19: Company law share and loan capital Flashcards
there are two types of ways a company can raise long term finance. this is by:
share capital
debt capital
both shareholders and debenture holders are investors who receive a return on their capital investment. shareholders receive a return by way of a _____ and debenture holders by a ____
dividend, interest
can a company issue share capital at a discount to its nominal value?
no.
can a company issue share capital at a discount to its market value?
yes, provided it is not lower than the nominal value
if the nominal value of a share is £1 and the company issue them for £1.25, what is the term for this £0.25?
share premium
Jacques set up Cloone Ltd two years ago, subscribing for a £1 share at its nominal value.
The company asked for 50p to be paid. This is called _ share capital.
Jacques actually paid 30p. This is _ share capital. Jacques still currently owes the company 20p per share. He is also under a duty to pay 50p per share in the future when the company calls for the _ share capital
fill in blanks
called up share capital
paid up share capital
uncalled share capital
what is the difference between unissued share capital and uncalled share capital?
unissued share capital is not issued to anyone and no liability has been created
uncalled share capital is a shareholder has not yet paid up for the share capital that they are obligated to pay and therefore creates a liability: it is a debt and if called upon, shareholder is obliged to pay,
is there only one class of share?
no
what are ordinary shares entitled to?
entitled to a dividend from the distributable profits
ordinary shares are entitled to a dividend from the distributable profits, but only once what…?
once the preferential share holders have been paid their dividends first
there may be class A ordinary shares and class B ordinary shares. what might the difference in these be?
perhaps a difference in voting rights
are preference shareholders entitled to dividends at a fixed or flexible rate?
fixed
what does it mean by cumulative and non cumulative preference shares?
if for any reason, a company cannot distribute dividend shares for that year, they will double your dividend rate in the next year. this is cumulative preference shares
if for any reason, a company cannot distribute dividend shares for that year, the right to the dividend lapses and you will not receive a dividend that year. this is non-cumulative preference shares
will a preference shareholder ever receive a dividend that is less than their fixed rate?
no, they will always receive their fixed rate or above. but never below.
what is a participating preference shareholder?
one that has receives dividends from their preference shares, but additionally receives dividends received from other classes of shares
what are deferred shares
shares that have a right attached to them that only begins conditional to a future date or event to occur.
example: shares that have no right to a dividend that will acquire voting rights when the company’s profits reach a defined amount
what are convertible shares?
shares that are, when issued, convertible into another share class.
example: convertible into ordinary shares
what are redeemable shares
shares that will be bought back by the company at a later date
do non-voting share have voting right?
no
do all companies need ordinary and preference shares?
no, not all companies have preference shares
what does the term “pari passu” mean?
it means that all share classes rank equally
does ordinary share capital include only all ordinary shares issued? for tax purposes
no.
it includes all shares issued, except preference shares (and it does include participating preference shares)
at what point leads to the allotment of shares?
after the person who wishes to subscribe to the shares in the company has offered and the company has accepted the offer. then, the shares are ‘alloted’ to the person
can directors buy shares in the same company they work at?
yes, provided they receive authority under the companies articles
or
from ordinary resolution of the shareholders
can a private company with one share class give authority to the director to allot shares for 10 years?
yes, because there is only one share class
can a public company with 3 share classes give authority to the director to allot shares for 6 years?
no
what is a pre-emption right?
existing shareholders have the opportunity to subscribe to further shares in the company before the shares are issued to new shareholders
what is consoldiation and sub-division of share capital?
consolidation is where the nominal value of shares are low, and the company converts the nominal value of shares to a higher amount. (consolidates ten 10p shares into one £1 share)
sub-division is where the nominal value of shares are high and the company converts the nominal value of shares to a lower amount (sub-divides one £1 share intp ten 10p shares)
what is the term creditors buffer
a creditor will look at the share capital of the company to decide whether the level is high enough to consider them a ‘safe’ company.
a company is required to maintain its share capital and for example, if a dividend was to be paid, this cannot be taken from the share capital, so the creditors know that this is a safe figure to look at
what are distributable profits (calculation)
accumulated realised profits less accumulated realised losses
aka
realised profits less realised losses over time
a public company can only make a distribution if its…?
if its net assets are not less than called up share capital + undistributable reserves
what is a dividend called if they do not follow the proper procedure to distribute dividends?
unlawful dividends
the shareholders may have to repay (i.e. make good) the amount paid out as an unlawful dividend
true or false?
false
the shareholders and directors may have to repay (i.e. make good) the amount paid out as an unlawful dividend
which type of dividend is declared by ordinary resolution?
final dividend
which of the type of dividend can the shareholders rescind if they decide they no longer want to distribute?
interim dividends
the existance of two possible levels of taxation for dividends leads to __ __ __
economic double taxation (one in the hands of the shareholder and one in the hands of the taxpayer of the same income)
does fiscal transparency mitigate the problem of economic double taxation?
yes, because it regards the commpany as an intermediary recipiant of income on behalf of its shareholders
a private company can reduce its share capital but on what conditions? (3)
- the Articles allow it (or changed to allow it)
- agreement by special resolution
- courts allow it; or solvency statement (showing they have no reason to not be able to pay its debts for the next 12 months)
what are the four ways a private company can execute a share buy-back?
- out of distributable profits
- from the proceeds of a fresh issue of shares
- with a de-minimus amount of cash
- out of capital
bob is a shareholder of xyz limited. xyz limited are executing a share buy back and have set a meeting in two weeks for an ordinary resolution. xyz have planned to buy back some of bob’s shares. can bob attend the meeting?
no. bcos he owns the shares they are buying back
once the shares are cancelled, an amount equal to the nominal value of the shares bought back must be transferred to the …?
capital redemption reserve
why might a loan be more advantageous than issuing shares to raise finance?
- interest payable rather than dividends based on distributable profits
- can pay loan off over time
- loan can be more tax efficient
- loans do not require voting rights (generally)
does a debenture holder have a contractual relationship with the company?
yes
what is the difference between secured and unsecured loan stock?
an unsecured loan stock is where the creditor has a contract with the company according to normal contract law
a secured loan stock is where the lender has rights against the company’s property against which the loan has been secured
what is a fixed charge?
a debt secured against an asset in the company.
a fixed charge relates to a specific asset in the company that the debt is secured against. therefore if the company fails to pay back to loan, the creditor can realise the asset to meet the debt owed
what happens if there is a fixed charge over an asset that the company has sold? how will the debt be repaid?(2)
the debt can be repaid by:
- by using the proceeds from the sale of the asset
- the purchaser of the asset will buy this asset with the fixed charged attached to the asset (encumbered by the charge)
is it more preferred for a fixed charge to be attached to an asset that will be held for a long term time period or short term?
long term, because the debt is secured against that particular asset
what is a floating charge attached to?
a class of assets of a company’s present and future.
why is a floating charge called floating?
because it is ‘floating’ above all the company’s assets. there is no one asset in particular that the debt is secured against
at what point does a floating charge crystallise?
at the time of a trigger event
for example, this can be upon insolvency of the company
what happens when a floating charge crystallises?
this is when a floating charge is converted into a fixed charge on assets owned by the company at the time of crystallisation
when does a floating charge attach to the assets of a company
upon crystallisation
proceeds from share issues must be set aside and used to pay creditors in the event of the company becoming insolvent
true of false?
false.
proceeds from share issues can be used in trade but not for to pay shareholders in the event of insolvency
the directors of sandringham ltd want to propose a buy back of company shares out of capital
what kind of resolution is required?
ordinary/special
with special/usual notice?
special resolution with usual notice
interest payments to debenture holders in a period must be paid out of
pre-tax profit or loss for the period
