4): Financing a Business

Question 1

What are the two ways companies obtain finance?

Answer 1

prospective shareholders pay for for shares - equity finance

companies borrow money - debt finance

Question 2

What are the 3 ways in which shares can change hands?

Answer 2

allotment

transfer

buyback

Question 3

What is allotment of shares?

Answer 3

company decides to create shares and give them to existing shareholder or new shareholders in return for payment

share certificate issued

new owner entered on register of members

consideration can be cash or property

Question 4

What is a share transfer?

Answer 4

where the shareholder sells or gives shares to another shareholder or to a new shareholder

Question 5

What is a share buyback?

Answer 5

company buys back some of its own shares from one or more shareholders

company reabsorbs shares so total number of shares in company increases

Question 6

What is the difference between allotment and issue of shares?

Answer 6

allot: person acquires unconditional right to be included on company’s register of members in respect of the shares

issue: when name of shareholder has been entered into register of members.

Question 7

what are the 3 key questions when working out whether to allot shares?

Answer 7

are there any constitutional restrictions on allotment?

do the directors have authority to allot shares?

are there any pre-emption rights?

Question 8

What is an Authorised Share Capital?

Answer 8

limit on the number of shares a company could have for companies incorporated before 1 October 2009.

Question 9

What should be done in checking for constitutional restrictions on allotment?

Answer 9

Pre-1 October 2009 companies:

Check if articles have been updated to remove ASC. If not, remove ASC by ordinary resolution and file it with Companies House.

Post-CA 2006 companies:

Check articles for share limits. Remove limits by special resolution if necessary.

Question 10

What authority to allot shares do directors have for private companies with one class of shares?

Answer 10

1. Post CA 2006 companies:

Directors automatically have authority to allot shares without shareholder approval.

Action required: A board resolution is sufficient to allot shares

2. pre 1 October 2009:

Directors do not have automatic authority.

Shareholders must pass an ordinary resolution to activate s 550 CA 2006.

Articles may restrict authority: If restricted, amend the articles by special resolution to give directors authority.

Question 11

What is the authority to allot shares for directors of public/private companies with more than one class of shares if no authority is granted in the articles?

Answer 11

1. Directors must obtain shareholder approval via an ordinary resolution
2. ordinary resolution must:

State the maximum

number of shares directors can allot.

Specify the expiry date of the authority (max 5 years from the resolution date)

3. Authority must be renewed by ordinary resolution every 5 years if still required

Question 12

Can authority to allot shares be granted through the articles for a private/public company with more than one class of shares?

Answer 12

Yes, but articles must:

Specify the maximum number of shares.

State an expiry date (max 5 years from incorporation)

Question 13

What are the filing requirements for ordinary resolutions under s 551 CA 2006?

Answer 13

must be filed at Companies House within 15 days

Question 14

What does s 551 CA 2006 states?

Answer 14

ordinary resolution of shareholders is required before company can allot shares

Question 15

What are pre-emption rights?

Answer 15

give existing shareholders the right of first refusal over new shares being allotted, ensuring they can maintain their proportional ownership.

Question 16

What is the rule for companies when considering pre-emption rights?

Answer 16

company must not allot ‘equity securities’ to a person unless it has first offered them to existing holders of ordinary shares on the same or more favourable terms.

Question 17

How should shares be offered to existing shareholders of ordinary shares when considering pre-emption rights for allotment of shares?

Answer 17

existing shareholders are offered a percentage of the new shares that reflect their existing shareholdings in the company

I.E: 60% shareholder gets offered 60% of new shares to be allotted

Question 18

What are the requirements for an offer of new shares in accordance with pre-emption rights?

Answer 18

must specify the period for acceptance (minimum 14 days)

If shareholders decline or do not respond, the directors may offer the shares to other buyers.

Question 19

When do pre-emption rights not apply?

Answer 19

If:

Bonus shares are being allotted

The consideration is non-cash

The shares are issued under an employee share scheme

Question 20

Can a company exclude or amend pre-emption rights?

Answer 20

Yes.

by including provisions in articles

to amend or remove, special resolution required

MAs do not include pre-emption rights by default

Question 21

How can private companies with one class of shares disapply pre-emption rights?

Answer 21

by passing special resolution of the shareholders

companies incorporated under the CA 2006 can do this

Question 22

What are the extra requirements for a special resolution to disapply pre-emption rights if authority to allot was specific only?

Answer 22

Directors must issue a written statement explaining:

The reason for disapplying pre-emption rights.

The price of the shares.

A justification for the price.

The statement must be circulated to shareholders along with notice of the meeting.

Question 22

How can public/private companies disapply pre-emption rights?

Answer 22

if the ordinary resolution gave general/specific authority to allot shares, then pre-emption rights can be disapplied by special resolution

extra requirements if authority was specific

Question 23

What are the rules around payment of shares?

Answer 23

1. MA 21 states that all shares must be fully paid so buyer must pay for the shares when they receive them
2. if articles do not include MA21:

share can be issued partly paid but the rest must be paid when obligation arises under contract

OR

if the company is wound up

Question 24

What are the rules surrounding share value increase?

Answer 24

When shares are issued at a price above nominal value, the excess is recorded in a share premium account share premium account is treated as share capital and must be maintained

Question 25

What are the main filing requirements for allotment of shares?

Answer 25

File a return of allotment and statement of capital (Form SH01) at Companies House within 1 month. File any ordinary or special resolutions related to the allotment within 15 days. prepare minutes of every board and general meeting

Question 26

Timings of filing requirements

Answer 26

Answer:

Question 27

How does a transfer of shares work?

Answer 27

shareholder sells/gives shares to an existing/not existing shareholder

Question 28

What is the change in shares after a transfer?

Answer 28

total number of shares does not change percentage shareholdings change only

Question 29

What are the key restrictions to note in share transfers?

Answer 29

articles cannot restrict selling shares or new person buying them person only becomes a shareholder once their name is entered onto register of members board has discretion to refuse registration of share transfers

Question 30

What is the position of transferors and transferees before registration of share transfer?

Answer 30

The transferor remains the legal owner (and can attend meetings and receive dividends). The transferee is the beneficial owner (entitled to dividends and voting rights via the transferor).

Question 31

What are the required steps for a transferor during a share transfer?

Answer 31

Transferor signs stock transfer form and gives it to transferee with share certificate. If the sale price exceeds £1,000, transferee pays stamp duty (0.5%, rounded up to nearest £5, min. £5). no stamp duty if shares are a gift. Transferee submits the form and certificate to the company.

Question 32

What must the company do after the transferor has completed the procedure for a share transfer?

Answer 32

Issue a new share certificate within 2 months Update the register of members within 2 months Report the change in the annual confirmation statement (CS01).

Question 33

When does transmission of shares occur automatically?

Answer 33

1. Death of a shareholder → Shares pass to personal representatives (PRs). 2. Bankruptcy of a shareholder → Shares vest in trustee in bankruptcy.

Question 33

Explain the principle of maintenance of share capital

Answer 33

Share capital is the fund provided by shareholders and acts as security for creditors. It cannot be reduced or returned to shareholders Unpaid capital liability on shares must not be reduced.

Question 34

What are the rights of PRs and trustees on automatic transmission?

Answer 34

1. They do not automatically become shareholders but are entitled to dividends 2. They can: Register as shareholders (subject to board approval). AND Sell the shares directly as representatives without registration.

Question 35

What must a company comply with when when following the principle of maintenance of share capital?

Answer 35

dividends can only be paid out of distributable profits, not capital company must not generally purchase its own shares

Question 36

What are the exceptions to the principle of the maintenance of share capital?

Answer 36

company can buy back its own shares with correct procedure Court-ordered purchase of shares permitted to resolve claims of unfair prejudice. Capital can be returned to shareholders after paying company debts on winding up

Question 37

What happens in a share buyback?

Answer 37

if company buys back its own shares, the shares in question are cancelled company pays outgoing shareholder for the shares result is the reduction of profits available for dividends

Question 37

What are the two types of share buyback?

Answer 37

Market Purchase: Shares bought on the stock market (public companies). Off-Market Purchase: Shares bought directly from shareholders

Question 38

What duties should directors consider before approving a buyback of shares?

Answer 38

promoting success of the company acting with skill, care and diligence

Question 39

What are the requirements set out in the CA 2006 for a buyback of shares?

Answer 39

1. Articles must not prohibit buyback 2. shares must be fully paid 3. shares must be paid for at time of purchase 4. payment must come from: distributable profits OR proceeds of new issue of shares 5. ordinary resolution required to authorise buyback contract 6. contract/memorandum must be available for inspection 7. file copy of buyback contract with registered office 8. file a return of buyback and cancel shares within 28 days of completion

Question 40

What are the administrative requirements for the buyback contract?

Answer 40

available for inspection: 15 days before and during GM sent with written resolution if necessary

Question 41

What is the buyback procedure (Out of Profits)?

Answer 41

1. check restrictions in articles 2. prepare accounts to ascertain available profits 3. hold board meeting 4. call GM or propose WR 5. circulate WR or hold GM 6. shareholders whose shares are being bought cannot vote if they make the difference 7. post GM/WR matters

Question 42

What are the post GM/WR matters for a share buyback out of profits?

Answer 42

Board resolves to enter into the contract. File return of purchase and cancel shares within 28 days. Update register of members and PSC register. Keep minutes/resolution for 10 years at registered office

Question 43

What is the procedure for a share buyback (Out of Capital)?

Answer 43

1. Directors prepare statement of solvency and auditors’ report 2. Special resolution is required + ordinary resolution for buyback contract. 3. Notice of shareholder approval put in London Gazette 4. Creditors have 5 weeks to object 5. If none object, directors hold BM to pass board resolution to enter into buyback contract.

Question 44

What are the filing requirements for a buyback out of capital?

Answer 44

File the directors’ statement and auditors’ report at Companies House. Keep docs available for inspection at registered office for 5 weeks. Payment out of capital must be made between 5 and 7 weeks after the special resolution.

Question 45

Timeline for buyback out of capital:

Answer 45

Answer:

Question 46

How can shareholders make money?

Answer 46

increase in share value dividends

Question 47

How are dividends paid?

Answer 47

can be paid if the company has distributable profits if no profits available, previous year's profits can be used. directors recommend amount and if it should be paid ordinary resolution of shareholders carried out to approve.