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Company Law > 7. Equity > Flashcards

7. Equity Flashcards

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1
Q

Capital

A

All of the assets of the company (including debt finance, shares and assets)

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2
Q

Legal capital

A

This is the value received from investors who subscribe for the company’s shares.
Share capital

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3
Q

Is there any maximum legal capital under CA 2006?

A
  • No maximum - companies may have as much share capital as they wish.
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4
Q

Do private companies have any minimum legal capital requirements.

A
  • One share is sufficient.
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5
Q

Do public companies have a minimum legal requirement?

A

Public companies have a legal requirement to have a minimum of £50,000.
s763 CA 2006
This order to protect creditors.

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6
Q

s 763 CA 2006

A

Public companies have minimum legal requirement of £50k

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7
Q

Issuing shares at a discount.

A

Shares may not be issued at a discount.
Ooregum Gold Mining Co of India v Roper 1892
Prohibited by s552 CA 2006

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8
Q

Ooregum Gold Mining Co of India v Roper 1892

A

Shares may not be issued at a discounted rate

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9
Q

Prohibited by s552 CA 2006

A

Shares may not be issued at a discount.

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10
Q

Issue at a premium

A

Shares can be issued at a premium.
This is allowed, but not required Hilder v Dexter
Common for shares to be issued at a premium.

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11
Q

Hilder v Dexter 1902

A

Issuing shares at a premium is allowed, but not required

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12
Q

Benefits to shareholders

A
  • Share in profits = dividends
  • Capital return = share value increase
  • Voting rights
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13
Q

Risks borne by shareholders

A
  • Separate legal personality
  • Creditors paid from company assets.
  • Liable up to the amount invested.
  • Creditors paid first in event of insolvency.
  • Unlikely that shareholders will receive full value.
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14
Q

Issue of new shares will usually dilute…

A

Usually dilute the rights of existing shareholders.
* Rights
* Dividends

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15
Q

Statutrory provisions on issue of new shares.

A

What prevents directors from issuing new shares without the knowledge and consent of existing shareholders
* Requires directors to seek approval of shareholders in most circumstances where new share are issued.

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16
Q

Four key issues directors must consider when a company is seeking to issue new shares

A
  • Limit on company’s authorised share capital
  • Limitations on directors to issue new shares.
  • Pre-emption rights
  • Class rights
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17
Q

Limit on company’s authorised share capital

A
  • Articles can limit the amount of share capital a company can issue (rare).
  • Limited in MoA prior to CA 2006, transferred into Articles.
  • Now limits to “authorised share capital” are in the Articles.
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18
Q

Limitations on power of directors to issue shares

A

s549 CA 2006
* Shareholder approval needed to issue shares
* Avoids directors issuing / subscribing to obtain a controlling majority

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19
Q

Section CA 2006

A

Directors have no power to issue shares except in accordance with
s 550 and s 551

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20
Q

s550 CA 2006

A

Gives directors of a private company, with only a single class of shares.
* Automatic authorization to issue new shares of the same class.
* Where articles do not state otherwise

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21
Q

s551 CA 2006

A

Shareholders may grant the directors authorisation to issue new shares by ordinary resolution
* Lasts up to 5 years
* Certain numbers of shares only.

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22
Q

Pre emption rights

A

Shareholders have rights of first refusal when company issues new shares in most circumstances.
s561

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23
Q

s561 CA 2006

A

Shareholders have rights of first refusal when company issues new shares in most circumstances.
Only applies if to be issued as “equity securities”

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24
Q

Pre-emption rights enable

A

Shareholders able to protect their percentage shareholding.

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25
Q

Equity Securities

A
  • Ordinary shares in the company
  • Rights to subscribe for, or to convert securities into, ordinary shares int he company
    s560(1)
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26
Q

Ordinary shares

A

Ordinary shares other than those that carry a right to participate up to a specified amount in distribution.

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27
Q

Effect of s560 only do not apply to…

A

Preference shares that have capped participating rights as to both dividends and capital.

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28
Q

Exceptions to the right of pre-emption when new shares issued.

A
  • Bonus shares
  • Issued under an employee share scheme.
  • Issued for non-cash consideration
    (s564)
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29
Q

Exclusion of the rights of pre-emption

A

Company may exclude the right of pre-emption by specific provisions in the articles.
ss567-568

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30
Q

Disapplication of pre-emption rights

A
  • Pre-emption rights may be disapplied in the companies articles.
  • This is not common.
  • Most commonly disapplied by special resolution of shareholders
  • S 569 - 571
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31
Q

Section 569 CA 2006

A
  • Directors of a private limited company with only one class of shares
  • Shareholders may agree to disapply pre-emption rights by special resolution
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32
Q

s570 CA 2006

A
  • Pre-emption rights may be disapplied by SR; when directors under general authority to issue shares.
  • Pre-emption rights disapplied for all shares in this scenario.
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33
Q

s571 CA 2006

A
  • Shareholders may pass a SR to disapply pre-emption rights in relation to a share allotment only
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34
Q

Pre-emption rights on transfer of shares - general

A
  • In general there are no rights of pre-emption for existing shareholders
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35
Q

Pre-emption rights on transfer of shares - small private company

A
  • May provide pre-emption rights in articles or shareholder agreements.
  • Common in small private companies
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36
Q

Pre-emption rights on transfer of shares - corporate shareholder

A
  • If a private company has a corporate shareholder.
  • Transfer of shares by corporate shareholder will not trigger pre-emption rights provisions
    Re Coroin 2011
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37
Q

Re Coroin 2011

A

Transfer of shares by corporate shareholder will not trigger pre-emption rights provisions

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38
Q

Class rights

A
  • Shares can be ussued with various rights
  • When new class of shares issued, class rights will need to be set out in Articles
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39
Q

What is needed to set out the new class rights.

A

A special resolution is required to amend the company’s articles.

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40
Q
A
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41
Q

Difference between capital and legal capital

A
  • Capital = all company’s assets
  • Legal capital = company’s share capital
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42
Q

Alloted share capital

A

s558 CA 2006
* Deemed allotted when a person acquires the unconditional right to be included in company’s register of members.

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43
Q

Issued share capital

A

Refers to all shares that have been issued by the company.

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44
Q

Minimum allotted share capital of public companues

A

Share capital = £50k
ss761/763

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45
Q

Origins of doctrine of capital maintenance

A

Case of Trevor v Whitworth 1887

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46
Q

Doctrine of capital maintenance states that the company must…

A

Company must maintain and not reduce its share capital, except in very limited circumstances.

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47
Q

Share capital is a …. fund available to creditors

A

Share capital is a permanent fund available to creditors.

48
Q

Trevor v Whitworth 1887

A
  • Doctrine of capital maintenance
  • For the protection of creditors.
  • Share capital gives an indication of creditworthiness
49
Q

Limited liability prevents.

A

Creditors from seeking funds from shareholders if the company has insufficient funds to repay debts.

50
Q

Capital can be lost…..

A

As a result of poor business decisions or market conditions.
= Legitimate risk

51
Q

Doctrine of capital maintenance - section of CA 2006

A

s 658 CA 2006

52
Q

Doctrine of capital maintenance

A
  • Limited company must not acquire its own shares… except in accordance with provisions of the port
    purported acquisition is void
  • Section 659 = exceptions
53
Q

Impact of doctrine of capital maintenance on different transactions….

A
  • Granting of dividends or distributions
  • Reduction of share capital
  • Purchase and redemption of own shares.
54
Q

Returning funds to shareholders: Dividends

A

Doctrine of capital maintenance limits funds from which company may pay dividends since may involve reduction of the company;s assets.

55
Q

s829(1) CA 2006

A

Every description of distribution of a company’s assets to its members, in cash or otherwise.

56
Q

Section 830(1)

A

States that a company may only pay dividends out of distributable profits

57
Q

A company can only pay dividends out of….

A

Distributable Profits.

58
Q

Distributable profits

A

The company’s accumulated, realised profits, so far as not previously utilised by distribution or capitalization, or written off.
S830(2)

59
Q

Share premium account.

A

Not a distributable reserve, therefore cannot be used to fund a distribution.

60
Q

Relevant Accounts

A
  • Ascertaining whether a company has enough distributable profits for the payment of a dividend.
61
Q

Interim accounts

A
  • Specially prepared accounts.
  • Where most recent accounts would not justify payment of dividends
  • Company has realised a substantial amount of profit.
62
Q

Where a company has recently started trading and does not have annual accounts….

A

Initial accounts may be prepared to justify the payment of a dividend.

63
Q

Different types of dividend

A
  • Dividend
  • Scrip dividend
  • Dividend in specie
64
Q

Dividend

A

Involved the distribution of profits by way of cash to shareholders.

65
Q

Scrip dividend

A

Is where a company gives the existing shareholders further shares in the company rather than cash

66
Q

Dividend in specie

A

Company giving the shareholders value by way of assets.

67
Q

When recommending a dividend, the directors must have regard to…

A
  • All there duties
  • s172 duty to promote success of the company
68
Q

Final dividends

A
  • Recommended by board, declared by OR.
    Following annual accounts.
  • Articles may provide to be paid without shareholder involvement.
69
Q

Shareholders cannot vote for..

A
  • Payment of a higher dividend that that recommended by the board.
  • Can require lower dividend
70
Q

Interim dividends

A
  • Usually lesser than final dividend.
  • Recommended by directors alone
71
Q

Disguised distributions

A
  • Disguised return of capital to shareholders
  • Anything where shareholder receives value
72
Q

Key case for disguised distributions:

A

Re Halt Garage 1964

73
Q

Re Halt Garage 1964

A
  • Director received renumeration = wife of majority shareholder
  • Had not worked for several years due to ill health.
  • Insolvent liquidation > renumeration = disguised gift
74
Q

Aveling Barford v Perion Ltd 1989

A
  • 2 companies owned and controlled by shareholder.
  • One company sold the sports ground at low price, then sold on to another at high price.
  • Liquidator successfully sued for unauthorized return of capital
75
Q

Key areas for disguised contrinutions

A
  • Intra-company transfers
  • Directors renumeration
76
Q

Unlawful distributions - liability

A
  • Directors and shareholders may be liable
77
Q

Unlawful distributions - Directors

A
  • Directors who ought to have known may be personally liable to repay dividends.
    Bairstow v Queens Moat Houses plc 2001
78
Q

Bairstow v Queens Moat Houses plc 2001

A
  • Directors unlawfully paid dividends exceeding reserves based on faulty accounts.
  • CoA ordered repayment of £78 mill dividends.
  • Total amount repaid, not only excess as was held to be dishonest
79
Q

Unlawful distribitions - liability of sharehodlers

A

s847 CA 2006
- Where member knows or has reasonable grounds for believing unlawful - liable to repay it to the company.
It’s a wrap UK) Ltd v Gula 2006

80
Q

It’s a wrap UK Ltd v Gula 2006

A
  • Liquidator sought repayment of dividends paid to sole shareholders and directors.
  • Despite no profits; divdends paid to shareholders.
  • Defendants liable to repay dividends
81
Q

Steps the board must take before issuing dividend / distributions

A
  • Directors’ duties
  • Restrictions on distributions
  • Any distributable profits?
  • Amount of distribution?
    Check whether profits cover whole amount of distribution.
82
Q

Reasons for reducing share capital

A
  • If share capital is greater than actual net assets.
  • Company has surplus cash to return to shareholders.
83
Q

Reduction of capital confirmed by court - overview

A
  • Both Public and Private may use the court.
  • ss641 - 651/
  • Special resolution of shareholders followed by the order of a court.
  • Creditors can object.
84
Q

s 648(1)

A

Court may make an order confirming the reduction of capital on terms and conditions as it thinks fit.

85
Q

s648(2)

A

Before making an order for the reduction of capital.
* The court must be satisfied that every creditor entitled to object has either consented to the reduction or that his debt has been prepaid or secured

86
Q

When will a reduction of capital take effect following a court order.

A
  • On registration of the court order.
  • Statement of capital at Companies House
87
Q

How can private companies only reduce capital?

A
  • Reduction of capital by special resolution and solvency statement
88
Q

Simplified procedure under CA 2006 for private companies reducing capital

A

ss642 - 644
Solvency statement of the directors and a special resolution of shareholders

89
Q

The solvency statemetn

A
  • Must be made not more than 15 days before the date DR is passed
  • Signed by all directors
  • Must confirm there is no grounds on which the company could be found to be unable to pay debts
  • Will be able to pay debts for 12 months from date of solvency statement.
90
Q

s642(1)

A
  • Solvency statement must be made not more than 15 days before the date that a special resolution is passed.
  • Must be signed by all directors
91
Q

643(2)(a) and (b)

A

Solvency statement must confirm.
* There is no ground on which the company could be found to be unable to pay its debts.
* Company will be able to pay its debts for 12 months from date of statemetn.

92
Q

Exceptions to the prohibition for a company acquiring its own shares….

A
  • Shares redeemable by option.
  • Purchase their own shares (subject to any restrictions in articles)
93
Q

s648(1) CA 2006

A
  • Issue shares that are redeemable by option to the company.
  • Must have express authorization in its article
94
Q

Difference between redemption and purchase of shares

A
  • Shares were always redeemable
  • Purchase = new agreement to terms of purchase.
95
Q

s684(4) CA 2006

A

For redeemable shares to be issued, there must be at least one other class of shares in issues

96
Q

Shares may not be redeemed unless….

A

Shares may not be redeemed unless they are fully paid

97
Q

Purchase (or buyback) of shares

A

ss690-708
* Company must draw up a contract with shareholders * Contract must be approved by OR of the shareholders.

98
Q

Purchase (or buyback) of shares - purchase can be funded

A
  • Purchase can be funded by
  • Distributable profits (all companies)
  • Capital (private companies only)
99
Q

Requirements for purchase of own shares using capital

A
  • Accounts must not be more than three months old
  • Directors statement
  • Auditors report
  • SR of shareholders required
  • Creditors notified and have period to object
    s 692 (1)(a)
100
Q

Financial Assistance

A

Company providing financial assistance for the purchase of its own shares.

101
Q

Prohibitions for financial assistance

A

Gift, loan, guarantee, security, or indemnity
s677 CA 2006

102
Q

Meaning of financial assistance

A

British and Commonwealth Holding Plc v Barclays Bank plc 1996

Financial assistance or help for the purpose of acquiring the shares.

103
Q

Financial assistance - prohibitions - private companies

A

CA 2006 removed prohibition in relation to private companies.

104
Q

s 678 CA 2006

A

Both public companies and private ltd subsidaries are prohibited from providing financial assistance for the purchase of shares in the public company

105
Q

s679 CA 2006

A

Public companies are prohibited from providing financial assistance for the purchase of shares in their private limited holding companies

106
Q

Consequence of unlawful financial assistance

A

Transaction will be held void.
Company and officer in default will be liable
* A fine
* up to two years in prison

107
Q

How are the exceptions to the prohibition construed.

A
  • Very narrowly
  • Very difficult to rely on.
108
Q

General rule for public companies re: financial assistance

A

Public companies must be careful to avoid providing financial assistance for the purchase of their shares.

109
Q

Section 681- Unconditional exceptions

A

Relate to procedures
* Procedures authorised in other sections.

110
Q

Section 682 - conditional exceptions

A

Apply only if the company has net assets and either
* Those assets are not reduced by giving financial assistance
* To the extent those assets are reduced, the assistance is provided out of distributable profits

111
Q

An example of conditional exception

A

Financial assistance by a company for the purpose of an employee share scheme.
* Made in good faith in the interests of the company
s682(2)(b)

112
Q

Exceptions that provide the financial assistance is not prohibited

A
  • Principal purpose of assistance is not to give it for the purpose of an acquisition of shares
  • Assistance is incidental to some larger purpose of the company.
  • Financial assistance is given in good faith in the interests of the company.
113
Q

Difficulty of relying on exceptions to financial assistance

A

Court needs to determine whether the giving of assistance for the purpose of an acquisition shares is an incidental part of some larger purpose.
Brady v Brady 1989

114
Q

Brady v Brady 1989

A
  • Division of a company’s business between two shareholders
  • Decided one would take haulage and the other soft drinks business.
  • Assets were transferred between the businesses, as one was worth than another.
    = financial assistance.
  • Exception did not apply - since shares could not be said to be incidental to reorganization.
115
Q
A

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