7. Equity Flashcards
Capital
All of the assets of the company (including debt finance, shares and assets)
Legal capital
This is the value received from investors who subscribe for the company’s shares.
Share capital
Is there any maximum legal capital under CA 2006?
- No maximum - companies may have as much share capital as they wish.
Do private companies have any minimum legal capital requirements.
- One share is sufficient.
Do public companies have a minimum legal requirement?
Public companies have a legal requirement to have a minimum of £50,000.
s763 CA 2006
This order to protect creditors.
s 763 CA 2006
Public companies have minimum legal requirement of £50k
Issuing shares at a discount.
Shares may not be issued at a discount.
Ooregum Gold Mining Co of India v Roper 1892
Prohibited by s552 CA 2006
Ooregum Gold Mining Co of India v Roper 1892
Shares may not be issued at a discounted rate
Prohibited by s552 CA 2006
Shares may not be issued at a discount.
Issue at a premium
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.
Hilder v Dexter 1902
Issuing shares at a premium is allowed, but not required
Benefits to shareholders
- Share in profits = dividends
- Capital return = share value increase
- Voting rights
Risks borne by shareholders
- 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.
Issue of new shares will usually dilute…
Usually dilute the rights of existing shareholders.
* Rights
* Dividends
Statutrory provisions on issue of new shares.
- 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.
Four key issues directors must consider when a company is seeking to issue new shares
- Limit on company’s authorised share capital
- Limitations on directors to issue new shares.
- Pre-emption rights
- Class rights
Limit on company’s authorised share capital
- 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.
Limitations on power of directors to issue shares
s549 CA 2006
* Shareholder approval needed to issue shares
* Avoids directors issuing / subscribing to obtain a controlling majority
Section 550 and 551 CA 2006
Directors have no power to issue shares except in accordance with
s 550 and s 551
s550 CA 2006
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
s551 CA 2006
Shareholders may grant the directors authorisation to issue new shares by ordinary resolution
* Lasts up to 5 years
* Certain numbers of shares only.
Pre emption rights
Shareholders have rights of first refusal when company issues new shares in most circumstances.
s561
s561 CA 2006
Shareholders have rights of first refusal when company issues new shares in most circumstances.
Only applies if to be issued as “equity securities”
Pre-emption rights enable
Shareholders able to protect their percentage shareholding.
Equity Securities
- Ordinary shares in the company
- Rights to subscribe for, or to convert securities into, ordinary shares int he company
s560(1)
Ordinary shares
Ordinary shares other than those that carry a right to participate up to a specified amount in distribution.
Effect of s560 only do not apply to…
Preference shares that have capped participating rights as to both dividends and capital.
Exceptions to the right of pre-emption when new shares issued.
- Bonus shares
- Issued under an employee share scheme.
- Issued for non-cash consideration
(s564)
Exclusion of the rights of pre-emption
Company may exclude the right of pre-emption by specific provisions in the articles.
ss567-568
Disapplication of pre-emption rights
- 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
Section 569 CA 2006
- Directors of a private limited company with only one class of shares
- Shareholders may agree to disapply pre-emption rights by special resolution
s570 CA 2006
- 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.
s571 CA 2006
- Shareholders may pass a SR to disapply pre-emption rights in relation to a share allotment only
Pre-emption rights on transfer of shares - general
- In general there are no rights of pre-emption for existing shareholders
Pre-emption rights on transfer of shares - small private company
- May provide pre-emption rights in articles or shareholder agreements.
- Common in small private companies
Pre-emption rights on transfer of shares - corporate shareholder
- If a private company has a corporate shareholder.
- Transfer of shares by corporate shareholder will not trigger pre-emption rights provisions
Re Coroin 2011
Re Coroin 2011
Transfer of shares by corporate shareholder will not trigger pre-emption rights provisions
Class rights
- Shares can be ussued with various rights
- When new class of shares issued, class rights will need to be set out in Articles
What is needed to set out the new class rights.
A special resolution is required to amend the company’s articles.
Difference between capital and legal capital
- Capital = all company’s assets
- Legal capital = company’s share capital
Alloted share capital
s558 CA 2006
* Deemed allotted when a person acquires the unconditional right to be included in company’s register of members.
Issued share capital
Refers to all shares that have been issued by the company.
Minimum allotted share capital of public companues
Share capital = £50k
ss761/763
Origins of doctrine of capital maintenance
Case of Trevor v Whitworth 1887
Doctrine of capital maintenance states that the company must…
Company must maintain and not reduce its share capital, except in very limited circumstances.
Share capital is a …. fund available to creditors
Share capital is a permanent fund available to creditors.
Trevor v Whitworth 1887
- Doctrine of capital maintenance
- For the protection of creditors.
- Share capital gives an indication of creditworthiness
Limited liability prevents.
Creditors from seeking funds from shareholders if the company has insufficient funds to repay debts.
Capital can be lost…..
As a result of poor business decisions or market conditions.
= Legitimate risk
Doctrine of capital maintenance - section of CA 2006
s 658 CA 2006
Doctrine of capital maintenance
- Limited company must not acquire its own shares… except in accordance with provisions
purported acquisition is void - Section 659 = exceptions
Impact of doctrine of capital maintenance on different transactions….
- Granting of dividends or distributions
- Reduction of share capital
- Purchase and redemption of own shares.
Returning funds to shareholders: Dividends
Doctrine of capital maintenance limits funds from which company may pay dividends since may involve reduction of the company;s assets.
s829(1) CA 2006
Dividend = distribution
Distribution = every description of distribution of a company’s assets to its members, in cash or otherwise.
Section 830(1)
States that a company may only pay dividends out of distributable profits
A company can only pay dividends out of….
Distributable Profits.
Distributable profits
The company’s accumulated, realised profits, so far as not previously utilised by distribution or capitalization, or written off.
S830(2)
Share premium account.
Not a distributable reserve, therefore cannot be used to fund a distribution.
Relevant Accounts
- Ascertaining whether a company has enough distributable profits for the payment of a dividend.
Interim accounts
- Specially prepared accounts.
- Where most recent accounts would not justify payment of dividends
- Company has realised a substantial amount of profit.
Where a company has recently started trading and does not have annual accounts….
Initial accounts may be prepared to justify the payment of a dividend.
Different types of dividend
- Dividend
- Scrip dividend
- Dividend in specie
Dividend
Involved the distribution of profits by way of cash to shareholders.
Scrip dividend
Is where a company gives the existing shareholders further shares in the company rather than cash
Dividend in specie
Company giving the shareholders value by way of assets.
When recommending a dividend, the directors must have regard to…
- All there duties
- s172 duty to promote success of the company
Final dividends
- Recommended by board, declared by OR.
Following annual accounts. - Articles may provide to be paid without shareholder involvement.
Shareholders cannot vote for..
- Payment of a higher dividend that that recommended by the board.
- Can require lower dividend
Interim dividends
- Usually lesser than final dividend.
- Recommended by directors alone
Disguised distributions
- Disguised return of capital to shareholders
- Anything where shareholder receives value
Key case for disguised distributions:
Re Halt Garage 1964
Re Halt Garage 1964
- Director received renumeration = wife of majority shareholder
- Had not worked for several years due to ill health.
- Insolvent liquidation > renumeration = disguised gift
Aveling Barford v Perion Ltd 1989
- 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
Key areas for disguised contrinutions
- Intra-company transfers
- Directors renumeration
Unlawful distributions - liability
- Directors and shareholders may be liable
Unlawful distributions - Directors
- Directors who ought to have known may be personally liable to repay dividends.
Bairstow v Queens Moat Houses plc 2001
Bairstow v Queens Moat Houses plc 2001
- 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
Unlawful distribitions - liability of sharehodlers
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
It’s a wrap UK Ltd v Gula 2006
- Liquidator sought repayment of dividends paid to sole shareholders and directors.
- Despite no profits; divdends paid to shareholders.
- Defendants liable to repay dividends
Steps the board must take before issuing dividend / distributions
- Directors’ duties
- Restrictions on distributions - disguised?
- Any distributable profits?
- Amount of distribution?
- Check whether profits cover whole amount of distribution.
Reasons for reducing share capital
- If share capital is greater than actual net assets.
- Company has surplus cash to return to shareholders.
Reduction of capital confirmed by court - overview
- Both Public and Private may use the court.
- ss641 - 651/
- Special resolution of shareholders followed by the order of a court.
- Creditors can object.
s 648(1)
Court may make an order confirming the reduction of capital on terms and conditions as it thinks fit.
s648(2)
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
When will a reduction of capital take effect following a court order.
- On registration of the court order.
- Statement of capital at Companies House
How can private companies only reduce capital?
- Reduction of capital by special resolution and solvency statement
Simplified procedure under CA 2006 for private companies reducing capital
ss642 - 644
Solvency statement of the directors and a special resolution of shareholders
The solvency statement
- Must be made not more than 15 days before the date SR 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.
s642(1)
- 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
643(2)(a) and (b)
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.
Exceptions to the prohibition for a company acquiring its own shares….
- Shares redeemable by option.
- Purchase their own shares (subject to any restrictions in articles)
s648(1) CA 2006
- Issue shares that are redeemable by option to the company.
- Must have express authorization in its article
Difference between redemption and purchase of shares
- Shares were always redeemable
- Purchase = new agreement to terms of purchase.
s684(4) CA 2006
For redeemable shares to be issued, there must be at least one other class of shares in issues
Shares may not be redeemed unless….
Shares may not be redeemed unless they are fully paid
Purchase (or buyback) of shares
ss690-708
* Company must draw up a contract with shareholders
* Contract must be approved by OR of the shareholders.
Purchase (or buyback) of shares - purchase can be funded
- Purchase can be funded by
- Distributable profits (all companies)
- Capital (private companies only)
Requirements for purchase of own shares using capital
- 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)
Financial Assistance
Company providing financial assistance for the purchase of its own shares.
Prohibitions for financial assistance
Gift, loan, guarantee, security, or indemnity
s677 CA 2006
Meaning of financial assistance
British and Commonwealth Holding Plc v Barclays Bank plc 1996
Financial assistance or help for the purpose of acquiring the shares.
Financial assistance - prohibitions - private companies
CA 2006 removed prohibition in relation to private companies.
s 678 CA 2006
Both public companies and private ltd subsidaries are prohibited from providing financial assistance for the purchase of shares in the public company
s679 CA 2006
Public companies are prohibited from providing financial assistance for the purchase of shares in their private limited holding companies
Consequence of unlawful financial assistance
Transaction will be held void.
Company and officer in default will be liable
* A fine
* up to two years in prison
How are the exceptions to the prohibition construed.
- Very narrowly
- Very difficult to rely on.
General rule for public companies re: financial assistance
Public companies must be careful to avoid providing financial assistance for the purchase of their shares.
Section 681- Unconditional exceptions
Relate to procedures
* Procedures authorised in other sections.
Section 682 - conditional exceptions
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
An example of conditional exception
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)
Exceptions that provide the financial assistance is not prohibited
- 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.
Difficulty of relying on exceptions to financial assistance
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
Brady v Brady 1989
- 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.
