Chapter 7 - Companies: finance

Question 1

When do shares have class rights?

Answer 1

Shares which have certain rights not enjoyed by other shares in the company are grouped in a class and are said to have class rights.

Question 2

How must shares be alloted?

Answer 2

Generally speaking, shares may be allotted provided authority is given in the articles or by ordinary resolution and they must first be offered to existing shareholders in proportion to their existing holdings.

Question 3

Can shares be issued at a premium or discount?

Answer 3

Shares must be paid for in money or money’s worth. They can be issued at a premium but not, as a general rule, at a discount.

Question 4

Are shares generally freely transferable?

Answer 4

Shares are generally freely transferable and may be transferred in a paper or paperless format.

Question 5

What is a share?

Answer 5

A share is a transferable form of personal property, carrying rights and obligations, by which the interest of a member of a company limited by shares is measured.

Question 6

Do ordinary shareholders have statutory pre-emption rights?

Answer 6

Yes.

All ordinary shareholders have statutory pre-emption rights.

Question 7

When the company is wound up, do ordinary shareholders have an automatic right to have their capital repaid?

Answer 7

Yes.

Ordinary shareholders have an automatic right to have their capital repaid and to participate in the distribution of profit, when the company is wound up, provided the company has surplus assets once creditors have been satisfied.

Question 8

When the company is wound up, do preference shareholders have a right to have their capital repaid?

Answer 8

Preference shareholders also have a right to have their capital repaid on a winding up (unless the articles provide otherwise).

If there is a surplus after repayment of capital, ordinary and preference shareholders will share equally.

Where preference shares are expressed to carry a priority or preferential right to return of capital, the amount paid up on each preference share is to be repaid before anything is repaid to ordinary shareholders.

Question 9

Do preference shareholders have statutory pre-emption rights?

Answer 9

Preference shareholders do not have rights of pre-emption unless they are specifically conferred by the company’s articles of association or terms of issue of the shares.

Question 10

What is a redeemable share?

Answer 10

A redeemable share is one which is issued on terms that it can be bought back by the company at the option of the company or the shareholder.

Question 11

How may the rights attached to a class of shares be varied?

Answer 11

The rights attached to a class of shares can be varied only in accordance with the articles or according to the procedure set out in the Act by a special resolution of the class or written consent from at least 75% in nominal value of the issued shares of that class.

The holders of at least 15% of the issued shares of the class in question (who did not consent or vote in favour of the variation) may apply to the court, within 21 days, to have the variation cancelled as ‘unfairly prejudicial’.

A class right is varied only if the right itself is altered. An alteration which affects how the right ‘operates’, but which leaves the right unchanged is not a variation.

Question 12

When are shares alloted?

Answer 12

Shares are allotted when a person acquires the unconditional right to be included in the company’s register of members in respect of those shares

Question 13

When are shares issued?

Answer 13

Shares are generally said to be issued once the allottee receives a letter of allotment or share certificate as evidence of their title.

Question 14

On what basis may the directors of any company allot shares?

Answer 14

1) There must be authority given either by the articles or by ordinary resolution. It can be general or specific, conditional or unconditional.
2. The authority must state the maximum number of shares to be allotted and state the expiry date for the authority, which must be not more than five years after the authority.

The authority may be given, varied, renewed or removed by an ordinary resolution, even if this constitutes an alteration of the articles (which would normally require a special resolution).

Question 15

What are pre-emption rights?

Answer 15

The rights of existing company shareholders to be offered new equity shares issued by the company pro rata to their existing holding of that class of shares are called pre-emption rights.

The offer must be made in writing or in electronic form and must specify a period of not less than 21 days during which the offer may be accepted.

Question 16

What happens if equity securities are issued in breach of the rules regarding pre-emption rights?

Answer 16

If equity securities are allotted in breach of these rules the members to whom the offer should have been made may, within two years from delivery of the return of allotment, recover compensation for their loss, if any, from those in default

The allotment will generally be valid.

Question 17

In what cases do the pre-emption provisions not apply?

Answer 17

Exceptions - bonus shares, securities to be wholly or partly paid up otherwise than in cash, securities relating to an employees’ share scheme

Exclusions - A private company may exclude all or any of the provisions in its articles, either generally or in relation to allotments of a particular description

Disapplication - Directors of a private company with only one class of shares may disregard the provisions by either the articles or special resolution.

Question 18

In which exceptional circumstance may a company pay a commission to someone who agrees to subscribe or to procure subscription for shares?

Answer 18

There is one exception, however, which entitles a company to pay a commission to someone who agrees to subscribe or to procure subscriptions for shares, provided the company’s articles contain the relevant authority and provided the commission paid does not exceed 10% of the issue price of the shares or the amount authorised by the articles, whichever is less.

Question 19

A company cannot distribute part of its share premium account:

Answer 19

as a dividend;

to write off expenses incurred in connection with the formation of the company; or

to write off expenses incurred in connection with an issue of debentures.

Question 20

When are shares deemed to be paid up?

Answer 20

Where the company receives:

cash

an undertaking to pay cash to the company (but not to another person) at a later date

a cheque

a release of its liability for a liquidated sum

Question 21

What area five additional rules regarding payment of shares that apply to public companies?

Answer 21

Subscribers - Shares taken by subscribers must be paid up in cash.

Services - Shares cannot be paid for by an undertaking by someone to do work or perform services for the company or any other person.

1/4 paid up - Shares must be paid up at least as to one-quarter of the nominal value plus the whole of any premium payable.

Long-term undertaking - Shares cannot be allotted as fully or partly paid up otherwise than in cash if the payment is or includes an undertaking which may be performed more than five years after the allotment.

Valuation of non-cash consideration - Any payment otherwise than in cash must be independently valued

Question 22

What happens when an allotment of shares is made in contravention with the relevant provisions?

Answer 22

Generally speaking, where an allotment is made in contravention of the provisions, the allottee is liable to pay an amount equal to the nominal value of the allotted shares together with interest.

Question 23

How may any limited company reduce its share capital?

Answer 23

Any limited company may reduce its capital by special resolution confirmed by the court.

If a reduction is confirmed for a public company that results in the nominal value of the allotted share capital falling below the authorised minimum, the company must be re-registered as a private company unless the court directs otherwise

Question 24

How may a private company reduce its capital?

Answer 24

A private company may reduce its capital by special resolution supported by a solvency statement given by all of the directors in a prescribed form (within 15 days prior to the resolution being passed) confirming the company’s ability to pay its debts over a period of 12 months.

A copy of the resolution and a statement of capital, together with a copy of the solvency statement or court order must be filed with the Registrar.

Question 25

Can a company increase or alter its share capital?

Answer 25

Yes.

A company may, however, increase or alter its share capital as follows and in each case must give notice to the Registrar of the alteration, accompanied by a statement of capital, within one month.

Question 26

Redeemable shares may only be redeemed out of:

Answer 26

distributable profits of the company; or

the proceeds of a fresh issue of shares made for the purposes of the redemption.

Save that a private limited company may redeem shares out of capital subject to certain conditions

Question 27

Can a company acquire its own shares?

Answer 27

Generally speaking a company is prohibited from acquiring its own shares save in limited circumstances (s.658), namely the:

redemption or purchase of shares in accordance with the Act

acquisition of shares in a permitted reduction of capital

purchase of shares in complying with a court order (eg, buying out an unfairly prejudiced minority)

forfeiture or surrender of shares in accordance with a company’s articles where there is failure to pay for them

Question 28

How must a market purchase be authorised?

Answer 28

A market purchase, ie, one made on a recognised investment exchange, must be authorised by a resolution of the company which specifies the maximum number of shares that can be acquired and states a maximum and minimum price that can be paid for them.

Question 29

How must an off-market purchase be authorised?

Answer 29

An off-market purchase, ie, one that is not conducted through a recognised investment exchange, must be authorised by a contract approved by (or conditional upon approval by) a special resolution.

A return giving details of the purchase must be sent to the Registrar of Companies within
28 days.

Question 30

Can private companies provide financial assistance for the purchase of shares?

Answer 30

Under the Act, private companies are no longer prohibited from giving financial assistance for the acquisition of their shares.

Question 31

Can public companies provide financial assistance for the purchase of shares?

Answer 31

A public company (or its subsidiary) is prohibited from giving financial assistance at or before the time of an acquisition of shares in the public company, unless the principal purpose of the assistance is something other than the proposed acquisition (s.678) or the giving of assistance is only an incidental part of some larger purpose and (in either case) it is given in good faith in the interests of the company.

Question 32

Financial assistance may be given for the following permitted transactions:

Answer 32

where the lending of money is in the company’s ordinary course of business

where the financial assistance is given in good faith in the interests of the company for the purposes of an employees’ share scheme

the making of loans to employees (not directors) in good faith to enable them to acquire fully paid shares in the company

Question 33

What is a charge?

Answer 33

A charge is an encumbrance upon real or personal property granted by one party (the chargor) that gives another party (the chargee) certain rights over that property, usually as security for a debt owed to the charge holder.

Question 34

What is a fixed charge?

Answer 34

A fixed charge is a form of protection given to secured creditors relating to specific assets of a company. It attaches to the relevant asset as soon as the charge is created.

Question 35

What is a floating charge?

Answer 35

Unlike a fixed charge, a floating charge permits a company to deal with the charged assets without the permission of the chargeholder until such time as the charge crystallises (thereby becoming a fixed charge).

Question 36

What are events causing crystallisation?

Answer 36

The liquidation of the company

Cessation of the company’s business

Active intervention by the chargee, generally by way of appointing a receiver

Any event specified in the charge, such as non-payment of interest on the due date or notice given by the chargee that the charge is converted into a fixed charge

Question 37

How can a floating charge become void automatically?

Answer 37

A floating charge, if created within 12 months before liquidation, may become void automatically on liquidation

Question 38

What is an advantage of a floating charge?

Answer 38

A floating charge has some advantage in being applicable to current assets which may be easier to realise than fixed assets subject to a fixed charge.

Question 39

What are the principle disadvantages of floating charges?

Answer 39

The holder of a floating charge cannot be certain until the charge crystallises which assets will form their security.

Even when a floating charge has crystallised over an identified pool of assets the chargee may find himself postponed to the claim of other creditors.

A floating charge may become invalid automatically if the company creates the charge to secure an existing debt and goes into liquidation within a year thereafter
(s.245 IA); the period is only six months with a fixed charge.

Question 40

What are the main points to remember in connection with the priority of any charges?

Answer 40

Legal charges rank according to the order of creation.

Equitable charges also take priority according to the order of creation.

A legal charge created before an equitable one has priority.

An equitable charge created before a legal charge will only take priority over the latter if, when the latter was created, the legal chargee had notice of the equitable charge.

Question 41

Regarding registration of charges, what documents must a company keep available for inspection?

Answer 41

a copy of every instrument creating a charge which is required to be registered;

a register of charges, listing all fixed and floating charges and giving the names of the chargees, the amount of the charge and a short description of the property charged.

They must be available for inspection by any creditor or member free of charge and by any other person on payment of a fee.

Must also deliver prescribed particulars to Registrar within 21 days, which then issue a certificate of registration.

Question 42

Failure to register a charge will:

Answer 42

render the charge void against any:

liquidator
administrator
creditor

The money secured by the (void) charge is then immediately payable.