8. Companies: Raising Finance Flashcards
1
Q
What are the two ways a company can raise finance?
A
- Equity
- Debt
2
Q
What is equity finance?
A
Raising capital by selling shares in the company
3
Q
What is a company’s share capital?
A
Money received on account of the nominal value of shares, which is not returned to the shareholders.
- Ring-fenced for creditors.
4
Q
When is shareholder approval not necessary for directors to issue further shares?
A
(1) company was incorporated on or after 1 October 2009;
(2) only has one class or shares; and
(3) no restrictions in its Articles removing directors’ power.
5
Q
What type of shareholder resolution is required to allot new shares if there are multiple classes of shares?
A
Ordinary resolution
6
Q
What is the amount paid for shares that exceeds the nominal or par value, and where is it recorded on the balance sheet?
A
Share premium - recorded in a separate share premium account at the bottom of the balance sheet.
- also ring fenced for creditors’ protection.
7
Q
What must shares be offered for in order for existing shareholders to have a preemption right?
A
Cash
- no pre-emption rights arise where shares are issued for anything else, e.g. property
8
Q
Where a preemption right does arise, how long must the existing shareholders be given to decide whether to accept?
A
14 days
9
Q
Does preemption apply to preference shares?
A
No
10
Q
How is a preemption right disapplied?
A
Through special shareholder resolution, or by amending the articles
11
Q
Under the model articles, what power do directors have regarding share transfers?
A
Absolute power to refuse to allow a transfer
12
Q
What is debt finance?
A
Raising capital by borrowing it
13
Q
Do the directors have the power to borrow money on behalf of the company?
A
Yes, unless excluded by the articles
14
Q
What is a fixed charge granted over?
A
Assets the company will own for a substantial period of time
15
Q
What is a floating charge granted over?
A
A group of assets that change regularly, and does not crystallise until default
16
Q
Within what time limit of the creation of a charge by a company must it be registered at Companies House?
A
21 days
17
Q
What is the impact of failing to register a charge at Companies House?
A
The charge is void against a liquidator or administrator of the company, and the company’s creditors.
- debt is immediately payable to relevant creditor.
18
Q
How is the priority of fixed charges over the same asset determined?
A
Based on the date of their creation, as long as they were validly registered at Companies House
19
Q
How is the priority of floating charges over the same asset determined?
A
Based on the date of their creation, as long as they were validly registered at Companies House
20
Q
What is the priority of a fixed charge and a floating charge in the same asset?
A
As long as it is properly registered, a fixed charge will take priority over a floating in the same asset, even if the floating charge was created and registered first
21
Q
Two mains forms of debt finance
A
- loan facilities
- debt securities
22
Q
Three forms of loan facilities
A
- overdraft
- term loan
- revolving credit facility
23
Q
How does an overdraft facility work, and what are its pros/cons?
A
operates like your regular credit care bank account.
Pro - provides on-demand ££
Cons - high interest rate is payable on the overdrawn amount, and bank can remand repayment at any time.
24
Q
How does a term loan work, and what are its pros/cons?
A
loan for a specified period, setting out when repayment is due.
Pros - lender cannot demand early repayment, and flexibility in structuring form of repayment (ie. lump sum vs. instalments)
Cons - interest is still payable over borrowed sum.
25
How does a revolving credit facility work, and what are its pros/cons?
hybrid between an overdraft facility and term loan.
- loan is given for a specified amount, but borrower takes out smaller loans within the agreed threshold, repays them, and then re-borrows.
Pros - allows borrower to keep interest costs low, and provides flexibility in adjusting its borrowed amount depending on its finances at the time.
26
Three forms of debt facilities
- bonds
- convertible bonds
- preference shares
27
How do convertible bonds operate?
first issued as a bond, but investor is given a chance to then opt to covert bond into shares.
- by doing, its right to repayment of the initial loan is waived.
28
What are bonds?
- promise for repayment by issuer to its
'holder' (for a specified maturity period)
- intended to be traded on capital markets, with holder receiving interest at particular points (cf. dividends)
29
Why are preference shares also considered a form of debt security?
depending on their accompanying shareholder rights, may be more akin to debt rather than equity
(ie. when share dividend/maturity date are fixed)
30
Do directors require shareholder approval to borrow and grant security over the company's assets?
No, unless its articles state otherwise.
- rationale - cf. issuing of shares, debt finance does *not dilute members' shareholding in the company, so no consent is needed.
31
What are the various types of security for a loan?
- pledge
- lien
- mortgage
- charge
32
Why is securing their loan important to a lender?
in the even of default, gives charge holder priority over unsecured creditors, enabling them to seek the charged asset to settle sums owed.
33
How are mortgages over land different from those granted in non-land contexts?
in non-land context, ownership is transfer to lender, and reverts back to borrower once debt is paid off ('equity of redemption')
- mortgages over land - need to be executed by dded.
34
Distinction between a charge and mortgage
charge - no transfer of legal title to lend (cf. mortgage)
35
What rights are granted to a lender when opting for a 'charge' as their form of security?
borrower retains possession, and lender is, instead, given an equitable proprietary interest over the asset.
- either be a fixed or floating charge.
36
What are the pros/cons of floating charges?
**Cons**
- no certainty and control over the value of floating assets at time of crystallisation.
- lender incurs costs of administrating assets.
- charge holder cannot control how assets are dealt with by administrator/company.
- if floating charge funds are insufficient, cannot recover its shortfall as an unsecured creditor.
- rank under fixed charge holders and preferential creditors
**Pros**
- gives company flexibility to deal with assets that are constantly changing (eg. stock)
37
What is a guarantee?
When a third-party acts as a guarantor, and agrees to pay any outstanding debt on behalf of the company.
- parent companies often guarantee loans for their subsidiaries (but note financial assistance rules!!)
- gurantor can be either a company or person.
38
What documents must be filed with CHs to register a charge, and who can do so?
Filings:
- Form MRO1
- Relevant fee
- certified copy of charge - document
May be registered by 'any person interested in charge' (company/lender)
39
When is a charged considered formally registered?
once Registrar issues 'certificate of registration'
40
Which business entities cannot grant floating charges?
sole traders and general partnerships!
41
What is a debenture?
document that includes security in the form of a floating charge or sometimes both fixed and floating charged.
- only be granted by a company or LLP (as they contain a floating charge)
42
When will a fixed charge or mortgage not take priority over a floating charge?
where floating charge document contains a **negative pledge clause**
AND
later fixed charges had **notice** of this prohibition at the time when it took its charge.
43
What is a negative pledge clause?
a clause in a debenture prohibiting the creation of later fixed charged without permission.
44
Can lenders agree to different priority arrangements?
Yes, by entering into a deed of priority.
45
Where must fixed charges over land also be registered?
Land Registry
46
What form should be completed and sent to CHs once a charge is redeemed?
Form MR04
47
When is a company considered 'highly geared'?
when its ratio of debt exceeds its equity
- key indicator of company's financial health.
48
What are the benefits of raising finance through debt rather than equity?
- less regulation (contract law rather than CA '06)
debenture interest is deductible for CT purposes
- interest and investment are paid/repaid under contract terms (company has more scope to negotiate with lender).
- no dilution on shareholders' rights, and high return once debt is paid off w/out having expended its own resources.
49
What are the disadvantages of raising finance through debt rather than equity?
- dividends *may* be paid only if profits are available.
- if company is highly geared, riskier/less attractive to prospective lenders.
- pressure to make a profit to meet interest due on loans, which can be perilous during economic downturns.
50
What is an important consideration must companies incorporated pre-2009 take into account when issuing shares?
need to check authorised share capital, and if in excess, may be amended via **O.R**
- rare occurrence an O.R needs to be filed at CHs.
cf. post-2009 companies w/ restriction in their Articles require a **S.R**
51
What presumption accompanies preference shares?
Pref shares = cumulative
- if dividends are not paid out the previous year, then accumulated amount carries forward in the next year, and then paid out alongside that year's dividends.
52
What are pre-emption rights?
refers to existing members **right of first refusal** for a minimum of 14 days.
- amount offered = proportionate to their existing shareholding (safeguards against dilution), and may be either on the same or more favourable terms.
53
How can pre-emption rights be waived or varied?
1) Articles can be amended by contrary provision (dispensing of pre-emption rights entirely) via S.R;
2) Dis-applied by S.R for particular issue/persons;
OR
3) Formally waived in relation to a specific issue (if all members intend to decline offer - no need for S.R!)
54
When will pre-emption rights not be relevant?
where shares are not considered an 'equity security' as rights are **capped both** on in relation to receivable dividend and capital amounts.
55
What is an equity security?
ordinary shares.
- have no/only one specified cap on # receivable dividends and/or capital.
- pre-emption rights apply.
56
What will information will a company's confirmation statement divulge?
whether new shares have been issued + amount.
- can be found at CHs.
57
What resolution must be passed to give directors authority to allot shares where company has more than one class of shares?
unless authority is expressly granted via company's articles, an O.R is needed, specifying maximum number of shares directors may allot + date on which authority expires (≠ exceed 5 years from date of O.R).
- rare occurrence = O.R must be filed at CHs (max. 15 days).
58
When might a company pass a shareholder resolution to give director general authority to allot new shares, and what are the relevenat requirements?
**General authority** - unconditional authority for directors to allot shares of new class, where it has more than one class of share.
- ordinary resolution - state number of shares,
not exceeding 5 years from the date the resolution is passed.
Specified allotment - authority is limited to a maximum amount.
- S.R should also include written approval from directors, purchase amount, and justification of purchase.
59
Can shareholders waive the need for a special resolution to waive pre-emption rights, and how might they wish to do this?
- Waived by SR specifying how it applies either to a relevant transaction or for a specified period.
- Via Articles of association
60
What are the filings requirements when pre-emption rights are disapplied?
- file S.R (if relevant) = max. 15 days at CHs
- complete form SHO1 (return of allotment and statement of capital) = max. 1 month
- amend register of members of company = max. 2 months
- issue new share certificates = max. 2 months.
61
Where a company goes into liquidation, what are shareholders with partly paid up shares obliged to do?
pay the outstanding unpaid amount to the company.
62
Why is the buyback of shares by companies extremely restricted?
based on the maintenance of capital rule, stating that capital provided by shareholders must be maintained.
- capital = ring-fenced fund for creditors to rely on for debts owed to them.
63
How can a company finance its buyback of shares, and how is the procedure restricted?
First consider whether there are sufficient:
(1) distributable profits to finance buyback; or
(2) proceeds made from fresh issue of shares intended to finance buyback.
Only where this is NOT the case AND company is private, can it then look to its **capital reserves.**
64
Procedure for buyback of shares from distributable profits
1) check whether shares are fully paid up;
2) check Articles do not prohibit buy-back
3) convene 1st BM to approve contract, and call GM or propose WR.
- WR - attach contract.
- GM - 15 days' period for members to inspect contract.
4) O.R is passed to authorise buyback contract.
- holders of shares being bought cannot vote.
5) 2nd BM is convened, where directors enter into the contract and authorise directors to sign on company's behalf.
- payment is made at time of buyback.
6) Keep buyback contract for **at least 10 years** at registered office.
7) File return of purchase of own shares (SH03) **within 28 days** at CHs
65
Procedure for buyback of shares from capital
Option of last resort
1) Same pre-1st BM procedure
2) At 1st BM, directors approve contract + **statement of solvency (SoS)** + auditors' report to affirm SOS (gurantee comp will be 12 months solvent)
- all three must be circulated to members
3) Pass an O.R to approve buyback AND an S.R to approve payment out of capital (within 1 week of SoS being signed)
4) Notify creditors within 1 week of SR, and wait at least 5 weeks from date of SR for objections.
5) File SR within 15 days at CHs, alongside SoS/contract/auditors report.
6) Keep BM and BRs for 10 years.
7) Deadline of 5-7 weeks to complete buyback from date S.R was passed.
8) file within 28 days - forms SH03 (notice of buyback) and SH06 (cancellation of shares) at CHs.
66
What is a statement of solvency, and what is its importance?
Confirmation of company will remain solvent for 1 year after transaction (s.714).
- based on most recent company accounts (max. 3 months old).
- auditors' report must then be annexed to SoS = indication that Ds opinion is not *unreasonable*
67
Procedure to notify creditors during buyback of shares using capital
1) Within 1 week of S.R, publish notice in London Gazette AND another national newspaper or by informing each creditor individually.
2) Creds have 5 weeks from *date of S.R* to apply to court to object.
68
How can a shareholder transfer their existing shares?
1) **Transferor** signs/completes a STF, and forwards it alongside share certificate to transferee.
2) **Transferee** pays stamp duty on STF based on consideration paid + then forwards it to company w/share certificate.
3) BM to pass BR to approve/reject transfer.
4) If approved, Board registers transfer and issue new share certification.
69
How is the procedure to transfer a deceased/bankrupts shares different?
- shares are automatically **transmitted** rather than transferred on death/bankruptcy to PR/trustee.
- PR or trustee in bankruptcy = not automatically registered as members.
- option to either transfer shares or apply to be registered as members.
70
Where shares are transmitted via death/bankruptcy, are PR/trustee in bankruptcy entitled to dividends declared?
Yes, but cannot vote at GMs until formally registered.
71
Distinction between a pledge and a lien
lien gives creditor the right to retain possession of the asset, but not to sell it.
cf. pledge involves delivery of a tangible movable asset + confers possession/right to sell asset.
72
What are redeemable shares?
shares provisioned to be bought back by company at some point in time - determined either by Articles or Ds.
73
How is the procedure to buyback redeemable shares different from the general one?
- No contract + O.R is required - terms were set out before allotment.
- only need GM and S.R if buyback is funded using capital (follows same procedure minus O.R)
74
During share transfer, at what point does legal ownership pass to the transferee?
- only transferee once **registered** on Register of members, but equitable ownership passes once STF is executed.
75
How much stamp duty tax is due on transfer of shares?
- no SDT if less £1000, otherwise 0.5% of value of consideration paid.
76
How are deferred shares different from ordinary shares?
only have a right to share in surplus profits after all other dividends have been paid.
- no voting/dividend rights.
77
When is the provision of financial assistance by a company prohibited ?
Where a public company or any subsidiary thereof—whether public or private—gives financial assistance to any person for the purchase of that public company's shares, this may constitute unlawful financial assistance.
78
What transactions constitute 'financial assistance'?
broadly defined - include assistance by way of gift, loan, security, indemnity, waive, and any other form that 'materially' reduces company's net assets.
79
What are the two mains types of exceptions to the prohibition on financial assistance?
(1) ‘unconditional’
exception - where financial assistance is **incidental** to the main purpose of a transaction.
(2) ‘Conditional’ exception - only available to Plcs where their net assets would not be
reduced, or if that's the case, then the assistance is provided out of distributable profits.
- applies to limited type of transactions (see separate flashcard)
80
What are the three transactions that fall under the conditional exception for financial assistance?
1) company is in the business of lending of money;
2) financial assistance is given in good faith to fund an employee share scheme;
3) loans to bona fide employees (other than directors) to enable them to acquire fully paid
shares in the company or its holding company.
81
What is a term sheet?
It is a document that sets out the main terms of the loan and is generally used as a **guide when drafting the loan agreement.**
82
How much stamp duty tax is payable on the purchase of shares?
**rate of 0.5%** on the consideration paid (rounded up to the nearest £5), unless it is £1,000 or less.
83
Is any stamp duty tax due where shares are **gifted** rather than purchsased?
no!
84
Where a company has realised losses in its current trading year, when may it still pay out a dividend to its shareholders?
if there are accumulated profits from the previous trading year, it can carry those forward.
