Business (Equity Finance) Flashcards
What are shares?
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).
What is share capital?
Share capital is the total value of the shares issued by a company, used to fund its operations and growth.
What is the nominal or par value?
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.
Can a share be allotted at a premium?
Yes. A share may be allotted for more than nominal value
The excess is known as the premium.
What is a called up/paid for share?
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.
What are treasury shares?
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.
What are the different types of shares?
The main types of shares are ordinary shares and preference shares.
What are ordinary shares?
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.
What are preference shares?
- 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.
Can a preference shareholder participate (vote?
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.
Where are the rights attaching to each class of share set out?
Articles of Association
Can the rights attaching to each share class be varied?
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.
What are dividends?
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.
What is share allotment?
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.
Who can a private company limited by shares (LTD) offer shares to?
It cannot offer its shares to the public.
They can only offer shares to targeted investors and not the public indiscriminately.
Who needs to publich a prospectus giving investors details about the company each time they issue a share?
Public Companies.
In an offer for shares by a private company, a prospectus is not usually needed.
What is the difference between transfer and transmission of shares?
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.
What is a share transfer?
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).
What are the procedures for transferring shares?
- 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.
How can a share transfer be restricted?
- 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
What happens if a shareholder dies?
If the shareholder dies, their shares automatically pass to their personal representatives.
What happens if a shareholder is made bankrupt?
If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.
What is stage 1of allotment?
Allotment Procedure
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?
What is Stage 2 of Allotment?
Allotment Procedure
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
What is stage 3 of allotment?
Allotment Procedure
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
When is a share subject to pre-emption rights and therefore must be offered to existing shareholders?
Relates to Stage 3 of Allotment
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 = Subject to Pre-Emption Rights and need disapplying
…
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. *
What is Stage 4 of Allotment?
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?
What is stage 5 of allotment?
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
What are the five stages of share allotment?
CADCA
- Is there cap on the number of shares issued?
- Do the directors have authority to allot
- Must pre-emption rights be disapplied on allotment?
- Must new class rights be created
- Directors must pass a board resolution to allot the shares
CADCA
What is financial assistance in relation to shares?
Financial assistance refers to the provision of funds or support by a company to help a shareholder purchase shares in that company.
Who is the target company?
Financial Assistance
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.
If the target company is a public company, who is prohibited from giving financial assistance?
- The target company
- Any subsidiary of the target company, whether private or public.
If the target company is a private company, who is prohibited from giving financial assistance?
Any public company subsidiary of the target company.
What does financial assistance look like?
- 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)
What transactions are exempt from the financial assistance prohibition?
-
Money lending in ordinary course of business; and
… - 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.
What is the doctrine of maintenance of share capital?
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
What are the two exceptions to the ban on share buy back?
- A company may purchase its own shares where a court order is made following a successful shareholder petition for unfair prejudice.
… - A company can buyback its own shares (or redeem redeemable shares) provided it follows CA 2006 procedure; and
How can a company fund a buyback?
Share Buy Back
The company may use…
* distributable profits;
* proceeds of a fresh issue of shares; or
* capital.
There are strict rules that apply to each category….
What is a stock exchange?
A stock exchange is a marketplace where shares of publicly listed companies are bought and sold.
When and how can a company buyback of shares out of profits or proceeds of fresh issue
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
When and how can a company buyback of shares out of capital?
- 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.
When buying back shars out of capital, what is the timing?
- 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
When buying back shars out of capital, what is the notification requirment??
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.
At a shareholder meeting to consider a recommended dividend, what can the shareholders do?
- 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.
What is an equity security?
All ordinary shares are equity securities
The only shares that are not equity securities are
* Non-participating shares
* Capped participating shares
In other words, there is either…
- No right to receive dividend or capital payments on winding up; or
- A capped right to receive dividend both capital payments on winding up. Note, both rights must be capped. If only one right (e.g. capital payements) are capped, this will be an equity security.
When shares are issued at a premium, share capital and share premium account show on the balance sheet? How do these two interact?
For example, X ltd issues 5,000 new ordinary shares at a nominal value of £2 each at a price of £8 per share. Before the share issue, the company’s balance sheet showed a share capital of £100,000 and a share premium account of £30,000.
The share capital account increases only by the nominal value. You do not add the the entire amount received, rather detract the premium (e.g. 5000 x £2 = £10,000 = £110,000)
The share premium account increases by the premium only (e.g. £6 x 5000 = £30,000 = £60,000)
What resolution is needed to remove or amend a cap on the number of shares that can be issued if included within a CA 2006 company?
Removing or altering the cap requires amending the articles of association, which requires a special resolution.
