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BL&P > 4. Equity Finance > Flashcards

4. Equity Finance Flashcards

1
Q

Def: Allotment

A

A company creates shares and gives them to existing shareholders or new shareholders in return for payment (company then issues a share certificate and enters this person on the register of members)

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2
Q

Def: Share transfer

A

The shareholder sells or gives shares to another shareholder or a new shareholder

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3
Q

Def: share buyback

A

Company buys back some of its own shares from one or more shareholders (reverse of allotment), company ‘reabsorbs some of its shares so the total number of shares decreases

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4
Q

When does ‘allotment’ occur? When does ‘issue’ occur?

A
  1. This will be when the shares have been transferred and paid for and the board has passed a resolution to register the transfer.
  2. The shares are issued by the company when the name of the shareholder has been entered on the register of members
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5
Q

Three key questions to ask when allotting

A
  1. Are there any constitutional restrictions on allotment?
  2. Do the directors have authority to allot shares?
  3. Are there any pre-emption rights
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6
Q

Do the directors have authority to allot shares: private companies with one class of share

A

The directors of a private company which has one class of shares both before and after the allotment have authority to allot shares without the permission of the shareholders under s 550 CA 2006, as long as the company was incorporated under the CA 2006. (board resolution)
UNLESS: If the company was incorporated before CA 2006 came into force, the shareholders must pass an ordinary resolution so ‘activate’ s 550

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7
Q

Do the directors have authority to allot: Private Company with more than one class of share / public company

A

s 55: The directors of public companies, or private companies with more than one class of shares before or after the allotment, must obtain the permission of the company’s shareholders before they can allot shares. (by ordinary resolution)

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8
Q

What key information must be contained on the shareholder’s resolution to authorise allotment?

A
  1. maximum number the directors may allot
  2. date when authority will expire
  3. this cannot be more than 5 years from the date of the resolution
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9
Q

Filing requirements for s 551 ordinary resolution to authorise alotment

A

The ordinary resolution MUST BE FILED at CH

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10
Q

Def: Pre-emption rights

A

Under s 561 the company may not allot ‘equity securities’ to a person unless it has first offered them to existing ordinary shareholders in the company on the same or more favourable terms - must offer to shareholders in the proportion that would enable them to maintain their shareholding %

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11
Q

Pre-emption rights: when a company makes the initial shareholder offer - does this expire?

A

Offer must state period for acceptance (deadline) and offer must now be withdrawn within that period (period cannot be less than 14 days)

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12
Q

When do existing pre-emption rights NOT APPLY

A
  • In relation to allotment of bonus shares
  • if consideration for allotment is wholly or partly non cash
  • if shares are to be held under or transferred pursuant to an employee share scheme
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13
Q

How to disapply pre-emption rights in a private company with one class of share?

A

Under s 569 CA 2006, the shareholders of a private company which has only one class of shares may pass a special resolution disapplying the existing shareholders’ pre- emption rights. So companies which had authority to allot shares under s 550 can disapply any preemption rights by special resolution under s 569.

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14
Q

Disapplying pre-emption rights for public companies / private companies with more than 1 class of share?

A

Companies which do not have automatic authority to allot under s 550 will need to pass an ordinary resolution under s 551 to give directors authority. If the ordinary resolution gives a ‘general’ authority to allot then s 570 allows companies to remove pre-emption rights by special resolution and this disapplication lasts as long as the directors’ authority under s 551

  • If authority in s 551 ordinary resolution for allotment is about a specific allotment, s 571 allows companies to disapply pre-emption rights by special resolution but this must be recommended by the directors of the company before proposing the SR
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15
Q

When would a company have a constitutional restriction on share allotment? What can be done about such a restriction?

A
  1. Companies incorporated before October 2009 had a ceiling on number of shares in their memorandum - CA 2006 transferred this clause to company articles - removed by ordinary res.
  2. Companies incorporated after 2009 may have a restriction in their articles if they’ve put it in - removed by special res
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16
Q

Can a company issue shares ‘partly paid’ - what would be the consequences of this?

A

Yes, if they exclude MA 21 from their articles
- shareholder would have to ‘pay up’ these shares if the company were wound up

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17
Q

Forms which may need to be sent to companies house after an allotment

A
  1. Return of allotment and statement of capital SH01 (within 1 month)
  2. possibly PSC forms if allotment has made changes in share distributions to this affect
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18
Q

Entries a company must make in its own registers after allotment of shares

A
  1. Amend register of members within 2 months
  2. Amend PSC register if necessary
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19
Q

Share Allotment: Which resolutions must be sent to companies house and within what time

A
  1. Within 15 days
  2. Special resolutions, ordinary resolutions removing ASC clause, Ord resolution to activate s 550 in pre-CA 2006 company, any s 551 ordinary res. granting directors authority to allot
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20
Q

Share Allotment: When must share certificates be allocated?

A

Within 2 months of the allotment

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21
Q

Does anything in CA 2006 place a restriction on share transfer? Are there any pre-emption obligations?

A
  1. No and No
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22
Q

Restrictions on share transfers: where would they be found and what could they be?

A
  1. In Company’s articles placing restrictions on who can be offered shares
  2. Cannot prevent someone from selling / someone else from buying but the board has discretion to refuse to register the new owner under MA 26 - so board approval needed
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23
Q

Share Transfer: What happens if the new owner is never entered on the register of members

A

They are the beneficial owner only
- transferor attends GMs for them and receives dividends for them (must vote in B’s interests)

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24
Q

First step of share transfer

A

The transferor must complete and sign a stock transfer form and give it to the transferee along with the share certificate relating to the shares (ss 770– 772 CA 2006).

25
Q

When does the recipient of shares in a share transfer have to pay stamp duty?

A

If the sale price of shares is over 1 000GBP, SD is 0.5% rounded up to the nearest 5
- does not pay if shares are a gift

26
Q

What is share transmission

A

An automatic process whereby if a shareholder dies, shares go to their PRs and if bankrupt, shares vest in the trustee in bankruptcy

27
Q

If share transmission occurs on death / bankruptcy, does the trustee / PR become a shareholder / obtain the same rights as a shareholder?

A

No, MA27 prevents them from ‘becoming shareholders’ but they are entitled to receive dividends
- can be registered as shareholders
- can sell the shares

28
Q

Where can dividends be paid from?

A

Profits (not capital)

29
Q

Can a company purchase its own shares?

A

Generally no, but share buyback can be done with the correct procedure
- court order under s 994 to buy out unfairly prejudiced minority shareholder

30
Q

When would shareholders (if ever) receive payments from the company’s capital?

A

company can return capital to shareholders, after payment of company’s debts, in a winding up

31
Q

How must share buyback be authorised?

A

By shareholders by way of ordinary resolution

32
Q

Effect of share buyback on company finances / dividends?

A

shares are cancelled, and company is financially worse off as buyback reduces profits available for dividends / capital available for creditors (and less money for shareholders if company is wound up)

33
Q

Methods of a company buying back shares

A

Market Purchase: buying shares off of stock market
Off-Market Purchase: not on stock market

34
Q

Conditions for a company to buy back its shares

A
  1. Companies articles cannot forbid it
  2. shares must be fully paid
  3. the company must pay for the shares at the time of purchase
  4. shares must be paid for out of distributable profits / proceeds of fresh share issue
  5. must be authorised by ordinary resolution
35
Q

Pre Buyback formalities

A

A copy of the buyback contract, or a summary of it, must be available for inspection for at least 15 days before the general meeting and at the general meeting itself (or be sent with the proposed written resolution when or before it is circulated (s 696(2)).

36
Q

Post buyback formalities

A

Under s 702 CA 2006, a copy of the buyback contract, or, if the contract is not in writing, a written memorandum setting out its terms, must be made available for inspection at the company’s registered office or SAIL as soon the contract has been concluded, for a period of ten years starting with the date of the buyback.
- file return of purchase of own shares and notice of cancellation within 28 days of completion

37
Q

What does it mean to say that shares must only be bought back out of ‘distributable profits’

A

Distributable profits are the company’s accumulated realised profits less accumulated realised losses (shown under profit loss reserve)

38
Q

How many meetings are required to authorise share buyback?

A
  1. Board meeting to decide method of finance, approve draft terms of purchase, resolve to call a general meeting or propose a written resolution
  2. Either written resolution or general meeting
  3. Board meeting to resolve to enter into contract and authorise one or two directors to execute
39
Q

What votes should not be counted in a general meeting to authorise share buyback?

A

Votes derived from the shares being bought should not be counted if they are the DECIDING VOTES

40
Q

Who counts as an eligible member for the purposes of a WR to authorise share buyback

A

If written resolution procedure is being used, member wanting their shares to be bought does not count as an eligible member

41
Q

Can private / public companies use capital to buyback shares?

A
  1. Private can unless forbidden in the company’s articles
  2. Public companies cannot
42
Q

If a private company wants to use capital to buyback shares - what must be done

A
  1. Use distributable profits as far as possible
  2. special resolution to authorise
43
Q

Conditions for a private company to buyback shares out of capital (administrative) : Pre buyback

A
  1. No more than 3 months before statement of solvency, prepare accounts to show shares are fully paid
    1a. Company’s directors must make statement of solvency no sooner than 1 week before general meeting
  2. Statement of solvency annexed to auditor’s report confirming auditor’s think directors decisions are reasonable
  3. Payment out of capital must be approved by special resolution (this is in addition to the OR shareholders must pass to approve the buyback contract)
  4. Copy of directors’ statement of solvency and auditor’s report must be made available to members (and circulated with written resolution if relevant)
44
Q

Conditions for a private company to buyback shares out of capital (administrative) : After resolution approved for buyback

A
  1. Within 7 days of resolution being passed, Company must put notice in London Gazette stating that shareholders have approved payment out of capital to allow share buyback (specifying amount of capital used, date of SR and where directors’ statements / auditor’s reports can be inspected)
    a. Must state that company’s creditors can apply for an order under s 721 preventing the buyback (within 5 weeks of SR being passed)
    b. Company must publish notice in the appropriate national newspaper and give notice to each creditor
  2. Company must file directors’ statements and audit report at CH before or at the same time as it places the notices in the London Gazette and Newspaper
45
Q

Share buyback from capital in a private company: what must be available for inspection after the buyback and for how long>

A

The directors’ statement and auditor’s report must be kept available for inspection at company’s registered office from date of first notice published until 5 weeks after SR has been passed

46
Q

Share buyback from capital: if shareholders approve special resolution and no creditors object: what is done next

A
  1. As long as none of the creditors object to the buyback out of capital, the directors hold a board meeting and will pass a board resolution to decide to enter into the contract to buy back the shares.
  2. The payment out of capital itself must be made no earlier than five weeks after the date of the special resolution to approve the buyback out of capital, and no later than seven weeks after the date of the special resolution (s 723(1)), so the board has a two- week window to enter into the contract.
47
Q

If the written resolution is being used to authorise a buyback of shares from capital, what must be circulated with the written resolution?

A
  1. statement of solvency
  2. written resolution
  3. auditors report
48
Q

How many shareholders resolution are needed to authorise share buyback out of capital?

A
  1. OR to authorise contract
  2. SR to authorise payment out of capital
49
Q

Authorising share buyback out of capital: how long must the meeting minutes of the GM / WR be held for?

A

10 years

50
Q

How long do the creditors / dissenting members have to object to a company using capital to buyback its own shares?

A

lasts for 5 weeks after the special resolution

51
Q

How long does the company have to keep the statement of solvency and auditors report at their office (buyback of shares from capital)

A

for 5 weeks from the date of the special resolution

52
Q

When must the directors place notices in the London Gazette / national newspapers if intending to authorise buyback of shares from capital?

A

Within 1 week of SR

53
Q

When must the statement of solvency and auditors report be filed at company’s house (authorising share buyback from capital)

A

Before first publication (in London Gazette / other places)

54
Q

When must the SR to approve the buyback from share capital be filed at CH?

A

Within 15 days of GM / WRs

55
Q

After completion of the contract to buyback shares from capital - what must be filed at CH and when?

A

The return of purchase of own shares (SH03) and notice of cancellation of shares must be filed within 28 days of completion

56
Q

After completion of the contract to buyback shares from capital - what must be kept at the registered office and for how long?

A
  1. Copy of contract (10 years)
  2. Updates register of members, PSC register, cancel shares
57
Q

When can a company pay dividends?

A

If they have profits available for that purpose (shown under profit / loss reserve)

58
Q

Who decides whether to recommend a dividend / the amount to be paid?

A

Directors
- it is approved by the shareholders by way of OR (‘declared’)

BL&P (14 decks)

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