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Business and Corporate Law > Capital & Financing > Flashcards

Capital & Financing Flashcards

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1
Q

How can a company raise a certain amount of capital?

A

By selling shares in the company (share capital) or by taking out loans (loan capital)

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2
Q

Who can be seen as investors in a company?

A

Both shareholders and lenders

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3
Q

What do buyers of shares in a company become?

A

Shareholders and are members of the company

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4
Q

What are the different types of capital?

A

Share capital and loan capital

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5
Q

What is share capital?

A

It is the interest of a shareholder in the company measured by a sum of money, for the purpose of a liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders

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6
Q

What does a share represent?

A

A measure of a shareholders liability to contribute monies on a call in the winding up of the company and his/her interest in the company

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7
Q

What type of value does a share have?

A

An open market value, representing a percentage of the overall value of the company

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8
Q

Does a shareholder have voting rights?

A

Depending on their class of shares held, yes, since they are a member of the company

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9
Q

What are the different classes of shares?

A

Ordinary shares, reference shares, redeemable shares, convertible shares and cumulative shares

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10
Q

What are ordinary shares?

A

Entitle the member to vote on resolutions, the right to be paid a dividend and to a return of capital on a winding up

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11
Q

What are preference shares?

A

They do not usually have the right to vote. In return for relinquishing the right to vote, they have a preferential right to be paid a dividend, and a return of capital on a winding up, in priority of other classes of shareholders, e.g. ordinary

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12
Q

What is issued share capital?

A

Comprises share capital hat has actually been issued, release or sold by the company

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13
Q

What is paid up share capital?

A

The amount which shareholders have actually paid on the shares issued

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14
Q

What is called up share capital?

A

The amount of unpaid share capital which has been called for from shareholders but not yet paid

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15
Q

What is uncalled share capital?

A

The amount of unpaid share capital that has not yet been called for from shareholders and therefore also remains unpaid

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16
Q

Shares may be acquired by what?

A

Original acquisition or derivative acquisition

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17
Q

What is original acquisition

A

Occurs when fresh shares are newly issued by a company, referred to as an allotment and issue of shares in terms of the 2006 Act

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18
Q

What is derivative acquisition?

A

Takes place where issued shares are acquired from an existing shareholder by another person

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19
Q

What is allotment of shares?

A

Where the shares are allocated to a person under a contract of allotment, once the shares are allowed and the holder is entered in the register of members, they become a member of the company

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20
Q

How might shares be issued?

A

By a rights issues or pursuant to a bonus issue

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21
Q

Whats a right issue?

A

Where a company issues shares in return for cash or kind as a means of raising corporate finance

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22
Q

Whats a bonus issue?

A

Where a company issues shares to persons without payment in cash or in kind in lieu of a distribution of annual profits by way of dividend

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23
Q

How may directors be given authority in order to allot shares?

A

By the articles or by passing an ordinary resolution

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24
Q

What must the authority state?

A

The maximum number of shares to be allowed and the expiry date for the authority (max. 5 years)

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25
Q

Existing shareholder have a right of what under s 561?

A

A right of pre-emption on allotment

26
Q

What does pre-emption rights do?

A

Protects existing shareholders from the dilution of their shares

27
Q

How can you disapply pre-emption rights?

A

In the articles of association or by special resolution

28
Q

What value does every share have?

A

A nominal value which is fixed at the time of incorporation of the company in the statement of capital and initial shareholding

29
Q

What is share premium?

A

Where a shoe is allowed at a value greater than its nominal value, the excess over the nominal value

30
Q

Under s 610, it is required that any premium to be credited to a share premium account, it may only be used for what?

A

Writing off expenses of the issue of new shares, writing off any commission paid on the issue of new shares, and issuing bonus shares

31
Q

Private companies may issue shares for what?

A

Non-cash consideration

32
Q

What must happen to capital once raised?

A

It must be maintained intact for the benefit of the creditors and cannot be returned to the members, except where the safeguards for the protection of the creditors allow

33
Q

What is the capital maintenance principle?

A

Capital, assets or funds must be returned to shareholders and should be maintained by the company

34
Q

Why might a company want to reduce capital?

A

If it no longer needs such a large capital, or there may be a class of shares with unattractive rights attached, which the company wishes to dispense with

35
Q

Why do the rules on maintenance of capital exist?

A

In order to prevent a company reducing its capital by returning it to its members, whether directly or indirectly

36
Q

What is spoke about in s 641?

A

Circumstances in which a company may reduce its share capital

37
Q

How may a company reduce its share capital?

A

Reduce or cancel liabilities on partly-paid shares, return capital in excess of the company’s needs, and cancel the paid-up capital that is no longer represented by the assets

38
Q

What are treasury shares?

A

Created when a company purchases its own shares from distributable profits

39
Q

What is spoke about in s 724?

A

Companies can buy, hold and resell their shares

40
Q

How else can treasury shares be created?

A

When a company initially issues shares to the public but keeps a portion in its treasury to be sold at a later date

41
Q

When can a company make a distribution?

A

Out of profits available

42
Q

What are distributable profits?

A

Accumulated realised profits less the accumulated realised losses

43
Q

What is profit and loss from?

A

Trading activities and capital transactions

44
Q

What is accumulated?

A

Looks at cumulative profit/loss, not just the current year in isolation

45
Q

What is realised?

A

A profit or loss is deemed to be realised if it is treated as realised in accordance with generally accepted accounting principles

46
Q

How can a plc declare a dividend?

A

Only if both before and after distribution its net assets are not less than the aggregate of its called up share capital and undistributable reserves

47
Q

What are undistributable reserves?

A

Share premium account, capital redemption reserve, unrealised profits and reserves that the company is forbidden to distribute

48
Q

If a dividend is not paid in accordance with the rules on distributions then what can the company recover the distribution from?

A

Shareholders who knew or had reasonable grounds to how the dividend was unlawful, any director unless he can show he exercised reasonable care in relying on properly prepared accounts, and the auditors if the dividend was paid in reliance on erroneous accounts

49
Q

Loan capital comprises of what?

A

Permanent overdrafts at the bank, unsecured loans either from a bank or other party,, or loans secured on assets on assets either from a bank or other party

50
Q

What is a debenture?

A

A document issued by a company evidencing a debt of any kind which is owed by the company to an investor

51
Q

What are the main types of debentures?

A

A single debenture, debentures issued as a series and usually registered, and a debenture stock subscribed to by a large number of lenders

52
Q

What are the advantages of debentures?

A

The board does not (usually) need the authority of a general meeting to issue debentures, as debentures carry not votes they do not dilute or affect the control of the company, interest is chargeable against the profit before tax, debentures may be cheaper to service than shares, there are no restrictions on issuing debentures at a discount or on redemption, and are freely transferable

53
Q

What are the disadvantages of debentures?

A

Interest must be paid out of pre-tax profits, irrespective of the profits of the company, default may precipitate liquidation and/or administration if the debentures are secured, and high gearing will affect the share price

54
Q

Why do most companies need to borrow money?

A

To support their business activities

55
Q

What happens with unsecured borrowing?

A

The company is under a personal obligation to repay, if it defaults, it can be sued in a civil action or it can be put into administration or liquidation

56
Q

What happens with secured borrowing?

A

The company has granted rights to a lender in security over some of its property, if the company defaults in its repayments, in additional to the remedies for unsecured borrowing, the lender can enforce rights over the property to obtain repayment of the sum owed

57
Q

What is a fixed security or charge?

A

It is granted over specific and identifiable property

58
Q

What is a floating charge?

A

A security which can be granted on the basis that it will not be fixed to particular assets for the duration of the loan, but will ‘float’ so that a company will be free to buy and sell assets in the course of trade

59
Q

A floating charge in Scotland has to be created by what?

A

A written document by the company, which must be registered

60
Q

How can a floating charge become fixed?

A

The appointment of a receiver by a floating charge credit under s 53(7) and 54(6) of the Insolvency Act 1986 where this is still permitted, the commencement of the winding up of the company, and the appointment of an administrator where the administrator files notice with Companies house

61
Q

What are the advantages of a floating charge?

A

The company can deal freely with the assets and a wider class of assets can be charged

62
Q

What are the disadvantages of a floating charge?

A

The value of the security is uncertain until it crystallises, it has a lower priority in order of repayment than fixed charge, and it may challenged by a liquidator if it was created within 12 months preceding a winding up

Business and Corporate Law (18 decks)

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