BLP 5 - Equity Finance

Question 1

Transfer of shares

Answer 1

Allotment
Buy-back
Transfer

Question 2

Allotment

Answer 2

Allots when person acquires unconditional rights to be included in companies register of members.

Restrictions -
Constitutional restrictions?
If not updated can amend articles by ordinary (only such time possible). *prior to October 2009.
If after - special required.

Have authority?
If one class of share - have permission without.
If before 2006 CA must authorise with ordinary.
More than one class - ordinary required - must state maximum can allot and date on which authority will expire. Not more than five years.
If in articles - again not more than five years and specify date which will expire

Pre-emption rights?
Must offer to existing first. Must offer number which preserve their percentage.
Offer must state period for acceptance and cannot be withdrawn.
Cannot be less than 14 days.
Do not apply to;
bonus shares, if consideration is wholly or partly non-cash (property), or shares to be held under pursuant to an employee share scheme.
Can modify in articles.

Dissapplication of pre-emption rights -
One class of shares -special resolution.

Public or private with more than one class -
If allotment ordinary - s570 allows company to remove by passing a special. Last as long under directors authority (s551).

If authority to allot contained in s551 ordinary was in relation to specific allotment. S572 allows companies to dismally pre-empt rights by special resolution. Must be recommended by directors and before proposing must make written statement -
reason for making recommendation
amount purchases will pay
directors justification of amount.

Must be circulated with notice of general meeting, or wtitten resolution . Offence to provide misleading information (s572).

Question 3

Payment for shares

Answer 3

MA21 -
all shares must be fully paid.
If not
must still pay when wound up or contractually obliged to do so.

If increase recorded on separate premium account on company balance sheet (s610 CA 2006).
Money treated as share capital and maintained.

Question 4

Administrative requirements on allotment

Answer 4

Copies of resolutions within 15 days.
Company forms (SH01) sent to Companies House within one month.
New persons with significant control (PSC01, PSC02, PSC04 and PSC07).

Amend register of members within two months (and PSC register)

Prepare share certificates within two months.

Question 5

Transfer of shares

Answer 5

No restrictions.

Must be registered on members. Can transfer but may not register.

S113 - board discretion not to register transfer.
If never entered simply beneficial owner. Transferor will remain legal owner.
Legal owner permitted to go to meetings if not registered.
Legal owner must vote in accordance with wishes of beneficial owner, and pay dividends to beneficial owner.

Procedure;
Complete and sign stock transfer form and give to transfereee with share certificate.
If over £1,000 must pay stamp duty (0.5% rounded up to nearest £5).
None if gift.
Minium is £5.

Should then;
send new share certificate within two months
enter name on register of members within two months
notify Registrar of companies of change in ownership (CS01).

Question 6

Transmission

Answer 6

Automatic process
- Shareholder dies versts to PRs
-made bankrupt vests to trustee of bankruptcy.

MA27 -trustees do not become shareholders but entitled to dividends.

PRs and trustee can insist on being registered. Director may refuse.

Question 7

Maintenance of share capital

Answer 7

Paid up cannot be returned and liability to capital they have not paid must not be reduced.
-dividends cannot be paid out of capital only distributable profits
-company must not generally purchase own shares.

Exceptions -
buy back if correct procedure (s690)
can purchase shares under court order to buy out unfairly prejudiced shareholder
can return to shareholders after payment of debts on winding up.

Question 8

Share buyback

Answer 8

Directors must consider long-run (s172).

May argue better to buy back disgruntled shareholder than work in unproductive way.

Procedure -
Off-market purchase
-Company article must not forbid buyback
-Shares must be fully paid
-company must pay for shares at time of purchase
-shares must usually be paid for out of distributable profits or proceeds of fresh issue of shares made for purpose of financing purchase.
Distributable shown on profit/loss reserve.
-Shareholder must pass ordinary authorising buyback
-copy of buyback (or summary) must be available for inspection at least 15 days before general meeting (or sent before or with written resolution s696(2).
-copy of buyback contract, or written memorandum if not in writing, setting out terms must be made available at registered office or SAIL as soon as contract concluded. For period of ten years starting with date of buyback.

Before board meeting
-check articles
-prepare accounts to ascertain profits

Board meeting
-decide method of finance
-resolve to approve draft terms
-resolve to call GM or WR
Contract or memorandum made available to members.
WR - memorandum circulated with WR
VM - at registered office at least 15 days before.

WR - holder not eligible
GM - invalid if passed on strength of vote from shares being bought.

Keep minutes/resolutions for ten years.

Completion of board - board resolves to enter contract and one or two directors authorised to execute buyback.

After completion - file return of purchase of own shares into contract and one or two directors authorised to execute buyback.

Important to see if company has enough cash (directors duties).

Question 9

Buyback out of capital

Answer 9

Permitted to buy back out of capital unless forbidden.

Public cannot.

Must exhaust distributable profits before using capital.

• Directors must make statement of solvency, stating company solvent and will remain solvent during year following buyback. - May be required to contribute if not. (Criminal sanctions as well)

-Statement of solvency must have annexed to it an auditors report confirming audits are not aware of anything to indicate directors opinion unreasonable (s714).

Payment out of capital must be approved by special resolution in addition to ordinary authorised for buyback.
GM - shareholder vote in question not effective.

Copy of directors statements of solvency and auditors reports must be available.
If WR - statement and report must be sent to members along with written resolution.
If GM - copy of statement and report available for inspection at meeting.
If not complied resolution ineffective.

-Within seven days of special resolution, notice in London Gazette stating shareholders have approved payment out of capital in order company can buy back shares (s719).
Must specify amount, date of special and directors statement and auditors location available for inspection.
Must also state creditors may within five weeks following special apply for order under s721 preventing buyback.
Must publish in newspaper or give notice to each of its creditors.
Purpose so creditors may apply to stop

Company must file copy of directors statement and auditors report at Companies House before or at same time as it places notices in Gazette and Newspaper.

Directors statement and report must be kept available for inspection at registered office from time company publishes until five weeks after passing special

As long as none of creditors object - directors hold board meeting and pass board resolution to decide to enter into contract to buy back shares.
Payment out of capital itself made no earlier than five weeks after date of special resolution and no later than seven weeks.

Question 10

Debt finance

Answer 10

Types -
Loan - overdraft, term loan and revolving credit facility
Debt securities - IOUs - issued by company to investor in return for cash payment - repaid at later dates

Question 11

Considerations prior

Answer 11

Must check constitution.

Before 2009 - check memorandum for restrictions.

If restrictions special resolution.

MA3 - directors act on behalf of company.

Partners - check partnership agreement. Generally only change by unanimous consent.

Question 12

Loans

Answer 12

terms on -
usual market practice
purpose
background and financial position
bargaining power

Secured - over property

Unsecured - higher interest.

Overdraft -
contract between business and bank.
Payable on demand without notice.
Interest charged (compound) any amount added to amount borrowed interest on whole amount
Implied unless agreed otherwise
Expensive and demanded at any time

Term loans -
borrows fixed amount of money for s specified period. Pay interest at regular intervals.
Short term - one year
Mediumterm - one to five years
Over five years - long term.

Secured or unsecured
Bilateral - between two parties (business and bank)
Syndicated - business and number of different lenders *jointly provide).
Common when loan high.

Allow draw-down - take out loan all in one go or take in instalments.

Greater certainty than overdraft, can only request under terms of the contract.
However - time and expense, and once repaid cannot be re-borrowed.

Resolving credit facilities -
Bank agrees to make available maximum amount of money throughout agreed period.
Business can borrow and repay. Interest at regular intervals.
Can re-borrow amount repaid so long as to not exceed overall maximum figure.
Useful where income not evenly distributed.
Secured or unsecured.
Flexible
However time and expense.

Question 13

Contractual terms

Answer 13

Term loans and revolving credit facilities involve complex contracts -

Terms;

Payment to borrower -
Initial clauses set out
amount
currency
type
availability period which loan can be taken.

Bank must provide (committed facilities)

Repayment -
May provide
whole loan at end of term
equal instalments over term of loan or
unequal instalments with final instalment being largest (balloon repayment).

Interest - expressly stated.
Variable = floating.

Express covenants -
borrower usually obliged to seek equity finance as opposed to further debt finance.

Usual covenants -
limitation of dividends
minimum capital requirements (current assets exceed current liabilities)
no disposal of assets or change of business
no further security over assets (without consent)
provision of information on business.

Bank does not want to be found as a shadow director.

Implied -
only implied if necessary to give business efficacy to contract

Default -
will contain in contract

Debentures.-
loan agreement in writing registered at companies house.

Secured debt -
unsecured - pari passu principle.

Question 14

Security

Answer 14

Business benefit as lower rate of interest

CA - charge umbrella term
LPA 25 - mortgage (any charge or lien over property).
IA - security - mortgage, charge lien or other security.

Must be registered at Land Registry if over land.

Question 15

Borrowing money - considerations

Answer 15

Unrestricted objects - no restriction on granting security if unamended. S30(1).

Before 2009 -
memorandum must be checked.

If restriction - special resolution.

MA3 - director authority.

Question 16

Lender considerations

Answer 16

No restriction on company granting security and directors have authority.

Inspect articles, search Companies House and request copies of board resolutions.

Search for charges at (on CH) and ensure value in property.
S859 - registrar must include certified copy of instrument creating charge in register.

Will be able to see -
date of creation of charge
amount secured
property subject
who holds charge.

If over land - Land Registry search to check title and pre-existing charges.

IP - Title at Intellectual Property Office

Winding up search at Companies Court to check insolvency proceedings.

What may be secured -
Most assets LLP or company own -
land
tangible property
intangible property

Question 17

Types of security

Answer 17

Mortgages - highest form. -
over land, buildings, machinery, aircraft, ships and states.
Mortgage (EXCEPT LAND) transfer of legal ownership form mortgagor to mortgagee.
Right to possession.

Charges - do not transfer legal ownership from chargor to chargee.
Immediate rights over asset should fail to repay.

Fixed charges -
over property.
One for each asset.
Cannot dispose without consent.
Keep in good condition.
If into receivership or liquidation - have right to sell before other claimants.
First holder - sell and pay proceeds.
Second holder - remainder

Floating charges -
Where company or LLP needs to sell assets.
Secures group such as stock.
Can create more than one over same.
-equitable charge over whole or class of company/LLP assets
-assets subject to charge constantly changing
-company LLP retains freedom to deal with assets in ordinary course of business until crystallises.

Crystallises when;
-chargor goes into receivership
-chargor goes into liquidation
-chargor ceases to trade
-any other event occurs which is specified in charge document.

Can no longer deal with asset on crystallisation.

Book debts -
money owed by debtors.
May be charged (floating).
Fixed where control and proceeds paid.

Advs of floating -
maxim amount to borrow.
May be taken over whole business.

Disadvs - fixed generally take priority.
May sell stock (get fixed over stock to compensate)
Preferential creditors take priority.

Question 18

Other securities

Answer 18

Personal guarantees

Pledge - asset physically delivered by debtor to creditor to serve as security. Creditor has right to sell

Lien - right to physical possession

Retention of title - does not get full title until pay full price.

Question 19

Terms in charging documents

Answer 19

Security -
what type. Borrower charges property to lender.

Representation and warranties -
series of contractual statements relating to assets. Reveal all information (e.g. free from charges).

Covenants -
e.g.
maintained value

Enforcement -
when becomes enforceable.
Lenders powers -
E..g. qualified floating charge holder - empowered to appoint administrator without petitioning court.

Procedural matters for companies issuing debentures -
may have to suspend provision in articles by ordinary
or amend by special

Registration -
after 2013 -
voluntary (compulsory before).
Company or person interest may decide to register.

Registration process -
Within 21 days - company or person interested must file statement of particulars (MR01), certified copy of instruments and fee

Once delivered must register charge and include certified copy on register

Registrar must also give person who delivered documents who delivered documents certificate of registration

Form MR01 and certified copy of charing document out on company’s file - available for public inspection.

If delivered in time - valid against creditors or administrator of company

Copy of charging document and form MR01 kept available for inspection at SAIL or registered office. Failure criminal offence (does not affect validity of charge).

Over land must be registered at land registry.

Failure to register - voids against liquidator or administrator or company other creditors (s859H(3) CA 2006). Company still obliged and repayable immediately, but lender cannot enforce.

If period missed or details supplied inaccurate, same consequences apply.
Court may extend if due to accident or inadvertence or if it would not prejudice position of other creditors.
If application successful, charge have priority from date of actual registration.
Also power to rectify or replace document on register.

Question 20

Redemption of loan

Answer 20

MR04 to companies house (not obliged to).

Release -
lender releases -
Form MR04
Statement from registrar - released or no longer belongs to company.

Question 21

Remedies of debenture holder

Answer 21

Provided all charges registered properly under s859A CA;
- fixed charge or mortgage priority over floating of same asset.
-if more than one registered charge or mortgage on same asset - priority in order of creation
-more than one registered floating charge over same asset - have priority on order of creation.

Subordination -
creditors themselves choose priority.

Question 22

Negative pledge

Answer 22

Clause prohibits company from creating later charges with priority to the floating charge without permission.

If does and has actual knowledge then will be subordinate.
Negative pledge on form MR01 - sent to CH and clause will be in certified copy of charging document delivered to Registrar.
Constructive knowledge not sufficient.
May be liable for tort of inducing breach of contract

May be covenant there is no negative pledges - if not true contract in breach and may be terminated immediately

Question 23

Execution of documents

Answer 23

Contracts -
company seal or behalf or person acting under authority (express or implied).

Deeds -
affixing seal or
signatures of two authorised signatories (director or secretary) or director if company in presence of witness who attest.

Must be delivered as a deed. (clear on face it is a deed).

MA49 - if use seal document must also be signed by at least one authorised person (director, secretary or other) and a witness attests in his presence.

Question 24

Accounts and regulations

Answer 24

Accounts-
help prepare financial reports.
Standardised
Audited accounts at Companies House

Taxation -
PAYE, NI records, HMRC - VAT records

Accounting standards -
UK financial reporting council produced financial reporting standards.
Failure disciplinary action by governing body of professional in question.
International standard by International Accounting Standards Board.

Income - earns from trading or offering services

Expenses - items business paid for, benefit from for a short time

Assets - owns or has right to own.

Liability.- owes

Question 25

Double entry bookkeeping

Answer 25

Left-hand - DR (debit)

Right-hand CR (credit).

Question 26

Final accounts

Answer 26

Profit and loss - how profitable.
Income - Expenses

Balance sheet - what worth, assets and liabilities.
Headed with date of preparation.
Shows how much worth on that date.
Assets
Less
Liabilities =
Net worth of business.

Employment of capital - where money is now
Capital employed - where money originally came from.

Assets - into fixed and current
Fixed - used to run effectively (premises and machinery)
Current assets (short-term) - stocks,debts and cash.

Liabilities -
Current - repayable in 12 months
Long-term - more than 12 months.
Appear in increasing order of liquidity
Net current assets shows liquidity.
Net assest - subtract short-term and long-term from fixed and current assets. Equal to amount owing to owner as capital at end of year.

Capital employed - shows value to owner. Consists of balance on capital account (amount put into business by owner), net profit from profit and loss.
Drawing accounts - money withdrawn.
Balance on drawing deducted from other figures in capital employed.

Trading accounts -
business which buy and sell goods have preliminary account.
Gross profit by subtracting cost of sales from income received
Gross then transferred to profit and loss account.

Prepared once a year at end of accounting period.
Recorded in period in which they relate rather then when payment or receipt occurs.
Must include all expenses even if no bill.

Question 27

Adjustments

Answer 27

When final accounts, have tone adjustment to trial balance.

Such as;

Oustanding expenses -
in trial when paid.
Unpaid for final included as adjustment.
in profit and loss as expense and in balance sheet as additional current liability under accruals

Prepayments -
payment made in advance.
Balance sheets as current assets called pre-payments.
Reduce value in expense section on profit and loss.
E.g. bought something to use in next financial year.

Work in progress -
work solicitors carried out but not submitted bill
Appear in additional income in profit and loss account for current year as additional current asset.

Closing stock-
stock remaining.
Addition item in current assets section of balance sheet.

Bad and doubtful debts -
Debtors classed as current assets.
Believe to be ever paid ‘bad debts’
No longer shown on balance sheet on debtors figure.
Doubtful debtors - those who may not pay - entered into expense section of profit and loss account as provision for doubtful debts and subtracted from debtors figure on balance sheet .

Depreciation and revaluation -
shown In profit and loss as expense which reduces net profit.
Directors determine rate.
If do not tend to depreciate - in accounts at acquisition value.
may revalue as figure may not be accurate.

Disposing of assets
fixed asset disposal.
Balance sheet - fixed asset figure reduce, cash increase.
If more than figure in accounts - shown in profit and loss account as profit. If less profit and loss about as reduction of net profit.

Question 28

Analysing accounts

Answer 28

only show what happened and not future performance.

Check date of balance sheet

look at accounts from previous years

Check how valuations have been carried out.
-freehold increase, business may be worth more if not valued.
Closing stock in trading. (may be damaged etc..).

Debtors figure - may not pay

Overdraft - debtors sheet, however banks do not tend to demand repayment.

Exceptional items - distort -
major investment in machinery which may not take effect yet.

Question 29

Profitability

Answer 29

Profit and loss account.

Balance sheet shows whether can pay debts.
Can only really use current assets.
If cannot pay as fall due will be deemed insolvent.

Liquid?
Cash, debts reasonably (debt factor purchase peoples debts for less).

Question 30

Company accounts

Answer 30

Shares-

Issuing shares -
Share capital account -
capital and reserces -
par value - 1 for 1
or premium - now worth more than nominal value.

Maintenance of capital -
Shares sold to third parties not shown - personal transaction.

Profit and loss account -
- salaries (even directors) expense on profit and loss.

Appropriation of profit - main purpose taxation, dividends and retention of profits.

Taxation -
Not shown on unincorporated.
Companies in accounts.
Larger - two instalments during accounting period.
Smaller - nine months after end of accounting period.
Profit and loss show certain sum due.
Tax due to HMRC appear on balance sheet as current liability.

Question 31

Partnership accounts

Answer 31

Share of profits -
share in accordance with agreement.
may receive salary, rest divided among partners on terms of agreement.

Appropriation account - shows how net profit divided between partners.

Current account - separate for each partner. Net profit owed to proprietors.

Separate capital - keep original contributions identifiable.

Balance sheet -
capital and current account each partner shown separately on balance sheet in capital employed section.

If partner leaves - net profit apportioned between period before and period after. Two accounts prepared. First show allocation of profit earned before change and second after change in accordance with shares set out in agreement.

Tax - submit own tax returns claiming own personal allowances.

Question 32

Company accounts

Answer 32

Issuing shares -
share capital accounts - all contributions
Balance sheet - ‘capital and reserves’
Par value
Or premium if worth more than £1 nominal value.

Maintenance of capital -
must be maintained .
Selling to third parties not recorded

Company profit and loss account - similar to sole trader.
trading expenses and figures
Directors salary and salaries on expenses

Appropriation of profit -
Net profit used for taxation dividend and retention profits

Taxation -
tax not shown in accounts of unincorporated
Lagre companies - two instalments of corporation tax
Small nine months after end
Profit and loss show certain sum needed to pay corporation tax.

Tax due to HMRC appear on balance sheet
When paid ‘provision for tax’ will disappear from current liabilities section and cash will decreased in current assets section.

Dividends - cash figure adjusted in profit and loss

Retained profit -
balance of net profit after tax and dividends retained in business.
Profit and loss reserve.
Does not form prert of capital.

Question 33

Company balance sheet

Answer 33

Capital and reserves -
owes to shareholders if company would up.
Revenue and capital (capital cannot be paid to shareholders).

Profit and loss reserve -
profits after tax and after payment of any dividends.
Common to be labelled to show reasons for retention.

Consolidated accounts -
parent companies produce showing groups profits, losses, assets and liabilities

Question 34

Regulation

Answer 34

Statutory -
Micro companies, small and medium sized less onerous.

Medium.- balance sheet not more than 18m, turnover not more than 36m and no more than 250 employees in one financial year

Must keep adequate accounting records and prepare accounts each financial year.
Directors must not approve unless satisfied give true and fair view of assets.

Must file to Register and send copy to shareholders, debenture holders and anyone else entitled to receive GM notice.

Small and dormant exempt .

10% or more nominal share holding can require audit

FRS102 - Financial Reporting Standard -UK and Ireland -
IASB

CA - Companies Act Individual Accounts or International Accounting Standards Individual Accounts - FRS102 and IFRS respectively.
Preceding year accompanied with current.

CA Individual Accounts -

Profit and loss separate income, expenses and profit from other items such as finance costs, see how well they are in trading activities.
Administration expenses - stops profit and loss being complicated. (groups together expenses into categories).

Assets rather than employment of capital

IFRS -
set out minimum requirements rather than format.

Additional document required called ‘Reports and Accounts’

Contain -
Strategic report
Chairs report
Directors report
Auditors report