Equity Finance

Question 1

What are the three ways shares can change hands?

Answer 1

• Allotment;
• Transfer;
• Buyback

Question 2

Define allotment.

Answer 2

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.

Question 3

What is a share buyback?

Answer 3

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).

Question 4

List the three questions asked when allowing shares.

Answer 4

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.

Question 5

What is the ASC clause in a company’s articles and when does it apply?

Answer 5

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.

Question 6

How to tell whether there is an upper limit on the amount of shares which can be issued in a company’s share capital?

Answer 6

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.

Question 7

Do directors have the authority to allot shares (without shareholder approval)?

Answer 7

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.

Question 8

Do director have the authority to allot when there is more than 1 class of share (before or after the proposed allotment)?

Answer 8

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).

Question 9

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).

Answer 9

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).

Question 10

Summarise how an allotment of shares can take place where there is more than 1 class of share.

Answer 10

Unless articles give directors powers to do so ordinary resolution of shareholders required to allot the shares.

Question 11

Explain the provision of s561 CA 2006 (pre-emption rights).

Answer 11

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).

Question 12

What must offer to existing shareholders contain to be valid offer for pre-emption right purposes (s562(4))?

Answer 12

To comply with pre-emption rights, offer must state period for acceptance (which must be at least 14 days).

Question 13

Define equity securities (s560 CA 2006)

Answer 13

Includes ordinary shares and shares with rights to subscribe for or convert existing securities into ordinary shares.

Question 14

What happens where none of the existing shareholders take the shares offered to them under pre-emption rights?

Answer 14

The company can then allot them to the new shareholder.

Question 15

Can statutory pre-emption rights be dissapplied by a company’s articles?

Answer 15

Yes.

Question 16

Give some examples of allotments where pre-emption rights will not apply.

Answer 16

• Allotment of bonus shares;
• Consideration is non-cash (wholly or in part); or
• If shares are offered as part of an employee share scheme.

Question 17

Give main example when pre-emption rights do not need to be complied with.

Answer 17

New share holder is offering non-cash consideration for the shares.

Question 18

Aside form amending articles, how else can a company dissapply pre-emption rights contained in s561?

Answer 18

By special resolution of the shareholders.

This. just be done for every specific allotment.

Question 19

For a company with more than one class of shares, how are the statutory pre-emotion rights applied?

Answer 19

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.

Question 20

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?

Answer 20

1) reasons for making the recommendation; and
2) the amount the purchaser is going to pay; and
3) the directors’ justification for that amount.

Question 21

Explain the provision of MA 21.

Answer 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.

Question 22

If a member holds partly paid shares, when must they make remaining payments?

Answer 22

• When their contractual liability to do so arises; or
• If the company is wound up.

Question 23

Explain the provision of MA 26 and the effect it has.

Answer 23

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).

Question 24

What is the significance of being the legal owner of shares?

Answer 24

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.

Question 25

When is stamp duty payable?

Answer 25

When consideration for share sis over £1,000.

Rate of stamp duty is 0.5% and the amount payable is rounded up to the nearest £5.

Question 26

What is a transmission of shares?

Answer 26

Where a shareholder dies, their shares will automatically pass to PRs of their estate; or

When a shareholder is made bankrupt, their shares will transmit automatically to their trustee in bankruptcy.

Question 27

What resolution is required for approving a buy back of shares by the company from a shareholder?

Answer 27

Ordinary resolution (unless paid for out of capital in which case a special resolution is also required).

Question 28

Explain the principle of maintenance of share capital.

Answer 28

Share capital = money provided by the shareholders to the company in return for shares.

This should not be decreased as its reserved for creditors should the company go into liquidation.

This means:
- Dividends cannot be paid out of share capital, only distributable profits;
- company must not generally purchase its own shares.

Question 29

What are the exceptions to the principle of maintenance of share capital?

Answer 29

1) Company can buy back its own shares provided the correct procedure is followed (s690);

2) Company can purchase its own shares under a court order to buy out fairly prejudiced minority shareholders; and

3) Company can return capital to shareholders, after payment of the company’s debts, in winding up.

Question 30

Explain the provision of MA 27.

Answer 30

Trustee in bankruptcy or PRs who receive shares by transmission do not become shareholders of the shares but will be entitled to any dividends on the shares.

They can choose to be registered as the shareholder of the shares and can then sell the shares. Alternatively they can sell the shares directly in their capacity as a representative.

Question 31

Where do the funds for buying back shares come from?

Answer 31

Distributable reserves.

Question 32

List the requirements for a share buyback by the company.

Answer 32

1) articles must allow it (or not forbid it);

2) shares must be fully paid (s691(1));

3) company must pay for the shares at the time of purchase (s691(2));

4) shares must usually be paid for out of distributable profits or proceeds of fresh issue of shares made for financing the purchase (s692(2)(a));

5) shareholders ordinary resolution needs to approve it;

6) copy of buyback contract must be made available for inspection at least 15 days prior to the general meeting and at meeting itself (or be sent with the proposed written resolution when circulated);

7) copy of buyback contract must be available fore inspection at company’s registered office as soon as contracts has been concluded, and must be available for period of 10 years starting with the date of the buyback.

Question 33

Define distributable profits.

Answer 33

Company’s accumulated realised profits less its accumulated realises losses (shown in the profit/loss reserve).

Question 34

Can the shareholder selling the shares to the company vote in respect of the resolution authorising their buyback?

Answer 34

No.

Question 35

What is the rule when assessing financial position of the company in order to determine whether company can buy the shares back?

Answer 35

It must not place the company in a risky financial position and they should therefore have enough profits, considering outgoings and upcoming outgoings.

Question 36

Can public companies buyback shares out of capital?

Answer 36

No.

Question 37

Can private companies buyback shares out of capital?

Answer 37

Yes provided the articles do not restrict this.

The distributable reserves must be exhausted before the capital is used (so in effect some is likely to be out of profits and the remainder out of the capital).

Special resolution would be needed to do this (and solvency report and auditors report).

Question 38

Is a statement of solvency by the directors required to effect a buyback of shares?

Answer 38

Yes and this must be annexed to a copy the auditors report confirming they are not aware of anything which renders the statement of solvency unreasonable.

Question 39

What use be filed at CH when affecting a buyback of shares out of capital (in whole or in part)?

Answer 39

• Copy of special resolution approving buyback;
• director solvency statement;
• Auditors report.

Note they are also required to place notice of the buyback in the London Gazette.

Question 40

Which resolution is required to affect a buyback of company shares out of:

1) capital;
2) profits.

Answer 40

1) Special resolution;
2) Ordinary resolution.

Question 41

How is a dividend declared and approved?

Answer 41

Directors recommend the payment of a dividend at a board meeting.

This must then be approved by ordinary resolution of the shareholders (or declared).