Chapter 4 – Equities Flashcards
What are the 4 main types of company?
A private company limited by shares
Private (i.e. you can’t trade the shares on a public exchange), has a share capital and the shareholders have a limited liability.
A private company limited by guarantee
Has no shareholders per se. Members agree to contribute an amount of capital if the company is wound up, and their liability is limited to that amount. Again, because it is private, it cannot offer shares to the public.
A private unlimited company
You can’t trade their shares on a public stock exchange and your liability is NOT limited to the amount initially paid by buying shares or contributing capital. Potentially more liability
A public limited company or plc
most well-known. It is public because its shares are traded on a stock exchange, and limited because the shareholders liability is limited to the price paid for the shares. It follows that all companies that are listed on the stock exchange must be a plc.
Of the above, The most common types of companies are public limited companies and private companies limited by shares.
4.1.1: What are the Requirements for forming a company
The formation of a new limited company is known as incorporation.
The process involves the completion of two documents: the memorandum of association and the articles of association along with various other application forms.
These documents are submitted to Companies House who issue the company with a certificate of incorporation once they have vetted all proposed directors and checked that the company name is acceptable. The documents are then kept on record and open for public inspection.
How many directors must a PLC have?
Public companies must have a minimum of 2 directors and a company secretary
There are certain requirements for directors that must be met, such as they must be over 16, not been previously disqualified from being a director or be an undischarged bankrupt, whilst the company secretary must be qualified to undertake the role.
Public limited companies must obtain a trading certificate from Companies House, as it is an offence to trade without one. True or false
True
4.1.2: Memorandum of Association
What is this for?
This is a relatively short document and forms the legal agreement by all the initial shareholders or subscribers that they are agreeing to form a company.
Once a company is registered, then the memorandum cannot be changed or updated.
4.1.3: Articles of Association
What is this for
The articles of association is a big document
It contains written rules agreed by the shareholders, directors and company secretary about how the company is to be run and how decisions will be taken by the shareholders and directors.
The articles can be changed but only with the agreement of the shareholders and must then be resubmitted to Companies House.
Firms can choose to write their own or to adopt the model articles.
The model articles are made up of 5 different areas:
Defined terms & Limited Liability
Directors
Shares & distributions
Decision making by shareholders
Administrative arrangements
How often must directors in PLCs be held up for election?
Directors in PLCs are required to submit themselves for re-election at intervals of no more than 3 years,
They must do it annually if they are director in a FTSE 350 companies.
Companies must hold Annual General meetings (AGM) where shareholders can exercise their vote on proposals made by the directors known as resolutions. True or false
True
Occasionally, the company may need to present exceptional matters (such as takeovers and mergers or a substantial change to the business) to the shareholders for their approval.
In these cases, an Extraordinary General Meeting or EGM will be called.
What are Partly paid shares?
At incorporation, the subscribers don’t provide all the capital. normally, all capital is provided. Instead, they pay for just a part of each share. These are known as partly paid shares.
The company can call on the shareholders to pay the balance at any time. At that point, the shareholders have a legal obligation to pay up!.
Ordinary shareholders are entitled to company profits after tax and ‘preference shareholders’ dividend payments
How do shareholders know about meetings?
Notices of AGMs must be sent to shareholders at least 21 clear days before the AGM.
14 days if a special resolution allowing it has been passed by members.
The voting record date determines who is entitled to vote at the meeting. If your name is on the share register on the voting record date, which must be no more than 48 hours before the proposed meeting, then you will be able to vote at the AGM
Under the Companies Act 2006, shareholders also have some statutory rights:
Companies must hold AGMs at least once a year.
Shareholders with more than 10% of the voting rights have the right to call an extraordinary general meeting (EGM), and those with more than 5% of voting rights can propose resolutions.
A shareholder can also petition the court if they feel that the affairs of the company are unfairly prejudicial to the interests of some or all of the shareholders.
4.2.2: Preference shares
Preference shares rank above ordinary shares in the event of liquidation.
Preference dividends are also paid ahead of ordinary dividends.
Pay dividends every 6 months, however the dividend will only be paid if profit is made (not guaranteed)
No voting rights normally, but if dividend payments are missed, voting rights are given
4.2.2: Preference shares
What are the different types of preference share?
Cumulative = missed dividends are made up in future years
Non cumulative = any missed dividend does not have to be made up and investor loses right to missed dividend after end of financial year
Participating = pay a fixed dividend. Also pays an extra dividend depending on profits (like with ordinary shares) so with participating the owner is entitled to some of the profits of the company. This combines ordinary and preference shares
Redeemable = Undated and dividends are payable until shares are repurchased by the company. Act as a source of temporary finance for the company
It’s worth pointing out that the features can be combined, so ‘cumulative non-participating’, ‘non-cumulative non-participating’, ‘cumulative participating’ …
4.2
What are Convertible preference shares?
DO NOT CONFUSE WITH CONVERTIBLE CORPORATE BONDS ALTOUGH THEY DO WORK SIMILARLY IN TERMS OF CONVERSION RATIO ETC
Convertible preference shares allow the holder to convert the preference share into ordinary shares on pre-determined dates.
The conversion ratio will set out how many preference shares are needed to buy 1 ordinary share.
extra:
Just as we did with convertible bonds, we can calculate the premium or discount to find whether it is cheaper to buy the ordinary shares in the market or buy them through the convertible preference share.
The formula is slightly different (because the conversion ratio is quoted differently) so make sure you don’t get them mixed up!
4.3: Holding Title
When we buy shares, we need to have some record of proof of ownership of the shares.
How is this achieved?
Holding title is the method by which this ownership is recorded. There are two methods of holding title;
Registered shares
Ownership of the shares are recorded on the share register which is maintained by the company registrar.
Bearer shares.
Issuing shares in bearer form involves issuing a certificate, but unlike registered shares there is no name on it. The company only records the certificate and not who owns it. That means that whoever holds the certificate owns the shares (a bit like a £10 note).
A share certificate can be issued by companies which details the number of shares owned
Can a shareholder use this as proof of ownership?
No, their record on the companies share register shows ownership.
In relation to the systems used, what happens when someone sells their shares and how does this differ from the past?
In the past, if you wanted to sell your shares then you would need to send the certificate along with a stock transfer form to the registrar who would then update the share register with the new owner’s details.
This was a drawn-out process and very inefficient, so these days most shares have been dematerialised (i.e. share certificates are not issued) and are held electronically. Transfer of the shares from the seller to the buyer happens very easily by amending the electronic record in a process that is known as book-entry transfer.
Nowadays = book-entry transfer
4.4: Ranking In Liquidation
If a company winds up, its assets will be liquidated and used to pay the company’s creditors.
As owners of the company, the shareholders are last in line.
The order of priority is: WHAT
1st - Secured creditors with fixed charge
2nd - Insolvency practistior fees
3rd - Preferential Creditors (employees wages, holiday pay etc)
4th - Secured creditor with a floating charge
5th -Unsecured creditors (also includes unpaid HRMC tax
6th - preference shareholders
7th - Ordinary Shareholders
4.5: Tax Treatment of Divided Income
LOOK AT R03 calc book for refresher of this
Dividends are paid gross
Pay 0% on the first £500 of dividends received in a tax year (dividend allowance).
After this allowance, the tax paid depends on which of the investor’s income tax bands the dividends fall in.
What about the dividend allowance (DA)?
4.6: Depositary Receipts
Outline and explain the two types
American Depository Receipt (ADRs)
Global Depository Receipt (GDRs)
(this is a favourite question in the J12 exam so make sure you remember this).
Depositary receipts help investors mitigate some of the costs and issues associated with buying foreign equities.
4.6.1: American Depositary Receipts (ADRs)
ADRs enable US investors to hold shares in foreign companies without the associated hassle of overseas equity transactions. They represent shares in foreign companies but are denominated in US dollars and trade on a number of stock exchanges including NYSE and NASDAQ. Holders get voting rights and receive dividends.
THEY CANNOT be included in a rights issue, instead the rights are sold and proceeds distributed.
4.6.2: Global Depositary Receipts (GDRs)
American Depositary Receipts (ADRs) ADRs enable US investors to hold shares in foreign companies without the associated hassle of overseas equity transactions. They represent shares in foreign companies but are denominated in US dollars and trade on a number of stock exchanges including NYSE and NASDAQ. ADRs settle in exactly the same way as domestic shares, which makes the whole process of buying shares in overseas companies much simpler and cheaper than buying the foreign shares directly
What rights do holders of ADRs get then in relation to company because they do own the shares through the ADR? Is it the same as investors who directly hold the shares domestically, for example, can they take part in AGMs etc?
they get the same rights as if they had bought the shares directly i.e. they receive dividends (in US dollars instead).
they can vote at shareholder meetings via a proxy.
However, they CANNOT, partake in rights issues. instead the rights are sold and the proceeds are distributed (this is a favourite question in the J12 exam so make sure you remember this).
Holders of ADRs cannot partake in rights issues
they CANNOT, partake in rights issues. instead the rights are sold and the proceeds are distributed. This is one right they do miss out on compared to those who hold the shares directly (this is a favourite question in the J12 exam so make sure you remember this).
Depositary receipts (DRs) issued outside of the US are known as Global Depositary Receipts.
For example, European Depositary Receipts (EDRs) are issued by non-European companies, are denominated in euros and trade on European stock exchanges.
GDR issues are particularly popular with Asian and emerging market issuers
