4): Financing a Business Flashcards
What are the two ways companies obtain finance?
prospective shareholders pay for for shares - equity finance
companies borrow money - debt finance
What are the 3 ways in which shares can change hands?
allotment
transfer
buyback
What is allotment of shares?
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
What is a share transfer?
where the shareholder sells or gives shares to another shareholder or to a new shareholder
What is a share buyback?
company buys back some of its own shares from one or more shareholders
company reabsorbs shares so total number of shares in company increases
What is the difference between allotment and issue of shares?
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.
what are the 3 key questions when working out whether to allot shares?
are there any constitutional restrictions on allotment?
do the directors have authority to allot shares?
are there any pre-emption rights?
What is an Authorised Share Capital?
limit on the number of shares a company could have for companies incorporated before 1 October 2009.
What should be done in checking for constitutional restrictions on allotment?
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.
What authority to allot shares do directors have for private companies with one class of shares?
- Post CA 2006 companies:
Directors automatically have authority to allot shares without shareholder approval.
Action required: A board resolution is sufficient to allot shares
- 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.
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?
- Directors must obtain shareholder approval via an ordinary resolution
- 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)
- Authority must be renewed by ordinary resolution every 5 years if still required
Can authority to allot shares be granted through the articles for a private/public company with more than one class of shares?
Yes, but articles must:
Specify the maximum number of shares.
State an expiry date (max 5 years from incorporation)
What are the filing requirements for ordinary resolutions under s 551 CA 2006?
must be filed at Companies House within 15 days
What does s 551 CA 2006 states?
ordinary resolution of shareholders is required before company can allot shares
What are pre-emption rights?
give existing shareholders the right of first refusal over new shares being allotted, ensuring they can maintain their proportional ownership.
What is the rule for companies when considering pre-emption rights?
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.
How should shares be offered to existing shareholders of ordinary shares when considering pre-emption rights for allotment of shares?
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
What are the requirements for an offer of new shares in accordance with pre-emption rights?
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.
When do pre-emption rights not apply?
If:
Bonus shares are being allotted
The consideration is non-cash
The shares are issued under an employee share scheme
Can a company exclude or amend pre-emption rights?
Yes.
by including provisions in articles
to amend or remove, special resolution required
MAs do not include pre-emption rights by default
How can private companies with one class of shares disapply pre-emption rights?
by passing special resolution of the shareholders
companies incorporated under the CA 2006 can do this
What are the extra requirements for a special resolution to disapply pre-emption rights if authority to allot was specific only?
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.
How can public/private companies disapply pre-emption rights?
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
What are the rules around payment of shares?
- MA 21 states that all shares must be fully paid so buyer must pay for the shares when they receive them
- 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
What are the rules surrounding share value increase?
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
What are the main filing requirements for allotment of shares?
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
Timings of filing requirements
Answer:
How does a transfer of shares work?
shareholder sells/gives shares to an existing/not existing shareholder
What is the change in shares after a transfer?
total number of shares does not change
percentage shareholdings change only
What are the key restrictions to note in share transfers?
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
What is the position of transferors and transferees before registration of share transfer?
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).
What are the required steps for a transferor during a share transfer?
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.
What must the company do after the transferor has completed the procedure for a share transfer?
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).
When does transmission of shares occur automatically?
- Death of a shareholder → Shares pass to personal representatives (PRs).
- Bankruptcy of a shareholder → Shares vest in trustee in bankruptcy.
Explain the principle of maintenance of share capital
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.
What are the rights of PRs and trustees on automatic transmission?
- They do not automatically become shareholders but are entitled to dividends
- They can:
Register as shareholders (subject to board approval).
AND
Sell the shares directly as representatives without registration.
What must a company comply with when when following the principle of maintenance of share capital?
dividends can only be paid out of distributable profits, not capital
company must not generally purchase its own shares
What are the exceptions to the principle of the maintenance of share capital?
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
What happens in a share buyback?
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
What are the two types of share buyback?
Market Purchase: Shares bought on the stock market (public companies).
Off-Market Purchase: Shares bought directly from shareholders
What duties should directors consider before approving a buyback of shares?
promoting success of the company
acting with skill, care and diligence
What are the requirements set out in the CA 2006 for a buyback of shares?
- Articles must not prohibit buyback
- shares must be fully paid
- shares must be paid for at time of purchase
- payment must come from: distributable profits OR proceeds of new issue of shares
- ordinary resolution required to authorise buyback contract
- contract/memorandum must be available for inspection
- file copy of buyback contract with registered office
- file a return of buyback and cancel shares within 28 days of completion
What are the administrative requirements for the buyback contract?
available for inspection:
15 days before and during GM
sent with written resolution if necessary
What is the buyback procedure (Out of Profits)?
- check restrictions in articles
- prepare accounts to ascertain available profits
- hold board meeting
- call GM or propose WR
- circulate WR or hold GM
- shareholders whose shares are being bought cannot vote if they make the difference
- post GM/WR matters
What are the post GM/WR matters for a share buyback out of profits?
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
What is the procedure for a share buyback (Out of Capital)?
- Directors prepare statement of solvency and auditors’ report
- Special resolution is required + ordinary resolution for buyback contract.
- Notice of shareholder approval put in London Gazette
- Creditors have 5 weeks to object
- If none object, directors hold BM to pass board resolution to enter into buyback contract.
What are the filing requirements for a buyback out of capital?
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.
Timeline for buyback out of capital:
Answer:
How can shareholders make money?
increase in share value
dividends
How are dividends paid?
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.
