Equity Finance

Question 1

What is:
- Allotment;
- Transfer; and
- Buyback, in the context of shares?

Answer 1

Allotment: A company creates shares and gives them to a new/existing shareholder in return for consideration;

Transfer: One shareholder sells or gives shares to another shareholder or a new shareholder, granted that the company permits the transfer;

Buyback: The company buys back some of its own shares and cancels them, thus decreasing the amount of share capital.

Question 2

What are the standard rights of preference shares? What does it mean for a preference share to be participating?

Answer 2

Standard: Cumulative preference as to dividends, but capped as to that amount.

Participating: Can participate in surplus profits and in surplus assets on a winding up.

Question 3

Is there a cap on the amount of shares a company can allot?

Answer 3

If incorporated under CA 1985 - before October 2009 - a company has a cap on the number of shares they can allot.

If under CA 2006, there is no cap on the number of shares a company can allot.

Question 4

How is a cap on shares removed?

Answer 4

Ordinarily via OR procedure (CA 1985).

If the cap is in the company articles (As it would be in a CA 2006 company), it would be via SR.

Question 5

When do directors have the authority to allot shares without OR approval?

Answer 5

• If they are directors of a private company with one class of share if they are allotting a share in the same class (only need a board resolution);

Question 6

What are pre-emption rights?

Answer 6

They are rights of first refusal over shares (equity securities) which are allotted.

Question 7

What are ‘equity securities’ for the purposes of pre-emption rights?

Answer 7

Ordinary shares, which are shares that do not have a cap on their dividends and capital.

A preference share can be an ordinary share.

Question 8

Which of these shares are NOT an equity security?

1) Ordinary share;
2) Preference share with preference to a 10% dividend and any surplus dividend;
3) Preference share with a preferential right to a 10% dividend and preferential right to 10% of capital on a winding up.

Answer 8

3, as the rights to dividends and capital are capped.

2, whilst technically not an ordinary share, is an ordinary share for the purposes of being an equity security.

Question 9

When do pre-emption rights not apply?

Answer 9

When:

• Bonus shares are allotted;
• if the consideration for the allotment is wholly or partly non-cash;
• if the shares are allotted or transferred pursuant to an employee share scheme

Question 10

Are pre-emption rights always in effect? How can they be disapplied?

Answer 10

• No, private companies can exclude
  pre-emption rights in their articles (only really used in subsidiaries, though);
• Private companies with one class of shares can disapply pre-emption rights in a specific allotment via a special resolution procedure;
• In other companies, general authority to allot shares via s551 means pre-emption rights are disapplied for the extent of the authority to allot (most common);
• If only for a specific allotment, the directors can disapply the rights via SH SR

Question 11

When allotting shares (and registering new members), what administrative procedures must be followed?

Answer 11

• Copies of resolutions must be sent to companies house within 15 days;
• SH01 needs to be sent within one month of allotment;
• Amend register of members in 2 months;
• Share certificates within 2 months

Question 12

What is the PSC register?

Answer 12

PSC = ‘Persons with significant control’, being:

• Someone with 25% + of the share capital; and/or
• Someone who has a significant say in the direction of the company

Question 13

How are shares transferred?

Answer 13

The transferor completes and signs a stock transfer form and gives it to the transferee;

the transferee sends the form to the company; then

the company, within 2 months, will either reject the transfer or issue a new share certificate in the transferee’s name and enter their name on the register

Question 14

What is share capital?

Answer 14

Money provided by shareholders in return for shares.

Question 15

How is share capital protected? In which three instances can a company use their share capital?

Answer 15

It is a doctrine that share capital cannot be touched by the company, unless:

the special procedure is followed;
the court orders it; or
the company is insolvent and is in the process of winding up.

Question 16

What is the standard procedure for a share buyback?

Answer 16

• Ensure the articles allow for the company to buyback their shares;
• shares are fully paid;
• company pays for shares at the time of purchase;
• paid out of distributable profits or proceeds of a fresh issue of shares;
• shareholders pass an OR authorising the buyback contract;
• copy of buyback contract available for 15 days, or, written memorandum setting out the terms of a non-written contract (don’t worry about perfectly remembering this point)

Question 17

What restrictions are there when approving a share buyback via OR?

Answer 17

The shareholder whose shares are being bought back cannot vote at the general meeting, as a shareholder cannot vote when they are personally interested in the transaction.

Question 18

What type of company can buy shares back out of share capital, private or public?

Answer 18

Only a private company can buy shares out of share capital.

Question 19

What is the process of a private company buying back shares out of share capital?

Answer 19

• Director’s must make a statement of solvency 1 week before, stating that they will be solvent for a year (BR to approve);
• statement annexed to an auditors report (both made available to members and filed at companies house, both available for inspection for 5 weeks after SR);
• BR approve draft contract
• must receive SR approval for buyback out of capital;
• must receive OR to approve the buyback contract;
• the company must put a notice in the London Gazette within 7 days of the resolution being passed

Question 20

How does a company fund dividends and what type of approval is needed?

Answer 20

Dividends are funded from distributable profits and are approved via an OR.

Shareholders cannot recommend an increased dividend.