18. Returning Value to SH

Question 1

DOCTRINE OF MAINTENANCE OF SHARE CAPITAL

WHAT IS IT?

Answer 1

Money recorded in equity account + share premium account …

• May be used to carry on the business of the company as working capital
• BUT CANNOT be released to return value to SH while the company is a going concern

Question 2

consequence of the doctrine of maintenance of SC

Answer 2

Companies are NOT usually permitted to return capital to SH (until winding up of the company)

Only return SH are entitled to…

ONE - Dividends out of D

TWO - redemption/purchase amount on a redemption or purchase of own shares by the company where permitted

Therefore, if SH wants capital return on his investment – his only option = sell his shares

Question 3

WHY doctrine of maintenance of SC?

Answer 3

Share capital is seen as a permanent fund available to its creditors (Trevor v Whitworth, s.658 CA 06)

• CREDITORS can assume full nominal value of its shares and any premium on the shares in comp have been paid up and no cap will be dissipated otherwise than in ord. course of comp’s business
• obligation to maintain SC mirrors liability of members on winding up being limited to amount unpaid on their shares

Question 4

how does CA protect company capital?

Answer 4

CA 06 protects company’s capital being depleted by:

ONE – preventing company making dividends out of capital

TWO – requiring a separate, more onerous procedure if shares are going to be brought back out of capital in the case of purchase of own shares (s.713)

This is in keeping with the doctrine of maintenance of share capital (protection of creditors)
 

Question 5

EXAM STRUCTURE

Answer 5

1. What kind of company? (Ltd/PLc? - only Ltd can use cap/de minimis amount of profit/cap to fund purchase of own shares)
2. What kind of BUYBACK is it? - redemption of redeemable shares or purchase of own shares?
3. How is it FUNDED? DP, cap, FIOS?
4. Is it funded partly by capital (in add. to DP.FIOS?) if yes more procedure

Question 6

advantages of buy back

Answer 6

For private comps especially: ONE - Buyback/redemption PREVENTS SH BEING LOCKED INTO COMPANY (esp. directors who want to leave) with no way to sell his shares

• hard to find buyer
• NB. very strict controls though

TWO - GOOD FOR INVESTORS (returns cash to SH)

THREE - INCREASES EARNINGS PER SHARE (reduces total no. of shares so all SH % INCREASE)

FOUR - Tax advantages

FIVE - doesn’t affect balance of power in comp (vs. if 1 SH bought shares off leaving SH)

Question 7

Distributable profits

s.711, s.712

Answer 7

Company’s accumulated, realised profits minus its accumulated, realised losses (s.736, s.830(2))

These are profits of Ltd that are available for distribution to SH as dividends (dividends can only be paid to SH out of DP)

Question 8

capital

Answer 8

Amount invested by shareholders that cannot be distributed

• permanent fund available to creditors (to protect creditors)
• SH can only receive back funds they have paid for their shares on a solvent winding-up of the company (after creditors have already been paid in full)

Question 9

Buyback - effect on balance sheet (FUNDED FROM DP)

Answer 9

TOP HALF

• net assets down (by consideration paid)
• equity (SC) decrease by no. of shares cancelled

BOTTOM HALF:

• CRR created (no. of shares cancelled)
• DP decrease (by consideration paid)

Question 10

Buyback - effect on balance sheet (FUNDED FROM DP and FIOS)

Answer 10

Same as for DP AND:

• Equity (SC) increase by value of fresh shares and decrease with value of buyback
• Share premium account REDUCED if shares were issued at a premium originally (reduced by amount of proceeds of FIOS that can be used to finance premium paid by comp on purchase/redemption)

Question 11

PERMISSIBLE CAPITAL PAYMENT

Answer 11

This is the payment that can be made out of capital is the amount that is required to meet price of redemption or purchase

AFTER applying for the purpose any available profits and proceeds of a fresh issue of shares made for the purpose of redemption or purpose

Question 12

SUBSTANTIAL PROPERTY TRANSACTION? - is this one?

Answer 12

NOT SPT –> s.192(a) EXEMPTION to requirement to get SH approval because SH is transacting with company in his capacity as SH

Question 13

Taxing SH for this

Answer 13

Payment up to amount paid on allotment of relevant shares = CGT

Payment exceeding amount paid on allotment = INCOME TAX (treated as distribution/dividend) – s.829

Question 14

TREASURY SHARES

Answer 14

Uncommon for private companies to keep shares as treasury shares (instead of cancelling) BUT It is possible (except for shares purchased out of FIOS/capital – incl. by de minimis procedure) - s.724

WHY?

• no need to reissue shares later
• private companies can hold treasury shares indefinitely

Question 15

COUNTING DAYS HERE - CLEAR DAYS?

Answer 15

NO

First day is day 1 (BM1 = day 1)

Question 16

define: redeemable shares?

Answer 16

Redeemable shares are those issued with rights entitling company to redeem:

ONE – At option of company or SH according to a formula/price that is pre-determined, or

TWO – on occurrence of certain circumstances

Companies can issue redeemable shares (s.684(1)) but ALWAYS check articles (might exclude/restrict issue of redeemable shares – s.684(2))

Question 17

Procedure for redemption ? where is it contained?

Answer 17

USUALLY: articles

POSSIBLE: statement of cap if details/rights were determined by directors (can do this if granted power to do this in the articles or by OR

(CONTRACT NO REQ)

Question 18

Market purchase:

Answer 18

Purchase of own shares does take place on a recognised investment exchange (e.g. Main Market of LSE)

Question 19

OFF MARKET PURCHASE

Answer 19

Purchase of own shares takes place otherwise than on ‘recognised investment exchange’ (e.g. LSE) or are purchased on a recognised investment exchange but are not subject to a marketing arrangement on the exchange (s.693(2))

• TO CONDUCT OFF-MARKET PURCHASE, RULES IN S.694

ONE – Contract must be approved by OR of the company (s.694(2)(a)), or

TWO – contract must provide that no shares may be purchased until terms authorised by OR (s.694(2)(b))

Contract must be available for inspection at company’s registered office for not less than 15 days prior to GM and at meeting (s.692(2)(b)) or if WR then set with WR (S.696(2)(a))

Question 20

voting rights - s.695

Answer 20

Resolution authorising off market purchase: exercise of voting rights

If WR – member who holds shares is not eligible member

If GM – if resolution would not have been passed without that member’s vote, resolution is not effective

Question 21

can SH vote in buyback of his own shares?

Answer 21

• SH can vote on resolution at GM BUT resolution will be ineffective if his votes in respect of shares being sold carried the resolution (if WR – all of that SH’s votes are not counted – s.695)