Equity Finance Flashcards
What is capital?
The funds available to run the business of a company.
In company law, what is share capital?
It is the money raised by the issue of shares which is contributed to by investors in the company.
Why does a company need funds?
Funds are needed to get the business started, buy machinery and stock, and to keep the business going through work capital, and to expand and grow.
What are the three general ways a company funds it’s business?
- Issuing shares (equity finance).
- Borrowing money (debt finance).
- Retaining its profits for use in the business.
What is a share often described as and why?
It is often described as a bundle of rights, because by investing in the share capital of any company, the investor becomes a part owner of the company and will often have voting rights in shareholder meetings.
What is a share often described as and why?
It is often described as a bundle of rights, because by investing in the share capital of any company, the investor becomes a part owner of the company and will often have voting rights in shareholder meetings.
What are the incentives for investing in a company?
Receipt of income by way of dividend and a capital gain by way of growth in the value of the company.
What is nominal or par value?
Nominal or par value of a share is the minimum subscription price for that share, which a share in a limited company must have. Any allotment of a share that does not have a fixed nominal value is void. It represents a unit of ownership rather than the actual value.
What is issued share capital, and what is a company’s ISC made up of?
Issued share capital is the amount of shares in issue at any time that will be shown in the company’s balance sheet in its accounts.
A company’s ISC is made up of shares purchased by the first members of the company, known as the subscriber shares, and further shares issued after the company’s incorporation, to new or existing shareholders.
What is an allotment of shares?
An allotment of shares is a contract between the company and a new or existing shareholder by which the company agrees to issue new shares in return for the purchaser paying a subscription price.
What is a transfer of shares?
A transfer is a contract to sell existing shares in the company between an existing shareholder and a purchaser.
What is the s 755 CA 2006 restriction on private companies offering shares?
Under s 755, a private company limited by shares is prohibited from offering its shares to the public. Private companies are restricted to offering shares to targeted investors only.
What is a prospectus?
A prospectus is an explanatory circular giving investors details about the company and about the investment decision. It contains all information necessary to enable investors to make an informed assessment of the financial status of the company and the rights attaching to the shares.
Is a prospectus always required to offer shares?
For a private company, a prospectus is not usually required to offer shares, but it is important to consider the rules each time regardless.
What is a financial promotion under s 21 FSMA?
It is any invitation or inducement inthe course of business to engage in investment activity, including buying shares, which is prohibited for all companies unless certain requirements are met.
What is transmission of shares?
Transmission of shares is an automatic process for two events:
If a shareholder dies their shares will automatically pass to their personal representatives.
If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.
What is transfer of shares?
When an existing shareholder transfers their shares to a new shareholder by way of sale or gift, subject to any restrictions in the company Articles.
What are the two most common forms of restriction on transfer?
Directors power to refuse to register and pre-emption clauses (rights of first refusal)
What is a directors power to refuse to register?
A director may refuse to register the transfer of a share with reasoning, and if they do, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent.
What is the instrument of transfer of shares?
A stock transfer form signed by the transferor, and submitted with the share certificate to the new shareholder.
When does beneficial title to the shares pass?
Beneficial title to the shares passes on execution of the stock transfer form.
When does legal title of the shares pass?
Legal title passes on the registration of the members as the owner of the shares in the register of members by the company.
When does legal title of the shares pass?
Legal title passes on the registration of the members as the owner of the shares in the register of members by the company.
Within two months of the registration of the member as owner of shares in the register of members by the company, what else is the company required to do?
The company will send the shareholder a new share certificate within two months.
What stamp duty is payable upon the stock transfer form being stamped?
Stamp duty is payable at 0.5% of the consideration rounded up to the nearest £5.
Where the consideration is £1000 or less no stamp duty is payable, but where the consideration is more than £1000, a minimum fee of £5 is payable.
Is there a cap on the number of shares that may be issued?
Company incorporated under CA 1985 -
Would have an authorised share capital acting as a ceiling on number of shares issued unless removed from the Articles.
Company incorporated under CA 2006 - does not have an authorised share capital so a cap can only be imposed to restrict the number of shares if the articles are amended.
How can a cap on the number of shares to be issued be removed?
Companies incorporated under CA 1985:
By shareholders through ordinary resolution.
Companies incorporated under CA 2006:
There is no bar to issuing shares unless a restriction was placed in the Articles, in which case it can be removed or the limit can be increased by special resolution.
What is step 2 to the allotment of shares?
To determine whether company directors need/ have authority to allot.
s550 CA 2006: for private companies with only one class of shares in existence, the directors will have automatic authority to allot new shares of the same class.
S551 CA 2006: for all other companies, the directors will need to be granted authority to allot the new shares by the shareholder by way of ordinary resolution.
What does s 550 CA 2006 say about private companies with only one class of share?
It provides that directors of private companies with only one class of share have the automatic power to allot shares of that same class, unless prohibited by doing so by the company’s Articles.
If s 550 CA 2006 cannot be relied upon, what does s 551(1) provide?
Under s 551(1), authority may be given to directors by a provision in the company’s Articles or by shareholder resolution.
What does pre-emption right mean?
It means the right of first refusal. New shares should be offered pro rata to existing shareholders before any new investor, because when shares are allotted there is an effect on the proportionate ownership of the company held by existing owners. Meaning their ownership is diluted.
What does pre-emption right mean?
It means the right of first refusal. New shares should be offered pro rata to existing shareholders before any new investor, because when shares are allotted there is an effect on the proportionate ownership of the company held by existing owners. Meaning their ownership is diluted.
