CH9 Companies: Finance Flashcards
- Identify the procedures for the issue of shares, including issues at a premium and pre-emption rights - Identify aspects of capital maintenance including -reduction of capital -redemption and purchase of a company's own shares -financial assistance for the purchase of a company's own shares -distribution of profits - Identify share transfer requirements and disclosure requirements - Identify the nature o
What are the three types of shares?
- Ordinary/equity
- Preference
- Redeemable
What is the dividend due on a £1 (nominal value) 5% preference share?
5p
Can preference shareholders compel the company to pay a dividend?
No
Can dividends be cumulative?
Yes. E.g. if the directors do not pay the dividend this year, they will need to catch up next year.
What are participating preference shares?
Normally your return is fixed, but if you have participating shares, you can participate in the profit as well.
If the company winds up, will you still get any undeclared dividends?
No
Do ordinary/equity shareholders have voting rights?
Absolutely
How are the value of ordinary shares decided?
At the discretion of the directors
Do preference shareholders have voting rights?
Yes, BUT this right is commonly disapplied in the articles
Do ordinary/equity shareholders have pre-emption rights?
Yes
Do preference shareholders have pre-emption rights?
No
Do ordinary shareholders have a right to a share in capital on winding up?
Yes - capital repaid and a right to share in any surplus profits.
Do preference shareholders have a right to a share in capital on winding up?
The Companies Act says that preference shareholders have the same rights on winding up as ordinary shareholders. BUT the articles normally remove that right to surplus profit.
Do ordinary shareholders have the right to participate in a rights issue?
Yes
Do preference shareholders have the right to participate in a rights issue?
No
What are redeemable shares? What can the company do?
They are shares that can be bought back by the company.
What is the one thing to remember about the issue of redeemable shares?
They can only be issued if there are other types of shares already in issue.
Can the rights attached to a class of shares be changed? In accordance with what? If no provision here, then according to what?
Yes
With the articles
Procedure set out in the Act
According to the Companies Act, what do you need in order to change the rights attached to a class of shares?
A special resolution of the relevant class or written consent from at least 75% in nominal value of the issued shares of that class.
When you have changed the rights attached to a class of shares, how long have you got to notify the Registrar?
Within one month
Is changing the rights attached to a class of shares an example, potentially, where minority protection might come into play?
Yes
If a minority shareholder wants to object to a change of the rights attached to a class of shares, what percentage of the class in question do they have to have?
At least 15%
If a minority shareholder wants to object to a change of the rights attached to a class of shares, how long do they have to do so?
Within 21 days of the consent being given by the class
If a minority shareholder applies to the court to have a change of the rights attached to a class of shares cancelled, what two options does the court have?
Confirm the variation
Cancel it as unfairly prejudicial
In a private company with one class of shares, who can allot shares of that class unless what?
The directors, unless prohibited by articles
In a PLC/company with more than one type of share, where is the authority to allot shares given?
Articles or by ordinary resolution
In a PLC/company with more than one type of share, the authority to allot more shares is given in the articles or by ordinary resolution. What two things must the authority state and how can it be given/varied?
- Maximum number of shares to be allotted
- Expiry date for authority (not more than 5 years)
- Can be given or varied by ordinary resolution (>50%)
What is the difference between a rights issue and a bonus issue?
Rights: shares issues to existing members in same proportion as existing holding
Bonus: issue of additional shares at no cost
What are rights of pre-emption?
Statutory rights that state that existing shareholders must be given first refusal on new share issues so that they can maintain the same proportion of control.
When existing shareholders are offered first refusal on new shares, how long do they have to accept?
21 days
If the rules on offering existing shareholders first refusal on new share issues is breached, how long do those shareholders have to object and what can they claim?
2 years
Compensation
What are the exceptions to the rule that existing shareholders have to be offered first refusal on new share issues?
- Bonus shares
- Share issued for non cash consideration
- Employee share schemes
- Exclusions in articles (private companies only) or by special resolution
Can you ever issue shares at a discount i.e. less than the nominal value?
NOOOOOOOO!!!!!!!!
But don’t forget, if you then sell your shares on, you ca sell them for whatever you like because that is between you and a third party.
What happens if shares are allotted at a discount?
What is this NOT the same as?
The allottee is liable to pay the company an amount equal to the amount of the discount, together with interest.
NOT the same as partly paid shares.
The share premium account is subject to strict rules. What three things can it NOT be used for?
- Paying dividends
- To write off expenses incurred in connection with the formation of the company
- To write of expenses incurred in connection with an issue of debentures
What CAN the share capital account be used for?
- To write off the expenses of the issue of those shares and any commission lawfully paid on the issue
- In relation to bonus shares (remember the double entry - DR share premium, CR share capital) NV
- In applying special rules for group reconstruction relief and merger relief
How can people pay for shares?
- Cash/cheque
- Assets (including goodwill and knowhow)
If accepting assets in return for shares, who can value the assets in a LTD?
The directors
If accepting assets in return for shares, who can value the assets in a PLC?
Must be independently valued
Shares are deemed to be allotted or paid up in cash where the company receives what?
- Cash/cheque
- Undertaking to pay cash
- Release of debt
What additional restrictions are placed upon companies in respect to when shares are deemed to be allotted or paid up? Five points.
First shareholders
Future services?
How much must be paid?
How long defer full payment?
Valuation for non cash
- Shares taken by subscribers (first shareholders) must be paid up in cash
- Can’t pay using future services
- Must be paid up at least to 1/4 of NV plus any premium
- Payment for non-fully up shares cannot be deferred for more than 5 years.
- Any payment other than cash must be independently valued
In terms of unlisted shares, what is the process for transferring shares?
Stock transfer form given to recipient plus share certificate.
Both sent to company for registration
Company either registers the transfer and issues a share certificate or gives notice of refusal within 2 months
In terms of transferring unlisted shares, what is transmitting by operation of law and is certification required?
Where the rights are transferred automatically e.g. on member’s death.
No
In terms of listed shares, what is the process for transferring shares? Which system is used
Contact broker and they will deal with it
CREST system
What is capital maintenance all about in simple terms?
Protecting creditors
Stopping shareholders taking too much money out of the business and not leaving enough to pay creditors
How are creditors protected (capital maintenance)?
- Restricting dividends so they can only be paid out of distributable reserves
- Shares may not be issued at a discount
- Restrictions on any reduction in share capital:
- Reduction on share capital
- Repurchase of own shares
- Redemption of shares
Does the law stop a company from using share capital as it’s working capital?
No
Why might a business wish to reduce share capital?
- Has surplus cash
- Net assets have fallen below the amount of its capital permanently
How can a business reduce share capital?
- Reduce liability on partly paid shares
- Reduce amount of paid up share capital (returning to shareholders or using for another purpose)
What strict procedures must be followed if a PUBLIC company wants to reduce share capital?
- Special resolution 75%
- Confirmed by court
- Notice to creditors
- File resolution and court order with registrar
What procedures must be followed if a PRIVATE company wants to reduce share capital?
- Special resolution 75%
- Solvency statement (signed by ALL directors within 15 days of SR)
- File resolution and solvency statement with registrar
Why might a company purchase its own shares?
To reduce its share capital
If a PLC buys back its own shares, what do they become?
Treasury shares which will be re-issued at some point
If an LTD buys back its own shares, what do they become?
Those shares are cancelled
When is a company allowed to buy its own shares back?
- Complying with court order (e.g. buying out unfairly prejudiced minority)
- Forfeiture/surrender of shares in accordance with articles where there is a failure to pay for them
- Redemption or purchase of shares in accordance with the Companies Act
- Acquisition of shares in a permitted reduction of share capital
What are the two ways a company can buy back shares?
Market purchase
Off market purchase
Where is a market purchase made?
On a recognised investment exchange
When a market purchase is made, how must it be authorised?
What two things must be specified?
By a resolution
Max no. of shares that can be acquired
Max/min price
Who is an off-market purchase of shares likely to be conducted with?
An individual shareholder to buy back their shares.
Once a company has bought back its shares, what must be done within what timeframe?
Send a return to the registrar within 28 days
Once a company has bought back its shares out of profits, where must the amount by which the company’s issued share capital is diminished when the shares are cancelled be transferred?
To the capital redemption reserve
What procedures must be followed for repurchase or redemption of shares by both private and public companies?
Type of shares
Articles
Non redeemable left
- Shares to be purchased must be fully paid shares
- No restriction in the articles
- Must be one non-redeemable share in issue after the re-purchase
Where must the money come from for the buy back of shares in a public company?
- Must use distributable profits to fund it OR
- Use the proceeds of a new share issue
Public companies can use distributable profits or proceeds from new share issue to fund a buy back of shares. What additional option is available for private companies?
What must they do in order to be able to do this?
If they have used all their available profits, they CAN use capital.
- Special resolution 75%
- Directors statement of solvency supported by auditor’s report
- Publicise repurchase to creditors
- Payment is made within 5-7 weeks of resolution
What are two other ways that share capital can be altered?
- Subdivision or consolidation by ordinary resolution >50%
Redenomination
In terms of altering share capital, when you subdivide or consolidate, does the proportion between paid and unpaid amounts on the original shares have to remain the same?
Yes
In terms of altering share capital, what is redenomination?
What are you allowed?
Changing the currency
Allowed 10% rounding adjustment
What is the definition of a PLC In crisis?
Net assets of PLC fall to half or less of the company’s called share capital
What must the directors do for a PLC in crisis?
Call a general meeting
What will a PLC have to do if NV of issued shares falls below £50,000?
Register as a private company
Can a private company give financial assistance to someone who wants to buy their shares?
Yes
Can a public company give financial assistance to someone who wants to buy their shares?
No, but there are exceptions
In terms of a public company giving financial assistance in relation to acquisition of shares, what are the two exceptions to the rule that they should not do it?
- Principal purpose of assistance is something other than the acquisition
- The assistance is only an incidental part of of some larger purpose
In terms of a public company giving financial assistance in relation to acquisition of shares, what are the two cases where all companies can do it?
- Lending of money is in the company’s normal course of business
- Assistance is given in good faith in the interests of the company for an employee’s share scheme
In terms of a public company giving financial assistance in relation to acquisition of shares, what is the caveat?
Must not reduce the company’s net assets and given in good faith
What reserves cannot be used to pay out a dividend?
- Share premium
- Capital redemption reserve
- Any surplus of accumulated unrealised profits over accumulated unrealised losses (known as the revaluation reserve)
- Any reserve which the company is prohibited from distributing by statute or articles
On winding up, who gets paid before a floating charge holder?
- Judgement creditor
- preferential debts (EE remuneration/holiday pay)
- Fixed charge over same assets
- Creditor who supplies goods but retains legal ownership
- Funds which are ring fenced
