Equity finance Flashcards
What is a share?
A share is often described as a ‘bundle of rights’. By investing in the share capital of the company, the investor becomes a part owner of the company and will often have voting rights in shareholder meetings.
Describe the following types of share:
-ordinary share
-preference share
-cumulative preference share
-participating preference share
-deferred share
-redeemable share
-convertible share
Ordinary shares: default share, carry a right to vote in GM, a dividend etc
Preference shares: give the holder a preference as to payment of dividend/return of capital, rank as higher priority
Cumulative preference shares: right to the preferred amount on a share is carried forward
Participating preference shares: may participate in surplus profits or surplus assets
Deferred shares: carry no voting rights but are sometimes entitled to share of surplus profits
Redeemable shares: issued with the intention that the company will buy back and cancel them
Convertible shares: carry an option to convert into a different class of share
When is the full legal title to shares achieved?
Once a person’s name is entered in the company’s register of members.
What consent is required to vary the existing class rights of a company?
Consent in writing of holders of at least 75% of the issued shares of that class or by means of a special resolution passed at a separate GM of holders of that class.
When are dividends payable?
Dividends are only payable by a company if it has sufficient distributable profits.
Describe the difference between an allotment of shares and a transfer of shares.
Allotment: a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price.
Transfer: a contract to sell existing shares in the company between an existing shareholder and the purchaser.
What events trigger an automatic transmission of shares?
Death-shares automatically pass to shareholder’s PRs
Bankruptcy-shares automatically vest in shareholder’s trustee
How is a transfer of shares made?
A transfer of shares is made by way of a stock transfer form, which has to be signed by the transferor and submitted, with the share certificate, to the new shareholder (s770 CA 2006).
When does legal and beneficial title to shares pass on transfer?
Legal title-registration of member as the owner of the shares in the register of members by the company.
Beneficial title-execution of the stock transfer form.
Outline the 5-step procedure for the allotment of shares.
- Check whether there is a cap on the amount of shares that can be issued by the company (can amend/remove cap via SR).
- Check whether company directors need authority to allot the shares-private companies have automatic authority to allot new shares of same class. All other companies, directors need authority to allot new shares by way of OR of the SH.
- Are the shares equity securities? If both dividend and capital payout are capped, the share is not an equity security and pre-emption rights are not relevant. All other shares are equity securities and pre-emption rights must be disapplied by SR.
- Is the company creating a new class of share? If so, the Articles will need to be amended by SR to incorporate the new class rights.
- Board will resolve to allot the shares on behalf of the company by BR.
Allotment of shares: what copies of resolutions need to be sent to Companies House within 15 days?
-Any s551 ordinary resolution granting the directors authority to allot if passed
-All special resolutions regarding the disapplication of pre-emption rights and/or amending articles if passed
-Amended Articles must also be sent to Companies House if a new class of shares has been created and the Articles amended
What is a Form SH01 and when does it need to be filed?
Return of allotment form and must be filed within one month of the allotment.
When must the register of members, PSC register and share certificates be updated after the allotment of shares?
Within two months of the allotment.
What is financial assistance and what are the rules on financial assistance applicable to?
It is the act of providing funds or economic resources, either conditionally or unconditionally, to an individual, entity, or body.
The rules are applicable to the acquisition, sale or issue of shares.
What is the target company in relation to financial assistance?
The company whose shares are being acquired, whether by transfer or issue, is referred to as the target company.
If the target is a public company, who is prohibited from giving financial assistance?
-The target company itself; and
-Any subsidiary of the target company, whether private or public
If the target is a private company, who is prohibited from giving financial assistance?
Any public company subsidiary of the target company.
What are the two exceptions to financial assistance?
Purpose exception: if the principal purpose in giving the financial assistance is not for the purpose of the acquisition or it is only incidental, it will not be unlawful.
Conditional exception: money lending in the ordinary course of business or assistance in respect of employee share schemes.
What are the consequences of carrying out prohibited financial assistance?
A fine for the company or fine/imprisonment for the officers of the company.
Outline the procedure for the buyback of shares out of profits/proceeds of a fresh issue of shares.
- Check Articles for any prohibition on buyback
- Verify distributable profits via company accounts
- Terms of buyback must be set out in a contract available for inspection at least 15 days before GM and at GM itself (or sent out with WR)
- Shareholders must approve the contract by OR
- BR to enter into the contract and appoint a director to sign the contract
- File return, notice of cancellation & statement of capital within 28 days and keep a copy of the contract for 10 years
Outline the procedure for the buyback of shares out of capital (private companies only).
- Check Articles for any prohibition on buyback and on use of capital
- Directors prepare statement of solvency (DSS) and auditors report (AR) which is approved by BR (reports must be less than 3 months old)
- Terms of buyback must be set out in a contract available for inspection at least 15 days before GM and at GM itself (or sent out with WR)
- Shareholders must approve the contract by OR and payment out of capital by SR, buyback to take place within 5-7 weeks following passing of SR
- File return, notice of cancellation & statement of capital within 28 days and keep a copy of the contract for 10 years
