was originally brought in to assist with bank supervision in 2016 and was extended to cover all firms authorised under FSMA2000 and regulated by the FCA December 2019 other than benchmark firs where implementation was the following year in December 2020.
The framework for individual accountability comprises three elements:
• Senior Managers Regime
• Certification Regime; and
• Conduct Rules

Question 7

If a company wants to employ someone to carry out specified senior management functions, who do they need to seek approval from?

Answer 7

From the FCA in advance. These senior management functions are broadly divided into customer functions and
significant influence functions.

Question 8

What is equity financing?

Answer 8

Equity is funding raised through the
issue of shares to private or institutional
investors

Question 9

What is debt financing?

Answer 9

Debt funding is loans owed by the company towards
another party usually institutions but sometime
private individuals

Question 10

What is authorise capital and is it allowed?

Answer 10

The Act abolished the concept of authorised share capital – the pool of shares both issued and available to be issued to investors. For companies incorporated under the previous Act, the authorised share capital stated in their memorandum continues to act as a ceiling on the number of shares that can be allotted and will be considered as a restriction in the Articles of the company.

Question 11

What is allotted capital?

Answer 11

The Act defines ‘allotted share capital’ as shares that the company has allotted (CA2006 s. 546(1)(b)). CA2006 s. 558states that shares are taken as allotted when a person acquires the unconditional right to be included in the company’s register of members which is generally accepted to be once the contract of allotment is completed and acceptance of the application notified to the applicant.

Question 12

How would you describe issued capital?

Answer 12

Issued capital is the total capital that has been issued and taken up by the members of the company and is expressed by reference to the aggregate nominal value of the shares. Accordingly, a company that issues 250 shares of £1 each has an issued share capital of £250. Provided there are no restrictions in the Articles, a company can increase its issued share capital by allotting new shares.

Question 13

What is paid up capital?

Answer 13

Paid-up capital refers to the nominal amounts that have been paid up on the company’s issued capital. For example, if a company has 500 shares of 50p each in issue, then the issued capital is £250. If they are fully paid, the paid-up share capital will be £250. However, if, for example, the shares are issued only partly paid, with 25p paid up on each share, with the balance due at some point in the future, the paid-up capital will be £125.

Question 14

What is called up capital?

Answer 14

Called-up capital means the amount equal to the aggregate amount of calls made on the shares (whether paid or not) together with any amounts paid up without being called and any share capital to be paid on a specific future date under the Articles, the terms of allotment or other arrangements for payment (CA2006 s. 547).

Question 15

What is equity capital?

Answer 15

Equity capital means the issued capital of the company excluding any shares that have the right to participate in a dividend or return of capital only up to a specified amount (CA2006 s. 548)

Question 16

How can a company make changes/alterations to its capital? Chapter 8 of Part 17 of the Act sets out the provisions relating to the alteration of share capital?

(CA2006 s. 617 provides
that a limited company with a share capital may not alter its share capital except as provided in Parts 17 and 18 of the Act.)

Answer 16

• increase its share capital by allotting new shares;
• subdivide or consolidate all or any of its share capital;
• reconvert stock into shares;
• redeem shares;
• purchase its own shares;
• redenominate its share capital;
• cancel its shares (duty to cancel shares held by or for a public company); and
• reduce its share capital (CA2006 s. 617).

Question 17

Define debt capital?

Answer 17

Companies can also list debt capital including debt made up of loan notes, bonds or redeemable shares, which are
treated as debt.
The directors have implied power to borrow money on behalf of the company under their general powers to manage the business of the company, subject to the provisions of the Act and the Articles of the company (Model Articles Plc & Ltd regs. 3 and 4).

Question 18

What is a debenture?

Answer 18

A debenture is defined in CA2006 s. 738 as debenture stock, bonds and any other securities of the company, whether or not constituting a charge on the assets of the company. In effect, a debenture is a document that creates a debt or acknowledges a debt.

Question 19

How are debentures usually issued?

Answer 19

The more common method is to issue a series of debentures in registered form. The conditions relating to interest, redemption or security will be printed on the reverse of each debenture issued. Registered debentures may be transferable on stock transfer forms under the Stock Transfer Act 1963 (STA1963) and such transfers are exempt from stamp duty (with a few exceptions). When a debenture or one of a series of debentures is transferred, the name and address of the new holder are endorsed on the debenture itself by the company.

Question 20

How do public companies issue their debentures?

Answer 20

Public companies normally issue their debentures in the form of debenture stock secured on the company’s assets and constituted by a trust deed between the company and a corporate trustee, e.g. an insurance company or a trust company.

Question 21

What can a company do to mitigate the higher risks involved with a loan stock?

Answer 21

To compensate for the high risk, it is usual for such stocks to bear a higher rate of interest than if it were a secured debenture stock. Sometimes it is also necessary to offer options in the form of a right to convert the stock into equity shares of the company at certain dates in the future (i.e. convertible loan stock).

Question 22

What is convertible loan stock?

Answer 22

Convertible loan stock is a form of loan stock, usually unsecured, which includes provision for the stock to be converted into equity shares at ratios determined at the time of issue of the stock. There is a requirement for the company to give the stockholders notice of their right to exercise the conversion rights in every year in which the right exists.

Question 23

Once a company has issued shares, how can they be returned to the company?

Answer 23

There are only limited circumstances under which they can be returned to the company as follows:
• purchase by the company;
• redemption;
• reduction of capital; and
• forfeiture.

Question 24

How can the authority to allot relevant securities be revoked, varied or renewed?

Answer 24

By ordinary resolution, even if the authority was given by a special resolution or contained in the Articles. A resolution renewing an earlier authority must state the
aggregate number of shares that may be allotted and an expiry date, within five years.

Question 25

Can securities be allotted after the expiry of authority?

Answer 25

Securities may be allotted after the expiry of the authority, provided that the allotment relates to an offer or agreement authorised by the directors prior to the expiry of their authority. A copy of a resolution giving authority to directors to allot relevant securities must be filed with the Registrar within 15 days after it is passed (CA2006 ss. 30 and 551(9)).