9: Companies: Finance

Question 1

Explain loan capital?

Answer 1

Issued debentures. Debenture is a document issued by a company containing an acknowledgment of indebtedness

Creditor of the company

No voting rights

Income - has a contractural right to interest, irrespective of profit availability

Liquidation - debenture has priority with respect the repayment

Question 2

Explain share capital?

Answer 2

A share is the interest if a shareholder in a company measured by a sum of money

A bundle of rights and obligation

Shareholders/owners/members have voting rights depending on class of shares

Income - dividends depends on availability of profits

Liquidation - get repayment after creditors, but can participate in surplus assets

Question 3

Three of classes of shares?

Answer 3

Preference shares
- no voting rights
- fixed dividend paid in priority to other dividends, usually cumulative
- if issued with preferential rights, will have right be repaid their capital first but cannot participate in any surplus

Ordinary shares (equity)
- full voting rights
- paid after preference dividend. Not fixed and cumulative
- entitled to share surplus assets after repayment of preference surplus

Redeemable shares
- must be bought back by the company at a certain time

Question 4

Two types of issue of shares?

Answer 4

Bonus issues
- carried out using some of the company’s reserved to issue fully paid shares to existing shareholders in proportion to their shareholdings
- does not raise new funds

Right issues
- new shares offered to existing shareholders in proportion to their shareholders
- raises new funds
- shares usually offered at discount to current market value

Question 5

How can class rights be varied (altered)?

Answer 5

Depends on whether a procedure for this is set out in the articles

If yes - procedure in articles must be followed

If no - variation needs special resolution, or written consent of 75% in nominal value of the class

Question 6

What minority protection is in place for variation of class rights?

Answer 6

Goes through unfairly prejudicial process

If holders of >15% of class of shares object to variation

May apply to courts within 21 days to cancel variation

Petitioner must prove that variation is unfairly prejudicial

Variation will be allowed: if variation merely affects the value, enjoyment or power derived from the rights

Variation will be cancelled if: variation changes rights themselves

Question 7

Who allots shares and how is it done?

Answer 7

Directors, but they need authority to allot shares. Can be given by:
- articles
- ordinary resolution

Authority must state:
- max number of shares to be allotted
- expiry date for authority (max 5 years)

Directors of private companies with only one class of shares may allot shares of that class unless prohibited by articles?

Question 8

Can shares by issued at a discount?

Answer 8

Shares cannot be issued at less than nominal value

If breached, issue is still valid but shareholder is still liable to pay the company the discount plus interest

Debentures can be issued at discount

Question 9

Can shares by issued at a premium?

Answer 9

Yes, but any premium must be credited to a share premium account.

This account must only be used for:
- writing off the expenses on issue of shares
- writing off any commission paid on issue of shares
- issuing bonus shares

Question 10

What are pre-emption rights?

Answer 10

Rights of first refusal. If you have this? Must be offered any new issues first!

CA2006 makes this statutory

Company cannot allot ordinary shares without offering them to existing shareholders:
- on a pro rata basis
- at the same or better terms than to outsiders

Shareholders have 21 days to accept

Question 11

What is contravention?

Answer 11

When you dont follow pre-emption rights procedure

Existing shareholders can sue company for any loss within 2 years

Question 12

When do pre-emption provisions not apply?

Answer 12

On allotment to employee share scheme

On allotment for non-cash considerations

Private company may exclude or modify the pre-emption rights in the articles

Any company may restrict or modify the statutory pre-emption right by special resolution

Question 13

How does paying for shares work for private companies?

Answer 13

May issue shares for non-cash consideration

Value of that consideration is determined by directors

Court will interfere with valuation is fraud is present, or if the consideration is ‘illusory, past or inadequate’

Question 14

How does paying for shares work for public companies?

Answer 14

Additional rules relating to issue of shares in public

• first shareholders (memorandum) must pay cash for subscription shares
• payment must not be in form of work or services
• shares cannot be allowed until a quarter of their nominal value and whole of any premium has been paid up
• non-cash consideration must be received in 5 years
• non-cash consideration must be independently valued and reported on by a person qualified to be the auditor

Question 15

How does registration of shares work?

Answer 15

Allotment of shares must be registered within two months

A return of allotment must be delivered to the Registrar together with a revised statement of capital

Punishable by fine if doesnt happen

Question 16

How does transfer of shares work, for listed and unlisted shares?

Answer 16

All shares are freely transferable in accordance with the company’s articles

Unlisted shares
- transferred using stock transfer together with share certificate
- both sent to company for registration
- transfer must be registered or give reasons for refused for two months
- is transfer is refused, transferee entitled to dividends or return of capital, but may not vote

Listed shares
- transferred electronically using CREST system, the multi-currency settlement system for UK and Irish

Question 17

How can shares be altered?

Answer 17

Can be:
- subdivided or consolidated
- redenominated in another currency

By passing ordinary resolution

Notification must be given to Registrar within one month, together with revised statement of capital

Question 18

What are the basic capital maintenance rules?

Answer 18

Capital of limited company is a ‘buffer fund’
- accounting fund, not real money

The rules prevent a company reducing its capital by returning it to its members

A member of the company cannot simply withdraw their capital from the company

Loan capital is not subject to maintenance rules

Question 19

Basics of reduction of capital rules?

Answer 19

A company can reduce its share capital provided that any reduction does not result in only redeemable shared being left in use

Must follow own procedure for public/private

Question 20

Procedure for reduction of capital for public companies?

Answer 20

Pass a special resolution

Apply to court to confirm special resolution

Court must require company to settle a list of creditors entitled to object

Court cannot confirm reduction until it’s happy that all creditors have either consented to reduction or had their debts discharged or secured

Company files docs with registrar. If share capital falls below £50,000, company must become private

Question 21

Procedure for reduction of capital for private companies?

Answer 21

Pass a special resolution supported by a solvency statement

Solvency statement is a statement by directors that the company will be able to meet its debts within the following year

Solvency statement made without reasonable grounds is an offence punishable by fine and/or imprisonment

Copies of resolution, solvency statement and statement of capital must be filed with registrar within 15 days

Question 22

Two main ways a company can purchase its own shares?

Answer 22

Redemption of own shares

Purchase of own shares

Either are fine but the purchase must be in line with the rules of CA2006

Contravention of the rule:
- an offence that renders company and defaulting officers liability to a fine and prison up to 2 years
- renders purchase void

Question 23

What are the other ways a company can purchase its own shares?

Answer 23

Can acquire its own fully paid shares otherwise than for valuable consideration

Acquisition in lawful reduction of capital

Acquisition pursuant to a court order

Forfeiture of shares when someone has failed to pay any sum in respect of them

Question 24

How does a redemption of shares work? Conditions of this happening?

Answer 24

Company has redeemable shares that it can redeem (buy back)

Conditions for this happening:
- articles authorise the redemption
- company still have some non-redeemable shares still in use
- shares must be fully paid and provide for payment
- redeemed shares must be cancelled
- company makes return and revised statement of capital to registrar within one month

Question 25

How can a redemption of shares be financed?

Answer 25

Distributable profits
- transfer equivalent to the nominal value of shares made to the capital redemption reserve

Proceeds of a new issue

Permissible capital payment
- private companies only
- can only be used if other two methods are insufficient
- subject to restriction or prohibition in articles

Question 26

What is the process for a permissible capital payment?

Answer 26

Directors make a declaration of solvency

Auditors make a statement supporting the director’s declaration

Copy of both statement available to members before the resolution approving the payment is passed

Special resolution passed within one week of director’s statement

Public notice made within one week of resolution, inviting creditors to apply to courts to prevent the payment within five years if they object

Payment made between five and seven weeks following the resolution

Docs filed with registrar

Question 27

Basics of purchasing own shares?

Answer 27

A company can buy back non-redeemable shares as long as its not prohibited by articles

Procedure and finance same as redemption of shares

A return is delivered to registrar within 28 days. Offence is a fine

Shares are usually cancelled, but can be held back by company is treasury. These may be sold by directors at later date without authority of existing members

Question 28

Two types of purchase of own shares?

Answer 28

Market purchase
- purchase on the stock exchange
- an ordinary resolution stating min and max of number and prices
- authority to purchase last 18 months

Off market purchase
- purchase directly from shareholder
- special resolution required
- contract of sale must be available for inspection by members 15 days before meeting
- vendors may not vote on resolution with the shares which are to be purchased

Question 29

Who can give financial assistance?

Answer 29

Private companies only, subject to provisions of the act

To third parties to enable them to buy shares

Question 30

What can financial assistance include and not include?

Answer 30

Include:
- gift, loan or indemnity
- guarantee or security of third party loan
- any other assistance where the net assets of company are materially reduced

Do not include:
- dividends of bonus shares
- distribution in winding up
- capital reduction under Act
- purchase or redemption of shares

Question 31

Conditions for financial assistance to be possible?

Answer 31

Principal purpose cannot be to enable buying of shares - assistance MUST be incidental to some larger purpose and must be given in good faith

Company lends money in ordinary course of business

For purpose of employees share scheme

Given to employee to enable them to purchase fully paid shares

If unlawful - fine and prison for two years

Question 32

How must dividends be paid?

Answer 32

Company can only make a distribution out of distributable profits

Model articles state should:
- directors recommend payment of dividend
- general payment passes ordinary resolution
- amount paid cannot exceed amount recommended by directors

Question 33

What are distributable profits?

Answer 33

Accumulated realised profits

LESS

Accumulated realised losses

Provisions are deemed realised

Question 34

What additional rules are there for dividends for public companies?

Answer 34

Plc can only declare a dividend if, before and after distribution, its net assets are not less than the aggregate of its called up share capital and undistributable reserves

Undistributable reserves:
- share premium account
- capital redemption reserve
- unrealised profits
- any reserves that the company cannot distribute

Question 35

What are the consequences of an unlawful dividend?

Answer 35

Company can get distribution back from
- shareholders who knew or should have knows that dividend was unlawful
- any director, unless they can show that they exercised reasonable care in relying on accounts
- auditors if dividend was paid in reliance on their accounts

Question 36

Who can issue debentures?

Answer 36

All trading companies have the implied power to borrow for business

Loan may or may not be secured on assets

Question 37

Ads and dis of debentures?

Answer 37

Ads:
- board does not need authority to issue
- carry no votes, so do not dilute control
- interest is chargeable to profit before tax
- cheaper than shares
- no restrictions on issuing at discount

Dis:
- interest may be paid
- default may precipitate liquidation or administration
- high gearing affects share price

Question 38

Why put a charge on a debenture?

Answer 38

To give the creditor security for their loan

Question 39

What is a fixed charge?

Answer 39

Charge relates to specific company asset

Asset must be retained in the business permanantly

Company has no general freedom to sell the asset. If disposed, company must repay the debt or transfer the charge

Question 40

What is a floating charge?

Answer 40

Charge relates to class of assets, and includes present and future assets

Asset does not have to be retained, may change

Company has freedom to deal with asset in ordinary course of business

Question 41

What is crystallisation?

Answer 41

When a floating charge attaches itself to a particular asset

Means the company cannot deal freely with assets

Occurs:
- on liquidation
- when company ceases to carry on business
- on an event specified in debenture

Question 42

Ads and dis of floating charges?

Answer 42

Ads
- company can deal freely with assets
- wider class of assets can be charged

Dis
- value of security is uncertain until crystallisation
- lower priority than fixed charge
- liquidator can ignore if it was created within 12 months of winding up

Question 43

What creditors get paid before floating charge holders? In order?

Answer 43

Judgement creditors
- creditor who (by court judgement) can seize named assets and sell them to get repayment of their debts

Preferential creditors
- paid before floating charge holders

Fixed charge holders

Reservation of title creditor
- creditor who sold goods on condition that they will retain legal ownership until goods are paid for

Paying unsecured creditors

Question 44

What can a charge holder do to keep priority?

Answer 44

Prohibit the creation of a later charge with priority, but prohibition is only effective if a subsequent chargee has notice of the prohibition

Floating charge can only take priority if fixed charge holder has notice

Question 45

How can a liquidator avoid a floating charge?

Answer 45

It was created within one year prior to winding up (two years if chargee is connected)

AND

At time, company unable to pay debts

Charge is valid to the extent of new consideration provided

Question 46

How are charges registered?

Answer 46

Must notify registrar in 21 days

Valid from date of creation

Can be undertaken by:
- company
- charge holder

Failure to register:
- renders charge void against liquidator
- fine on company and officers
- renders money secured immediately repayable

Must be in register of charges
Failure to be in register does not invalidate the charge!