Equity finance

Question 1

What is a share?

Answer 1

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.

Question 2

What is the nominal/par value of a share?

Answer 2

It is the minimum subscription price for that share. It represents a unit of ownership rather than the actual value of the share.

Question 3

When is the full legal title to shares achieved?

Answer 3

Once a person’s name is entered in the company’s register of members.

Question 4

What are preference shares?

Answer 4

This share may give the holder a ‘preference’ as to payment of dividend or to return of capital on a winding up of the company, or both. This means the payment will rank as higher priority than any equivalent payment to ordinary shareholders.

Question 5

What are cumulative preference shares?

Answer 5

It is presumed that a preference share is ‘cumulative’ unless otherwise stated. This means that if a dividend is not declared for a particular year, the right to the preferred amount on the share is carried forward and will be paid, together with other dividends due, when there are available profits.

Question 6

What are participating preference shares?

Answer 6

Shareholders with this share may participate, together with the holders of ordinary shares, (1) in surplus profits available for distribution after they have received their own fixed preferred dividend; and/or (2) in surplus assets of the company on a winding up.

Question 7

What consent is required to vary the existing class rights of a company?

Answer 7

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.

Question 8

When are dividends payable?

Answer 8

Dividends are only payable by a company if it has sufficient distributable profits.

Question 9

Describe the difference between an allotment of shares and a transfer of shares.

Answer 9

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.

Question 10

What events trigger an automatic transmission of shares?

Answer 10

Death-shares automatically pass to shareholder’s PRs

Bankruptcy-shares automatically vest in shareholder’s trustee

Question 11

How is a transfer of shares made?

Answer 11

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).

Question 12

When does legal and beneficial title to shares pass on transfer?

Answer 12

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.

Question 13

Outline the 5-step procedure for the allotment of shares.

Answer 13

1. Check whether there is a cap on the amount of shares that can be issued by the company (can amend/remove cap via SR).
2. 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.
3. 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.
4. 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.
5. Board will resolve to allot the shares on behalf of the company by BR.

Question 14

Allotment of shares: what copies of resolutions need to be sent to Companies House within 15 days?

Answer 14

-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

Question 15

What is a Form SH01 and when does it need to be filed?

Answer 15

Return of allotment form and must be filed within one month of the allotment.

Question 16

When must the register of members be updated after the allotment of shares?

Answer 16

Update register of members within two months of the allotment.

Question 17

When must share certificates be prepared and sent to new shareholders?

Answer 17

Within two months of the allotment.

Question 18

What is financial assistance and what are the rules on financial assistance applicable to?

Answer 18

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.

Question 19

What is the target company in relation to financial assistance?

Answer 19

The company whose shares are being acquired, whether by transfer or issue, is referred to as the target company.

Question 20

If the target is a public company, who is prohibited from giving financial assistance?

Answer 20

-The target company itself; and

-Any subsidiary of the target company, whether private or public

Question 21

If the target is a private company, who is prohibited from giving financial assistance?

Answer 21

Any public company subsidiary of the target company.

Question 22

What is the purpose exception to financial assistance?

Answer 22

The giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose is only an incidental part of some large purpose.

Question 23

What specific types of transaction will be exempt from the prohibitions?

Answer 23

-Money lending in the ordinary course of business

-Assistance in respect of employee share schemes

Question 24

What are the consequences of carrying out prohibited financial assistance?

Answer 24

A fine for the company or fine/imprisonment for the officers of the company.

Question 25

Outline the procedure for the buyback of shares out of profits/proceeds of a fresh issue of shares.

Answer 25

1. Check Articles for any prohibition on buyback
2. Verify distributable profits
3. 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)
4. Shareholders must approve the contract by OR

Question 26

Outline the procedure for the buyback of shares out of capital (private companies only).

Answer 26

1. Check Articles for any prohibition on buyback and on use of capital
2. 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)
3. DSS and AR; accounts (<3 months old)
4. Shareholders must approve the contract by OR
5. Shareholders must approve the payment out of capital by SR, buyback to take place within 5-7 weeks following passing of SR
6. Detailed notification requirements for creditors