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Business Law & Practice > 5. Company Finance > Flashcards

5. Company Finance Flashcards

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1
Q

What is equity finance?

A

Prospective shareholders pay money / give property in return for shares

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2
Q

What is debt finance?

A

Companies borrow money to fund expansion / day-to-day running of the company

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3
Q

What are the advantages of fixed term interest bearing loan over subscription for shares?

A
  • No dilution of shareholding
  • No risk of new shareholder being able to appoint or remove directors
  • Fixed interest means provider of loan wouldn’t benefit from any increase in company value
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4
Q

What are the disadvantages of a fixed term interest bearing loan?

A
  • Debt has to be repaid in full according to term of the loan, as well as interest, irrespective of company’s profitability
  • Debt can be assigned to a third party without company’s consent (depending on T+Cs of the loan)
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5
Q

What is the position in the MA regarding directors’ rights to borrow or grant security?

A

There is no restriction on directors to borrow / grant security - therefore no shareholder resolution required

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6
Q

What is allotment of shares?

A

Creation of new shares to give to new / existing shareholders in return for payment

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7
Q

What is an authorised share capital and when may a company have one?

A

Limit on number of shares a company could have

Companies incorporated before October 2009 would have an ASC

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8
Q

Do companies with model articles have an authorised share capital?

A

No, it is unlimited

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9
Q

If a company has an ASC, how can it be removed?

A

By ordinary resolution

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10
Q

What is a director’s authority under s 550 CA in relation to allotment and the requirements for it to apply?

A

Directors can allot with just board resolution

Only available if a private company with one class of share, and the proposal is to allot that same class of shares

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11
Q

What is a director’s authority under s 551 CA in relation to allotment and the requirements for it to apply?

A

Directors must obtain an ordinary resolution in order to allot

Required for public companies, or private companies with more than one class of shares BEFORE or AFTER allotment

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12
Q

Are ordinary or preference shares automatically entitled to an annual dividend?

A

No - a dividend will not be paid to either the ordinary or preference shareholders if profits are not available for the purpose

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13
Q

What does it mean if a preference share is cumulative?

A

The preference shareholder will receive any missed dividend payment when dividends are next declared

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14
Q

If the company is introducing a new class of shares through allotment, then what else would be required and why?

A

A special resolution would be required in order to amend the Articles to incorporate the new class of shares

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15
Q

What are pre-emption rights?

A

The right of first refusal of new shares which are being allotted for existing members (up to amount already held)

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16
Q

What do pre-emption rights apply to?

A

Equity securities = ordinary shares, and rights to convert securities into ordinary shares

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17
Q

What are exceptions to pre-emption rights?

A

Allotment of bonus shares

If consideration for the allotment is wholly or partly non-cash - i.e. part is property

If pursuant to an employee share scheme

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18
Q

How can companies disapply pre-emption rights?

A

Special resolution

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19
Q

What are the most likely documents needing to be filed with the Registrar of Companies within 15 days of the allotment of new shares?

A

Special resolution adopting new articles

New articles of association

Ordinary resolution removing ASC

Ordinary resolution authorising allotment

Special resolution disapplying pre-emption rights

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20
Q

How can a transfer of shares be refused?

A

By a director

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21
Q

When is stamp duty payable on a transfer of shares?

A

If over £1,000 then pay 0.5% rounded up to nearest £5

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22
Q

When are the administration requirements relating to the transfer of shares?

A

Send a new share certificate - within 2 months

Enter name on register - within 2 months

Notify Registrar of Companies when filing annual confirmation statement (CS01)

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23
Q

What is share buy back and what are the requirements?

A

Where a company buy shares off shareholders

Buy-back must not be prohibited by the company’s articles (not restricted in MAs)

AND

Shares must be fully paid - s 691(1) CA 2006

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24
Q

What must the company use to buy back the shares?

A

Distributable profits (i.e. profit and loss reserve)

NOT capital

25
Q

What resolution is required to authorise share buy back?

A

Ordinary resolution

26
Q

What must be filed with Registrar for Companies following share buy back?

A

Forms for return of purchase of own shares (SH03) and notice of cancellation of shares (SH06)

27
Q

When can a public company buy back out of capital and what is required?

A

Once they have exhausted their distributable profits

Must make a statement of solvency

Must pass special resolution

28
Q

What is an uncommitted facility?

A

Something like an overdraft, usually payable on demand

29
Q

What is a syndicated loan?

A

A loan between business and a number of different lenders (common when amount is high)

30
Q

What is the name of the agreement put in place for term loans / revolving credit facilities?

A

Facility agreements

31
Q

When is a revolving credit facility an appropriate choice?

A

Fluctuating income
Facility to be used annually
Equity finance not possible

32
Q

What are the three standard types of repayment contained in facility agreements?

A
  1. Bullet payment - whole loan in one go at the end
  2. Amorisation - equal instalments over the term of the loan
  3. Balloon repayment - unequal instalments with final being the largest
33
Q

What is a debenture?

A

Term generally used to describe a loan agreement in writing between a borrower and lender that is registered at Companies House

34
Q

What are the key considerations in choosing equity or debt finance for corporate borrowers?

A

Risk of investment - equity finance more risky, dividend payment discretionary and shareholder lose the capital value of their shares if company goes insolvent; debt finance interest payments are a contractual liability so will be paid before dividends, loan often secured meaning more likely to be repaid in insolvency

Involvement in company - equity finance allows certain rights to shareholders; lenders have no involvement

Repayment of capital - shareholders generally do not have capital repaid unless company wound up; loan capital must be repaid

Restrictions on sale - transfer of shares governed by company articles; lender can sell a debenture to a third party whenever

Capital value of the investment - shares can increase or decrease; facility agreement generally remains constant

Degree of statutory control - CA 2006 tightly controls equity finance; debt finance predominantly a matter of contract law therefore can be more flexible

Tax treatment - payment of a dividend not a deductible expense for the company; payment of a debt is normally a trading expense and so deductible for corporation tax purposes

35
Q

What are the three main types of security?

A

Mortgages, fixed charges and floating charges

36
Q

What happens to the legal ownership in a mortgage (except in land)?

A

The legal ownership is transferred to the lender

37
Q

What happens to legal ownership in charges?

A

It remains with the receiver

38
Q

What is the effect of a fixed charge on the asset?

A

The lender has control of the asset, and therefore the charger cannot dispose of it without the charge holder’s consent

39
Q

What are the three basic features of a floating charge?

A
  1. Equitable charge over a whole class of assets, e.g. stock
  2. Assets subject to the charge are constantly changing
  3. Company retain freedom to deal with the assets in the ordinary course of business until the charge “crystallises”
40
Q

When does “crystallisation” occur?

A

Lender goes into receivership
Chargor goes into liquidation
Chargor ceases to trade

41
Q

Provided all charges are registered properly, what is the order of priority?

A
  1. Fixed charge / mortgage (regardless of date of creation)
  2. Floating charge in order created
42
Q

What is a negative pledge?

A

Prohibits the company from creating later charges which has a priority over a floating charge, without their permission

43
Q

What is the consequence of a subsequent lender taking a charge over an asset with actual knowledge that it has a negative pledge?

A

The charge is subordinate

44
Q

What would rank higher in priority - a floating charge with a negative pledge, or a fixed charge?

A

A floating charge with a negative pledge

45
Q

When must a charge be registered?

A

Within 21 days of creation

46
Q

What happens if a charge is not registered, regarding it standing in order of priority?

A

It would rank last in order of priority

If more than one, then rank based in order of creation

47
Q

What is the purpose of final accounts of a business?

A

To show how profitable a business is

48
Q

How does a profit and loss account show a business’ profit?

A

Income LESS expenses = profit

49
Q

What does the Profit & Loss Reserve show?

A

Cumulative profit since business started trading

50
Q

What does Net Profit on the Profit & Loss Account show?

A

Profit from the current year

51
Q

What are current assets?

A

Assets that convert into cash within a year, e.g. stock of finished goods, trade debtors

52
Q

What are fixed assets?

A

Long term assets that a business uses, e.g. freehold premises, plant and machinery, fixtures, fittings, tools & equipment

53
Q

What is the Net Current Assets calculation?

A

Current Assets LESS Current Liabilities

54
Q

What are current liabilities?

A

Amounts owed to others, falling due within one year

55
Q

What is the Net Assets calculation?

A

Total Fixed Assets PLUS Total Current Assets LESS Total Long Term Liabilities and Current Liabilities

56
Q

How are different types of shares listed in the Capital Employed section of the balance sheet?

A

Ordinary / preference shares are listed separately

Nominal share value of £1

Additional value listed separately as “Share premium account”

57
Q

What is “work in progress” on a balance sheet?

A

Work which solicitors have carried out but for which they have not yet submitted a bill

58
Q

What are the two main types of reserves on a balance sheet and what is the difference?

A

Revenue = can in theory be distributed to shareholders, e.g. profit and loss reserves

Capital = cannot be distributed

59
Q

If the company are distributing a dividend payment to shareholders, what must this come out of?

A

Profit and loss reserve

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