Equity finance Flashcards
1
Q
What is capital and what is share capital?
A
- 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)
2
Q
When will an investor get their money back if they buy shares in a private company?
A
Sale of their stake, sale of company, on floatation, or when company wound up (if funds available)
3
Q
What is the ‘fixed nominal value’ and what happens if an allotment of a share does not have one?
Nominal = par = original
A
- The minimum subscription price for share
- An allotment of a share without a fixed nominal value is void
4
Q
Can a share be allotted/issued above or below its fixed nominal value?
A
- 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
5
Q
What is meant by issued share capital (ISC)?
A
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
6
Q
What is the difference between when shares are allotted and issued?
A
- 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)
7
Q
When is full legal title to shares achieved?
A
Only once a person’s name is entered into the company’s register of members
8
Q
What is the difference between paid-up share capital and called-up share capital?
A
- 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
9
Q
What are treasury shares?
A
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)
10
Q
What will company shares be if they are issued without differentiation?
A
Ordinary shares
11
Q
What rights are provided by ordinary shares? Are they entitled to dividends?
A
- 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
12
Q
What do preference shares give the shareholder?
A
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
13
Q
Do preference shares give the right to vote?
A
Normally no - but need to check Articles
14
Q
How much will a pref holder receive if amount is expressed as 5% £1 pref share?
A
5% of £1 per share - 5p per share - by way of dividend each year (if declared)
15
Q
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)?
A
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.
16
Q
What does it mean if a preference share is cumulative? Will they automatically be cumulative?
A
- 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
17
Q
What do participating prefs allow the shareholder to do?
A
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
18
Q
What is the difference between deferred, redeemable and convertible shares?
A
- 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
19
Q
Where will the rights attaching to each share be set out in?
A
Articles - no formal/universal definition of types of shares so Articles will specify
20
Q
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!
A
- 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
21
Q
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?
A
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
22
Q
What is the effect of an application by 15% of the shareholders within 21 days of resolution on variation?
A
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
23
Q
What are the two ways a shareholder will make ROI?
A
- Receipt of dividends
- Increase in capital value of shares
24
Q
When will dividends be payable?
I.e. what must a company have
A
If a company has sufficient distributable profits (accumulated realised profits less accumulated realised losses)
25
What are the 2 kinds of dividend and how is each approved?
1. **Final** - declared by directors and appoved by OR of shareholders following financial year ahead
2. **Interim** - directors usually have power from Articles to pay without OR
26
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])
27
To whom can a private company offer shares?
Cannot offer shares to the public indiscriminately - only **targeted investors**
28
What are the exceptions to 'offering shares to the public'?
1. Intended **only for the person receiving them**; and
2. A **private concern** of the persons making and receiving them (existing shareholders, company employees, certain family members, employee share scheme)
29
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!)
30
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**
31
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
32
What are the 2 common restrictions on a **transfer** of shares?
| Other than what might already be contained in Articles
1. **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
2. **Pre-emption clauses** - a shareholder must offer them to other existing shareholders before they can sell to outsider
33
Are pre-emption rights on a **transfer** of shares automatic?
No - so must be specifically inserted into Articles
34
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)
## Footnote
Think logically about equitable and legal title
35
What must happen to the STF before the new owner can be registered as the holder of those shares?
The STF must be **stamped**
36
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
37
Is stamp duty payable on a gift?
No
38
What are the 5 steps that must b considered in the procedure for the allotment of shares?
1. Is there a **cap** on number of shares that can be issued?
2. Do the company's directors need **authority** to allot?
3. Must **pre-emption rights be disapplied** on allotment?
4. Must new **class rights be created** for the shares?
5. Must **directors pass a BR** to allot the shares?
## Footnote
**C**an
**A**nyone
**P**roduce
**CR**unchy nut (for)
**BR**eakfast
39
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
40
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
41
What is the process of **imposing or removing a cap/restriction on share capital** for companies incorporated under CA 2006?
SR
42
What must be checked regarding a (potential) cap on the number of shares that must be issued?
| Summary for Step 1
* Whether any resolutions to remove, impose or change any cap or increase share capital have been passed (check Articles)
* Whether any shares have been issued by checking register of members for most recent confirmation statement
| Proceed to Step 2 if no limit or sufficient unissued shares...
43
Will a board resolution and **authority** of shareholders be needed to allot shares?
| Step 2
* BR **always** needed
* Whether authority of shareholders needed depends...
44
When will directors of **private companies** have automatic authority to allot new shares? What are the 2 exceptions?
If they only have **one class of shares in existence (and are allotting more of the same), they will have automatic authority**, unless...
* Prohibited by Articles
* Were incorporated under CA 1985 - in which case need an OR
45
For other companies, must authority be granted from shareholders?
| I.e. all other companies
## Footnote
'Other companies' = **a) public or b) private that have more than one class of share in existence**
Yes - by way of OR (unless Articles provide for higher majority or provides authority)
46
How is authority granted by an OR for not private companies limited?
Authority is limited in **time** and **number of shares**; so if company has already granted authority it must be checked to ensure it is still valid
47
What do pre-emption rights mean directors have to do and how are they typically disapplied?
| Step 3
* Mean new shares have to be offered pro rata to existing shareholders **before** new investor
* Where they apply - usual approach is to request existing shareholders to disapply by **SR**
48
For what type of shares are pre-emption rights relevant?
Any new **equity securities** must be offered to existing shareholders in proportion to their existing shareholdings
49
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
50
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
## Footnote
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.
51
What is the process for a **general disapplication** of pre-emption rights? Is it a permanent disapplication?
| Most common means
* Where directors are generally authorised (to allot new shares) by passing a **SR** or by including disapplication in **articles**
* Not a permanent disapplication - attaches to a particular, pre-existing authority (to allot new shares)
52
How will private companies with one class of share disapply pre-emption rights? How long will it apply for?
* Special resolution
* Will apply for as long as company has in issue and allots only one class of share
53
What is the process for a **specific** **disapplication** of pre-emption rights?
| I.e. to one specific allotment of shares (to certain person/purpose)
Special resolution and need to provide shareholders with written statement explaining reasons for specific disapplication and amount to be paid to company pursuant to allotment
54
How can private companies exclude statutory pre-emption rights permanently?
Through provision in their Articles
| But will only be done commonly in subsidiary companies
55
If a new class of shares must be created, how is this done?
| Step 4
## Footnote
E.g. wants to create a new class of pref shares
Requires alteration of articles via SR
56
What must directors pass to allot the new shares?
| Step 5
A board resolution
| Requirements re shareholder resolutions dealt with in GM before BR
57
When will a GM not needed in advance of BM for allotting new shares?
| Summary of all past steps
1. No limit in constitution on share capital; and
2. Does not require directors' authorisation (private company with one class of share **or** has already given directors authority to allot shares); and
3. Is issuing the new shares to existing shareholders in proportion to their existing shareholdings and follows procedure **or** has disapplied; and
4. Has the relevant class rights in Articles
58
What resolutions must be sent to Companies House within 15 days on allotment?
* OR granting director's authority to allot
* All SRs regarding disapplication of pre-emption rights and/or amending Articles
* Amended Articles if a new class of share has been created
* CA 1985 companies: OR removing cap on ASC / CA 2006 companies: SR removing cap if it was imposed
59
What company forms must be sent to CH?
* Return of allotment (Form SH01) and statement of capital within 1 month
* If PSCs have changed from allotment - relevant forms
60
By when must the register of members be updated after allotment? What other register should be updated?
| Personnel registers
* Update register of members within 2 months of allotment
* Update PSC register if necessary
61
When should share certificates be sent to new shareholders and what is the consequence of not doing this?
* Must be sent within 2 months of allotment
* Failing this = no legal title and unable to exercise voting rights
62
What types of company are the financial assistance rules relevant to?
* Public companies
* Private companies in groups which contain public companies
63
To what transactions do the rules on financial assistance apply?
1. (Proposed) acquisition or sale of shares
2. Issue of shares (by company to investor)
64
What is the **target company**?
| In both share sale and issue of shares
The company whose shares are being acquired (whether by transfer or issue)...
* On share sale = company which is the subject of the acquisition
* On issue of shares = company doing the issuing of shares
65
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
## Footnote
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!)
66
What transactions can amount to financial assistance?
## Footnote
I.e. what kind of transactions can constitute financial assistance in the case of a share sale/issue of shares
* Gift
* Guarantee, security or indemnity, release or waiver
* Loan or similar agreement
* Any other where net assets are reduced to material extent by giving of FA or companuy has no net assets (catch-all)
67
To **constitute** financial asistance, what two things must the assistance **be**?
## Footnote
Not enough for type of transaction to meet definition of financial assistance`
No - must actually **constitute** financial assistance: assistance must be being **given** and it must be **financial** in nature
| Ordinary meaning - 'smooth the path to the acquisition'
68
Does the FA cover both direct and indirect assistance? And must FA be given before or after acquisition?
* Can be direct (e.g. loan given to buyer) or indirect (e.g. guarantee given to bank in re a loan made by bank to buyer of shares)
* Can be before, at same time as, or after acquisition
69
70
What are the 3 exceptions to the prohibition on FA?
1. The **purpose** exceptions (not normally relied upon) - FA not unlawful if principal purpose in giving it is not for purpose of acquisition or the acquisition purpose is an incidental part of a larger purpose
2. The **unconditional** exceptions - specific types of transaction exempt e.g. dividend payments
3. The **conditional** exceptions - for specific types of transaction - e.g. money lending in ordinary course of business and assistance re employee share scheme - if certain conditions are met
71
What are the conditions for the **conditional** exceptions?
| One for private and one for public
1. Company giving assistance is a **private** company; or
2. The company giving assistance is a **public** company and net assets are not reduced/to extent they are reduced the assistance is provided out of distributable profits
72
What are the consequences of carrying out prohibited financial assistance?
* **Penalties** for company (fine) and officers of company (fine/imprisonment)
* Transaction amounting to FA (loan by buyer) would be **void** as may wider transaction (share acquisition)
73
Can the investments of shareholders normally be returned to them?
No - all payments to shareholders should be made from distributable profits
74
What is meant by the doctrine of maintenance of share capital?
* Money represented in accounts (equity and share premium) can be used as working capital but generally cannot be returned to shareholders while company is a going concern
* Share capital of company seen as a permanent fund available to creditors
## Footnote
Even though many private companies have small issued share capital so maintenance becomes basically irrelevant
75
What are the 2 consequences of share capital maintenance?
## Footnote
I.e. what does it **mean** that share capital cannot be returned to shareholders while company is a going concern
1. Dividends can only be paid out of distributable profits (not capital)
2. Companies generally must not purchase their own shares
76
What are the 2 exceptions to a company not purchasing its own shares?
* Company can **buyback its own shares** (redeem redeemable shares) provided it follows CA 2006 procedures
* Company can purchase own shares where **court order** is made following successful unfair prejudice claim
## Footnote
Both private and public companies may buyback their own shares or redeem redeemable shares provided they comply with the provisions of CA 2006.
77
How is a contract setting out the purchase of its own shares approved?
By OR of shareholders
78
What are the 3 ways a company can fund the buyback of its own shares?
1. Distributable profits
2. Proceeds of a fresh issue of shares made for purpose of financing buyback; or
3. Capital
79
When is it okay to use **capital** for the buyback of shares?
| 2 conditions
1. Is a **private company**
2. First two options - distributable profits and proceeds of fresh issue of shares - **exhausted**
80
If using **distributable profits/proceeds** of fresh issue, how must this not be **restricted**, what must the shares being purchased **be**, and what must the company **continue to have** after?
* Not restricted by **Articles**
* Shares being purchased are **fully paid up**
* Company must continue to have **issued shares other than redeemable and treasury shares** after purchase
81
What is the 3-stage contract procedure for the buyback of shares using **profits/proceeds of fresh issue?**
1. Contract approved by BR
2. Contract available for inspection at registered office for 15 days before GM and at GM
3. Terms of contract approved by OR
82
How is the procedure different if a written resolution is used?
Contract must be circulated with written resolution
83
Who cannot vote at the GM for buyback out of profits/proceeds?
The holder of the shares being bought
84
What are the post meeting matters once a contract to buy shares using profits/proceeds is entered?
* File return, notice of cancellation and statement of capital within 28 days
* Keep copy of contract for 10 years
* Cancel shares, update register of members (and PSCs)
85
In what conditions can a company purchase own shares using capital?
**Private companies only**, otherwise same as using profits/proceeds...
* Not restricted by Articles
* Shares being purchased are fully paid up
* Company must continue to have issued shares other than redeemable and treasury shares after purchase
| And other options exhausted!
86
What is the procedure for buyback of shares using capital?
Contract to purchase own shares is available for inspection for 15 days and terms approved by OR
| Basically same as profits/proceeds
87
What extra conditions must be fulfilled specifically for **capital** funding?
## Footnote
When must accounts have been prepared? What should be checked? What two things must be prepared together and made available to members?
* Check accounts prepared no more than 3 months before directors' statement
* Check that distributable profits/proceeds of fresh issue cannot be used (must be used first if available!)
* **Director's statement of solvency** prepared together with **auditor's report** and made available to members at GM (or sent with written resolution)
* Resolution passed...
88
What kind of resolution must be passed to approve payment out of capital and **when**?
* Special resolution
* Within a week after directors sign written statement of solvency
89
What resolutions are passed and what for for buyback of shares using capital? Who cannot vote in either?
1. OR to approve contract
2. SR to approve payment out of capital
| Holders of share cannot vote in either
90
What **2 things** are confirmed in a director's statement of solvency and **when** must it be made?
* Confirmation that 1) company is solvent and able to pay debts as they fall due and 2) will remain solvent for 12 months after buyback
* Must be made no earlier than one week before GM
91
What if the company does become insolvent and wound up within a year of making the directors' statement of solvency?
Directors may be required to contribute to assets of company/face criminal sanctions if they **lacked reasonable grounds** for making statement
92
What does an auditor's report confirm?
Confirmation that auditors are not aware of anything to indicate director's opinion is not reasonable - must also be made no earlier than one week before GM
93
What must happen within 15 days of the SR?
SR filed at cH
94
When must a company give notice to its creditors once a SR is passed and how? How can creditors inspect the relevant documents?
* Must give notice within 7 days of passing SR
* Give notice by: publishing a notice in Gazette and appropriate national newspaper
* File copies of directors' statement and auditors' report at CH for inspection by creditors
95
What 3 things must the notice in the Gazette and national newspaper contain?
## Footnote
Statement, where, how
* Statement that company approved payment out of capital
* Where directors' statement and auditor's report is available for inspection
* How creditor/company can apply to court for order preventing payment
96
How many weeks does a creditor/shareholder have the right to object to the payment?
5 weeks immediately following date of resolution
97
In what time period can the share purchase take place and how can this time be reduced?
* Can take place no earlier than 5 weeks and no later than 7 weeks after date of SR
* Cannot be reduced even if SR passed unanimously
## Footnote
7 week longstop intended to ensure view formed by directors re solvency of company is accurate + so creditors can lodge object to payment by court application
98
What must company send to CH within 28 days of date on which shares are bought back?
Return, notice of cancellation and statement of capital
## Footnote
Must also keep contract for 10 years and cancel shares, update register of members
99
Summary of procedure for buyback of share
100
In what 2 circumstances will redeemable shares be redeemed?
* On occurrence of certain circumstances (e.g. providing redemption on fixed date at fixed price)
* On option of issuing company or shareholder
| Details of redemption found in Articles/determined by directors
101
Will a contract be required to redeem shares? Whatever funding is used?
| Like profits/proceeds/capital
No regardless of funding used - terms of redemtion already set out in Articles prior to allotment
