Business - WS5 Equity Finance (Allotment) Flashcards
What are the 2 ways that a company can raise finance?
1) Equity Finance (issuing shares to new members in return for which the company will receive consideration, ££ cash)
2) Debt Finance- Borrowing money (loan)
What is the process of issuing (allotment) of new shares?
1) Is there any cap on the number of shares that may be issued?
2) Check whether directors have authority to issue new shares
3) Check whether statutory pre-emption rights apply
4) Check whether the pre-emption rights have already been disapplied
5) If the Pre-emption rights have not been dis-applied by special article, they will need to be dis-applied by a special resolution
Explain when ‘Directors’ have authority to the issue of new shares?
Firstly, directors must make a board resolution to approve allotment, but may need prior shareholder authority to do this.
Directors will only automatically have authority:
S550: In private companies with unamended model articles of association, the directors have automatic authority to allot new shares of the same class.
The directors are ^ free to issue further shares of the same class by board resolution without reference to the shareholders.
When do directors not automatically have authority?
1) If the company has more than one class of share
2) The directors are seeking to issue more than one class of share.
Therefore if the above applies ^ and all other companies, as per s551 the directors must be granted authority to allot shares by an ordinary resolution of the shareholders.
Authority by the shareholders can be given subject to limits (check company articles) and the authority must state
1) max no. of shares the directors are allowed to issue
2) the date when the authority will expire (usually lasts up to 5 years from the date the authority is given but can be renewed)?
For companies incorporated prior 1 October 2009: The memorandum of association will set out the authorised share capital (maximum number of shares that may be issued)
Following the CA, this provision is transferred to the articles s28(1) and may be amended by an ordinary resolution. And a copy of the ordinary resolution must be filed at Companies House.
For companies incorporated on or after 1 October 2009: it is necessary to check the articles for restrictions and amend, if necessary, by special resolution. There are no such restrictions in the model articles.
What is a pre-emption right?
A pre-emption right is that a company must offer
1) Ordinary shares that it wishes to allot (NOTE. definition of ordinary is different)
2) To its existing shareholders first
3) In numbers proportionate to their current holdings
On the same or more favourable terms.
The shareholders have a right of first refusal for a period of at least 14 days.
When do pre-emption rights apply? Rule 561
1) If it is proposed that the consideration is wholly for cash only
2) The company is seeking to allot ‘equity securities’ - this means ordinary shares.
When do pre-emption rights not apply?
1) To wholly or partly paid up shares not in cash
2) To an issue of non-equity securities, e.g. preference shares, employee share schemes, bonus shares
Can a company dis-apply pre-emption rights? General di-sapplication.
Yes.
A company may dis-apply a pre-emption right when
1) Directors are generally authorised by s551 by passing a special resolution
2) If a special article exists (there are no pre-emption rights in the Model Articles)
Any pre-emption provisions in the articles will override the statutory provisions in s561 rule (e.g. cash/equity securities).
Usually the reason for disapplying pre-emption rights is that the company wishes to include pre-emption rights which are more tailored to how it wishes to operate. For example, the board and shareholders might agree that they would prefer the shareholders to have 21 not 14 days to consider the pre-emption offer. Or they might decide that they would like pre-emption rights to apply even when the consideration for the allotment is non-cash.
What if the pre-emption rights have not been dis-applied by a special article, how can they be dis-applied?
Pre-emption rights may be dis-applied by SPECIAL RESOLUTION ONLY under either s569, s570 or s571.
s569: This is applicable only if the directors have authority to issue shares under s551 (i.e. the company with only one class of share seeking to issue shares of that class)
s570: must be used if there is no directors authority under s551 (e.g. the directors require an ordinary resolution to give them authority to issue the shares)
s571: special resolution. But must be recommended by the directors of the company and before proposing a special resolution the directors must make a written statement setting out
1) Reasons for making the recommendation
2) Amount the purchaser will pay
3) The directors justification of that amount
Directors written statement must be circulated to the shareholders along with notice of the general meeting, or if the resolution is proposed as a written resolution, it must be sent out with the written resolution s571(7) CA 2006.
What is the procedure if the pre-emption rights apply?
Shares must be offered to existing shareholders:
- In proportion to the amount each shareholder currently holds
- For 14 days beginning on the date the offer is sent
What is the point of pre-emption rights?
They protect members, where the effect of issuing shares would be to weaken their control of the company.
This is because where new shares are issued there is potential for an individual’s percentage shareholding to decrease.
Example: Clauds has 55 of 100 voting shares in a private limited company, which has unamended MAs. What would be the consequence if a further 20 shares were issued to a new shareholder, for cash?
Clauds shareholding would be reduced to approx 46%, so she could no longer pass or block ordinary resolutions. But on the facts, the statutory pre-emption rights would apply to protect her, she would have first refusal on 11 (55%) of the new shares.
Give an example of how share issue (authority and pre-emption) may work in practice?
Goth and Emanuel Limited is a private limited company, incorporated on 28 December 2015 with unamended model articles.
It has 50,000 ordinary shares and 50,000 preference shares and wishes to issue 20,000 new ordinary shares for cash. Will authority be required and will the pre-emption rights apply?
1) Authority will be required as the company has more than one class of shares (before and after issue).
2) The pre-emption rights apply but may be dis-applied by a special resolution or waived if all the other shareholders agree.
3) If the shares where issued for non-cash consideration e.g. the transfer of property, the pre-emption rights would not apply. However, it would be an SPT if a director or connected person was buying the shares and the value of the asset was substantial.
What if preference shares are being issued?
- If preference shares are being issued when the company did not previously have preference shares, the company’s articles will need to be amended to set out the rights of the preference shareholders
- This will require a special resolution by the shareholders
What are the admin requirements for the allotment of shares?
Copies of Resolutions to be sent to companies house within 15 days:
- A copy of the ordinary resolution (to activate s550 and giving directors authority to issue the shares)
- A copy of the ordinary resolution (removing the authorised share capital in pre-CA 2006 company)
- A copy of the special resolution to disapply the pre-emption rights
^ within 15 days
Company forms to be sent to Companies House
- Form SH01 within one month of the allotment
- Possibly form(s) PSC01, PSC02, PSC04 and PSC07, for new persons with significant control/ a change of which percentage band a person is in/ a person ceasing to be a person with significant control
Entries in company’s own registers:
1) Amend register of members within 2 months
2) Amend PSC register if necessary
Preparation and allocation of share certificates:
- Prepare share certificates within 2 months of allotment
Generally need to keep:
1) Minutes of general meeting for 10 years
2) A written record for every director’s decision
3) Minutes for any board meetings for 10 years
If a new class of shares, i.e. preference shares are being issued, must file
- A copy of the special resolution to change the articles (s29 & s3))
- An updated copy of the company articles no later than 15 days after the special resolution.
Why should the directors written statement regarding a special resolution to disapply pre-emption rights be accurate?
Because it is an offence to knowingly or recklessly authorise or permit the inclusion of any matter that is misleading, false or deceptive in a material particular in the directors’ written statement (s 572 CA 2006).
