Business (Equity Finance)

Question 1

What are shares?

Answer 1

Shares are units of ownership in a company (bundles of rights)

The incentive is recipes of income by dividend, and a capital gain by growth in value of the company and individual shares (upon sale of the shares).

Question 2

What is share capital?

Answer 2

Share capital is the total value of the shares issued by a company, used to fund its operations and growth.

Question 3

What is the nominal or par value?

Answer 3

The nominal/par value is the minimum subscription price.

Common nominal values for ordinary shares: 1p, 5p or £1

A share may not be allotted at a discount to its nominal value.

Question 4

Can a share be allotted at a premium?

Answer 4

Yes. A share may be allotted for more than nominal value

The excess is known as the premium.

Question 5

What is a called up/paid for share?

Answer 5

Shareholders need not pay the full amount immediately.

The amount of nominal capital paid is the ‘paid up share capital’ and the amount outstanding can be demanded by the company anytime.

Once demanded, ihe payment has been called.

Called up share capital is the amount of the calls made on a company’s shares.

Question 6

What are treasury shares?

Answer 6

Shares that have been bought back by the company itself and are held by the company.

The company can then sell those shares out of the treasury, or choose to cancel treasury shares or transfer them to an employee share scheme.

Question 7

What are the different types of shares?

Answer 7

The main types of shares are ordinary shares and preference shares.

Question 8

What are ordinary shares?

Answer 8

Default share position.

They carry
* A right to vote in the GM
* Right to a dividend if one is declared
* A right to a portion of surplus assets on a winding up.

Question 9

What are preference shares?

Answer 9

• The shareholder will rank as higher priority than an equivalent payment to ordinary shareholders when there is payment of dividend or return of capital on winding up.
• They are usually non-voting
• Unless stated otherwise, a preference share is cumulative. If a dividend is not declared for a year, the right to the preferred amount is carried forward and will be paid when profits are available.

Question 10

Can a preference shareholder participate (vote?

Answer 10

Preference shareholders are usually non-voting.

However, ‘Participating’ preference shareholders can participate as ordinary shareholders (1) in surplus profits available for distribution after they have received their own fixed preferred dividend; and (2) in surplus assets upon winding up.

Question 11

Where are the rights attaching to each class of share set out?

Answer 11

Articles of Association

Question 12

Can the rights attaching to each share class be varied?

Answer 12

If an attempt to alter the Articles is made that varies existing class rights, the resolution will be ineffective unless in accordance with the variation provision of the Articles.

Where no provision is found, they can only be varied…
* By written permission of holders of at least 75 % of the issued shares of that class; or
* By special resolution passed at a separate general meeting of the** holders of that class.**

Shareholders holding 15% of the relevant share can apply to court within 21 days of the resolution to have the variation cancelled if the variation unfairly prejudices the shareholders of the class.

Question 13

What are dividends?

Answer 13

Dividends are payments made by a company to its shareholders, usually as a distribution of profits.

Final Dividends are recommended by directors and declared by ordinary resolution of the GM following financial year end.

Interim Dividends do not need GM approval usually.

Question 14

What is share allotment?

Answer 14

Contract between company and a new/existing shareholder whereby the company agrees to issue new shares in return for the purchaser paying a subscription price.

Question 15

Who can a private company limited by shares (LTD) offer shares to?

Answer 15

It cannot offer its shares to the public.

They can only offer shares to targeted investors and not the public indiscriminately.

Question 16

Who needs to publich a prospectus giving investors details about the company each time they issue a share?

Answer 16

Public Companies.

In an offer for shares by a private company, a prospectus is not usually needed.

Question 17

What is the difference between transfer and transmission of shares?

Answer 17

Transfer of shares refers to the voluntary transfer of ownership between parties, while transmission of shares occurs due to legal reasons such as death or bankruptcy.

Question 18

What is a share transfer?

Answer 18

A contract to sell existing shares in the company between existing an shareholder and the purchaser.

Unlike allotment, there is no new issue. The company is not a party to the contract (unless selling treasury shares).

Question 19

What are the procedures for transferring shares?

Answer 19

• Stock transfer form.

Beneficial title passes on execution of the transfer form signed by the transferor

Legal title passes on registration in the register of members in the company.

• The stock transfer form must be stamped before the new owner can be registered.
• Stamp duty is payable by the buyer at 0.5% of the consideration rounded up to nearest £5. No stamp duty payable where less than £1000.

Question 20

How can a share transfer be restricted?

Answer 20

• In the MA, the directosr may refuse to register the transfer of a share. The company must give reasons.
• Pre-Emption clauses on a transfer may be inserted into the articles requiring that a shareholder wishing to sell shares must offer them to existing shareholders before going to outsiders

Question 21

What happens if a shareholder dies?

Answer 21

If the shareholder dies, their shares automatically pass to their personal representatives.

Question 22

What happens if a shareholder is made bankrupt?

Answer 22

If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.

Question 23

What is stage 1of allotment?

Allotment Procedure

Answer 23

Is there cap on the number of shares issued?

If yes….
* Incorporated under CA 1985 > cap can be removed by an ordinary resolution of the general meeting.

• Incorporated under CA 2006 > there is no authorised share capital (no cap) therefore there is no issue for step 1 unless a provision limiting number was inserted.

Stage 1: CAP?

Question 24

What is Stage 2 of Allotment?

Allotment Procedure

Answer 24

Do the directors have authority to allot?

• Private company with only one class of shares = directors have automatic authority to allot new shares of the same class unless prohibited by Articles;
• For all other companies, directors need to be granted authority by shareholders by way of ordinary resolution unless Articles sat otherwise (s.551)

Stage 2: Authority

Question 25

What is stage 3 of allotment?

Allotment Procedure

Answer 25

Must pre-emption rights be disapplied on allotment?

Pre-emption rights mean new shares should be offered pro rata to existing shareholders before new outside investors have the opportunity
….
* A company may exclude pre-emption rights by a specific provision in its articles;
…
* Pre-emption rights may be misapplied by a shareholder special resolution
…

Stage 3: Disapplied?

See flashcard on when a share is subject to pre-emption rights

Question 26

When is a share subject to pre-emption rights and therefore must be offered to existing shareholders?

Relates to Stage 3 of Allotment

Answer 26

Step 1: Is the allotment concerning an ordinary share, or converting securities into ordinary shares?
…

No > Not Pre-Emption Right
Yes > Step 2

…
Step 2: Does the class of share carry (a) a right to receive dividend; (b) a right to capital payments on winding up; and (c) these rights are both capped
….
No > (i.e. they are not both capped) = Equity Security = Not Subject to Pre-Emption Right
…
Yes > (capped as to both dividend and capital) = Not Equity Security = Not Subject to Pre-Emption Right
…
*For example, if you have the right to participate, it isn’t capped! For example, a right to dividends of £35,000 plus participation (50% of the surplus after their dividend payment) isn’t capped and is an equity security. *

Question 27

What is Stage 4 of Allotment?

Answer 27

Must new class rights be created?

A company may wish to create a new class of shares (e.g. preference shares). To do this, the company must insert a provision in the Articles dealing with the rights attached to the new shares.

To alter the articles, special resolution of the shareholders is needed.

Stage 4: Create New Class Rights?

Question 28

What is stage 5 of allotment?

Answer 28

Directors must pass a board resolution to allot the shares.

A general meeting will be needed prior to the board meeting if shareholder resolutions are required

Stage 5: Allot Shares

Question 29

What are the five stages of share allotment?

CADCA

Answer 29

1. Is there cap on the number of shares issued?
2. Do the directors have authority to allot
3. Must pre-emption rights be disapplied on allotment?
4. Must new class rights be created
5. Directors must pass a board resolution to allot the shares

CADCA

Question 30

What is financial assistance in relation to shares?

Answer 30

Financial assistance refers to the provision of funds or support by a company to help a shareholder purchase shares in that company.

Question 31

Who is the target company?

Financial Assistance

Answer 31

The company whose shares are being acquired whether by transfer or issue.

In other words, the buyer is recieving the shares of the target company.

Question 32

If the target company is a public company, who is prohibited from giving financial assistance?

Answer 32

• The target company
• Any subsidiary of the target company, whether private or public.

Question 33

If the target company is a private company, who is prohibited from giving financial assistance?

Answer 33

Any public company subsidiary of the target company.

Question 34

What does financial assistance look like?

Answer 34

• Gift
• Guarantee
• Security
• Indemnity
• Release or Waiver
• Loan

Note, assistance must actually be given, it must be financial in nature. It can be direct (e.g. giving a loan) or indirect (e.g. guarantee given to a bank for a loan from the bank to buyer of the shares)

Question 35

What transactions are exempt from the financial assistance prohibition?

Answer 35

1. Money lending in ordinary course of business; and
   …
2. Assistance in respect of employee share scheme

… if….

a. the company is a private company; or

b. the company is a public company and the net assets are not reduced by giving assistance or the reduction is provided out of distributable profits.

Question 36

What is the doctrine of maintenance of share capital?

Answer 36

Once a shareholder has invested, that cannot normally be returned to the shareholder.

A company is not usually permitted to return capital

This means…
…
1. Dividends may only be paid from distributable profits, not capital; and

2. Companies must not purchase their own shares

Question 37

What are the two exceptions to the ban on share buy back?

Answer 37

1. A company may purchase its own shares where a court order is made following a successful shareholder petition for unfair prejudice.
   …
2. A company can buyback its own shares (or redeem redeemable shares) provided it follows CA 2006 procedure; and

Question 38

How can a company fund a buyback?

Share Buy Back

Answer 38

The company may use…
* distributable profits;
* proceeds of a fresh issue of shares; or
* capital.

There are strict rules that apply to each category….

Question 39

What is a stock exchange?

Answer 39

A stock exchange is a marketplace where shares of publicly listed companies are bought and sold.

Question 40

When and how can a company buyback of shares out of profits or proceeds of fresh issue

Answer 40

If…..
* The shares must be fully paid up
* The company must continue to have issued shares other than redeemable and treasury shares following purchase
* The purchase is not restricted or prohibited (e.g. article limit)

To buyback the shares…
* Board Resolution to draft the contract, call a GM and approve form of notice -
* Share the contract with GM
* GM - Ordinary Resolution

Question 41

When and how can a company buyback of shares out of capital?

Answer 41

• Only private companies - Public companies can never use capital to purchase sits shares.
  …
• Companies must first use any money available from distributable profits or proceeds of a fresh issue of shares before using capital.
  …
• The shares must be fully paid up
  …
• A directors statement of solvency must be prepared supported by auditors report.
  …
• Shareholder ordinary resolution to approve contract and special resolution to approve payment must be passed within a week after directors sign the statement of solvency.

Question 42

When buying back shars out of capital, what is the timing?

Answer 42

• Share purchase can take place no earlier than 5 weeks, and no later than 7 weeks after the date of the special resolution.
• File return, notice of cancellation, statement of capital within 28 days

Question 43

When buying back shars out of capital, what is the notification requirment??

Answer 43

Within 7 days of passing the special resolution, the company must give notice to creditors by
…

• Publishing in the Gazette
  …
• Publishing in a national newspaper; or giving notice to each creditor; and
  ….
• Filing copies of the directors solvency statement and auditors report at Companies House. Dilution of shares occurs when a company issues additional shares, reducing the ownership percentage of existing shareholders.

Question 44

At a shareholder meeting to consider a recommended dividend, what can the shareholders do?

Answer 44

• Approve the directors’ recommendation
• Reject the directors’ recommendation
• Declare a dividend smaller than that recommended.

The Model Articles contain a provision which prevents shareholders from declaring a dividend which exceeds the amount recommended by the directors.