BLP WK 5

Question 1

What are the three main ways a company can fund its business?

Answer 1

Equity finance, debt finance, and retained earnings.

Question 2

What is equity finance?

Answer 2

Raising funds by issuing shares, which makes the investors part-owners of the company.

Question 3

What are some of the rights that come with owning shares?

Answer 3

Voting rights, dividends (if declared), potential capital gains, and rights to surplus assets upon winding-up.

Question 4

Where are the specific rights attached to shares outlined?

Answer 4

In the company’s Articles of Association.

Question 5

What is the nominal or par value of a share?

Answer 5

The fixed value assigned to a share, such as 1p, 5p, or £1. Shares cannot be issued below this value.

Question 6

Can shares be issued at a price higher than their nominal value?

Answer 6

Yes, shares can be issued at a premium above their nominal value.

Question 7

What does issued share capital (ISC) represent?

Answer 7

The total number of shares a company has issued to date, including subscriber shares and any new shares issued later.

Question 8

When are shares considered allotted?

Answer 8

When a person gains an unconditional right to be included in the company’s register of members.

Question 9

Define called-up/paid-up share capital.

Answer 9

The portion of the share capital that shareholders have already paid. The remaining unpaid amount can be called up by the company at any time.

Question 10

What are treasury shares?

Answer 10

Shares that a company has bought back from its shareholders and holds for potential future sale or transfer.

Question 11

What are the main types of shares a company can issue?

Answer 11

Ordinary shares, preference shares, deferred shares, redeemable shares, and convertible shares.

Question 12

What rights do ordinary shareholders typically have?

Answer 12

Voting rights, the right to receive dividends if declared, and rights to surplus assets during winding-up.

Question 13

Describe preference shares.

Answer 13

Shares that give holders priority over ordinary shareholders in receiving dividends or capital repayment upon winding-up.

Question 14

Explain cumulative preference shares.

Answer 14

Preference shares where any unpaid dividends accumulate and must be paid when the company has sufficient profits.

Question 15

What are participating preference shares?

Answer 15

Preference shares that, in addition to their fixed dividend, may entitle holders to share in surplus profits or assets.

Question 16

Explain deferred shares.

Answer 16

Shares that typically do not have voting rights or rights to dividends, often issued to founders or early investors.

Question 17

What are redeemable shares?

Answer 17

Shares issued with the understanding that the company can repurchase them at a future date.

Question 18

Define convertible shares.

Answer 18

Shares that can be converted into another class of shares, typically ordinary shares, under certain conditions.

Question 19

How can rights attached to a class of shares be varied?

Answer 19

With the consent of at least 75% of the holders of that class or through a special resolution, subject to the company’s Articles.

Question 20

Can shareholders challenge a variation of class rights?

Answer 20

Yes, shareholders who oppose the variation may apply to court for relief under certain circumstances.

Question 21

What are dividends?

Answer 21

Distributions of a company’s profits to its shareholders.

Question 22

Distinguish between final and interim dividends.

Answer 22

Final dividends are declared by shareholders after the year-end, while interim dividends can be declared by directors during the year.

Question 23

From what funds can dividends be paid?

Answer 23

Dividends can only be paid from distributable profits, which are realised profits minus realised losses.

Question 24

What is the difference between allotment and transfer of shares?

Answer 24

Allotment involves issuing new shares, while transfer involves selling existing shares.

Question 25

Are private companies allowed to offer shares to the public?

Answer 25

No, private companies are prohibited from offering shares to the public. Offers must be made to specific individuals.

Question 26

When is a prospectus required for share issuance?

Answer 26

A prospectus is generally required when offering shares to the public, but not for private companies.

Question 27

What are financial promotions in the context of share issuance?

Answer 27

Invitations or inducements to invest in shares, which are prohibited unless they are approved by an authorised person or fall under an exemption.

Question 28

How are shares typically transferred?

Answer 28

Using a stock transfer form signed by the transferor and accompanied by the share certificate.

Question 29

When does legal ownership of shares pass to the buyer?

Answer 29

Legal ownership passes when the new owner is registered in the company’s register of members.

Question 30

Is stamp duty payable on share transfers?

Answer 30

Yes, stamp duty is usually levied at 0.5% of the sale price for share transfers.

Question 31

Can directors refuse to register a share transfer?

Answer 31

Yes, under the Model Articles, directors can refuse to register a transfer, but they must provide reasons for their refusal.

Question 32

What are pre-emption rights in share transfers?

Answer 32

Rights that give existing shareholders the first opportunity to purchase shares being sold by another shareholder before they can be offered to external parties.

Question 33

What happens to shares upon the death of a shareholder?

Answer 33

The shares automatically pass to the deceased shareholder’s personal representatives.

Question 34

What happens to shares if a shareholder is declared bankrupt?

Answer 34

The shares become vested in the trustee in bankruptcy.

Question 35

Briefly describe the first step in the allotment of shares procedure.

Answer 35

Check for any restrictions or caps on share issuance in the company’s Articles of Association.

Question 36

Do directors automatically have the authority to allot shares?

Answer 36

Not always. For private companies with one class of shares, directors have automatic authority unless restricted by the Articles. Otherwise, they need shareholder approval.

Question 37

What are the conditions for directors to have automatic authority to allot shares in a private company?

Answer 37

The company must have only one class of shares, and the Articles must not restrict this authority.

Question 38

What are pre-emption rights in the context of share allotment?

Answer 38

Rights that require new shares to be offered to existing shareholders first before they can be offered to outsiders, protecting their ownership stake.

Question 39

Can pre-emption rights be disapplied?

Answer 39

Yes, they can be disapplied generally or specifically by shareholder resolution, or permanently excluded in the Articles.

Question 40

What needs to be done if a company wants to create a new class of shares?

Answer 40

The Articles of Association must be amended to specify the rights of the new share class, requiring a special resolution.

Question 41

Describe the final step in the share allotment procedure.

Answer 41

The directors must pass a board resolution formally approving the allotment of new shares.

Question 42

Briefly outline the administrative requirements after share allotment.

Answer 42

File relevant resolutions and forms with Companies House, update the register of members, prepare share certificates, and update the PSC register if necessary.

Question 43

What is the main purpose of the prohibition on financial assistance for share purchases?

Answer 43

To protect the capital of public companies and prevent it from being used to facilitate the acquisition of its own shares.

Question 44

Which types of companies are subject to the financial assistance rules?

Answer 44

Public companies and private companies that are part of a group that includes a public company.

Question 45

Give some examples of transactions that could be considered financial assistance.

Answer 45

Gifts, guarantees, security, indemnities, loans, and any actions that materially reduce the company’s net assets.

Question 46

Are there any exceptions to the prohibition on financial assistance?

Answer 46

Yes, there are limited exceptions, such as when the primary purpose of the transaction is not to facilitate share acquisition, or for specific transactions like dividend payments or employee share schemes.

Question 47

What are the potential consequences of breaching the financial assistance rules?

Answer 47

Fines for the company, fines and/or imprisonment for officers, and the transaction being declared void.

Question 48

What is the maintenance of capital doctrine?

Answer 48

A principle that prevents companies from returning share capital to shareholders, except in specific circumstances, to protect creditors’ interests.

Question 49

When can a company buy back its own shares?

Answer 49

Buybacks are allowed under strict procedures outlined in CA 2006, either using distributable profits, proceeds from a fresh share issue, or capital (private companies only).

Question 50

What is the difference between buyback and redemption of shares?

Answer 50

Buyback refers to repurchasing any type of shares, while redemption specifically applies to repurchasing redeemable shares, which have pre-defined terms for repurchase.