Business Principles

Question 1

For which 3 transactions would you use the written resolution procedure to expedite because the short notice resolution procedure only saves one day?

Answer 1

1) Long term service contracts
2) Share buy-backs
3) Loans/ related transactions

Question 2

Ordinary resolution

Answer 2

More than 50% of votes (simple majority)

Question 3

Special resolution

Answer 3

75% or more votes

Question 4

Show of hands method of voting

Answer 4

1 vote per shareholder

Question 5

Poll method of voting

Answer 5

1 vote per share

Question 6

Short notice procedure for GM

Answer 6

SHs holding shares with nominal value of at least 90% of the total nominal value of the shares agree AND majority in number

Adjourns BM1 which then reconvenes after GM

Question 7

Ordinary share (most common form + default under MA)

Answer 7

• Vote at GM
• Unrestricted right to dividend of one declared (although do receive dividends after preference SHs)
• Right to portion of surplus assets of company on winding-up

Can have many classes of OS with different rights and different nominal values

Ordinary shares are always equity securities

Question 8

Nominal/ par value of share

Answer 8

Minimum subscription price (unit of ownership, NOT value of share. Market value often higher than nominal value)

Shares can be allotted at a discount (lower than nominal value) or premium (higher than nominal value)

Question 9

Issued share capital (ISC)

Answer 9

Total amount of all shares in issue (subscriber + shares issued after incorporation to new and existing shareholders)

Question 10

Paid up share capital

Called up share capital

Answer 10

Paid up = amount of nominal capital paid by SHs

Called up = aggregate amount of existing paid-up share capital + calls made on shares

(Amount outstanding (if any) can be demanded/ called by company at any time)

Question 11

Share capital

Answer 11

= money raised by issuing shares to investors

Subscription shares + newly issued shares

Question 12

Allotment of shares

Answer 12

When a person acquires the unconditional right to be included on the company’s register of members in respect of those shares

Question 13

Issue (shares)

Answer 13

Shares issued and part of ISC once shareholder is registered in company’s register of members and their title has become complete

Question 14

Time limit for completion of administrations?

Answer 14

12mos but could get extension

Question 15

Capital

Answer 15

Funds available to run the business of the company

Question 16

Share

Answer 16

= bundle of rights

• Ownership of business
• Different classes have different rights/ entitlements (see Articles)

Question 17

Incentives to buy shares

Answer 17

Dividends (income from company’s distributable profits if sufficient) + capital gain (profit when sell shares to realise their increased value)

NEITHER are guaranteed

Question 18

Treasury shares

Answer 18

= shares bought by company itself out of distributable profits. Held by the company ‘in treasury’ where they can be sold out of

Sale of them is a TRANSFER, not issue. BUT pre-emption rights and their disapplication apply

Question 19

Distributable profits

Answer 19

= company’s accumulated realised profits less its accumulated realised losses

Question 20

X2 types of dividends

Answer 20

1) Final: recommended by directors and declared by company via OR of SHs following financial year end

2) Interim: without OR/ often if company has realised an investment. Company must have sufficient distributable profits. Articles give directors power to decide to pay them usually

Question 21

Preference shares

Answer 21

= preferences as to payment of dividend if dividend declared (% of nominal value or total subscription price (nominal + premium)) +/or return of capital on winding up

• Higher priority than any equivalent payment to ordinary SHs
• Uusally non-voting but check Articles
• Presumed cumulative (dividends accumulate until there are available profits) but can be non-cumulative
• Participating (almost always issued with fixed dividend and can be cumulative) = can receive available surplus profits on top of dividend + surplus assets on winding up

Question 22

Deferred shares (‘worthless’)

Answer 22

= no voting rights, no dividend, but could get share of surplus profits once other dividends paid

Question 23

Redeemable shares (buy back)

Answer 23

= intention that company will buy back and cancel them. Terms usually specified

Question 24

Convertible shares

Answer 24

= option to convert into different class of share according to stipulated criteria

Question 25

When do long term investors of a private company realise their investment?

Answer 25

When their stake is sold, the company is sold, the company goes public, the company is wound up

Question 26

Variation of class rights - how to do?

Answer 26

Alter articles - methods:

• According to article provisions
• SHs with at least 75% of issued shares in that class consent in writing
• SR @ GM of SHs of that class

Question 27

Variation of class rights - how to oppose?

Answer 27

SHs holding 15% of relevant shares can apply to court within 21 days of resolution to have the variation cancelled (provided they didn’t vote in favour of it initially)

Variation won’t take effect until confirmed by court if such as application is made

Court wouldn’t confirm a variation that unfairly prejudices SHs of the class in question

Question 28

Allot

Answer 28

Company issues shares to SH for a price

Question 29

Transfer

Answer 29

SH sells or gifts shares to SH (new or existing)

(Although company is the only party for transfer of treasury shares)

Question 30

Transmission

Answer 30

Automatic if SH dies or goes bankrupt

Shares to PR (death)
Shares to trustee (bankruptcy)

Question 31

Fixed asset (aka non-current)

Answer 31

Tangible (building, etc - physical) or intangible (trademark etc)

Question 32

Current asset

Answer 32

Cash and assets which can be quickly turned into cash

Continually flowing through business

Eg inventory stock, trade debtors (bought on credit/ owe the business)

Question 33

Liability

Answer 33

Current (1yr) and long term (at least 1yr)

Question 34

Income

Answer 34

Sums received by business

Question 35

Expense

Answer 35

Day to day spending (revenue/ income expenditure) rather than long term assets (capital expenditure)

Question 36

What are the x5 year end adjustments made to ensure accurate record of the state of a company is kept?

Answer 36

1) Depreciation: deals with decline in value of fixed assets over time by spreading cost over its useful life. Straight line method (same charge each year, eg for shelving) vs reducing balance method (higher charge earlier on, eg for vehicles). Amortisation is depreciation for an intangible asset’s cost

2) Accuruals: business gained the benefit of something but didn’t pay for it until the following year (have to adjust for this to profits aren’t artificially inflated)

3) Prepayments: opposite to accruals - business pays for something in advance of receiving its benefit

4) Bad debts: written off debts the company will never get back. Shown on profit/ loss account

5) Doubtful debts: debts that may not be paid - treated as a liability against asset it most directly affects. Can be specific amount or a general provision of percentage of debtors that may not pay what they owe (eg due to market forces). Ringfencing used to cushion some net asset value in case doubtful debts do indeed need writing off