5. Company Finance Flashcards
What is equity finance?
Prospective shareholders pay money / give property in return for shares
What is debt finance?
Companies borrow money to fund expansion / day-to-day running of the company
What are the advantages of fixed term interest bearing loan over subscription for shares?
- 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
What are the disadvantages of a fixed term interest bearing loan?
- 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)
What is the position in the MA regarding directors’ rights to borrow or grant security?
There is no restriction on directors to borrow / grant security - therefore no shareholder resolution required
What is allotment of shares?
Creation of new shares to give to new / existing shareholders in return for payment
What is an authorised share capital and when may a company have one?
Limit on number of shares a company could have
Companies incorporated before October 2009 would have an ASC
Do companies with model articles have an authorised share capital?
No, it is unlimited
If a company has an ASC, how can it be removed?
By ordinary resolution
What is a director’s authority under s 550 CA in relation to allotment and the requirements for it to apply?
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
What is a director’s authority under s 551 CA in relation to allotment and the requirements for it to apply?
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
Are ordinary or preference shares automatically entitled to an annual dividend?
No - a dividend will not be paid to either the ordinary or preference shareholders if profits are not available for the purpose
What does it mean if a preference share is cumulative?
The preference shareholder will receive any missed dividend payment when dividends are next declared
If the company is introducing a new class of shares through allotment, then what else would be required and why?
A special resolution would be required in order to amend the Articles to incorporate the new class of shares
What are pre-emption rights?
The right of first refusal of new shares which are being allotted for existing members (up to amount already held)
What do pre-emption rights apply to?
Equity securities = ordinary shares, and rights to convert securities into ordinary shares
What are exceptions to pre-emption rights?
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
How can companies disapply pre-emption rights?
Special resolution
What are the most likely documents needing to be filed with the Registrar of Companies within 15 days of the allotment of new shares?
Special resolution adopting new articles
New articles of association
Ordinary resolution removing ASC
Ordinary resolution authorising allotment
Special resolution disapplying pre-emption rights
How can a transfer of shares be refused?
By a director
When is stamp duty payable on a transfer of shares?
If over £1,000 then pay 0.5% rounded up to nearest £5
When are the administration requirements relating to the transfer of shares?
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)
What is share buy back and what are the requirements?
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
What must the company use to buy back the shares?
Distributable profits (i.e. profit and loss reserve)
NOT capital
What resolution is required to authorise share buy back?
Ordinary resolution
What must be filed with Registrar for Companies following share buy back?
Forms for return of purchase of own shares (SH03) and notice of cancellation of shares (SH06)
When can a public company buy back out of capital and what is required?
Once they have exhausted their distributable profits
Must make a statement of solvency
Must pass special resolution
What is an uncommitted facility?
Something like an overdraft, usually payable on demand
What is a syndicated loan?
A loan between business and a number of different lenders (common when amount is high)
What is the name of the agreement put in place for term loans / revolving credit facilities?
Facility agreements
When is a revolving credit facility an appropriate choice?
Fluctuating income
Facility to be used annually
Equity finance not possible
What are the three standard types of repayment contained in facility agreements?
- Bullet payment - whole loan in one go at the end
- Amorisation - equal instalments over the term of the loan
- Balloon repayment - unequal instalments with final being the largest
What is a debenture?
Term generally used to describe a loan agreement in writing between a borrower and lender that is registered at Companies House
What are the key considerations in choosing equity or debt finance for corporate borrowers?
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
What are the three main types of security?
Mortgages, fixed charges and floating charges
What happens to the legal ownership in a mortgage (except in land)?
The legal ownership is transferred to the lender
What happens to legal ownership in charges?
It remains with the receiver
What is the effect of a fixed charge on the asset?
The lender has control of the asset, and therefore the charger cannot dispose of it without the charge holder’s consent
What are the three basic features of a floating charge?
- Equitable charge over a whole class of assets, e.g. stock
- Assets subject to the charge are constantly changing
- Company retain freedom to deal with the assets in the ordinary course of business until the charge “crystallises”
When does “crystallisation” occur?
Lender goes into receivership
Chargor goes into liquidation
Chargor ceases to trade
Provided all charges are registered properly, what is the order of priority?
- Fixed charge / mortgage (regardless of date of creation)
- Floating charge in order created
What is a negative pledge?
Prohibits the company from creating later charges which has a priority over a floating charge, without their permission
What is the consequence of a subsequent lender taking a charge over an asset with actual knowledge that it has a negative pledge?
The charge is subordinate
What would rank higher in priority - a floating charge with a negative pledge, or a fixed charge?
A floating charge with a negative pledge
When must a charge be registered?
Within 21 days of creation
What happens if a charge is not registered, regarding it standing in order of priority?
It would rank last in order of priority
If more than one, then rank based in order of creation
What is the purpose of final accounts of a business?
To show how profitable a business is
How does a profit and loss account show a business’ profit?
Income LESS expenses = profit
What does the Profit & Loss Reserve show?
Cumulative profit since business started trading
What does Net Profit on the Profit & Loss Account show?
Profit from the current year
What are current assets?
Assets that convert into cash within a year, e.g. stock of finished goods, trade debtors
What are fixed assets?
Long term assets that a business uses, e.g. freehold premises, plant and machinery, fixtures, fittings, tools & equipment
What is the Net Current Assets calculation?
Current Assets LESS Current Liabilities
What are current liabilities?
Amounts owed to others, falling due within one year
What is the Net Assets calculation?
Total Fixed Assets PLUS Total Current Assets LESS Total Long Term Liabilities and Current Liabilities
How are different types of shares listed in the Capital Employed section of the balance sheet?
Ordinary / preference shares are listed separately
Nominal share value of £1
Additional value listed separately as “Share premium account”
What is “work in progress” on a balance sheet?
Work which solicitors have carried out but for which they have not yet submitted a bill
What are the two main types of reserves on a balance sheet and what is the difference?
Revenue = can in theory be distributed to shareholders, e.g. profit and loss reserves
Capital = cannot be distributed
If the company are distributing a dividend payment to shareholders, what must this come out of?
Profit and loss reserve
