Equity finance Flashcards
Shares?
Equity finance
- Share is a bundle of rights
- Often get voting rights
- Incentives would be receipt of income and a capital gain
Share capital structure
Nominal or par value – s542 CA 2006 – shares in a limited company having a share capital must have a fixed nominal value. – minimum subscription price of share.
- Represents a unit of ownership rather than actual value – so like 1p or £1 shares.
Premium
- Share may be allotted for more than its nominal value and excess is known as premium.
Types of shares?
Amount that will be shown in company’s balance sheet in its accounts.
- Shares purchased by first members of the company – subscriber shares
- Further shares issues after a company have been incorporated
Allotted shares – shares are said to be allotted when a person acquires the unconditional right to be included in company register of members in respect of those shares.
- Full legal title to shares only achieves once a person’s name is entered into company’s register of members.
Called up/paid shares – not necessary for shareholders to pay full amounts immediately – the amount of nominal capital paid is known as paid-u share capital. The outstanding amount can be called at any time.
Treasury shares
- Shares been bought back by company out of its distributable profits and are held by company in treasury.
- Pre – emption right still apply to these
Class of shares?
Ordinary shares –
- Most common form – default position under MA
- Carry a right to vote in GM, a right to dividend if one is declared and a right to portion of any surplus assets of the company on a winding up.
- Entitlement of ordinary shareholders to a dividend is unrestricted
Preference shares – gives holder a preference as to payment of dividend or return of capital on a winding up of company. Higher rank.
- Usually expressed as a percentage of par nominal value.
- Usually, non-voting
Cumulative preference shares
- It is presumed that a preference share is cumulative unless otherwise stated. So, if dividend is not declared for a particular amount, the right to preferred amount on share is carried forwards and aid together with any other dividends due.
- Otherwise, must be expressed as non-cumulative if company don’t want this.
Participating preference shares
- May participate in surplus profits available for distribution after they have received their own fixed dividend
- Surplus assets of a company on a winding up.
Deferred shares
- Carry no voting rights and no ordinary dividend – sometimes entitled to a share of surplus profits. More usually they’re simply worthless.
Redeemable
- Whish are issues with intention that company at some time will buy them back and cancel them
Convertible shares
- Convert into a different class of share according to criteria
Variation of class rights?
- Rights attaching to each class usually set out in articles.
- A variation of class rights – will not be effective unless carried out with articles OR at least 75% of issued shares of that class – in consent by writing of those or by means of a special resolution passed at a separate general meeting of holders of that class.
- Shareholders holding 15% of relevant shares may apply to court within 21 days to have a variation cancelled. – variation will not take effect unless confirmed by court.
Dividends?
- Received return on investments by
- By receipt of dividends
- An increase in capital value of shares
Dividends –
- Only payable if have sufficient distributable profits. So, company’s accumulated realised profits less its accumulated realised losses.
Final dividends
- distributable income includes SATISFYING HMRC BEFORE.
- Recommended by directors and declared by an ORINDARY resolution following financial year
- Interim dividends – articles of a company normally give the director the power to decide to pay interim dividends if company has sufficient distributable profits.
Allotment of shares?
- Considerations on allotment
- S755 restriction on private companies offering shares to the public
- A private company limited by shares Is prohibited by offerings shares too public.
- Essentially restricted to offering to targeted investors only.
- Requirement for a prospectus – every time a company offers share it will need to consider whether it is required to publish a prospectus to would-be investors usually not the case in a private company.
- Financial promotions – under s21 FSMA a financial promotion is any invitation or inducement to engage in investment activity. they’re prohibited unless certain requirements in FSMA are met
Transfer and transmission of shares?
Transfers – is a contract to sell existing shares to another shareholder. Company is not a party to the contract
Transmission – automatic proves in event of death or bankruptcy –
- If dies shares will automatically pass to personal representatives
- If bankrupt shares automatically vest in their trustee in bankruptcy,
Shareholders are free to transfer subject to any restrictions in the articles.
Restrictions
- Directors power to refuse to register – s26 MA company must give reasons
- Pre-emption clauses – right of first refusal MA does not contain it must be placed in.
Method of transfer
Instrument of transfer – made by way of stock transfer form which ahs to be signed and submitted with share certificate to new shareholder
Legal and equitable ownership – beneficial title to shares passes on execution of the stock transfer form. Legal title passes on registration.
Stamp duty – stock transfer form must be stamped. Minimum £5 where more than 1000.
Procedure for allotment of shares? Step 1?
5 step process to issue shares
- Check companies’ articles
- If incorporated under CA 1985 – will have authorised share capital – as a ceiling – unless removed from articles
o Ordinary resolution – despite that this changes articles and that normally requires special resolution.
- Companied under 2006 – don’t have a cap – can add or remove via special resolution.
Step 2 - Allotment of shares?
do company’s directors need authority to allot.
- Directors are responsible – they must resolve by board resolution to make an allotment – may need to have prior shareholder approval
- S549 – MUST NOT EXECERISE ANY POWER TO ALLOT UNLESS COMPLIES WITH:
- S550 – for private companies with only one class of shares – directors will have automatic authority to allot new shares of the same class or.
- S551 - for all other company’s directors will need to be granted authority to allot new shares by ORINDARY resolution. Unless articles require a higher resolution.
Step 3 - Allotment of shares?
Must pre-emption rights be disapplied on allotment
- Pre-emption rights is right of first refusal
- Are they equity securities -
- Where they apply company request the existing shareholders to disapply these pre-emption rights by special resolution,
Pre-emption rights are relevant to
- Any new equity securities. –
- Not including if a class of shares carries a right to receive dividend on a winding up and capital payments these rights are both capped the shares will not fall within definition of equity securities.
Disapplication of it
- General disapplication
- By passing special resolution – or by including the disapplication in its articles
- Private company with one class of share – disapplication by special resolution
Other ways
- Special disapplication – a company to disapply in relation to specific allotment of shares by passing a special resolution under s571. More cumbersome procedure.
- Private companies – exclusion of pre-emption rights in articles
- Private companies with one class of share – disapplication in articles
Step 4 - Allotment of shares?
must new class rights be created for the shares
- If yes, need to amend articles and needs special resolution
Step 5 - Allotment of shares?
- Any requirements for shareholder resolution must be dealt with in a general meeting before ethe board meeting
Administrative requirements on allotment
- Copied of resolution to be sent to company’s house within 15 days – any ordinary resolution removing cap or granting authority to allow
- All special resolutions
- Amended articles
- Company form to be sent to company’s house – rerun to allotment, if persons of significance have changed
- Update company registers –
- Share certificates.
Financial assistance?
When shares are being acquired in a company statutory rules prohibiting certain companies involved in acquisition form giving assistance of purpose of the acquisition.
Acquisition or sale of shares
Issue of shares
Which companies are prohibited from giving financial assistance
First necessary to establish identity of the company in which the shares are being acquired in
- On a share sale - company that is subject to acquisition
- On an issue of shares – company doing the issuing
Company whose shares are being acquires will be referred to as target company
- When target company is a public company, the prohibition applies to
o Target company itself
o Any subsidiary of target company – whether private or public
Financial assistance meaning?
- Broadly defined in s677
- By way of gift
- By way of guarantee, security or indemnity, release or waiver
- By way of loan
- Any other financial assistance where net assets of company are reduced to a material extend by the giving of the financial assistance or the company has no net assets
Prohibition on financial assistance?
If the target company is PUBLIC
THE PROHIBITON APPLIED TO
- IF TARGET IS PUBLIC
- Any subsidiary of the public target.
ITS PRIVATE AND ITS SUBSIARY IS PUBLIC - private offering assistance for purchase of shares in a public holding company.
LEADS TO FINE AND 2 YEARS IMPRISONMENT
EXCEPTIONS
Purpose exception
- Principal purpose is NOT for purpose of acquisition or incidental part of some larger purpose – narrow case law
Unconditional exception – certain ones exempt
Conditional exceptions-
- Money lending in ordinary course of business
- Assistance in respect of an employee share scheme
