Business Law and Practice - Raising Finance

Question 1

Methods of Raising Finance

Answer 1

Equity finance: sale of shares to investor

Debt finance: company obtains loan

Question 2

Equity Finance

Answer 2

Subscription agreement: persons signing a Memorandum of Association agreeing to buy shares in the company after it is formed (subscribers)

Shares have a nominal value or par value stipulated in the articles

Money paid in by shareholders is held in a share capital account - cannot be returned to shareholders unless on liquidation or other limited circumstances

Issuing shares at a premium: i.e. for more than nominal value. Money company receives above the nominal value is kept in a premium share capital account. To return this various rules must be followed

Shares can also be issued for other consideration such as property (does not have to be for cash)

Question 3

Pre-emption right

Answer 3

Shareholders have the right to purchase new shares being offered for cash in the same proportion as they currently own the shares

E.g. if you currently own 100 shares and another 100 are being sold, you have the right to purchase 50

Companies Act provides that shareholders must be given 14 days to decide if they want to purchase the shares - only after that can shares be sold to a third-party

Can be disapplied by a special resolution

Question 4

Transfer of shares from existing shareholder to third-party

Answer 4

Company does not receive any finance - shareholder does

Directors can refuse to register share transfer if articles allow them to do so - model articles give directors can absolute discretion to refuse

Question 5

Debt finance

Answer 5

Company borrows money - creditor has no ownership rights but has a contract with the company

Directors make decision to borrow money, not shareholders - unless there is an exception in the articles (model articles do not provide an exception)

Loan guaranteed against assets (fixed and floating charges)

Question 6

Fixed charge

Answer 6

Taken over assets which have a long lifetime in the company (e.g. machinery)

Company cannot dispose of asset without lenders consent

Rank higher than floating charges

Fixed charges rank in order they were created (not when they were registered) provided they were valid (registered within 21 days)

Question 7

Floating charge

Answer 7

Taken over assets which change regularly (not fixed to particular assets)

Company free to sell the assets

If loan defaulted on the charge fixes on what is in company’s inventory at that time

Question 8

Additional Share Allotment

Answer 8

For companies incorporated after 2009 directors automatically have the power to allot additional shares provided:

1. The company only has one class of shares; and
2. There is no restriction removing this power in the articles

Otherwise the directors must seek permission from shareholders via an ordinary resolution