E Capital and Financing of Companies Flashcards
Classes of shares
Preference shares:
No voting rights, fixed dividend paid in priority to other dividends, and surplus on winding up is prior to return of capital - cannot participate in surplus
Ordinary shares:
Full voting rights, dividends paid after preference dividends (not fixed), surplus on winding up entitle to share surplus assets after repayment of preference shares
Treasury shares:
Created when a company purchases its own shares from distributable profits, up to 10% of the shares can be held in treasury which means they can be reissued without the usual formalities
Altering class rights:
Class rights are the special rights attached to each class of shares, such as dividend rights distribution of capital on a winding up and voting
Procedure for varying class rights dependents on if it is specified in articles
Minority protection is in place for holders of 15% the nominal value of that class who did not consent to variation may ask the court to cancel the variation
Allotment of shares
Issued share capital:
Share capital that has been issued released or sold by the company
Paid up share capital:
The amount which shareholders have actually paid on the shares issued
Called up share capital:
The amount of unpaid share capital which has been called for from shareholders but not yet paid
Uncalled share capital:
The amount of unpaid share capital that has not yet been called for from shareholders and therefore also remains unpaid
Statutory pre-emption rights:
New shares offered to existing shareholders in proportion to their shareholdings to raise new funds without diluting individual member shareholding (only applies to ordinary shares)
Bonus issues:
Scrip issue or capitalisation issue
Normally issued at no cost and do not raise new funds using the companies non distributable reserves, can be partly paid up bonus shares though
Rights issues:
New shares offered to existing shareholders in proportion to their shareholdings to raise new funds, can be used where the statutory pre emption rights have been disapplied
Issue of shares
Issue at a discount:
Every share has a nominal value, the common law rule is that a company cannot issue its shares for a consideration which is at a discount on their nominal value
Issue at premium:
Where a share is allotted at a value greater than its nominal the excess is the premium, where the market value is the greater than the fixed nominal value
Paying for shares private/public:
Private companies may issue for non cash consideration, court will only interfere if there is fraud or inadequacy
Public companies have additional rules contained in CA06
Loan capital and debentures meaning & advantages and disadvantages
loan capital comprises all the longer term borrowing of a company such as:
Overdrafts
Unsecured loans from a bank or other party
Loans secured on assets either from a bank or other party
A debenture is a document issued by a company containing an acknowledgement of its indebtedness whether charged on the companys assets or not:
A single debenture e.g. a company obtains a secured loan or overdraft
Debentures issued as a series and usually registered
Debenture stock subscribed to by a large number of lenders
Advantages of debentures:
Board does not need authority of an agm to issue debentures
Debentures carry no votes or dilute shares
No restrictions on issuing debentures at a discount, freely transferable
Disadvantages of debentures:
Interest must be paid out of pre tax profits
High gearing will affect share price
May precipitate liquidation/administration if the debentures are secured
Company charges types and meaning
Fixed charge:
Legal or equitable mortgage on a specific asset e.g. land, which prevents the company dealing with the asset without the consent of the mortgagee
Always on an identified asset
Asset is intended to be retained permanently in the business
The company has no general freedom to deal with the asset
Floating charge:
It is on a class of assets, present and future
The assets within the class will change from time to time
The company has freedom to deal with the charged assets in the ordinary course of its business
Cannot be created by a partnership
Crystallisation:
A floating charge does not attach to any asset until crystallisation which means the company can no longer deal freely with the assets e.g. liquidation
Advantages of a floating charge:
Company can deal freely with the assets
A wider class of assets can be charged
Disadvantages of a floating charge:
Value of the security is uncertain until it crystallises, it has a lower priority in order of repayment than a fixed charge
Registering company charges procedure and purpose
Priority of a charge depends on the type of charge and whether or not it has been registered:
Equal charges - first created has priority
Fixed charge - has priority over a floating charge
An unregistered registrable charge has no priority over a registered charge
A chargeholder can prohibit the creation of a later charge with priority, but the prohibition is only effective if a subsequent chargee has notice of the prohibition as well as the charge
Registration:
Company must notify the registrar within 21 days undertaken by the company or chargeholder
Failure to register renders the charge void or can result in a fine or money immediately repayable
Doctrine of capital maintenance and reduction explain the meaning and purpose
The share capital of a ltd company is regarded as a buffer fund for creditors:
The rules on maintenance of capital exist to prevent a company reducing its capital by returning it to its members, this means as a general rule a limited company cannot reduce its share capital
Exceptions include reducing or cancelling liabilities on partly paid shares, return capital in excess of the companies needs e.g. repaying cash to shareholders, cancel the paid up capital that is no longer represented by the assets
Distribution of dividends procedure and rules for ltd and plc
Distributable profits are the accumulated realised profits less the accumulated realised losses taken from trading activities and capital transactions:
Public companies can only declare a dividend if both before and after distribution its net assets are not less than its called up share capital and undistributable reserves
Model articles:
The directors recommend the payment of a dividend and the company declares it by passing an ordinary resolution
Consequences of an unlawful dividend:
If a dividend is not paid in accordance, then the company can recover the distribution shareholders who knew the dividend was unlawful, any director unless they can show they exercised reasonable care, the auditors if the dividend was paid in reliant on accounting errors
