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(FLK1) Business Law and Practice > Equity Finance > Flashcards

Equity Finance Flashcards

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1
Q

What is a Share?

A

A bundle of rights in a Firm.

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2
Q

What is the Difference between Share Allotment, Share Issuance, and Share Transfer?

A
  • Allotment is the creation and allocation of Shares by way of contract between the Firm and Purchaser.
  • Issuance is the registration of:
    • Shares in the Share Register; and
    • Shareholders in the Register of Members.
  • Transfer is the sale or gift of existing Shares by a Shareholder or the Firm (Treasury Shares) to a Purchaser.

CA 2006 — §549, §554.

Allotment precedes Issuance, and neither Shares nor Shareholders are legally recognised until Issuance (§112(2)).

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3
Q

What do the Rights attaching to Shares concern?

A
  • Voting.
  • Capital Repayment.
  • Participation in Capital Gains.
  • Income by way of Distributions.

The right to Capital Repayment is otherwise called a Fixed Entitlement to Capital on Winding Up.

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4
Q

What are the Different Types of Shares?

A
  • Ordinary Shares.
  • Cumulative Preference Shares.
  • Participating Preference Shares.
  • Treasury Shares.
  • Convertible Shares.
  • Redeemable Shares.
  • Deferred Shares.
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5
Q

What Rights do Ordinary Shares confer?

A
  • One vote per share.
  • The right to participate in Capital Gains.
  • The right to Capital Repayment, subordinate to Preference Shareholders.
  • The right to participate in Distributions, subordinate to Preference Shareholders.
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6
Q

What Rights do Cumulative Preference Shares confer?

A
  • The accruing right to receive a fixed amount of Distributions per year in prioirty of Ordinary Shareholders.
  • Unpaid Distributions accrue annually and are payable on the next Distribution.

Preference Shares are Cumulative de facto.

Although Preference Shares technically confer a right to participate in Capital Gains, their fixed value significantly limits their potential for price appreciation, effectively making that right pointless.

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7
Q

What Rights do Participating Preference Shares confer?

A
  • The accruing right to receive a fixed amount of Distributions per year in prioirty of Ordinary Shareholders.
  • The right to generally participate in Distributions.
  • The right to Capital Repayment, subordinate to Creditors.

Consider the following:

  • A Cumulative and a Participating Preference Shareholder are entitled to £1,000 p/a in Distributions.
  • The Firm issues Dividends of £2,000 for the year.
  • The Cumulative Preference Shareholder will only receive £1,000 while the Participating Preference Shareholder will receive the full £2,000.
  • This is because the former’s entitlement is fixed, while the latter’s is fixed up to a point and general thereafter.
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8
Q

What are Treasury Shares?

A
  • Shares held by the Firm on its own behalf.
  • Treasury Shares confer no rights and are not part of a Firm’s outstanding Share Capital.

Sales of Treasury Shares are Share Transfers, not Share Issuances.

Treasury Shares give Firms flexibility, allowing them to control their Share supply without having to use Cancellation.

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9
Q

What Rights do Convertible Shares confer?

A

The right to convert from one Class to another.

The precise ratios and timings are matters of fact.

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10
Q

What Rights do Redeemable Shares confer?

A

The right for the Firm to repurchase the Share for a predetermined price on a specific date (or event).

The specific terms will be in the AOAs.

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11
Q

What Rights do Deferred Shares confer?

A
  • Usually, none, very few, or conditional rights to Voting and Distribution.
  • Their primary uses are economic, particularly as regards restructuring and executive compensation.
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12
Q

What is Share’s Par Value?

A

The nominal value of a Share. Think of this as a Share’s Default Price.

CA 2006 — §542, §580.

Issuances below Par Value are voidable at the instance of the Firm, or anyone affected (Shearer v Bercain).

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13
Q

What is a Share Premium?

A

The amount above Par a Share is Allotted.

CA 2006 — §610.

This amount is recorded separately in the Firm’s Share Premium account.

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14
Q

What is Authorised Share Capital?

Otherwise known as the ‘Nominal Share Capital’.

A
  • The maximum Share Capital a Firm can raise at Par Value.
  • Only Firms incorporated under the 1985 Regime are subject to this limitation.
  • Such Firms may remove it by Ordinary Resolution or adopting new AOAs.

Firms may also pass a Special Resolution to permit Allotment above the cap.

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15
Q

What is Paid-Up Share Capital?

A

The proportion of paid consideration for Shares.

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16
Q

What is Called-Up Share Capital?

A
  • The proportion of unpaid consideration.
  • For PLCs, this cannot exceed 75% of the sale price.

CA 2006 — §547, §586.

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17
Q

Who has the Authority to Allot and Issue Shares?

A

The Board.

  • In LTDs with a single class, the Board has unfettered discretion to Allot Shares of that same class.
  • In all other cases, the Board needs an Ordinary Resolution which must be filed at Companies House.
    • The Resolution must specify the Authority’s duration and the number of Shares Allottable thereunder.

CA 2006 — §549-§551.

The maximum duration is five years.

Pre-2006 Firms do not automatically benefit from §50. An Ordinary Resolution is always necessary to grant Authority to Allot.

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18
Q

What is the Procedure for Allotting and Issuing Shares?

A

Step 1 — Due Diligence:

  • Ensure neither the Board nor AOAs impose restrictions on Allotment. If they do, comply accordingly.
  • Ensure the Board has been granted authority to Allot, if needed.
  • Ensure Pre-Emption disapplies. If it does not, comply accordingly.

Step 2 — Allotment:

  • Pass a Board Resolution on Allotment and Issuance.

Step 3 — Issuance:

  • Issue Share Certificates.
  • Update the Register of Members.

Step 4 — Admin:

  • Update the PSC Register (Form PSC01).
  • File a Return of Allotment (Form SH01).
  • File an updated Statement of Capital (Form SH08).
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19
Q

What is the Procedure for Transferring Shares?

A

Step 1 — Due Diligence:

  • Ensure the AOAs do not contain restrictions on Transfer. If they do, comply accordingly.

Step 2 — Contract and Tax:

  • Draft a Stock Transfer Form.
    • Form J30 for fully-paid Shares.
    • Form J10 for partly-paid Shares.
  • Have the Transferor execute the Form and deliver it to the Transferee with their Share Certificate.
  • Pay Stamp Duty (0.5%) if the Shares’ value exceeds £1,000 and the Transfer is not exempted.

Step 3 — Firm Certification:

  • Submit the executed (and Stamped) Form to the Firm.
  • Pass a Board Resolution to approve the Transfer and update the Registry of Members.
    • If the Board withholds approval, it must declare why.
  • Issue a Share Certificate for the Transferee within two months.
  • Update the PSC Register (Form PSC01), if necessary.

CA 2006 — §112(2), §769, §770.

Relevant Stamp Duty exemptions include:

  • Gifts.
  • Intra-Group Transfers.
  • Employee Share Schemes.
  • Transfers to spouses or civil partners, or due to divorce or dissolution.

Stamp Duty is rounded to the nearest £5.

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20
Q

What is the Procedure for Creating a New Class of Shares?

A

Step 1 — Due Diligence:

  • Ensure the AOAs do not contain restrictions on Creation. If they do, comply accordingly.

Step 2 — Drafting:

  • Define the rights and characteristics of the New Class.

Step 3 — Board Resolution:

  • Pass a Board Resolution to call a General Meeting or to circulate a Written Resolution.

Step 4 — Creation:

  • Pass a Special or Written Resolution to amend the AOAs and create the New Class.

Step 5 — Admin:

  • Notify all Shareholders.
  • File the Amended AOAs.
  • File Form RES01 (Special Resolution).
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21
Q

What is the Procedure for Varying a Class of Shares?

A

Step 1 — Due Diligence:

  • Note the AOAs’ prescribed procedure for Variation.
    • If the AOAs are silent, the procedure defaults to §630.

Step 2 — Drafting:

  • Define the terms of the Variation.

Step 3 — Board Resolution:

  • Pass a Board Resolution to call a Class Meeting.
  • Serve notice to all affected Shareholders.

Step 4 — Variation:

  • Pass a Special Resolution. Failing that, obtain written consent from Shareholders holding 75% of the Class’s nominal value.
    • Beware that dissenting Shareholders holding 15% of the Class’s nominal value can challenge the Variation in Court.
  • Pass a Board Resolution to execute Variation.

Step 5 — Admin:

  • Notify affected Shareholders.
  • Update the Register of Members to reflect the Class’s current rights and characteristics.
  • If applicable, file the following at Companies House:
    • The amended AOAs.
    • A copy of the Written Consent.
    • Form RES01 (Special Resolution).
    • Form SH08 (Reduction of Capital).

CA 2006 — §630-§633.

A Class Meeting is in itself a General Meeting.

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22
Q

In a Share Transfer, at which point does the Beneficial Title in the Shares transfer?

A

On execution and delivery of the Stock Transfer Form.

Re Rose [1952] Ch 499.

23
Q

What constitutes an ‘Offer of Shares to the Public’?

A
  • A communication to a wide audience;
  • That provides sufficient information about the terms and nature of a securities offer;
  • To decide whether to invest.

UK Prospectus Regulation — Art. 2(d).

24
Q

What constitutes a ‘Communication’?

A

Any form of information or message that is made available to potential investors about the offer of securities.

25
Q

Who should Approve Communications, and why?

A
  • An individual within the Firm authorised by the FCA to publicise Financial Promotions.
  • Failing to secure proper authorisation may result in sanctions and any subsequent transactions being unenforceable.

FSMA 2000 — §21.

This is irrespective of whether the Communication is pursuant to a Public Offer.

26
Q

What are the Exemptions to the ‘Public Offer’ Definition?

A
  • Offers with a denomination of €100K per unit.
  • Offers for Equities in a Takeover by Exchange.
  • Offers where each investor invests at least €100K.
  • Offers made to to fewer than 150 persons in the UK.
  • Offers made in connection with a bona fide Employee Share Scheme.
  • Offers made to Qualified Investors, i.e. HNWIs or Institutional Investors.
  • Offers where the total consideration is less than (the equivalent of) €1m over a 12-month period.
  • Offers made to existing Shareholders in proportion to their Shareholding, with clear and transparent terms.

UK Prospectus Regulation, Art. 1(3)-(4).

27
Q

What are the most common Restrictions on a Shareholder’s ability to Transfer Shares?

A
  • Pre-Emption.
  • Director Discretion.

Neither of these are Statutory. The former must be inserted into the AOAs, and the latter is in MA, Art. 26(5).

28
Q

What are Pre-Emption Rights?

A
  • Existing Shareholders’ right to be offered Allotted Shares in proportion to their shareholding;
  • Before they are offered to new Investors.

CA 2006 — §561.

29
Q

Which Shares trigger Pre-Emption?

A

Any Shares that confer rights beyond merely participating in Distributions and Capital on Winding Up on a fixed, capped or excluded basis.

CA 2006 — §561.

These Shares are also the ones to which Pre-Emption applies.

30
Q

Can Pre-Emption Rights be Excluded?

A
  • In PLCs, no.
  • In LTDs, yes, specifically by amending the AOAs accordingly.
31
Q

When are Pre-Emption Rights Exempted?

A
  • Bonus Shares.
  • Employees’ Share Schemes.
  • Companies in Financial Difficulty.
  • Allotments of Non-Cash Consideration

CA 2006 — §564-§566A.

32
Q

What is the Procedure for Disapplying Pre-Emption Rights?

A

Step 1 — Due Diligence:

  • Note the AOA’s prescribed procedure for Disapplication.
    • If the AOAs are silent, the procedure defaults to §569-§573.

Step 2 — Authority to Allot:

  • If necessary, acquire or renew the authority to Allot.

Step 3 — Recommendation to Disapply:

  • Have the Board recommend a Special Resolution to Disapply Pre-Emption, specifying:
    • The Board’s reasoning.
    • Income projections for the Allotment.
    • The Disapplication’s scope.
    • The Disapplication’s duration.
    • The Classes and number of Shares affected.
    • Limits on Shares issuable w/o Pre-Emption.
  • Circulate the Draft Resolution.

Step 4 — Board Resolution:

  • Pass a Board Resolution to call a General Meeting or circulate a Written Resolution.

Step 5 — Disapplication:

  • Pass an Special or Written Resolution.
  • Pass a Board Resolution to execute Disapplication.

Step 6 — Admin:

  • File the following at Companies House:
    • The amended AOAs.
    • Form RES01 (Special Resolution).

Create alternate procedures for §550 into §569 / §551 into §570.

33
Q

What is a Distribution?

Otherwise known as a Dividend.

A

A disbursement of assets to a Firm’s Shareholders that does not constitute:

  • A Share Buyback.
  • An Allotment of Bonus Shares; or
  • A Reduction of Share Capital.

CA 2006 — §829.

Hereafter, I will refer to Distributions as Dividends.

34
Q

What are the Two Types of Dividens?

A
  • Annual Dividends.
  • Interim Dividends.
35
Q

Who has the Authority to Declare a Dividend?

A

The Board.

  • It can declare Interim Dividends at any time.
  • It can recommend an Annual Dividend at a GM or by circulating a Written Resolution.

MA — Art. 30.

Shareholders cannot declare an Annual Dividend without a prior Board Recommendation.

36
Q

What is used to Fund Dividends?

A

Distributable Profits, which are defined as a Firm’s:

  • Accumulated, Realised Profits; less its
  • Accumulated, Realised Losses.

As per its most recent Interim or Annual Accounts.

CA 2006 – §830, §836.

37
Q

What is the Procedure for Issuing an Interim Dividend?

A

Step 1 — Due Diligence:

  • Note the AOA’s prescribed procedure for Disapplication.
    * If the **AOAs** are **silent**, the procedure **defaults** to **Part 23**.
  • Ensure there are Distributable Profits available.

Step 2 — Board Resolution:

  • Pass a Board Resolution to declare an Interim Dividend.
  • The Resolution must specify:
    • The sum;
    • The Record Date; and
    • The Board’s justification.

Step 3 — Admin:

  • Notify all Shareholders.
  • Issue Dividend Vouchers for each Shareholder and transfer the funds.
  • Update the Accounts.
38
Q

What is the Procedure for Issuing an Annual Dividend?

A

Step 1 — Due Diligence:

  • Note the AOA’s prescribed procedure for Disapplication.
    * If the **AOAs** are **silent**, the procedure **defaults** to **Part 23**.
  • Ensure there are Distributable Profits available.

Step 2 — Board Resolution:

  • Pass a Board Resolution to recommend an Annual Dividend.
  • The Resolution must specify:
    • The sum;
    • The Record Date; and
    • The Board’s justification.

Step 3 — Board Resolution:

  • Pass a Board Resolution to call a GM or circulate a Written Resolution.

Step 4 — Declaration:

  • Pass an Ordinary or Written Resolution.
  • Pass a Board Resolution to execute the Declaration.

Step 5 — Admin:

  • Notify all Shareholders.
  • Issue Dividend Vouchers for each Shareholder and transfer the funds.
  • Update the Accounts.
39
Q

What are the Consequences of Unlawfully Issuing a Dividend?

A
  • The offending Officers are liable to the Firm for the sum.
  • The recipients are liable to return the sum, unless they were acting in good faith.
    • This is notwithstanding any provisions with the Firm to the contrary.

CA 2006 – §847.

40
Q

What is a Buyback?

A

A repurchase of a Firm’s own Shares from existing Shareholders.

41
Q

Who has the Authority to Execute a Buyback?

A

The Board, although it must be granted that authority by an Ordinary Resolution.

CA 2006 — §693A, §701.

This applies to both On-Market and Off-Market Purchases.

42
Q

Who can Vote on the Ordinary Resolution to Approve a Buyback?

A

Anyone whose Shares would not get bought as a result.

CA 2006 — §695.

43
Q

What is used to Fund Buybacks?

A
  • Firm Capital (LTDs only);
  • Distributable Profits; or
  • The proceeds of a fresh Issuance.

Companies Act 2006 – §692.

44
Q

What is Firm Capital?

A

The sums invested by Shareholders that cannot be distributed back to them.

45
Q

How are Repurchased Shares held by the Firm?

A

As Treasury Shares, wherein any associated rights cannot be exercised. It may later either liquidate, cancel, or distribute them to employees.

Companies Act 2006 – §724-§733.

46
Q

What is the Procedure for Executing a Buyback?

A

Step 1 — Due Diligence:

  • Ensure the Shares are fully paid.
  • Ensure the AOAs do not contain restrictions. If they do, comply accordingly.
  • Ensure the Firm has sufficient Distributable Profits or proceeds from a fresh Issuance.

Step 2 — Board Resolution:

  • Pass a Board Resolution to:
    • Approve the Draft Contract; and
    • Call a GM or a Written Resolution.
  • The Draft Contract must be available for inspection at the Registered Address for at least 15 days.

Step 3 — Shareholder Resolutions:

  • Pass an Ordinary or Written Resolution to approve the Draft Contract.
  • Pass a Board Resolution to execute the Buyback.

Step 4 — Admin:

  • Store the Repurchased Shares as Treasury Shares, or cancel them, and update the Register of Members.
  • File the following at Companies House:
    • Updated PSC Register (Form PSC01).
    • Statement of Capital (Form SH08).
    • Notice of Cancellation (Form SH06), if applicable.
    • Return of Purchase of Own Shares (Form SH03).
47
Q

What is the Procedure for Executing a Buyback using Firm Capital?

A

Step 1 — Due Diligence:

  • Ensure the Shares are fully paid.
  • Ensure the AOAs do not contain restrictions. If they do, comply accordingly.
  • Ensure the Firm has exhaused both its Distributable Profits and proceeds from a fresh Issuance.

Step 2 — Board Resolution:

  • Pass a Board Resolution to:
    • Approve and sign the Solvency Statment and Auditor’s Report;
    • Approve the Draft Contract;
    • Call a GM or a Written Resolution.
  • The Solvency Statment and Auditor’s Report must be signed at least one week before any Resolution.

Step 3 — Shareholder Resolutions:

  • Pass an Ordinary or Written Resolution to approve the Draft Contract.
  • Pass an Special or Written Resolution to approve the Use of Capital.
  • Pass a Board Resolution to execute the Buyback.

Step 4 — Notice and Admin:

  • Within one week of passing the Special Resolution, the Board must:
    • Publish a notice in the Gazette of its intentions;
    • Publish a notice in a national newspaper of its intentions;
    • File the Solvency Statement, Auditor’s Report, and Special Resolution at Companies House.

Step 5 — Grace Period:

  • The Buyback must occur no earlier than 5 weeks and no later than 7 weeks from the Special Resolution.
    • During those 5 weeks, Creditors can challenge the Buyback in Court.

Step 6 — Further Admin:

  • Once executed, cancel the Repurchased Shares and update the Register of Members.
  • File the following at Companies House within 28 days:
    • Updated PSC Register (Form PSC01).
    • Statement of Capital (Form SH08).
    • Notice of Cancellation (Form SH06).
    • Return of Purchase of Own Shares (Form SH03).

CA 2006 — Part 18, Chapter 5.

48
Q

What is used to Fund Redemptions?

A

Either Distributable Profits or a Fresh Issuance.

CA 2006 – §687.

49
Q

What is the Procedure for Executing a Redemption?

A

Step 1 — Due Diligence:

  • Ensure the Shares are fully paid.
  • Ensure compliance with the terms of Redeemable Shares.
  • Ensure the AOAs do not contain restrictions. If they do, comply accordingly.
  • Ensure the Firm has sufficient Distributable Profits or proceeds from a fresh Issuance.

Step 2 — Redemption:

  • Pass a Board Resolution to execute the Redemption.

Step 3 — Admin:

  • Notify all affected Shareholders.
  • Store the Redeemed Shares as Treasury Shares, or cancel them, and update the Register of Members.
  • File the following at Companies House within 28 days:
    • Updated PSC Register (Form PSC01).
    • Statement of Capital (Form SH08).
    • Notice of Cancellation (Form SH06), if applicable.
    • Return of Redemption of Shares (Form SH02).
50
Q

What is the Prohibition on Financial Assistance?

A

In the case of Public Targets:

  • A prohibition on financially assisiting the purchase of shares in either the PLC or any of its Subsidiaries.

In the case of Private Targets:

  • A prohibition on financially assisiting the purchase of shares in any of its Public Subsidiaries.

CA 2006 — §678-§679.

51
Q

What constitutes ‘Financial Assistance’?

A

Using Direct or Indirect financial means to facilitate a Share Acquisition either before, during, or after it takes place.

  • Direct Financial Assistance:
    • Gifts.
    • Loans and Quasi-Loans.
    • Security, Indemnities, and Guarantees.
  • Indirect Financial Assistance:
    • Transactions materially reducing the Firm’s net assets.
52
Q

What are the Exceptions to the Prohibition on Financial Assistance?

A

Purpose Exceptions:

  • The Transaction’s main purpose is not to facilitate a Share Acquisition.

Conditional Exceptions:

  • The Transaction is part of an Employee Share Scheme.
  • The Transaction constitutes money lending in the Firm’s ordinary course of business.

Unconditional Exceptions:

  • The Transaction is a lawful:
    • Buyback.
    • Dividend.
    • Reduction of Capital.
    • Distribution of Assets pursuant to a Winding Up.

CA 2006 — §678-§679, §681-§682.

53
Q

What are the Consequences of Breaching the Prohibition on Financial Assistance?

A
  • The Firm is fined.
  • The offending Officers are fined or imprisioned.
  • The Financial Assistance is voided, and the related Acquisition may be voided.

(FLK1) Business Law and Practice (13 decks)

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