Capital & Financing Flashcards
How can a company raise a certain amount of capital?
By selling shares in the company (share capital) or by taking out loans (loan capital)
Who can be seen as investors in a company?
Both shareholders and lenders
What do buyers of shares in a company become?
Shareholders and are members of the company
What are the different types of capital?
Share capital and loan capital
What is share capital?
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
What does a share represent?
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
What type of value does a share have?
An open market value, representing a percentage of the overall value of the company
Does a shareholder have voting rights?
Depending on their class of shares held, yes, since they are a member of the company
What are the different classes of shares?
Ordinary shares, reference shares, redeemable shares, convertible shares and cumulative shares
What are ordinary shares?
Entitle the member to vote on resolutions, the right to be paid a dividend and to a return of capital on a winding up
What are preference shares?
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
What is issued share capital?
Comprises share capital hat has actually been issued, release or sold by the company
What is paid up share capital?
The amount which shareholders have actually paid on the shares issued
What is called up share capital?
The amount of unpaid share capital which has been called for from shareholders but not yet paid
What is uncalled share capital?
The amount of unpaid share capital that has not yet been called for from shareholders and therefore also remains unpaid
Shares may be acquired by what?
Original acquisition or derivative acquisition
What is original acquisition
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
What is derivative acquisition?
Takes place where issued shares are acquired from an existing shareholder by another person
What is allotment of shares?
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
How might shares be issued?
By a rights issues or pursuant to a bonus issue
Whats a right issue?
Where a company issues shares in return for cash or kind as a means of raising corporate finance
Whats a bonus issue?
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
How may directors be given authority in order to allot shares?
By the articles or by passing an ordinary resolution
What must the authority state?
The maximum number of shares to be allowed and the expiry date for the authority (max. 5 years)
Existing shareholder have a right of what under s 561?
A right of pre-emption on allotment
What does pre-emption rights do?
Protects existing shareholders from the dilution of their shares
How can you disapply pre-emption rights?
In the articles of association or by special resolution
What value does every share have?
A nominal value which is fixed at the time of incorporation of the company in the statement of capital and initial shareholding
What is share premium?
Where a shoe is allowed at a value greater than its nominal value, the excess over the nominal value
Under s 610, it is required that any premium to be credited to a share premium account, it may only be used for what?
Writing off expenses of the issue of new shares, writing off any commission paid on the issue of new shares, and issuing bonus shares
Private companies may issue shares for what?
Non-cash consideration
What must happen to capital once raised?
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
What is the capital maintenance principle?
Capital, assets or funds must be returned to shareholders and should be maintained by the company
Why might a company want to reduce capital?
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
Why do the rules on maintenance of capital exist?
In order to prevent a company reducing its capital by returning it to its members, whether directly or indirectly
What is spoke about in s 641?
Circumstances in which a company may reduce its share capital
How may a company reduce its share capital?
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
What are treasury shares?
Created when a company purchases its own shares from distributable profits
What is spoke about in s 724?
Companies can buy, hold and resell their shares
How else can treasury shares be created?
When a company initially issues shares to the public but keeps a portion in its treasury to be sold at a later date
When can a company make a distribution?
Out of profits available
What are distributable profits?
Accumulated realised profits less the accumulated realised losses
What is profit and loss from?
Trading activities and capital transactions
What is accumulated?
Looks at cumulative profit/loss, not just the current year in isolation
What is realised?
A profit or loss is deemed to be realised if it is treated as realised in accordance with generally accepted accounting principles
How can a plc declare a dividend?
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
What are undistributable reserves?
Share premium account, capital redemption reserve, unrealised profits and reserves that the company is forbidden to distribute
If a dividend is not paid in accordance with the rules on distributions then what can the company recover the distribution from?
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
Loan capital comprises of what?
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
What is a debenture?
A document issued by a company evidencing a debt of any kind which is owed by the company to an investor
What are the main types of debentures?
A single debenture, debentures issued as a series and usually registered, and a debenture stock subscribed to by a large number of lenders
What are the advantages of debentures?
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
What are the disadvantages of debentures?
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
Why do most companies need to borrow money?
To support their business activities
What happens with unsecured borrowing?
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
What happens with secured borrowing?
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
What is a fixed security or charge?
It is granted over specific and identifiable property
What is a floating charge?
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
A floating charge in Scotland has to be created by what?
A written document by the company, which must be registered
How can a floating charge become fixed?
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
What are the advantages of a floating charge?
The company can deal freely with the assets and a wider class of assets can be charged
What are the disadvantages of a floating charge?
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
