BLP - Week 5 Equity Finance Flashcards
What is share capital?
- Money raised by the issue of shares.
- It is contributed by investors and represented by shares issued to them.
What do shares represent?
A bundle of rights.
What is the most common type of share?
Ordinary share.
What rights do ordinary shares provide?
- Entitlement to vote at shareholder meetings, AND
- Right to receive a share of profits, AND
- Right to surplus assets after winding up.
- Defined by law as shares with unlimited rights to dividends and capital distribution when a company is wound up.
What is the nominal or par value of a share?
The fixed minimum subscription price for that share.
What happens if a share does not have a fixed nominal amount?
The allotment of that share is void.
What is issued share capital?
The total amount in value (nominal and premium) of all shares in issue at any time.
What is paid-up share capital?
The amount of money a company has received from shareholders in exchange for shares.
When is the full legal title of the shares achieved?
Once a person’s name is entered on the company’s register of members.
What are called-up shares?
Shares for which payment has been requested from the shareholder.
What defines the rights of different classes of shares?
The company’s Articles.
What are preference shares?
Shares that give priority in dividend payments and/or return of capital upon winding up.
What does it mean if preference shares are cumulative?
- Dividends accumulate for future payment if not declared in a given year.
- Preference shares are cumulative unless stated otherwise.
What is the difference between participating and non-participating preference shares?
- Participating: allow holders to share in surplus profits and assets available for distribution after receiving their fixed dividend and/or surplus assets on winding up.
- Non-Participating: Shareholders receive a fixed dividend only.
How do participating preference shares work: Shareholders receive a fixed 5% dividend on the par value of shares per annum (£1).
- 5p per share annually.
- Paid before ordinary shareholders.
- Also entitled to share in any remaining dividends with ordinary shareholders.
How do non-participating preference shares work: Fixed 5% dividend on the total subscription price (£2).
- 10p per share annually.
- Paid before ordinary shareholders.
- Do not receive any additional dividends beyond the fixed rate.
What are the two types of dividends?
- Final dividends
- Interim dividends
What kind of approval needed for final dividends?
Recommended by directors and approved by shareholders by OR after the financial year.
What kind of approval needed for interim dividends?
MA (/check articles if allowed) give the directors the power to decide to pay interim dividends if the company has sufficient distributable profits. Doesn’t need shareholder approval/OR.
What is required for a dividend to be payable?
The company must have enough distributable profits.
Distributable profits = accumulated profits minus accumulated losses.
What is the difference between allotment and transfer of shares?
- Allotment: Issuing new shares to a shareholder.
- Transfer: Selling existing shares between shareholders.
What happens to shares upon a shareholder’s death?
Shares pass to their personal representatives.
What is the method of transferring shares?
Using a stock transfer form signed by the seller and submitted with the share certificate.
When does beneficial ownership and legal ownership pass from seller to buyer?
- Beneficial ownership - upon signing the stock transfer form
- Legal ownership - once the company registers the new shareholder in the register of members
What is the five-step process for allotting shares?
- Check for cap on amount of shares that can be issued
- Check authority to allot
- Determine if shares are equity securities. If yes, disapply pre-emption rights.
- Check for creation of new class of shares
- Board resolution to allot shares
CATS AND DOGS NIBBLE BONES
Under CA 2006, do directors need shareholder approval to allot shares of the same class?
No, unless the Articles restrict it.
Under CA 1985, what is required to remove or amend the cap?
An ordinary resolution, despite it involving amending the Articles.
Do the company’s directors need authority to allot under CA 2006?
- For private companies with one class of shares: directors do not need shareholder approval, unless the Articles restrict it.
*For other companies/all other cases, shareholder approval via ordinary resolution is needed, unless the Articles require a higher majority.
Do the company’s directors need authority to allot under CA 1985?
An ordinary resolution is required to authorise the director to rely on this power.
What is the maximum expiry date for authority granted to allot shares?
No more than 5 years from the date of authorisation.
What are pre-emption rights?
Rights of first refusal for existing shareholders to purchase new shares before new investors.
What must happen before new equity securities are offered to new investors?
They must be offered to existing shareholders holding ordinary shares first.
What are the types of equity securities?
- Ordinary shares OR
- Rights to subscribe for, or convert, securities into ordinary shares
How can pre-emption rights be disapplied?
- General disapplication by a special resolution
- Private companies with one class of share through a special resolution
- Specific disapplication for a particular share allotment [rare]
- Permanent exclusion in Articles [rare]
What is required to create new class rights for shares?
Amendment of the Articles via a special resolution under CA 2006.
What must directors do to allot shares?
Pass a Board resolution.
When is shareholder resolution not needed before a board passes resolution to allot shares?
- There’s no cap on share issuance, and
- The directors have authority under s 550 or s 551 CA 2006 to allot shares, and
- Pre-emption rights are followed or disapplied, and
- Class rights for new shares exist in the Articles.
When do financial assistance rules apply?
- Acquisition or sale of shares
- Issue of shares
Which companies are prohibited from giving financial assistance?
If target is public company: target and its subsidiaries (public or private).
If target is private company: a private company can’t give financial assistance if it has a public company subsidiary.
What does giving financial assistance include?
- Gifts
- Guarantees or security for loans
- Loans
- Any action that reduces company assets significantly
Are there exceptions to the prohibition on financial assistance?
- Purpose exceptions: if its main purpose is not to help with the acquisition, or if helping with the acquisition is only a small part of a larger goal.
- Unconditional exceptions: such as dividend payments.
- Conditional exceptions: such as money lending in the normal course of business or employee share schemes.
What are the consequences of carrying out prohibited financial assistance?
- Fines for the company
- Fines or imprisonment for company officers
- Transactions may be declared void
What is the doctrine of maintenance of share capital?
Shareholders cannot get their capital back directly from the company.
Important effect of principle:
* Dividends can only be paid from distributable profits, not capital, and
* Companies generally cannot buy back their own shares.
What are the exceptions to the principle of maintenance of share capital?
- Companies can buy back shares under CA 2006 rules
- Court order after successful shareholder petition for unfair treatment
What are the two methods for a company to buy back shares?
- Redemption of redeemable shares
- Purchase of own shares (buyback)
How can companies fund share buybacks?
- Distributable profits
- Proceeds from new share issues
- Capital (highly regulated)
What conditions must be met for a company to buy back shares using profits?
- Articles of Association do not prohibit purchases
- Shares are fully paid up
- Company has other issued shares after buyback
What additional conditions apply for buybacks out of capital?
- Articles of Association must not prohibit it
- Accounts must be prepared within three months
- Distributable profits must be checked
- Directors’ statement of solvency and auditor’s report needed
- Special resolution must be passed within a week
What must directors confirm in their statement of solvency for a buyback out of capital?
The company can pay its debts and will remain solvent for 12 months after the buyback.
What are the notification requirements after passing a special resolution for payment out of capital?
- Publish a notice in the Gazette
- Publish in a national newspaper or notify creditors
- File copies of the directors’ statement and auditor’s report at Companies House
What is the timing for a share purchase after passing the special resolution?
Between five to seven weeks.
What are redeemable shares?
Shares issued to be redeemed under certain circumstances, providing temporary membership in the company.
Is a contract required to redeem shares?
No, as details are in the Articles or determined by directors.
