Allotment of Shares Flashcards
What is the nominal value of a share?
The minimum subscription or purchase price for a share - lowest amount an investor may pay to purchase the shares
What is the premium on a share?
The amount above the nominal value that represents a profit the company makes when issuing a share
What is the company’s share capital?
The total value of all issued shares
Under the maintenance of share capital doctrine, this share capital cannot be distributed to shareholders, it must be maintained in the business
What is the procedure for allotting shares?
- Is there a cap on the number of shares that can be issued?
- Do directors need authority to allot shares?
- Must pre-emption rights be disapplied on allotment?
- Must new class rights be created for the shares?
- Directors must pass a Board Resolution to allot the shares
Step 1: is there a cap on the number of shares that can be issued?
- CA 1985 - default cap on number of shares, unless amended articles. To change the cap, ordinary resolution
- CA 2006 - no default cap, unless included in the Articles. If required, change by special resolution
Step 2: do directors need authority to allot shares?
Private company with one class of shares in issue
- automatic authority to allot shares of the same class (unless prohibited by articles)
All other companies (e.g., private company with more than one class of shares)
- Must be granted authority to allot shares by Ordinary Resolution
Step 3: must pre-emption rights be disapplied?
Must dis-apply pre-emption rights for equity securities
- must offer shares to existing shareholders pro-rata first (pre-emption rights)
- can dis-apply pre-emption rights by Special Resolution
If shares are not equity securities
- shares are capped both as to dividend and capital
- pre-emption rights do not apply
What shares are NOT equity securities?
Class of shares with rights capped for both right to receive dividends and capital payment
- BOTH capped
- “fixed” = capped
- pro rata = no restrictions = equity securities
Step 4: must new class rights be created for the shares?
New class of shares being created
- not already in Articles
- must amend Articles by Special Resolution
No new class of shares created
- class already used in Articles
- no need to amend the Articles
Administrative requirements: what copies of resolutions must be sent to Companies House and by when?
Copies must be sent to Companies House within 15 days
- CA 1985: any ordinary resolution to remove cap and ordinary resolution to use s550
- Any s551 ordinary resolution granting directors authority to allot if passed
- All special resolutions regarding dis-application of pre-emption rights and/or amending articles
- amended articles sent to Companies House
What is the exception where an ordinary resolution does need to be sent to Companies House?
Normally ordinary resolutions are not sent to Companies House
But the OR passed to grant directors authority to allot shares does need to be filed at Companies House
Allotment of new shares (s551) = OR filed at Companies House
What company forms must be sent to Companies House?
- Return of allotment (Form SH01) and statement of capital within one month
- if PSC have changed
When must the company registers be updated?
- Update the register of members within two months of allotment
- update PSC register if necessary
When must share certificates be sent to new shareholders?
Share certificates must be prepared and sent to new shareholders within two months of allotment
What are treasury shares?
- Shares that have been bought back by the company itself and are held by the company ‘in treasury’
- They are issued shares being held by the company in its own name and company can subsequently sell those shares out of treasury
- Although sale of treasury shares is a transfer (not issue), s561 pre-emption rights and s573 disapplication of pre-emption rights applies
- Company can cancel treasury shares at any time or transfer them to employee share scheme
What are a company’s distributable profits?
- The company’s accumulated realised profits less its accumulated realised losses
- Dividends are only payable by a company if it has sufficient distributable profits
Who can a private company offer its shares to?
Private company is prohibited from offering its shares to the public
It can only make:
- offers intended only for the person receiving them
- offers which are a ‘private concern’
What are the two most common forms of restriction on the transfer of shares?
- Directors’ power to refuse to register
- MA: directors may refuse to register the transfer of shares
- Under CA a company must give reasons if it refuses to register a transfer - Pre-emption clauses (rights of first refusal) on a transfer of shares
- CA and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the Articles of a company
How is a share transferred?
- A stock transfer form, which has to be signed by the transferor and submitted, with the share certificate to the new shareholder
- beneficial title to the shares passes on execution of the stock transfer form
- legal title passes on registration of the member as the owner of those shares in register of members by the company
- Company will send the shareholder a new share certificate in this name within two months
- Stamp duty: stock transfer form must be stamped before new owner can be registered
How much stamp duty is payable on a share transfer and when does it apply?
- Stamp duty is payable by the buyer at 0.5% of consideration, rounded up to nearest £5
- No stamp duty payable where consideration is £1000 or less
What must occur for the third party being transferred the shares to become legal owner of the shares?
The Stock Transfer Form is sent to the Stamp Office
What must occur for the beneficial ownership of transfer of shares (and to comply with company law)?
- name of recipient is entered on Register of Members
- board resolution to approve the transfer
- company secretary files a Return on Transfer of Shares at Companies House after the transfer
Can shareholders compel directors to recommend a dividend?
No, because only the directors have the power to recommend the payment of dividends
- dividends are only payable out of distributable profits
What are the two types of dividend?
- Final dividends - recommended by directors and declared by company by ordinary resolution of shareholders (but only directors have the power to recommend)
- Interim dividends - company Articles normally give directors power to decide to pay interim dividends if company has sufficient distributable profits. These can be paid without need for ordinary resolution of shareholders
You incorporated a private limited company for a client a couple of years ago. The company has unamended Model Articles and four existing shareholders, who own 50 ordinary shares each. The company is looking to raise further finance and the directors have decided to issue 100 Non-Participating 5% Preference Shares, for cash.
Who needs to authorise the allotment of the new preference shares in order to comply with the requirements of the Companies Act 2006?
- The shareholders must approve the rights attaching to the new shares and give directors authority to allot them
These are non-participating preference shares = they have fixed income rights
- do not need to dis-apply pre-emption rights
- this means directors can allot them
What are preference shares?
Preference shares may give a holder ‘preference’ as to payment of dividend or return of capital on a winding up
Rights of cumulative preference share holder:
- the preference shareholders will be entitled to any missed dividends payable as well as any current dividend
Cumulative preference share:
- if the dividend is not paid it will accumulate
What is the difference between borrowing and issuing shares (tax purposes)?
The interest payable on the loan by the company is tax deductible, but the payment of dividends to shareholders is not
- Dividends are paid out of profits after a company has paid its corporation tax
