2. Equity finance Flashcards
What is the share maintenance doctrine
A company cannot, without the leave of the court or the adoption of a special procedure, return its capital to its shareholders. It follows that a transaction which amounts to an unauthorised return of capital is ultra vires and cannot be validated by shareholder ratification or approval.
Aveling barford v Perion
Why must capital be maintained
fund to which creditors look for repayment
Consequences of share maintenance
Co must generally not purchase its own shares s658, CA
Public co may not give financial assistance for buying co shares
Dividends must only be paid out of distributable profits (not capital)
If a public co suffers severe loss of capital, GM to be called to discuss the problem
Subsidiary must not be a member of its own holding co, any allotment or transfer of shares in holding co to its subsidiary is void
Exceptions to share capital doctrine
Reduction with court consent (priv co by passing a special resolution) s641-648,CA
Buy back s690, CA or redeem its own shares ss684-689
Purchase its own shares under court order made under s994, CA to buy out minority on conversion of public to priv co
Return capital to shareholders, after payment of co debt’s upon winding up
Capital maintenance doctrine applicable to sums received when
Redeemable shares are redeemed by co (paid into capital redemption reserve) or
Shares are issued at a premium (money being paid into share-premium account)
What is equity finance?
Allotment of new shares
How to raise equity finance
Board determines price & number of shares to allot
Board receives application from the one wanting to buy shares from the co (subscriber)
Board resolve to allot shares to that person, issue them with share certificate & enter that person’s name on the co’s register of members
CA may require board to obtain shareholder resolutions prior to share allotment (allotment likely affects each existing shareholder’s shareholding, dividend distribution etc)
What is pre-emption right ss561,549 CA 2006
Right of first refusal given to existing shareholders ss561,549 CA 2006
What is share capital?
The amount of money a co raises by issuing shares
How can number of shares issued be restricted?
Remove limit by changing articles by SR s21
S561,565 CA 2006
where shares are in exchange for cash, shares must first be offered to existing shareholders
How many shares are offered to existing shareholders
Number they are offered dependent on shareholding %
Minimum time pre emption offer must be open for
14 days
What if director does not want to allot shares to existing shareholders?
Check articles to see whether statutory pre emption rights have been disapplied
Disapplication of pre emption rights
SR of shareholders, or article provisions (s569, CA 2006)
Disapplication is indefinite
No provision for disapplication in model articles- co would need to pass SR to benefit from s569, CA 2006
Other methods of disapplication
Inclusion of special article generally or in relation to particular allotments (s,567)
Pre-emption provisions in articles override statutory provisions in s,561
Disapplication by SR of shareholders, or provision in articles where directors have general authority to allot
Disapply statutory pre-emption for specified allotment by SR (s571, CA 2006)
Directors to send written statement justifying SR, consideration co would receive and justification of amount
Disapplication of pre emption rights for public co
Pre-emption provisions override statutory provisions of s561 (s568, CA 2006)
Public co can disapply statutory pre-emption rights by SR or articles provisions (s570,CA 2006)
Disapplication limited to s551 authority
Public co can disapply statutory pre-emption rights under s561 by SR for specified allotment of shares
Procedure for where shareholder approval is needed to allot shares
BM called by any director on reasonable notice
Directors must check
Whether article restrictions need revoking
Whether they have authority to allot shares (under articles or CA 2006, whether articles need to be amended, or pass OR authorising allotment)
Whether pre-emption rights apply
If articles need amending to remove a restriction on shares issued and/or authority is needed and/or pre-emption rights need disapplying
BM pass board resolution to call GM/propose written resolutions for shareholder agreements
14 clear days’ notice required for GM
Notice in writing to shareholders/short notice consented by shareholders
GM held, resolutions pass (if requisite majority in favour)
Directors call second BM, directors pass board resolution to allot shares
Resolution to issue shares to persons who have made written application for them
Private cos in general not permitted to offer shares to public
Offer to buy to come from prospective shareholder, which is accepted by the co
If co has a seal, directors resolve to seal share certificates
Share certificate sent to new shareholder
Instruct secretary to enter name of new shareholder on register of members
Notification to Registration of Companies on form SH01 that shares have been issued
Form to inform Registrar that shares have been issued
SH01
Procedure for share allotment where approval is not needed
BM called on reasonable notice
Directors to check
Whether they have authority to allot shares, under articles or CA 2006
Whether pre-emption rights apply
If shareholder approval is not needed & pre-emption rights need not be disapplied;
Directors pass board resolution to allot the shares (no GM or shareholder involvement needed)
Board resolve to issue the shares to those who have made a written application for them
If co has a seal, directors resolve to seal share certificates
Shareholders sent share certificate
Secretary instructed to enter name of new members on register of members
Registar notified on form SH01 that new shares have been issued
Payment for shares
Must be by cash (non cash consideration only where co agrees)
What if consideration in kind is acceptable?
they must send return to Registrar and send statement of capital (ss555-557, CA 2006)
Can directors agree to part payment of shares?
Yes- Eg directors issue 100 £1 shares (£100) on the basis that 50p per share is payable on issue and remaining 50p payable 6 months later
What are the rules of shares issued above par value? s610
Excess amount of consideration paid above nominal must be recorded in a separate share premium account (s610, CA 2006)
Can shares be issued at a discount? What happens if they are?
Shares may not be issued for less than nominal value (s580, CA 2006)
Shareholder is obliged to pay discount amount to co + interest (s580(2), CA 2006)
What is financial assistance?
If someone wants to buy shares, but cannot do so without a loan they may ask co itself to lend them the money/ask financial institution for them & ask co to guarantee the loan
General rule on financial assistance
Public co cannot give prospective/actual shareholder financial assistance to enable them to purchase shares in the co (s678, CA 2006)
s677 definition of financial assistance
A gift, loan, indemnity, guarantee, assignment or other transaction by which the acquirer is directly/indirectly put in funds (s677, CA 2006)
Harlow v Loveday
Loan given to purchase shares held to be financial assistance
Chaston v SWP Group
Payment by target co of accountants fees retained by purchaser amounted to unlawful financial assistance
Transactions exempt from s678 rule (difficult to rely on)
Where principle purpose was not to give FA
Where FA was incidental to some larger purpose
What options does a shareholder have to sell their shares
Find a third party to buy them (transfer of shares)
Ask co itself to buy shares from the shareholder (share buy-back)
general rule for share buy back
Share buy-backs are usually treated as cancelled (s706(b)(i), CA 2006)
Money leaves co permanently - no financial value in return for the co
Why must directors consider buy backs carefully
No financial value for the co- contrary to s172 duty
Why do co’s buy back shares
Where directors are the main/only shareholders but they are in dispute with the others
The others want that director to resign from the board
Director refuses to resign unless someone buys their shares for a fair price
Other directors are unwilling/unable to buy shares
May be prepared to arrange for co itself to buy the directors shares to cut ties
Family owned/run business
Family members wants to extract their investment (on retirement)
Directors sympathetic to this request and arrange fo ruby back
Buy-backs in public co
Returning surplus cash to shareholders (instead of paying dividend)
Reducing number of shares to increase earnings per share (attractive to investors)
Increase value of existing shares
How do shareholders receive profits
During the co’s lifetime whenever it pays a dividend
Winding up the co whilst solvent, selling assets and splitting proceeds among shareholders
When is buy back permitted? s692 (2)
Articles of the co permit this (s690(1)
Shares must be fully paid (s691(1)
When the shares are bought by the co, it must pay for them at the time of purchase (s691(2)
Procedure for share buy back
Contract must be approved by shareholders passing OR at GM or shareholders’ WR (s694(2), CA 2006)
Directors must hold BM to pass a board resolution to call GM/circulate WR
Shareholder having their shares bought excluded from WR (s695(2),CA 2006)
OR -> second BM and pass board resolution to contract into share buyback
Directors attend to administration
Paying for shares
Form SH03 (return of purchase of own shares) & SH06 (notice of cancellation of shares) + details of shares -> CH within 28 days (ss707,708, CA 2006)
Register of members altered, share certificates dealt with
Form SH03
Return of purchase of own shares
SH06
notice of cancellation of shares
What is the effect of a buy back after cancellation?
Co does not become holder of its own shares
Issued share capital of co is decreased
Voting control between shareholders may have altered
Capital redemption reserve to be created or increased if one exists
Share premium account reduced.increased if premium paid on buy-back or redemption issued out of fresh issue
When can co buy back shares from capital?
Articles do not prohibit this (s709(1), CA 2006)
Shares must be fully paid (s691(1)
Where shares are bought by co, it must pay for them at the time of purchase (s691(2)
Directors to make solvency statement stating co is solvent, and will remain so for the next 12 months (s714) after buy back
- requires consideration, as insolvency -> contribution of financial losses (s76, IA) or criminal sanctions for misrep (s715, CA 2006)
Statement must be made no sooner than one week before GM (s716(2)
Permitted amount of capital for share buy back
limited to ‘permissible capital payment’ (ss710-712)
What must be done in relation to PCP
Auditors to prepare report that PCP is in order and they do not know of anything that would make the statement unreasonable (714(6))
What happens once OR/SR is passed for buy back out of capital
notice to be placed in the London Gazette / written notice to every creditor (s719) to allow for dissenting shareholders/creditors to apply to court under s721 to cancel buy back
Administrative tasks after buy back from capital
Paying for shares
Copy of SR to CH within 15 days (ss29 and 30)
Send SH04 and SH06 with details of shares bought back within 28 days (Ss707 and 708)
Contract copy/summary available for inspection for 10 years after share purchase at co reg office
Register amended/share certificates dealt with
Rules for buy back of a small amount
Articles authorise this
Doesnt exceed 15k
Doesn’t exceed 5% of the co’s share capital (of total nominal value, excluding any premium)
^ in a financial year (s692(1ZA)(b), CA 2006)
No special procedure required
Shareholders OR to approve contract
Can capital be reduced to re classify shares as distributable profits
Articles must not prohibit reduction of share capital s641(6),CA 2006
Directors must make solvency statement (s642(1), CA 2006) stating that co is solvent & will remain so for the next 12 months (s643(1)) after capital reduction at a BM and pass a BR to call GM or circulate WR
Solvency statement no sooner than 15 days before GM and must be made available to shareholders or sent with WR before circulation (s642(2)
Shareholders to approve reduction by passing SR at GM or WR (s641(1)(a))
Second BM to attend to administration
What are ordinary shares? SH rights if they have ordinary shares
Right to declare a dividend
Rights to participate in surplus upon winding up
What are preference shares?
Shares that have priority over ordinary shares
Might be in relation to capital/dividends
Preference shares may be cumulative/payable only out of profits of each year
Difference between ordinary and preference shareholders
Preference shareholders are entitled to first of any profits at a fixed rate and that dividend is usually paid quarterly
Cumulative dividends
Shareholder has to be paid any missed dividends as well as the current dividend if preference share dividend has not been paid on a preceding occasion
Non cumulative
If there are insufficient profits to pay a dividend in one year, the unpaid dividend will not be paid in future years
Participating
Further right to participate in profits/assets + fixed preference rights
If ordinary shareholders are paid above specified amount, may trigger right to an additional payment for participating shareholders
Convertible
Preference shares may be exchanged for ordinary shares at specified price and after specified date
Why are redeemable shares issued
Sometimes used by venture capital investors to ensure a straightforward exit route from co when they invest
What happens if a private co offers shares to public
Offering shares is not a criminal offence, but court may require re-registration of private co as public or remedial order including repurchase of shares by the co (ss757-759)
What must be sent to CH when issuing redeemable shares
Notice must be sent to Registrar of companies within one month of the shares being redeemed + amended statement of capital (ss 688 and s689)
Directors powers in relation to dividends
Permitted to recommend payment of dividend from available profits (s830, CA 2006)
What if a dividend is paid from insufficient profits?
If dividend is paid from insufficient profit, director may be jointly and severally liable to the co for the full amount
Personally liable to repay those dividends Bairstow v Queens Moat Houses plc
Share transfer procedure
Seller (‘transferor’) to complete and sign stock transfer form and give to recipient (‘transferee’) s770-772, CA 2006
If shares are sold for more than £1k, buyer must pay stamp duty on stock transfer form
If shares are a gift, no stamp duty
Transferee sends share certificate and stock form to co
Co sends new shareholder a new share certificate in their name within 2 months & ensures their name is entered on the register of members within the same time period (s771, CA 2006)
Change is notified to Registrar on form CS01
MA 26 restriction on transfer
directors have absolute discretion & may refuse to place a name on the register (share transfer)
What happens if a SH dies
their shares -> personal representatives
If shareholder is bankrupt -> trustee in bankruptcy
PR of deceased shareholder must produce to co a grant of representation to establish their right to deal with the shares as PRs
What can a PR do?
Elect to register as shareholders
Transfer shares to ultimate beneficiary or third party in their capacity
What happens where a director experiences serious loss of capital (net assets worth less than half called up capital)
S656 directors obliged to call GM within 28 days from earliest date on which any director knew the co had suffered from a serious loss of capital
Date of meeting must be fixed for not more than 56 days ahead
Other ways of selling shares
Placing
New shares created
Co broker sells them direct to a range of investors
