Equity finance Flashcards
What is capital and what is share capital?
- Capital = funds available to run business of company
- Share capital = money raised by issue of shares (contributed by investors and represented by shares issued to investors)
When will an investor get their money back if they buy shares in a private company?
Sale of their stake, sale of company, on floatation, or when company wound up (if funds available)
What is the ‘fixed nominal value’ and what happens if an allotment of a share does not have one?
Nominal = par = original
- The minimum subscription price for share
- An allotment of a share without a fixed nominal value is void
Can a share be allotted/issued above or below its fixed nominal value?
- Can not be allotted/issued at a discount to nominal value
- Can be allotted/issued for more than nominal value (a premium)
Re premium - market value of share will often be much higher than nominal value of share
Represents a unit of ownership rather than actual value of share - common nominal values for ordinary shares are 1p, 5p or £1
What is meant by issued share capital (ISC)?
The amount of shares in issue at any time (subscriber shares [initial] + further shares issued [after incorporation]) - will be shown in company’s balance sheet
What is the difference between when shares are allotted and issued?
- Shares are allotted = person acquires unconditional right to be included in register of members re those shares
- Shares are issued = once shareholder has actually been registered in register of members and title has become complete
Usually used interchangeably
A(llotted) comes before I(ssued)
When is full legal title to shares achieved?
Only once a person’s name is entered into the company’s register of members
What is the difference between paid-up share capital and called-up share capital?
- Paid-up share capital = amount of nominal capital paid (not necessary for shareholders to pay full amount due on shares immediately)
- Called-up share capital = amount owed by shareholders but not yet paid
Amount can be demanded whenever - but rare for shares to not be fully paid up
What are treasury shares?
Shares that have been bought back by company and held by company ‘in treasury’
A ‘sale’ of these shares will be a ‘transfer’ (not an issue)
What will company shares be if they are issued without differentiation?
Ordinary shares
What rights are provided by ordinary shares? Are they entitled to dividends?
- Right to vote in GMs, to (declared) dividend, portion of assets on winding-up
- Unrestricted right to dividends (but may receive after prefs)
Can be different classes of ordinary shares
What do preference shares give the shareholder?
A ‘preference’ re the payment of dividend or return of capital; ranks higher in priority than equivalent payment to ordinary shareholders
Will be paid dividends before other shareholders. In liquidation, will also receive before other shareholders
Do preference shares give the right to vote?
Normally no - but need to check Articles
How much will a pref holder receive if amount is expressed as 5% £1 pref share?
5% of £1 per share - 5p per share - by way of dividend each year (if declared)
If prefs are issued at a premium to the par value, will the dividend be calculated as a % of the amount paid (par plus premium)?
Only if they expressly state that dividend is to be calculated as a % of total subscription price and not par value, i.e. will either be…
- Right to receive fixed preferential dividend of X% of the par value of shares per annum
- Right to receive fixed preferential dividend of X% of the total subscription price per annum
Company A has participating preference shares in issue with right to receive a fixed preferential dividend of 5% of the par value of the shares per annum. The shares have a par value of £1 each.
If dividend has been declared = pref shareholders entitled to receive dividend of 5p per share per annum before the ordinary shareholders receive any dividend.
Would then also be entitled to a fraction of the remaining general dividend alongside the ordinary shareholders
Company B has non-participating preference shares in issue with right to receive a fixed preferential dividend of 5% of the total subscription price per share per annum. The shares have a par value of £1 each but were subscribed for at a price of £2 per share.
If dividend has been declared = pref shareholders entitled to receive dividend of 10p per share per annum before the ordinary shareholders receive any dividend.
They would not be entitled to any further dividend.
What does it mean if a preference share is cumulative? Will they automatically be cumulative?
- Cumulative = if dividend not declared for particular year, the right to preferred amount on share is carried forward and paid together with other dividends due when there are available profits
- Will be presumed to be cumulative unless otherwise stated
What do participating prefs allow the shareholder to do?
Participate (with ords) in 1) surplus profits available for distribution after receiving own fixed pref dividend and/or 2) surplus assets of company on winding up
Cf non-participating prefs; entitled to dividend before ords but no further dividend
What is the difference between deferred, redeemable and convertible shares?
- Deferred = no voting rights or ordinary dividend but sometimes entitled to share of surplus profits after other dividends paid
- Redeemable = issued with intention company will buy back and cancel
- Convertible = carry option to convert into different class of share
Where will the rights attaching to each share be set out in?
Articles - no formal/universal definition of types of shares so Articles will specify
What are the 2 ways of varying the existing class rights in Articles via resolution if there are no provisions in the Articles to do so?
If provisions = follow them!
- Consent in writing of holders of at least 75% of issued shares of that class or
- Special resolution passed at GM of holders of that class
How can shareholders of that class have that variation cancelled and how much of the relevant shares do they need to own to do so?
Shareholders holding 15% of relevant shares may (as long as they did not vote in favour of variation) apply to court within 21 days of resolution to have variation cancelled
What is the effect of an application by 15% of the shareholders within 21 days of resolution on variation?
Variation will not take effect unless and until confirmed by the court - will not confirm if it unfairly prejudices shareholders of the class in question
What are the two ways a shareholder will make ROI?
- Receipt of dividends
- Increase in capital value of shares
When will dividends be payable?
I.e. what must a company have
If a company has sufficient distributable profits (accumulated realised profits less accumulated realised losses)
What are the 2 kinds of dividend and how is each approved?
- Final - declared by directors and appoved by OR of shareholders following financial year ahead
- Interim - directors usually have power from Articles to pay without OR
What is the difference between the allotment and transfer of shares?
- Allotment = contract between company and new/existing shareholder where company agrees to issue new shares in return for purchaser paying subscription price
- Transfer = contract to sell (or gift) existing shares in company between existing shareholder and purchaser (company not a party [unless treasury shares])
To whom can a private company offer shares?
Cannot offer shares to the public indiscriminately - only targeted investors
What are the exceptions to ‘offering shares to the public’?
- Intended only for the person receiving them; and
- A private concern of the persons making and receiving them (existing shareholders, company employees, certain family members, employee share scheme)
What does a prospectus do and will a private company need one in an offer of shares?
- Prospectus = gives details about the company and investment itself (for investors to make an informed assessment of financial status and rights attaching to shares)
- Prospectus will usually not be required (but check Articles!)
What is a financial promotion and what are the restrictions/exemptions on it?
- Financial promotion = any invitation or inducement (in course of business) to engage in investment activity (e.g. buying shares)
- Prohibited by FSMA unless meets an exemption in s21 prohibition or issued/approved by authorised person
What is meant by the transmission of shares and who do they go to in this case?
Automatic process in the event of death/bankruptcy of a shareholder
* Dies = shares automatically pass to PRs
* Bankrupt = shares automatically vest in T in bankruptcy
What are the 2 common restrictions on a transfer of shares?
Other than what might already be contained in Articles
- Director’s power to refuse to register - in which case must be returned to transferee with notice of refusal (with reasons!) unless they suspect fraud
- Pre-emption clauses - a shareholder must offer them to other existing shareholders before they can sell to outsider
Are pre-emption rights on a transfer of shares automatic?
No - so must be specifically inserted into Articles
How is a stock transfer form carried out for transferring shares (who signs and where submitted)? When does the legal and equitable title pass?
- Stock transfer form (STF) signed by transferor and submitted to new shareholder with share certificate
- Equitable title passes on execution of STF
- Legal title passes on registration of member in register of members (will also send shareholder new certificate in name within two months)
Think logically about equitable and legal title
What must happen to the STF before the new owner can be registered as the holder of those shares?
The STF must be stamped
What is the stamp duty payable on the transfer of shares, when will it not be payable and what is the minimum fee payable?
- 0.5% of consideration rounded up to nearest £5
- Not payable where consideration is £1000 or less
- If £1000 or over, minimum fee is £5
Is stamp duty payable on a gift?
No
What are the 5 steps that must b considered in the procedure for the allotment of shares?
- Is there a cap on number of shares that can be issued?
- Do the company’s directors need authority to allot?
- Must pre-emption rights be disapplied on allotment?
- Must new class rights be created for the shares?
- Must directors pass a BR to allot the shares?
Can
Anyone
Produce
CRunchy nut (for)
BReakfast
What is the difference between a company incorporated under CA 1985 and CA 2006 in terms of the cap/limit on number of shares that can be issued?
Step 1
- CA 1985 = will have an authorised share capital (ASC) [i.e. ceiling on number of shares it can issue] unless it is removed from Articles
- CA 2006 = no ASC, will need to amend Articles if they want to include one
What is the process for removing share cap/limit fo companies incorporated under CA 1985?
- By OR (even though it is SR under CA); or
- Will fall away as a consequence of company adopting wholesale new Articles which do not include provision for the cap
What are ‘equity securities’?
For which pre-emption rights will apply
‘Ordinary shares’ with a wider meaning than the standard definition (shares ‘other than shares that as respects dividends and capital carry a right to participate only up to a specified amount’ for this purpose)
So most shares will be caught within definition of equity securities
What will not fall within definition of equity securities and will not need to be offered preemptively?
Class of shares carrying rights to receive dividends and capital (on winding up) and shares are both capped
Are not subject to pre-emption rights
XYZ Ltd has a class of shares in issue which carry a right to receive a fixed preferential dividend of 5% of the nominal amount of the shares with no other right to any dividend. In addition, the shares carry a right to share pari passu with the ordinary shareholders in any surplus assets on a winding up.
These shares are equity securities for the purpose of s 560(1) because even though the right to receive dividends on the shares is capped (at 5%) they carry an uncapped right to participate in capital payments on a winding up.
How does the prohibtion apply when the target is a public company and a private company?
- Target is a public company = target company itself and subsidiary (private or public) of it cannot give financial assistance
- Target is a private company = public company subsidiary of company cannot give financial assistance
I.e. a public company can never give financial assistance, a private company can always give financial assistance unless it is the subsidiary of a plc (sub = bad = cannot give financial assistance!)
Summary of procedure for buyback of share
