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Business Law and Practice > Chapter 5 > Flashcards

Chapter 5 Flashcards

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1
Q

What is capital?

A

Funds available to run the business of a company

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2
Q

How does a company fund its business?

A

Equity finance- issuing shares

Debt finance- borrowing

Hybrid investment- characteristics of both debt and equity

Retaining profits used for the business

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3
Q

What are shares?

A

‘Bundle of rights’- voting rights

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4
Q

What are the incentives for investing?

A

Receipt of income- dividends

Capital gain- growth in the value of the company and therefore individual shares

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5
Q

Effect of equity finance on the balance sheet?

A

Increase share capital to show nominal value of shares issued

Increase cash (current assets) to show the cash received for the shares

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6
Q

What is the nominal/ par value?

A

Minimum subscription price for that share. Represents a unit of ownership rather than actual value of share.

Common- 1p, 5p, £1.

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7
Q

Statutory concerns with nominal/ par value?

A

s542(1) CA 2006- shares in ltd company having share capital must have fixed nominal value

s542(2) CA 2006- any allotment of a share that does not have a fixed nominal value is void

s580 CA 2006- share may not be allowed at a discount to NV BUT can be allowed for more than it’s NV- ‘premium’

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8
Q

What is the issued share capital?

A

ISC- amount of shares in issue at any time.

Made up of;

  • Shares purchased by the first members of the company (subscriber shares)
  • Further shares issued after the company has been incorporated
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9
Q

Define ‘allotment’

A

s558 CA 2006- person acquire unconditional right to be included in the company’s register of members in respect of those shares

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10
Q

Define ‘paid up’ share

A

Not necessary for shareholders to pay full amount due on their shares immediately- amount of nominal capital paid= paid up share capital

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11
Q

What is ‘called up’ share capital?

A

s547 CA 2006

Amount outstanding on a share demanded by the company at anytime

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12
Q

Difference between allowing and transferring shares?

A

Allotment- contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price

Transfer- contract to sell existing shares in the company between an existing shareholder and the purchaser

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13
Q

What are treasury shares?

A

Bought back by the company and are held by the company in treasury

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14
Q

How many steps are there for allotting and issuing new shares?

A

5

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15
Q

What are the steps for issuing shares?

A
  1. Check whether there is a cap or ceiling on the number of shares which can be issued
  2. Do the directors have authority to allot shares in the proposed allotment?
  3. Do pre-emption rights need to be disapplied?
  4. Does the company need to create a new class of shares?
  5. Directors allot new shares by BR
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16
Q

When will there be a cap on the number of shares that can be issued?

A

Company incorporated under CA 1985 will have had an authorised share capital which acted as a cap

Company incorporated under CA 2006 will not automatically have one- shareholders will have to amend articles of association by SR to include a cap

Check- memorandum, articles and any resolutions that have altered these documents

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17
Q

How can a cap on issued shares be removed?

A

Company incorporated under CA 1985- s121 CA 1985 states by OR

Company incorporated under CA 2006- limit in articles can be removed (or limit increased) by SR under s21(1) CA 2006

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18
Q

Where do directors get their authority to allot shares?

A

s549 CA 2006- directors of a company must not exercise any power of the company to allot shares in the company except in accordance with s551 CA or s550 CA 2006

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19
Q

Why is s550 relevant to private company’s with one class of share?

A

Provides that directors have the power to allot shares of the same class unless they are prohibited from doing so by articles

Helps smaller companies simplify the process of issuing shares

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20
Q

What does s551 allow?

A

Provides authority may be given by a provision in the company’s articles of association or by shareholder resolution

Authority to allot under s551(1) can only be given subject to limits in both time and umber of shares

s281(3)- this means OR unless articles require higher

21
Q

What are pre-emption rights?

A

Gives current shareholders the right of first refusal

22
Q

Why are there pre-emption rights?

A

To stop the company’s power being diluted

23
Q

Where are pre-emption rights contained?

A

s561 CA 2006- a company must not allot equity securities to a person on any terms unless…

24
Q

What are equity securities?

A

Defined in s560;

  • ordinary shares; or
  • rights to subscribe for, or convert securities into, ordinary shares
25
Q

How are ordinary shares defined in respect of s560?

A

Wider than normal

Shares other than share that as respects dividends and capital carry a right to participate only up to a specified amount

I.e. if a class of shares carries a high to receive dividends and capital payments and these rights are BOTH capped, the shares will not fall within the definition of ‘equity securities’

26
Q

Do shares that don’t fall within the definition of ‘equity securities’ need to be offered pre-emptively?

A

No

27
Q

Can a company dis-apply pre-emption rights?

A

Yes, with the permission of shareholders.

Three methods;

  • General disapplication
  • Disapplication by special resolution- private companies with one class of share
  • Specific misapplication of pre-emption rights
28
Q

How does general disapplication of pre-emption rights work?

A

Where the directors are authorised under s551

Special resolution under s570(1)

Not permanent- attaches to a particular, pre-existing s551 authority

Most common means

29
Q

How does disapplication by special resolution work

A

s569

Presupposes the director’s authority to allot shares derives from s550

30
Q

How does specific disapplication work?

A

Possible though uncommon under s571 CA 2006

31
Q

How are new classes of shares created?

A

Insert new provisions in its articles of association

Requires a SR f shareholders under s21

32
Q

Who’s responsibility is it to allot shares?

A

Directors via BR on behalf of the company

Any requirements of shareholders must be dealt with at GM before board meeting is held where new shares are allotted

33
Q

When wouldn’t a GM be needed in advance of a BM when allowing shares?

A

There’s no limit in its constitution on the number of shares which can be issued by the company

Company is private with only one class of shares and there is no restriction in the company’s articles- s550

If the company is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows procedure of s562

Has relevant class rights in its articles of association

34
Q

What are the post meeting matters that must be addressed after removing a cap?

A

File new articles (s26(1) CA)

CA 2006 companies- file resolution

CA 1985 companies- file OR to remove cap

35
Q

What are the post meeting matters that must be addressed after granting director’s authority to allot?

A

Authority given under s551- file OR granting authority at CH (s551(9))

Authority arising under s550- CA 1985 company must file any OR granting directors authority. No action required for CA 2006

36
Q

What are the post meeting matters that must be addressed after disapplying pre-emption rights?

A

File SR at CH (s29(1)(a) and s30(1) within 15 days

37
Q

What are the post meeting matters that must be addressed after creating class rights?

A

File SR amending articles of association within 15days after it is passed

38
Q

Why would shares be transferred?

A

Gift or sale

Transmitted following death/ bankruptcy

39
Q

What are the restrictions on transfer?

A

Subject to provisions in articles (s544(1) CA 2006)

Two most common forms:
Directors’ power to refuse to register- Article 26(5) MA

Pre emption clauses

40
Q

What is the method of transfer?

A

Instrument of transfer- s770(1) CA

Stamp Duty

Legal and Equitable Ownership- s112 CA

41
Q

What should be considered on allotment?

A

s755 restriction- private company limited by shares is prohibited fro offering its shares to the public

42
Q

6 Broad Categories of shares?

A 
Ordinary 
Preference 
Participating Preference
Deferred
Redeemable
Convertible
43
Q

What is a prospectus?

A

Explanatory circular giving investors details about the company they are investing in

44
Q

What should a prospectus contain?

A

All the information necessary to enable investors to make an informed assessment of the financial status of the company and rights attaching to the shares (s87A(2) FSMA)

45
Q

When is a prospectus required?

A

Offer of shares by private co- prospectus not required

Two tests- if EITHER satisfied then the company will have to publish a prospectus which will need to be approved by the FCA

46
Q

What are the tests for deciding to make a prospectus?

A

Set out in s85 FSMA- are shares…

  • Being offered to the public in the UK (s85(1) FSMA)
  • Being admitted to trading on a regulated market in the UK (s85(2) FSMA)

Definition of ‘public’ wide (s102B FSMA)

Main market- London Stock Exchange but NOT AIM

47
Q

Exemptions to requiring a prospectus?

A

Two categories of exemption:

  • Dealing with exempt offers (s86(1) FSMA)
  • Dealing with exempt securities (Schedule 11A FSMA)

Most likely to be relied on by private companies- offer made to fewer than 150 persons

48
Q

Define financial promotion

A

s21 FSMA- invitation or inducement to engage in investment activity

PROHIBITED unless certain FSMA requirements are satisfied

49
Q

How is the price of a share calculated?

A

Work out value of the company as a whole and divide between the number of shares in issue

Business Law and Practice (1 decks)

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