Equity Finance

Question 1

Definition

Answer 1

Companies obtain finance in one of two ways:
1) Prospective shareholders pay money or give property to the company in return for shares. Trying to generate more money for the company - EQUITY FINANCE
2) Companies borrow money to fund expansion or just the day-to-day running of the company - DEBT FINANCE

Question 2

Different types of Equity Finance

Answer 2

3 ways shares can change hands:
1) Allotment
2) Share transfer
3) Buyback
All methods involve the % of shareholding of at least one of the shareholders changing

Question 3

Allotment - Definition

Answer 3

When a company decides to create shares and give them to an existing shareholder or a new shareholder in return for payment - the number of shares in the company increased so the existing shareholder’s percentage shareholding will decrease

Question 4

Allotment - When are shares issued/allotted?

Answer 4

The shares are issued by the company when the name of the shareholder has been entered on the register of members. They are allotted when the company has agreed and passed a resolution to allow this person to be a member

Question 5

Allotment - 3 requirements

Answer 5

1) Are there any constitutional restrictions on allotment?
2) Do the directors have authority to allot shares?
3) Are there any pre-emption rights?

Question 6

Allotment - Constitutional restrictions

Answer 6

May be necessary to change their articles, this may be required if:
- The new shares being allotted have new rights or powers different from existing share
- There is a restriction in the articles on the allotment of shares
- Although rare the articles may set too low a cap on the number of shares to be allotted (authorised share capital)
- The company wishes to disapply pre-emption rights via the articles

Question 7

Allotment - Constitutional restrictions - Changing the articles

Answer 7

A special resolution is required to change the articles although changing the articles to grant authority to allot can be via ordinary resolution

Question 8

Allotment - Director’s authority

Answer 8

S. 550 permits allotment of shares by the directors without any shareholder resolution. However there are 4 requirements which must be met before S. 550 applies. These are:
1) Must be a private company
2) One class of shares -in most situations it will be ordinary shares- (before and after allotment)
3) The proposal is to allot that same class of shares
4) There is not restriction in the articles

Question 9

Allotment - Director’s authority - If S. 550 doesn’t apply

Answer 9

If S. 550 does not apply then authorization under S. 551 can either be given by the articles or by ordinary resolution. If given in the articles they must state the max. number of shares that may be allotted under it and the date on which it will expire (must be more than 5 years). If articles restrict director’s power then companies can remove this by amending the articles by special resolution

Question 10

Allotment - Pre-emption rights

Answer 10

Pre-emption rights = rights of first refusal over shares which are being allotted. Under S. 561 a company proposing to allot equity securities must offer those securities to the ordinary shareholders in proportion to their existing shareholdings.

Question 11

Allotment - Pre-emption rights - What are equity securities?

Answer 11

Defined as meaning ordinary shares or rights to subscribe for or convert securities into ordinary shares. If a share carries a right to participate only up to a specified amount in a distribution then it is not an ordinary share (e.g a fixed amount or a fixed rate interest).

Question 12

Allotment - Pre-emption rights - Non-cash

Answer 12

Pre-emption rights do not apply to shares issued for non-cash consideration even if the non-cash consideration is only a small part of the overall offer.

Question 13

Allotment - Pre-emption rights - Excluding these rights in articles

Answer 13

A private company may exclude pre-emption requirements by a provision in its articles or by special resolution. No pre-emption rights in the Model Articles

Question 14

Allotment - Administration - Filings at Companies house

Answer 14

1) Special resolution adopting new articles
2) Names and addresses of the directors allotting the shares
3) Ordinary resolution removing authorised share capital
4) Form SH01 - return of allotment + statement of capital
5) Ordinary resolution authorising allotment
6) Special resolution disapplying pre-emption rights
7) New articles of association if amended

Question 15

Allotment - Authorisation - Fillings at Companies House - Time limit

Answer 15

15 days from relevant transaction but Form SH01 has a month

Question 16

Transfer of shares - Definition

Answer 16

Where the shareholder sells or gives shares to another shareholder or to a new shareholder. The transferor’s % shareholding decreases and the transferee’s % shareholding increases.

Question 17

Transfer of shares - How are shares transferred?

Answer 17

The transferor must complete and sign a stock transfer form and give it to the transferee along with the share certificate relating to the shares. Transferee must then send the share certificate and stock transfer form to the company. The company will then send the new shareholder a new share certificate, enter their name on the register of members.

Question 18

Share buyback - Definition

Answer 18

Where the company buys back some of its own shares from one or more shareholders. Reverse allotment - total number of shares in the company decreased but the remaining shareholder’s % shareholding increases. Company is financially worse off.

Question 19

Share buyback - Disadvantages

Answer 19

It will result in the reduction of profits available for declaring dividends or of capital available for creditors in the event that a company cannot pay its debts. If the company is wound up there will be less money available for the company’s shareholders once creditors have been paid.

Question 20

Share buyback - How to buy back shares - Off-market purchase - Definition

Answer 20

Buy back which is not on the stock market - what private companies make

Question 21

Share buyback - How to buy back shares - Off-market purchase - Requirements

Answer 21

1) Articles must not forbid buyback
2) Shares must be fully paid
3) Company must pay for shares at the time of purchase
4) Shares must be paid for out of distributable profits
5) Must pass an ordinary resolution authorising buyback

Question 22

Share buy back - Buy back out of capital - Definition

Answer 22

Sometimes companies wish to buy back shares but do not have enough distributable profits to fund the buy back. Only possible if articles don’t forbid it and as long as they’ve exhausted their distributable profits. Where a company used this method the shares will be brought back partly using the companies’ profits and partly using its capital

Question 23

Share buy back - Buy back out of capital - Requirements

Answer 23

Same conditions for buy back out of distributable profits must be met as well as:
1) Company’s directors must make a statement of solvency no sooner than one week before GM
2) Must be approved by special resolution in addition to the ordinary resolution needed for buy back out of distributable profits
3) 7 days after special resolution must be a statement in London Gazette