COMPANIES: FINANCE Flashcards
Types of shares
PREFERENCE: e.g. 5 %
Dividends:
- Preferential right to a dividend (no right to payment)
- Cumulative - assumed
- Participating - not assumed
- Undeclared dividends cease to be payable on winding up (even if rollover) unless declared not yet paid
Voting rights:
- Yes ( BUT usually disapplied in articles)
Pre-emption rights:
- No
Right to share in capital on winding up:
- Right to be repaid capital (articles usually state this is in priority to ordinary)
- Right to share in surplus profits (but usually disapplied in articles)
Rights to participate in rights issue:
No
ORDINARY: e.g. £1
Dividends:
- Yes
Voting rights:
- Yes
Pre-emption rights:
- Yes
Right to share in capital on winding up:
- Right to be repaid capital
- Right to share in surplus profits
Rights to participate in rights issue:
- Yes
Redeemable shares
Can be bought back by the company.
PLC articles must state authority to issue.
Can only be issued when there are other types of shares in issue.
Class rights
Rights to shares can be varied in articles.
Default articles:
- SPECIAL RESOLUTION of class or written consent (LTD only) of 75% of nominal value of issued shares in that class
- Notice giving particular of variation, new class must be given to registrar WITHIN 1 MONTH of variation.
Shareholder right to object:
- Holders of at least 15% of class (who have not voted in favour of variation) can apply to court WITHIN 15 DAYS of consent given by class to have variation cancelled, court can confirm variation or cancel it as unfairly prejudicial. It can’t modify variation.
- Value of existing rights may be affected will not concern court if rights are unchanged. Variation is only when the right itself is changed e.g. sub dividing share class & issue preference shares paid ahead or ordinary.
Allotment of shares
Directors of an LTD with ONLY 1 CLASS OF SHARES can allot shares of that class UNLESS it is prohibited by articles.
In other cases the following applies: (e.g. PLC’s)
- Must be authority in articles or ORDINARY RESOLUTION.
- Authority must:
- State max no. shares to be allotted
- State expiry date for authority (not more than 5 YEARS)
- Given or varied with ORDINARY resolution.
Rights issue & bonus issue
Rights issue: CASH GENERATED
- Allotment of additional shares to existing members
- Usually pro rata to their existing shares
- If they do not wish to have additional shares under rights issue, may be able to sell their rights but obtain value of issue.
Bonus issue: NO CASH GENERATED
- Capitalisation of reserves by issue of additional shares to existing shareholders.
- In proportion to holding
- Normally fully paid with no cash required from shareholders
Rights of pre-emption (protects others diluting others powers)
- First right of refusal for existing shareholders.
- If allotted in breach of these rules, members who this was offered to may return their allotment within 2 YEARS, recover compensation for loss from those who defaulted.
- An issue to third party is still valid though.
Timeline:
- Offer equity shares pro rata to existing shareholders.
- AT LEAST 21 DAYS…..
- Offers not accepted may be allotted on the same (or less favourable terms) to other members.
Rights of pre-emption (protects others diluting others powers) - EXCEPTIONS
Bonus shares (as non cash generating)
Shares issued for non cash consideration
Employee share schemes
Exclusion in articles (LTD ONLY) or by SPECIAL RESOLUTION e.g. PLC
Shares at a discount
General rule….
- Shares can’t be allotted at a discount less than nominal value.
- If they are, the receiver is liable to pay to nominal value with interest.
Not the same as partly paid shares
Shares at a premium
Must be transferred to share premium account.
Uses of share premium account:
- Write off expenses of the issue of those shares and any commission lawfully paid on issue.
- Allotted to members as fully paid bonus shares.
- Special rules for group reconstruction and merger relief.
CAN’T be used for:
- Dividend
- Write off expenses to do with the formation of co.
- Write off expenses to do with issue of debentures.
Payment of shares
Must be paid up with money or moneys worth (consideration of sufficient value) - needs to be reasonable else courts court intervene.
Shares deemed to be allotted or paid when received:
- Cash
- Undertaking to pay cash at a later date.
- Cheque
- Release of liability for a liquidated sum.
Additional restrictions for public companies:
- Shares from first shareholders (subscribers) must be paid in cash.
- Can’t be paid for an undertaking to do work or services.
- Must be paid up at least 1/4 of nominal value plus all premium (except from employee share schemes)
- Can’t be allotted as fully or partly paid (otherwise than in cash) if payment includes undertaking to be performed more than 5 YEARS after allotment.
- Any payment not in cash needs to be indepently valued e.g. building.
- At least 50k of nominal value to be issued.
Transfer of shares
Unlisted shares (LTD & some PLC)
- Seller does a stock transfer form in favour or buyer with the share certificate.
- Sent to company for registration.
- Either register transfer with a certificate or give notice of refusal to buyer with reasons within 2 MONTHS.
- No requirement for certificate when transmitted by law e.g. member trustee in bankruptcy or deceased members representative becomes entitled to shares.
Listed shares: PLC
- CREST system (transferred using paperless system)
- Normally completed WITHIN 3 DAYS.
- Act may require companies to adopt paperless holding and transfer of shares.
Capital maintenance
Law protects creditors by maintaining shareholders funds:
- Restricts dividends to only be paid from distributable reserves
- Shares not to be issued at a discount
- Restricts of reduction in share capital: repurchase of own shares, redemption of shares
Law does not prevent share capital being used as companies working capital.
Capital maintenance - reduction in share capital
WHY:
- Capital exceeds company needs e.g. shareholders injected lots of capital on start up.
- Net assets fallen below capital and this is likely to be permanent.
HOW:
- Reducing liability on partly paid shares e.g. change nominal value.
- Reducing the amount of paid share capital or share premium e.g. returning it to shareholders or using it for another purpose.
PROCEDURES:
PLC
- SPECIAL RESOLUTION
- Confirmed by court
- Notice to creditors (creditors need to be happy)
- File resolution with court order
LTD
- SPECIAL RESOLUTION
- Solvency statement (signed by directors WITHIN 15 DAYS of special resolution
- File resolution and solvency statement
Capital maintenance - purchase of own shares
ALLOWED IF:
- Complying with court order e.g. buying out unfairly prejudicial.
- Surrender of shares in articles when there is a failure to pay.
- Redemption or purchase of shares (companies act) - IMPORTANT
- Acquisition of shares in permitted reduction of share capital
- Return must be sent WITHIN 28 DAYS
- Purchased shares can be cancelled or a quoted company can hold shares in treasury pending reissue.
- Redeemed or purchased shares out of company profit, the amount which is lost when shares are cancelled must be transferred to the capital redemption reserve. Reserve is treated as a part of called up share capital, except that it can be used to pay fully paid bonus shares.
MARKET PURCHASE:
- Recognised investment exchange
- Authorised by resolution (DEFAULT ORDINARY)
- Specifies min and max number of shares and price.
OFF MARKET PURCHASE:
- NOT conducted in a recognised investment exchange
- Contract approved (or conditional approval with SPECIAL RESOLUTION), this disregards voting rights of shares to which the resolution relates.
Redemption of shares (redeemable)
Shares are issued on terms where they can be redeemed at a later date.
Details are in articles, Co can exercise own powers with rules in CA.
Redeemable shares can only be issued if there are other types of shares in issue.
