EQUITY FINANCE

Question 1

What are the two main ways companies obtain finance?

Answer 1

○Equity finance: Prospective shareholders pay money or give property to the company in return for shares.
○Debt finance: Companies borrow money

Question 2

What are the three ways shares can change hands?

Answer 2

○Allotment
○Transfer (or transmission)
○Buyback

Question 3

What is allotment?

Answer 3

When a company creates new shares and gives them to an existing or new shareholder in return for payment. The form of payment will usually be cash but sometimes the consideration will be an object such as a property.

Question 4

What is share transfer?

Answer 4

Where a shareholder sells or gives shares to another shareholder or to a new shareholder.

Question 5

What is buyback?

Answer 5

Where a company buys back some of its own shares from one or more shareholders. The shares are then cancelled.

Question 6

What changes in all three methods of shares changing hands?

Answer 6

The percentage shareholding of at least one of the shareholders.

Question 7

Why are a number of restrictions placed by statute on allotment and buyback?

Answer 7

To prevent shareholders losing power or other shareholders gaining more power.

Question 8

When are shares allotted?

Answer 8

When a person acquires the unconditional right to be included in the company’s register of members in respect of the shares. This will be when the shares have been transferred and paid for and the board has passed a resolution to register the transfer.

Question 9

When are shares issued?

Answer 9

When the name of the shareholder has been entered on the register of members

Question 10

What three questions need to be considered when working out the procedure needed to allot shares?

Answer 10

1. Are there any constitutional restrictions on allotment?
2. Do the directors have authority to allot shares?
3. Are there any pre-emption rights?

Question 11

What is an authorised share capital (‘ASC’)?

Answer 11

An upper limit on the number of shares a company could have. Companies incorporated under the CA 2006 will not have an ASC, but may have a similar provision in their articles.

Question 12

Do the directors of a private company with one class of share have authority to allot shares?

Answer 12

Yes, under s 550 CA 2006, as long as the company was incorporated under the CA 2006, and providing the company’s articles do not restrict this. The company will only need to pass a board resolution to allot the shares

Question 13

Do the directors of a private company incorporated before the CA 2006 with one class of share have authority to allot shares?

Answer 13

They will need permission from the shareholders, who must pass an ordinary resolution to ‘activate’ s 550.

Question 14

Do the directors of public companies, or private companies with more than one class of share, have authority to allot shares?

Answer 14

They must obtain permission from the company’s shareholders by ordinary resolution under s 551 CA 2006. The resolution must state the maximum number of shares the directors may allot and the expiry date (no more than 5 years). This authority can also be included in the articles from incorporation

Question 15

What are pre-emption rights?

Answer 15

Rights of first refusal over shares which are being allotted. Under s 561 CA 2006, the company must offer existing shareholders of ordinary shares the number of shares which will enable them to preserve their percentage shareholding in the company, before offering them to anyone else

Question 16

What are ‘equity securities’?

Answer 16

Ordinary shares and rights to subscribe for, or to convert securities into, ordinary shares in the company.

Question 17

When do pre-emption rights not apply?

Answer 17

They do not apply in relation to:
○the allotment of bonus shares
○if the consideration for the allotment is wholly or partly non-cash
○if the shares are to be held under, allotted or transferred pursuant to an employee share scheme

Question 18

Can private companies exclude pre-emption rights?

Answer 18

Yes, they can exclude or amend pre-emption rights in their articles (s 567 CA 2006). This overrides the statutory provisions in s 561. Note: There are no pre-emption rights in the Model Articles

Question 19

How can private companies disapply statutory pre-emption rights in relation to a particular allotment?

Answer 19

By special resolution under s 569 (if the company has only one class of shares), or s 571 (if the company is a plc or has more than one class of shares).

Question 20

What must directors do if disapplying pre-emption rights under s 571?

Answer 20

Make a written statement setting out:
○the reasons for making the recommendation
○the amount the purchaser will pay
○the directors’ justification of that amount.

Question 21

How can private companies disapply statutory pre-emption rights in relation to a general authority to allot?

Answer 21

By special resolution under s 570

Question 22

Must all shares in a company be fully paid?

Answer 22

Yes, under MA 21, meaning the buyer must pay for the shares when they receive them

Question 23

What happens if a share is allotted for more than its nominal value?

Answer 23

The excess consideration is recorded in a separate share premium account on the company’s balance sheet. This is treated as share capital and must be maintained.

Question 24

When does a person become a shareholder of a company?

Answer 24

When they are entered on the register of members.

Question 25

What is transmission of shares?

Answer 25

An automatic process where:
○if a shareholder dies, their shares automatically pass to their personal representatives (PRs)
○if a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy. Under MA 27, the trustee in bankruptcy and the PRs do not become shareholders, but are entitled to any dividends.

Question 26

What is the principle of maintenance of share capital?

Answer 26

A long-standing principle of company law that paid up share capital cannot be returned to shareholders, and their liability with regard to any capital they have not paid on their shares must not be reduced.

Question 27

What are the consequences of the principle of maintenance of share capital?

Answer 27

○ Dividends cannot be paid out of capital, only out of distributable profits.
○ The company must not generally purchase its own shares.

Question 28

What are the exceptions to the principle of maintenance of share capital?

Answer 28

○ A company can buy back its own shares as long as the correct procedure is followed (s 690).
○ A company can purchase its own shares under a court order made under s 994 CA 2006 to buy out an unfairly prejudiced minority shareholder.
○ A company can return capital to shareholders, after payment of the company’s debts, in a winding up.

Question 29

What are the requirements for a company to buy back its own shares?

Answer 29

1. The company’s articles must not forbid buyback (s 690(1)).
2. The shares must be fully paid (s 691(1)).
3. The company must pay for the shares at the time of purchase (s 691(2)).
4. The shares must usually be paid for out of distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the purchase (s 692(2)(a) CA 2006).
5. The shareholders must pass an ordinary resolution authorising the buyback contract (s 694 CA 2006).
6. A copy of the buyback contract, or a summary of it, must be available for inspection at least 15 days before the general meeting and at the general meeting itself (or be sent with the proposed written resolution (s 696(2)).
7. A copy of the buyback contract, or a written memorandum setting out its terms, must be made available for inspection at the company’s registered office or SAIL as soon the contract has been concluded, for ten years (s 702 CA 2006)

Question 30

What is a market purchase?

Answer 30

A buyback of shares on the stock market.

Question 31

What is an off-market purchase?

Answer 31

A buyback of shares not on the stock market.

Question 32

Are shareholders who hold shares that are being bought back allowed to vote on the resolution?

Answer 32

No.

Question 33

Can private companies buy back their own shares out of capital?

Answer 33

Yes, unless their articles forbid this (s 709 CA 2006). Public companies cannot.

Question 34

What are the additional requirements for buyback out of capital?

Answer 34

As well as fulfilling the requirements for buyback out of distributable profits:
1.
The company’s directors must make a statement of solvency (no sooner than one week before the general meeting) stating that the company is solvent and will remain solvent for a year.
2.
The statement of solvency must have an auditors’ report confirming the auditors are not aware of anything to indicate that the directors’ opinion is unreasonable (s 714 CA 2006).
3.
The payment out of capital must be approved by special resolution (s 716).
4.
A copy of the directors’ statement of solvency and auditors’ report must be available to members, either with the written resolution or for inspection at the meeting.
5.
Within seven days of the special resolution, the company must put a notice in the London Gazette and an appropriate national newspaper (or notify each creditor) stating that the shareholders have approved payment out of capital to buy back shares, and that creditors can apply to court to stop this within five weeks (s 719 CA 2006).
6.
The company must also file a copy of the directors’ statement and auditors’ report at Companies House at the same time as it publishes the notices.
7.
The directors’ statement and auditors’ report must be available for inspection at the company’s registered office from the time the company publishes its first notice until five weeks after the passing of the special resolution (s 720).
8.
The payment must be made no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s 723(1)).

Question 35

What is a dividend?

Answer 35

A payment to shareholders if the company has profits available.

Question 36

What are a company’s available profits?

Answer 36

Its accumulated, realised profits less its accumulated, realised losses.

Question 37

Who decides whether to recommend a dividend and how much it should be?

Answer 37

The directors (under MA 30).

Question 38

What is required for a dividend to be paid?

Answer 38

An ordinary resolution of the shareholders.