Equity Finance Flashcards
What are the three ways shares can change hands?
- Allotment;
- Transfer;
- Buyback
Define allotment.
When a company decides to create shares and give them to existing shareholders or a new shareholder in return for payment.
Share certificate will be issued to the person and the member will be added to register of members.
What is a share buyback?
Company buys back some of its own shares from a shareholder (or shareholders). The total number of shares then decreases as the company buys them back and then cancels them (using SH06 form at CH).
List the three questions asked when allowing shares.
1) Are there any constitutional resections on the allotment;
2) Do the directors have the authority to a lot; and
3) Are there any pre-emption rights.
What is the ASC clause in a company’s articles and when does it apply?
It is an upper limit on the amount of shares which a company can allot/issue (the authorised share capital).
This will apply to companies with adopted model articles prior to when the CA 2006 came into force. The provision can be removed by ordinary resolution.
How to tell whether there is an upper limit on the amount of shares which can be issued in a company’s share capital?
For companies incorporated prior to 1st October 2009, check whether they have updated articles since that date. If they have not, shareholders will need to pass an ordinary resolution to remove the ASC.
For all companies, check if company’s articles specify a limit on the number of shares the company can have. If there is such a limit, change articles by special resolution.
Do directors have the authority to allot shares (without shareholder approval)?
Directors of a private company with 1 class of share (both before and after allotment) have the authority to allot shares without the permission of shareholders under s550 CA 2006 (provided the company was incorporated under CA 2006).
If incorporated prior to the CA 206 coming into force, directors do not automatically have authority to allot. Authority to allot therefore needs to come from the shareholders, where they will pass an ordinary resolution to do so.
Do director have the authority to allot when there is more than 1 class of share (before or after the proposed allotment)?
No. s551 - shareholders must give consent to this by ordinary resolution where there is more than 1 class of share before or after allotment.
The OR must state the max number of shares directors can allot and the date on which the authority will pass (which must not be more than 5 years from the date of that ordinary resolution).
Authority to allot can also be contained in the company’s articles, but must state the maximum number of shares which may be allotted under it. Also, it must specify when the authority ends (and again cannot be more than 5 years from incorporation of the company).
Summarise how an allotment of shares can take place where there is only 1 class of share (and it remains that way after the allotment).
For private companies incorporated after CA 2006 with one class of shares (before and after allotment) = directors have authority to allot shares without shareholder approval (board resolution is needed).
Summarise how an allotment of shares can take place where there is more than 1 class of share.
Unless articles give directors powers to do so ordinary resolution of shareholders required to allot the shares.
Explain the provision of s561 CA 2006 (pre-emption rights).
Ordinary shares can’t be allotted to new shareholder without first offering them to existing ordinary shareholders in the company on same/more favourable terms.
When shareholders are offered new shares in accordance with pre-emption rights, s562(4) states offer must state period for acceptance (which must be at least 14 days).
What must offer to existing shareholders contain to be valid offer for pre-emption right purposes (s562(4))?
To comply with pre-emption rights, offer must state period for acceptance (which must be at least 14 days).
Define equity securities (s560 CA 2006)
Includes ordinary shares and shares with rights to subscribe for or convert existing securities into ordinary shares.
What happens where none of the existing shareholders take the shares offered to them under pre-emption rights?
The company can then allot them to the new shareholder.
Can statutory pre-emption rights be dissapplied by a company’s articles?
Yes.
Give some examples of allotments where pre-emption rights will not apply.
- Allotment of bonus shares;
- Consideration is non-cash (wholly or in part); or
- If shares are offered as part of an employee share scheme.
Give main example when pre-emption rights do not need to be complied with.
New share holder is offering non-cash consideration for the shares.
Aside form amending articles, how else can a company dissapply pre-emption rights contained in s561?
By special resolution of the shareholders.
This. just be done for every specific allotment.
For a company with more than one class of shares, how are the statutory pre-emotion rights applied?
If they have been given general authority to allot (ie in their articles or by ordinary resolution) they can remove the pre-emption rights by passing a special resolution. The dissapplication of the pre-emption rights will last as long as the directors authority to allot.
If the authority to allot was given in relation to a specific allotment, the pre-emption rights must be dissapplied every time. This requires special resolution which must be recommended by the directors.
Where directors have had authority to allot in relation to a specific allotment, and they make their statement recommending the special resolution to dissapply pre-emption rights, what must this statement include?
1) reasons for making the recommendation; and
2) the amount the purchaser is going to pay; and
3) the directors’ justification for that amount.
Explain the provision of MA 21.
All shares in a company must be fully paid, meaning buyer must pay for them on receipt.
If MA 21 is removed, then partly paid shares can be issued.
If a member holds partly paid shares, when must they make remaining payments?
- When their contractual liability to do so arises; or
- If the company is wound up.
Explain the provision of MA 26 and the effect it has.
It gives the board of directors the power to refuse to register a transferee on the register of members.
As such if a company has adopted model articles and MA 26 applies, every share transfer would need to be approved by the board of directors.
If a transferee is not entered into the register, they will be the beneficial owner of the shares (but the seller will retain legal title).
What is the significance of being the legal owner of shares?
As the legal owner you are the person entitled to be paid dividends and attend and vote at general meetings of shareholders.
However the legal owner must vote as directed by the beneficial owner and pay any dividends received to the beneficial owner.