Capital And Financing

Question 1

What are the ways that a company can raise capital?

Answer 1

Issuing Shares

Taking out a loan

Question 2

What happens when someone buys shares in a company?

Answer 2

Rights - To Vote, to Attend meetings - as set out in the articles of association
Obligations - To invest all unpaid share capital
Interest - Amount of company owned = Number of shares owned/total shares.

Question 3

What are the two main types of shares?

Answer 3

Preference

ordinary (equity)

Question 4

What are the key features of preference shares?

Answer 4

Give no or restricted voting rights
Dividends are fixed, normally paid in priority and are cumulative.
When liquidating/winding up - right for capital to be repaid first.
Cannot receive any surplus funds.

Question 5

What are the key features of ordinary (equity) shares?

Answer 5

Have full voting rights.
Dividends are not fixed and will be paid after preference shares.
Capital will be repaid only after capital shares but can receive share surplus.

Question 6

What is meant by class rights?

Answer 6

special rights attached to each type of share.
can be varied but may have a procedure specified in the articles.
If a procedure is specified it must be followed.
If no procedure specified - variation needs a special resolution or written consent of 75fi in nominal value of the class of share.

Question 7

What is minority protection in relation to variation of class rights?

Answer 7

Set outing S.633 of CA06
Holders of minimum of 15% of affected class of shares object.
May apply to courts within 21 days
And must prove variation is unfairly prejudiced:
1. Variation affects value, enjoyment or power - courts will allow variation.
2. Variation changes the rights them selves - courts will cancel the variation.

Question 8

What is share capital?

Answer 8

this is the authorised capital of the company - and will be the total number of shares X their nominal value.

Question 9

What are issued shares?

Answer 9

Shares that have been sold.

It will follow that unissued shares are shares that have not been sold.

Question 10

% paid up?

Answer 10

% of nominal share value share holders have paid to the company.

Question 11

% called up?

Answer 11

% of nominal share value called up but not yet paid.

Question 12

% uncalled?

Answer 12

% of nominal value the company has not yet requested.

Question 13

What are the different values of shares?

Answer 13

Market Value - What the market is willing to pay, will fluctuate
Nominal Value - value share is held at in accounts, maximum liability to the shareholder.
Share premium - Excess paid over nominal value.

Question 14

What other issues of share might occur?

Answer 14

Bonus issue - Uses reserves to issue fully paid shares to existing shareholders. This does not raise additional share capital.
Rights issue - New shares offered in proportion to existing shareholding at a discount to market value, but not nominal value. Raises additional capital.

Question 15

What are pre- emption rights?

Answer 15

Right of first refusal - New share issue must be offered to existing shareholders first.
* For ordinary shares and must be cash paid.
21 days to accept offer
Can be dis applied by provision in articles or special resolution.

Question 16

How might a directors authority to allot ordinary shares be given?

Answer 16

May be in the articles or
Given by ordinary resolution.
Must state:
The maximum number of shares to be allowed
The expiry date of the authority.
Note ;
Shares cannot be issued at a discount to nominal value, the issue will still be valid but the shareholder is liable to the company for the discount + interest.

Question 17

Can shares be issued at a premium?

Answer 17

Yes - the premium received must be credited to the share premium account.
Can only be used for:
Writing off related expenses
Writing off commission
Issuing Bonus shares.

Question 18

What is capital maintenance?

Answer 18

In a Ltd company the Capital is regarded as a buffer fund.
Companies cannot reduce capital by returning it to it’s members
Members cannot withdraw their capital from the company.

Question 19

How can companies reduce their share capital?

Answer 19

Reducing or cancelling liability on partly paid shares
Returning capital in excess of the companies needs
Cancel paid up capital which is no longer represented by the companies assets.

Question 20

What are treasury shares?

Answer 20

Created when a company purchases it’s own shares from distributable profits - up to 10% of shares can be held this way.
These can be shares purchased back off share holders.

Question 21

What a distributions?

Answer 21

Dividends which should only be paid if rules are met.
Per the model articles this is:
When Directors recommend payment of a dividend.
General meeting declares the dividend by passing an ordinary resolution.
the amount paid cannot exceed the recommendation an can only be paid from distributable profits (not reserves)
Note - a public company can only declare a reserve if the distribution will not result in net assets being less than aggregate of called up share capital and undistributable reserves.

Question 22

When and from who can a company recover an unlawful dividend?

Answer 22

From Shareholders - who knew/had reasonable grounds to know that the dividend was unlawful.
From any director - unless they can show reasonable care exercised in relying on properly prepared accounts.
From the auditors - if the dividend was paid based on their erroneous accounts.

Question 23

What are long term loans also referred to as?

Answer 23

Debentures - basically a document confirming indebtedness.

Question 24

What are the benefits of loans over raising share capital?

Answer 24

No authority required from a general meeting
Carry no votes so do not affect control of the company.
Interest is chargeable against profit before tax
May be cheaper to service than shares.
No restriction on issuing at a discount or on redemption.

Question 25

What are the disadvantages of loans over raising share capital?

Answer 25

Interest must be paid irrespective of profit level
Default may result in liquidation or administration (if secured)
High gearing will affect the share price.

Question 26

What is a fixed charge?

Answer 26

Where a loan is secured against a specific asset.
the asset must be retained.
The business has no general freedom to sell the asset (mortgage)

Question 27

What is a floating charge?

Answer 27

Loan is secured against a class of assets.
Individual assets do not need to be retained.
The business has the freedom to deal with the charged assets in the course of business.

Question 28

What is crystallisation?

Answer 28

Where a floating charge becomes attached to an asset.
Occurs in the following circumstances:
When the company enters liquidation
When the company ceases to trade.
On any event specified in the debenture.

Question 29

What is the priority of charges?

Answer 29

Charges are equal - Pay 1st created
Fixed charges paid before floating charges
Unregistered charges have no priority - have to be registered within 21 days.