Equity Finance

Question 1

A company is looking to issue some new shares to an outside investor. The shares will have the following rights attached to them:
· The holder shall receive a preference as to dividend of 5% of the nominal value per annum.
· On winding up, the holder shall receive as a preference the nominal value of the share, if there is sufficient capital to pay.
· The right to the preference dividend is cumulative.
· The holder shall have no right to any other dividend or any return on capital.
· The shares carry no rights to vote.
Which of the following statements best describes the shares?

(a) 
5% preference redeemable shares.

(b) 
5% non-cumulative preference shares.

(c) 
5% cumulative preference shares.

(d) 
5% ordinary shares.

(e) 
5% participating cumulative preference shares

Answer 1

(c) 
5% cumulative preference shares.


Question 2

A company is looking to issue some new shares to an outside investor. The shares will have the following rights attached to them:
· The holder shall receive a preference as to dividend of 4% of the nominal value per annum.
· On winding up, the holder shall receive as a preference the nominal value of the share, if there is sufficient capital to pay.
· The right to the preference dividend is not cumulative.
· The holder shall have the right participate in the general dividend and return on capital.
· The shares carry no rights to vote.
Which of the following statements best describes the shares?

(a) 
4% participating non-cumulative preference shares.

(b) 
4% non-participating preference shares.

(c) 
4% participating cumulative preference shares.

(d) 
4% non-participating non-cumulative preference shares.

(e) 
4% redeemable shares.

Answer 2

(a) 
4% participating non-cumulative preference shares.


Question 3

When does a shareholder acquire full legal title to new shares that the company has issued to the shareholder?

(a) On payment for the shares.

(b) When they receive their share certificate.

(c) 
When the company notifies Companies House that the shares have been issued.

(d) When they acquire the unconditional right to be included in the company’s register of members in respect of those shares.

(e) 
When their name is entered into the company’s register of members.

Answer 3

(e) 
When their name is entered into the company’s register of members.

Question 4

What is a share capital?

Answer 4

Relates to money raises by issue of shares - contributed by investors in company and is represented by shares that are issued to such investors.

Question 5

What is a company’s issued share capital made up of?

Answer 5

1. Shares purchased by first members of company, ie subscriber shares AND
2. Further shares issued after company has been incorporated, to new or existing shareholders

Question 6

When does allotment occur?

Answer 6

Full legal title to shares is only achieved once person’s name is entered in company’s register of members

Question 7

What is a company’s paid up share capital?

Answer 7

Amount of nominal capital paid - payment can be demanded at any time by company

Question 8

What is a company’s called-up share capital?

Answer 8

Once payment of share has been demanded, it has been called - called-up share capital is the aggregate amount of calls made on a company’s shares and existing paid-up share capital

Question 9

What are treasury shares?

Answer 9

Shares that have been bought back by company itself out of distributable profits and are held by company ‘in treasury’ - can be held in company’s own name and sold

Question 10

What are ordinary shares?

Answer 10

Most common form of share and default position under MA - ‘shares other than shares that as respects dividends and capital carry right to participate only up to specified amount in distribution’

Carry:
(i) right to vote in GM
(ii) right to dividend if one is declared and
(iii) right to portion of any surplus assets of company on winding up

Question 11

What is a preference share?

Answer 11

Gives holder a preference as to payment of dividend or to return of capital on winding up of company, or both. This means that payment will rank higher than any equivalent payment to ordinary shares.

Question 12

What is a cumulative preference share?

Answer 12

Presumed that preference share is cumulative unless expressly stated otherwise.

If dividend is not declared for particular year, the right to preferred amount on share is carried forward and will be paid, together with any other dividends due, when there are available profits.

Question 13

What is a participating preference share?

Answer 13

Holders may participate in:
(a) surplus profits available for distribution after they have received their own fixed preferred dividend and/or
(b) surplus assets of company on winding up

Question 14

What are deferred shares?

Answer 14

Usually carry no rights at all and are used in specific circumstances where ‘worthless’ shares are required

Question 15

What are redeemable shares?

Answer 15

Issued with intention that company will, or may wish to, at some time in future, buy them back and cancel them, usually on specified terms.

Question 16

What are convertible shares?

Answer 16

Will usually carry option to convert into different class of share according to stipulated criteria.

Question 17

What are distributable profits?

Answer 17

Company’s accumulated realised profits less its accumulated realised losses.

Question 18

When are dividends payable?

Answer 18

Dividends are only payable where a company has sufficient distributable profits.

Question 19

What are the two types of dividend?

Answer 19

1. Final dividends = declared by company by OR of shareholders following financial year end
2. Interim dividends = can be paid without need for OR and often paid where company has realised an investment

Question 20

A company has two shareholders, A and B. A wishes to transfer all of their shares to B. B will pay market value for the shares of £15,000.
Which of the following statements is correct about the transfer of shares proposed?

(a) 
Legal title will pass to B on execution of the stock transfer form.

(b) 
The company will need to be party to the transfer agreement.

(c) 
Both A and B will need to sign the stock transfer form.

(d) Stamp duty of 0.5% of the value of the transfer will be payable be B.

(e) 
No stamp duty is payable as this share transfer is not caught by the legislation.

Answer 20

(d) Stamp duty of 0.5% of the value of the transfer will be payable be B.


Question 21

When does a shareholder acquire full legal title to shares that are transferred to them from an existing shareholder?

(a) 
When their name is entered into the company’s register of members.

(b) 
When they receive their share certificate.

(c) 
When the stock transfer form is executed.

(d) 
When they have paid the stamp duty payable or confirmed that the transfer is exempt from stamp duty.

(e) 
On payment for the shares.

Answer 21

(a) 
When their name is entered into the company’s register of members.


Question 22

In which one of the following circumstances is a stock transfer form required to transfer the shares to the new shareholder?

(a) 
When a shareholder is made bankrupt and their shares are passed to their trustee in bankruptcy.

(b) 
When a shareholder dies and their shares are passed to their personal representatives.

(c) 
When a company issues new shares.

(d) 
When an existing shareholder of the company gifts their shares to a family member during their life.

Answer 22

(d) 
When an existing shareholder of the company gifts their shares to a family member during their life.

Question 23

What are the two most common restrictions on transfer?

Answer 23

1. Directors’ power to refuse to register
2. Pre-emption clauses

Question 24

Where does transmission of shares occur?

Answer 24

Transmission is an automatic process in the event of death of a shareholder.

• If shareholder dies, their shares automatically pass to their PRs
• If shareholder is declared bankrupt, the shares automatically vest in their trustees in bankruptcy

Question 25

What is the difference between allotment and transfer of shares?

Answer 25

Allotment is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for purchaser paying subscription price.

Transfer is a contract to sell existing shares of the company between existing shareholder and purchaser - the company is not a party to the transfer.

Question 26

Where is stamp duty payable on transfer of shares?

Answer 26

Stamp duty is payable on transfer of shares at 0.5% (subject to minimum payment of £5) where the sale price exceeds £1,000.

Stamp duty is not payable on transfers below £1,000.

Question 27

A private limited company, which was incorporated in September 2018, currently has an issued share capital of £1000 made up of 1000 £1 ordinary shares. The shares are held equally by five shareholders.
The company now wishes to issue 150 £10 2% preference shares to an outside investor. The preference shares entitle the shareholder to receive only a fixed dividend of 2% per annum, with no right to share in any surplus profits. The shareholder is only entitled to the return of the nominal value of the shares on winding up of the company.
The company has Model Articles with one amendment; this new preference share has already been included in the Articles.
Which of the following statements represents the best advice to the company about the resolutions required for the proposed share allotment?

(a) 
The company will not need any shareholder resolutions, only a board resolution to allot.

(b) 
The company will need a special resolution from the shareholders to disapply pre-emption rights.

(c) 
The company will need an ordinary resolution from the shareholders to give the directors authority to allot the shares.

(d) The company will need a special resolution from the shareholders to give the directors authority to allot the shares.

(e) 
The company will need a special resolution to amend the articles.

Answer 27

(c) 
The company will need an ordinary resolution from the shareholders to give the directors authority to allot the shares.


Question 28

A company is proposing to issue shares to a new shareholder. The shares will give the shareholder the right to a fixed dividend of 2% of the nominal value of the shares in preference to the other shareholders with no other right to share in any surplus profits. In respect of capital return on a winding up the shareholder will receive firstly, as a preference, the nominal value of the share and then the shareholder will rank pari pasu with the ordinary shareholders if there is any surplus capital.
Which of the following statements best describes the shares and any resolutions required as a result of them?

(a) 
The company will not need to disapply pre-emption rights because these shares will not dilute the current shareholdings.

(b) 
The company will need a special resolution to disapply pre-emption rights because the shares are equity securities.

(c) 
The company will need an ordinary resolution to disapply pre-emption rights because the shares are an equity security.

(d) 
The company will need unanimity from its shareholders to agree to disapply the pre-emption rights because the shares are equity securities.

(e) 
The company will not need to disapply pre-emption rights as the shares are not equity securities.

Answer 28

(b) 
The company will need a special resolution to disapply pre-emption rights because the shares are equity securities.


Question 29

You act for a company incorporated under the CA 1985. The company has an issued share capital of 1000 £1 ordinary shares and an authorised share capital of £2000. The company wishes to issue a further 1000 £1 ordinary shares to an outside investor.
The company has not passed any shareholder resolutions which would be relevant to this question.
Which of the following statements represents the correct shareholder resolutions that the company would need to issue these shares?

(a) 
A special resolution to disapply pre-emption rights only.

(b) 
An ordinary resolution to remove the cap and a special resolution to disapply pre-emption rights.

(c) An ordinary resolution to remove the cap, an ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights.

(d) 
An ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights.

(e) 
An ordinary resolution to remove the cap and an ordinary resolution to give the directors authority to allot the shares.

Answer 29

(d) 
An ordinary resolution to give the directors authority to allot the shares and a special resolution to disapply pre-emption rights.


Question 30

A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a private limited company (the ‘Target’). The Target is a wholly owned subsidiary of a PLC. The Buyer is proposing to fund the acquisition partly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, the parent company and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?

(a) Only the security from the Target company is caught by the prohibited financial assistance regime.

(b) 
Both the security of the Target and its parent are caught.

(c) 
None of the security options fall within the prohibited financial assistance regime.

(d) 
All of the security options fall within the prohibited financial assistance regime.

(e) Only the security from the parent of the Target company is caught by the prohibited financial assistance regime.

Answer 30

(c) 
None of the security options fall within the prohibited financial assistance regime.


Question 31

A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a private limited company (the ‘Target’). The Target has two wholly owned subsidiaries: one of which is a PLC and the other is a private limited company. The Buyer is proposing to fund the acquisition wholly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, both of the Target’s subsidiaries and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?

(a) 
The security offered by the target itself will be caught by the prohibited financial assistance regime.

(b) 
None of the securities will be caught because the target is private.

(c) 
Only the security proposed by the Plc subsidiary is caught by the prohibited financial assistance regime.

(d) 
The security offered by all four companies is caught by the prohibited (e) 
The security offered by the Target and both of the subsidiaries are caught by the prohibited financial assistance regime.

Answer 31

(c) 
Only the security proposed by the Plc subsidiary is caught by the prohibited financial assistance regime.

Question 32

A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a public limited company (the ‘Target’). The Target has two wholly owned subsidiaries: one of which is a plc and the other is a private limited company. The Buyer is proposing to fund the acquisition wholly with a loan from the bank. In return for the loan, the bank requires security over the assets of the Target, both of the Target’s subsidiaries and the Buyer.
Which of the following statements is correct in respect of prohibited financial assistance?

(a) 
The security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime.

(b) 
Only the security offered by the target will be caught by the prohibited financial assistance regime.

(c) 
All of the security offered by all four companies will be caught by the prohibited financial assistance regime.

(d) 
Only the security offered by the PLC subsidiary will be caught by the prohibited financial assistance regime.

(e) 
The security offered by the Target and the PLC subsidiary will be prohibited financial assistance but not the other companies.


Answer 32

(a) 
The security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime.


Question 33

What is a target company?

Answer 33

Target company is the company whose shares are being acquired, whether for share sale or issue of shares.

Question 34

If the target company is a public company, to which companies does the prohibition apply to?

Answer 34

FA prohibition applies to:
1. The target company itself AND
2. Any subsidiary of the target company, whether private or public

Question 35

If the target company is a private company, to which companies does the prohibition apply to?

Answer 35

FA prohibition only applies to any public company subsidiary of the target company.

Question 36

True or false: the financial assistance prohibition applies to indirect and direct assistance.

Answer 36

True

Question 37

True or false: Financial assistance is covered by rules only given before or at the same time as the acquisition.

Answer 37

False: Financial assistance is covered by rules whether given before or at the same time as the acquisition or after the acquisition.

Question 38

What are the three exceptions to financial assistance prohibition?

Answer 38

1. Purpose exceptions
2. Unconditional exceptions under s. 681 eg dividend payments
3. Conditional payments under s. 682

Question 39

What are the consequences of carrying out prohibited financial assistance?

Answer 39

Under s. 680, breach or s. 678 or s. 679 is an offence which can lead to penalties for:
(a) the company (fine)
(b) officers of the company (fine or imprisonment).

Also under case law, the transaction amounting to prohibited financial assistance would be void (eg loan) and the wider transaction (eg share acquisition) may also be void.

Question 40

A company has a class of redeemable shares which it is looking to redeem. Where will the terms of redemption of those shares be set out?

(a) 
The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued and set out in a shareholders’ agreement.

(b) 
The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued and are set out in the company’s articles.

(c) 
The company must draw up a contract setting out the terms on which it will redeem the shares. This must be approved by an ordinary resolution of the shareholders.

(d) The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued. They are set out in a contract signed by the company and the shareholders.

Answer 40

(b) 
The terms on which redeemable shares may be redeemed are determined at the time that the shares are issued and are set out in the company’s articles.


Question 41

Which of the following best summarises the principle of maintenance of capital?

(a) 
The share capital of a company is represented in the bottom half of the balance sheet. These sums may never (b) 
The share capital of a company is seen as a permanent fund available to its creditors. Companies are never permitted to return capital to shareholders.

(c) The share capital of a company is seen as a permanent fund available to its creditors. Companies are not permitted to return capital to shareholders other than in limited circumstances.

(d) The share capital of a company is seen as a permanent fund available to its creditors. Buybacks are only allowed for private limited companies and then only in limited circumstances.

Answer 41

(c) The share capital of a company is seen as a permanent fund available to its creditors. Companies are not permitted to return capital to shareholders other than in limited circumstances.


Question 42

A private limited company with unamended Model Articles and four shareholders with equal shareholdings is seeking to buyback its shares from one of its shareholders. The company does not have sufficient distributable profits to fund the buyback and is also not able to fund the buyback out of the proceeds of a fresh issue of shares. The company therefore wishes to use capital to fund the buyback. What shareholder resolution(s) will be necessary in order to approve this buyback?

(a) 
An ordinary resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital.

(b) 
An ordinary resolution to approve the terms of the contract for the buyback only.

(c) 
An ordinary resolution to approve the terms of the contract for the buyback and an ordinary resolution to approve the payment out of capital.

(d) 
A special resolution to approve the payment out of capital only.

(e) 
A special resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital.

Answer 42

(a) 
An ordinary resolution to approve the terms of the contract for the buyback and a special resolution to approve the payment out of capital.


Question 43

What is the procedure for buyback out of profits and/or proceeds of fresh issue of shares (summary)?

Answer 43

• Check articles for any prohibition on buyback
• Verify distributable profits
• Terms of buyback must be set out in contract - must be available for inspection at least 15 days before GM and at GM itself (or circulated with WR)
• Shareholders must approve contract by OR

Question 44

What is the procedure for buyback out of capital (summary)?

Answer 44

Applies to PRIVATE companies only.
- Check articles for any prohibition on buyback and on use of capital
- Terms of buyback must be set out in contract - must be available for inspection at least 15 days before GM and at GM itself (or circulated with WR)
- Directors’ solvency statement and auditor’s report + prepare accounts (<3 months)
- Shareholders must approve contract by OR
- Shareholders must approve payment of capital by SR
- Detailed notification requirements for shareholders (eg publishing notice to Gazette within 7 days from passing of SR)

Question 45

True or false: share purchase can take place no earlier than 5 weeks and no later than 7 weeks after SR for buyback from capital.

Answer 45

True

Question 46

True or false: a contract is required to redeem redeemable shares.

Answer 46

False - all details will either be in Articles or determined by directors.

Question 47

The client tells you that following the sale, he now has £50,000 cash and he would like some advice about how to invest this money, specifically whether he should buy shares in XYZ Plc. He wants to know whether shares are generally a good investment at the moment and, in particular, whether or not he should buy the shares in XYZ.
Which one of the following statements is correct in relation to the above scenario?

(a) 
The advice is not likely to be incidental under s 327 FSMA.

(b) 
It is likely that Article 67 of the Financial Services and Markets Act (Regulated Activities) Order 2001 (‘RAO’) would apply to your advice.

(c) 
You would be free to advise about the merits of the shares in XYZ Ltd because you could rely on the exclusion under Art 70 RAO.

(d) 
You would be able to give the client generic advice on the rights attaching to shares because this advice does not fall within Article 53(1) RAO.

(e) 
The advice is likely to be complementary under Scope Rule 2.

Answer 47

(d) 
You would be able to give the client generic advice on the rights attaching to shares because this advice does not fall within Article 53(1) RAO.


Question 48

Which one of the following would not be classified as financial services and therefore not be regulated under FSMA?

(a) 
Advising on the acquisition of a business.

(b) Dealing in investment products on behalf of clients.

(c) 
Arranging investment products on behalf of clients.

(d) 
Advising on investment products on behalf of clients.

Answer 48

(a) 
Advising on the acquisition of a business.


Question 49

You are a solicitor in the corporate department of Price Prior. Your client wishes to buy 50% of the shares in a company as an investment. Your client has instructed you to advise her on the acquisition (including on the merits).
Which one of the following statements is correct regarding authorisation under FSMA?

(a) 
FSMA does apply and you will need to be authorised by the FCA to act for the client on the acquisition.

(b) 
You will not need to be authorised by the FCA to act for the client because your advice will be excluded from FSMA under Article 70 RAO.

(c) 
There is a specific exclusion relating to advising on the merits that will allow you to act.

(d) 
You will not need to be authorised by the FCA to act for the client because acting for a client who is acquiring shares in a company is not a specified activity under Article 53(1) RAO.

(e) 
Shares are not a specified investment, therefore FSMA does not apply.

Answer 49

(b) 
You will not need to be authorised by the FCA to act for the client because your advice will be excluded from FSMA under Article 70 RAO.