Equity finance

Question 1

Allotment of shares: Are there any constitutional restriction on allotment?

Answer 1

1. For companies incorporated prior to 1 October 2009, check whether they have updated AoA. If not shareholder need to pass an ordinary resolution to remove upper limit of shares called “authorised share capital” (ASC). (exception to general rule that AoA only can be amended =special re.)
2. For all companies, check AoA on limit of number of shares of company. If there is such limit, change the article by special resolution.

Question 2

Do directors have authority to allot shares?

Answer 2

1. Private company with 1 class of shares:
   a. Under s500 CA2006, directors of private company which has 1 class of shares both before and after allotment, directors have authority to allot share without shareholder’s permission.
   b. For company incorporated before CA2006, shareholders must pass an ordinary resolution (transitional regulations under CA2006).
2. Public companies or private companies with more than on class of shares before or after allotment, must obtain shareholder’s ordinary resolution (must state max number of shares and the date on which authority will expire which is <=5 years)

Question 3

Are there any pre-emption rights

Answer 3

1. S561 of CA2006- preemption right of existing shareholders.
2. S567 CA2006 allows private companies to exclude preemption right in AoA
3. In case, AoA provides for preemption right differ from S561 of CA2006, AoA will apply. AoA provisions can be removed by a special resolution.
4. If S561 applies (i.e. AoA does not disapplied it), they can disapplied by a special resolution
5. If plc or private company with more than 1 class of share is dissaplying preemption rights in relation to a specific allotment, the directors must make a written statement justifying the disapplication of pre-emption.

Question 4

Payment for shares

Answer 4

1. Under MA21, all shares in company must be fully paid (buyer must pay for shares when they receive them).
2. If the AoA does not include MA21. the shares can be issued partly paid, but the shareholder must by the remainder when contractually obliged or if the company is wound up.
3. If company performs well, a share with nominal value may be alloted at a higher price (issued at a premium). The excess consideration would be recorded in a separated share premium account on the company’s balance sheet. This money will be treated as share capital and must be maintained.

Question 5

Adminisrative and filing requirements for allotment of shares

Answer 5

1. All resolution to be sent to CH within 15 days.
2. Company forms (SH01 - allotment and statement of capital) within 1 month of allotment
3. Forms PSC01,02,04 or 07 for new person with significant control
4. Amend register of members within 2 months, amend PSC register if necessary
5. Prepare share certificate within 2 months of allotment
6. Prepare minutes of every board meetings and GM meetings

Question 6

Transfer of shares

Answer 6

1. No restrictions under laws
2. Company may have certain restrictions in AoA
3. A person does not become shareholder of the company until they are entered on register of members (s113 CA2006)
4. MA26 gives the board discretion to refuse to register the transfer of shares. If the Company has the MA, every transfer must be approved by board. If transferee is not entered on the register, they will be beneficial owners of the shares.

Question 7

Procedure for transfer of shares

Answer 7

1. Transferor to complete and sign the stock transfer form and give it to transferee along with share certificate
2. Stamp duty:if the sale price is over GBP 1000, the buyer must pay stamp duty of 0.5% on the stock transfer form. No stamp duty is payable if the shares are gift.
3. Transferee send the form and share certificate to the company.
4. The company shall:
   a. send a new share certificate within 2 months
   b. enter the name of new shareholder in register of members within 2 months
   c. Notify the Registrar of Companies of the change in ownership of shares when the company files its annual confirmatio statement (CS01).

Question 8

Transmission of shares

Answer 8

1. Is an automatic process whereby:
   a. if a shareholder dies, their shares automatically pass to their personal respresentatives (PRs); or
   b. if a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.
2. Under MA27, The trustee in bankruptcy and PRs do not become shareholders of the company, but they are entitled to dividends declared on shares.
3. The trustee and PRs can choose to be registered as shareholder themselves (unless directors are entited to refuse to register) and can sell the shares. Or they can sell the shares as representative.

Question 9

Maintenance of share capital

Answer 9

1. Key principle of company law that paid up capital cannot be returned to shareholders, consequences include:
   * dividends cannot be paid out of capital
   * company must not generally purchase its own share.
2. Exceptions to this rule:
   * company can buy back its own shares as long as the correct procedure is followed s 690 CA.
   * company can purchase its own share under court order made under s994 CA2006 to buy out an unfairly prejudiced minority shareholder; and
   * a company can return capital to shareholders after payment of company’s debt, in a winding up.

Question 10

Requirements for Off market buy back

Answer 10

1. AoA does not forbid buy back
2. Shares must be fully paid
3. Company must pay for shares at time of purchase
4. Shares must usually be paid for out of distributable profits or the proceeds of fress issue of shares made for purpose of financing purchase
5. Shareholders pass an ordinary resolution approve the buy back contracr
6. A copy of buy back contract or summary of it must be available for inspection for 15 days before GM and at the GM (or sent with proposed written resolution)
7. A copy of buy back contract or written memorandum of its term (if contract is not in writing), mustbe made available for inspection at company’s registered office or SAIL as soon as contract concluded for 10 years from buy back date.

Question 11

Buy back out of capital

Answer 11

1. Only private comapnies are permitted to buy back out of capital
2. Company cannot use share capital to fund a buy back when they have distributable profits left.
3. In addition to normal conditions of buy back:
   * The directors must make a statement of solvency: stating it will remain solvent during the year following buyback. (director may be required to contribute to financial losses and face criminal if the statement is not reasonable)
   * Statement of solvency must have annexed to it an auditor report confirming that auditor are not aware of anything indicate that director unreasonable
   * Payment out of capital must be approved by special resolution (in addition to ordinary resolution to approve the buyback agreement)
   * A copy of statement solvency and auditors report must be available to members. If by written resolution, must be sent together with written resolution. If proposed at GM, must be available for inspection at the GM, otherwise, special resolution is ineffective.
   * within 7 days from special resolution, company must put a notice in London Gazette, stating that shareholders approved payment out of capital in order that company can buyback. It must specify the amount of capital to be used, date of special resolution, where the directors statement and auditors report are available for inspection. It must state that any creditors of comapny within 5 weeks following special resolution may apply for an order to prevent the buyback. The Co. must also publish an equivalent notice in an appropriate national newspaer or give notice to each creditor
   * Co. must file the statement and auditors report at CH before or at the same time as it places notices in the newspaper.
   * Statement and report must be kept at registered office from time it places notice until 5 weeks after special resolution.
   * If none creditor objects, board resolution to enter contract within next 2 weeks as
   * Payment must be made no later than 7 weeks after special resolution.