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SQE 1 > Chapter 5 - Financing a business, financial records, and accounting requirements > Flashcards

Chapter 5 - Financing a business, financial records, and accounting requirements Flashcards

1
Q

What are the main two funding options available to business?

A

Equity Finance
Debt Finance

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2
Q

What is another name for equity finance?

A

Share finance

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3
Q

What is equity finance ?

A

Is the creation of new shares in exchange for consideration which means where something of value is given in exchange of a promise received by a company. It generates assets for the company

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4
Q

What is another name for debt finance?

A

Loan Fianance

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5
Q

What is debt finance?

A

Involves borrowing money in order to finance a business (incorporated or unincorporated)

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6
Q

What are the two types of debt ?

A

Secured and unsecured

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7
Q

What is the minimum number of shareholders that a company must have on incorporation?

A

A company must have a minimum of ONE shareholder on incorporation

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8
Q

After incorporation of a company, who is responsible for share issue?

A

The directors of a company are responsible for share issue

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9
Q

What means share issue?

A

Is the process where new shares are alloted (created) in exchange for consideration received by the company, and the member is entered onto the register of members in respect of those. shares

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10
Q

When can the change the control of the company?

A

When the number of shares increases

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11
Q

Do directors have authority to issue the shares?

A

In private companies with unamended model articles of association and only one class of shares , before and after the issue, the directors are free to issue further shares of the same class by board resolutionunder MA3. This can be done without prior reference to the members

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12
Q

Do pre-emption rights apply?

A
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13
Q

Do directors have authority to issue the shares?

A

Otherwise, the proposed issue of shares by the directors will require the advance authority of the members by OR (ordinary resolution) or by provision in the comapny’s articles.

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14
Q

What happens to cpmpanies that that were incorporated prior 1st October 2009? Do the directors have the authority to issue the shares?

A

No, there, the memorandum of association will set out the authorised share capital (the maximium number of shares that may be issued). Following the CA, this provision is transfered to the articles and may be amended by OR. Adn a copy of the OR must be filled at the Companies House.

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15
Q

What happens for companies that were incorporated ON or AFTER 1st October 2009?

A

It is necessary to check the articles of restriction and amend, if necessary, by special resolution. There are no such restrictions in the MA.

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16
Q

What does the authority must state in the articles or by way of OR (ordinary resolution)?

A

The maximum number of shares the directors are allowed to issue
the date when the authority will expire (generally not more than 5 years from the date the authority is given)
If an OR is passed, this must be filled at Companies House within 15 days

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17
Q

Explain the statutory pre-emption right

A

The statutory pre-emption rights dictate that generally on an issue of new shares, they must first be offered to the existing members, on the same or more favourable terms, in proportion to their existing shareholdings. They have a right of first refusal for a period of at least 14 days.

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18
Q

How can the statutory right might be?

A

varied or removed for private companies by contrary provision in the articles, either on incorporation or subsequently by SR
disapplied by SR of the members
formally waived in relation to a specific issue (if all the members intend to decline the offer)

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19
Q

Do pre-emption rights protect members?

A

Yes

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20
Q

What is the negatove effect of issuing shares?

A

It weakens the control of the company, because there is a potential for an individual percentage shareholding to decrease.

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21
Q

How is it called if the shares are issued wholly for cash?

A

Pre-emption

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22
Q

Explain the term buyback of shares

A

When a company buys back its own shares and the shares are cancelled

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23
Q

Explain capital maintenance

A

A fundamental principle, which states that capital provided by shareholders must be maintained and must not be returned to them as creditors rely on it

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24
Q

For SQE on what purchases should I focus on?

A

On off market purchases

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25
Q

How many types of shares are?

A

Share issue
Share transfer and
Share transmission

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26
Q

What does involve share transfer?

A

Involves dealing with existing shares (gift or on sale)

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27
Q

Explain share transfer

A

There is no money generated for the company and there is a potential for an individual control of the company to change

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28
Q

Between who is it done the share transfer?

A

It’s a transaction between transferor and transferee

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29
Q

What happens to the ownerhip of the share transfer?

A

Ownership changes

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30
Q

What happens to the number of shares in a share transfer?

A

The number of shares remain the same

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31
Q

What is share transition?

A

Transfer of shares by law

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32
Q

When does a share transition happen?

A

When trustee is in bankrupcy, (PR on death).

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33
Q

Who receives the dividents in a share transmission?

A

The PR ( personal representative)

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34
Q

Share transmission explain about shreholders

A

They do not become shareholders

35
Q

What can the PR do in a share transmission?

A

Can apply to be registered as a member or sell

36
Q

What is the first step of share transfer process?

A

The transferor completes and signs a stock transfer form (STF) and sends it with the share certificates to the transferee

37
Q

What is the second step of the share transfer process?

A

Transferee pays stamp duty on the STF (rounded to the nearest £5)

38
Q

What is the third step of the share transfer process?

A

Transferee sends the stamp STF and the share certificates to the company

39
Q

What is the 4th step in the share transfer process

A

Directors pass BR to approve or reject the transfer. Directors have absolute discretion under MA26. - Check for special articles

40
Q

What is the 5th step in the share transfer process?

A

Transfer must be registered and the new share certificate sent to the new member within 2 months of the application.(unless the directors have the right to refuse to register the transfer).

41
Q

What is the 6th step in the share transfer process?

A

The company will update details of shareholders annually on the Confirmation Statement

42
Q

On what does it depend if the directors can or cannot refuse the to register the share transfer?

A

It depends on the terms of the company’s article

43
Q

Can the directors refuse to register the share transfer?

A

Yes, they can in MA26

44
Q

When is the transferee going to become a member?

A

When entered onto the register of members

45
Q

What happens with the share until the transferee did not become a member yet?

A

The transferor holds them on trust for the transferee

46
Q

What happens if the directors exercise their discretion not to register the share transfer?

A

Then, the transferee may never be the legal owner.

47
Q

What does the transferor must do?

A

The transferor must vote according to the wishes of the transferee and must hold any dividends on trust for them.

48
Q

Are there any other types of restrictions on the right to transfer shares and where do they set them up?

A

Yes, there are and they can be found in their articles

49
Q

What are the other types of examples of restrictions that can be set out in the transfers of shares?

A

requiring a member who whishes to sell to first offer shares to the existing members pro rata ( in proportion to their existing shareholding).
Or allowing the members freedom only to transfer to family or other company members

50
Q

What is important to know for SQE about dividends?

A

When and how a company can issue a dividend to its shareholder

51
Q

What is a divident?

A

A dividend is a payment the company makes to its members, which provides them with a return on their financial investment in the company.

52
Q

When can a divident be made by the company? and what does that mean?

A

A dividend may only be made out of profits available for the purpose. That means that the company must calculate its accumulated profits to date, and deduct its realized loses to date.

53
Q

Can a divident may be paid if the company experienced loses?

A

Yes, a dividend may be paid even if a loss has occurred in that year, only if the accumulated profits exceed the accumulated losses.

54
Q

How is going to be determined when and how a dividend is paid ?

A

The company’s article will regulate that

55
Q

When is buyback of shares permitted and why?

A

Buyback of shares is permitted in limited circumstances, due to the principal of capital maintenance.

56
Q

What means buyback of shares?

A

Where a company buys back its onw shares, and the shares are cancelled.

57
Q

Explain capital maintenance, what is it?

A

A fundamental principle

58
Q

What does capital maintenance states and why?

A

Capital maintenance states that capital provided by shareholders must be maintained and must not be returned to them because creditors rely on them

59
Q

Who provides the capital?

A

The shareholders

60
Q

Are the buyback of shares heavily regulated and why?

A

Yes, they are heavily regulated as it could leave the company in a precarious financial position by reducing available profits or capital.

61
Q

On what purchases should I focus on for the SQE?

A

Off-stock market ourchases

62
Q

From where are the shares brought back?

A

From profit, or capital

63
Q

What is the procedure of a buyback of shares from profits?

A

Check the shares are fully paid
Check the articles do not prohibit buyback
Directors should consider their duties under s172 and 174
Check profits are available by producing accounts- Distributable profits must be available or payment made from a fresh issue
OR required to approve contract - Holders of shares being bought cannot vote and their vote do not count
Copy buyback contract or summary of it must be sent with written resolution or made available for inspection at least 15 days before GM and at the GM
Payment must be made at the time of buyback
File forms SH03 and SH06 within 28 days
Cancel shares, update register of members, file relevant PSC forms and update PSC register
Make contract, summary available for inspection for 10 years at the registered office once completed

64
Q

When is the permitted buyback of shares?

A

When distributable profits are available

65
Q

What companies can buyback shares from capital?

A

Only Private companies

66
Q

When is permitted the buyback of shares from capital?

A

When distributable profits are unavailable

67
Q

Can a company buy back shares from capital from profits?

A

No !

68
Q

How many stages are in the buyback of shares out of capital?

A

15

69
Q

What is the first stage of buyback of shares from capital?

A

Check shares are fully paid

70
Q

What is stage 2 of buyback of shares from capital?

A

Check articles do not prohibit buyback

71
Q

What is stage 3 of buyback of shares from capital?

A

Directors should consider their duties

71
Q

What is stage 4 of buyback of shares from capital?

A

Check whether profits are available by producing accounts (prepared no more than 3 months before the statement of solvency).

72
Q

What is stage 5 of buyback of shares from capital?

A

Not earlier than 1 week before the meeting, directors must make a statement of solvency with auditors report annexed, that the company will remain solvent for a year after the transaction.

73
Q

What is stage 6 of buyback of shares from capital?

A

They may face personal liability and criminal sanctions if they do this negligently

74
Q

What is stage 7 of buyback of shares from capital?

A

The auditor’s report must confirm that the statement of solvency is not unreasonable

75
Q

What is stage 8 of buyback of shares from capital?

A

OR required to approve contract

76
Q

What is stage 9 of buyback of shares from capital?

A

SR required to approve buyback from capital

77
Q

What is stage 10 of buyback of shares from capital?

A

Holders of shares being bought cannot vote and their votes do not count

78
Q

What is stage 11 of buyback of shares from capital?

A

Copy buyback contract or summary which must be sent with written resolution or made available for inspection within 15 days before the General MAnager and at the General Manager.

79
Q

What is stage 12 of buyback of shares from capital?

A

Copy statement of solvency and auditors report must be available for inspection before and at the meeting, otherwise the resolution will be ineffective.

80
Q

What is stage 13 of buyback of shares from capital?

A

Includes 2 steps:
Notice must be published in the London Gazette as well as a national Newspaper or actual notice to each creditor within 7 days of the SR, stating where the statement of solvency and auditors report will be available and the creditors have 5 weeks to apply for an order preventing the buyback.
Before, or at the same time, the statement of solvency or report, must be filled at Companies House,

81
Q

What is stage 14 of buyback of shares from capital?

A

Copies of the statement of solvency and auditors report must be available for inspection until 5 weeks after the Special REsolution.

82
Q

What is stage 15 of buyback of shares from capital?

A

Contains 4 steps:
a. Payments must be made in the two weeks, following 5 weeks of the SR.
b. File form SH03 and SH06 within 28 days
c. File SR at Companies House within 15 days
d.Cancel shares, update register of members, file relevant people with significant control forms, and update the People with Significant control register.
e. Contract and summary available for inspection for 10 years at the registered office once completed.

83
Q

What to be aware of when it comes to buyback of shares?

A

When buyback is permitted, and what resolutions are required.

SQE 1 (12 decks)

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