Equity finance Flashcards
Is receipt of income through dividends and capital gain by way of growth in value of the company guarantees?
NO
nominal value vs premium
Nominal or par value
the minimum subscription price for that share
It represents a unit of ownership rather than the actual value
a share may not be allotted/issued by a company at a discount to its nominal value
any allotment of a share that does not have a fixed nominal value is void
Premium
Excess over nominal value
When is a person’s full legal title to shares acquired?
full legal title to shares is only achieved once a person’s name is entered in the company’s register of members
Called up vs paid up shares
Paid-up shares - the nominal capital already paid
Called-up shares - cals made on company’s shares to be paid + existing paid-up share capital
Treasury shares
These are shares that have been bought back by the company itself and are held by the company ‘in treasury’. Treasury shares are issued shares being held by the company in its own name, and the company can subsequently sell those shares out of treasury.
Note that although such a sale of shares is a transfer, not an issue, of shares
The company can also choose to cancel treasury shares at any time or transfer them to an employee share scheme.
Where can you find information about the rights attached to a class of shares?
Articles of association
Ordinary shares - what rights are attached to them?
Ordinary shares carry a right to vote in general meetings, a right to a dividend (unrestricted) if one is declared and a right to a portion of any surplus assets of the company on a winding-up.
Preference shares - what rights do they give to a shareholder?
A preference 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.
The amount of preferred dividend is usually expressed as a percentage of the par (nominal) value of the share eg 5% £1 preference shares – these shares give an entitlement to 5% of £1 per share (which equates to 5p per share) by way of dividend each year provided a dividend is declared.
Preference shares are usually non-voting
Cummulative preference shares - what are they?
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. If this accumulation is not desired, then the share must be expressed to be non-cumulative.
Participating preference shares - what rights are attached to them?
‘Participating’ preference shareholders 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
Redeemable shares - what are they?
Redeemable shares are shares which are issued with the intention that the company will, or may wish to, at some time in the future, buy them back and cancel them.
Convertible shares - meaning
Such shares will usually carry an option to ‘convert’ into a different class of share according to stipulated criteria.
How to vary class rights attached to shares?
Variation: by 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 general meeting of holders of that class
How can a shareholder cancel a variation of shares?
Shareholders holding 15% of the relevant shares may (provided they did not vote in favour of the variation) apply to court within 21 days of the resolution to have a variation cancelled - then the variation will not take effect unless it is confirmed by the court. The court will not confirm the variation if it feels that the variation unfairly prejudices the shareholders of the class in question.
Interim vs final dividends
Final dividends – Final dividends are recommended by the directors and declared by the company by an ordinary resolution of the shareholders following the financial year end.
Interim dividends - The articles of a company normally give the directors the power to decide to pay interim dividends if the company has sufficient distributable profits (MA 30 allows this). Interim dividends can be paid without the need for an ordinary resolution of the shareholders. Interim dividends are often paid where the company has realised an investment.
Allotment vs transfer of shares
An allotment of shares is 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.
A transfer is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares (with the exception of a sale out of treasury of treasury shares).
Can private companies offer their shares to the public?
NO
Restrictions on power of shareholders to transfer shares
Directors’ power to refuse to register
The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent
a company must give reasons if it refuses to register a transfer
Pre-emption clauses (rights of first refusal)
CA 2006 and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the Articles of any company wishing to establish them.
Pre-emption rights on transfer will often require that a shareholder wishing to sell shares must offer them to the other existing shareholders before being able to offer them to an outsider.
Do NOT confuse them with pre-emption rights on allotment
What is the instrument of transfer of shares?
Stock transfer form (signed and submitted by the transferor with a share certificate to the new shareholder)
When does the beneficial and legal title pass to the new shareholder on a transfer of shares?
Beneficial title to the shares passes on the execution of the stock transfer form.
Legal title passes on the registration of the member as the owner of those shares in the register of members by the company
The company will also send the shareholder a new share certificate in this name within two months
Procedure for the allotment of shares
Step 1 – check whether there is a cap on the amount of shares that can be issued by the company.
Step 2 – check whether company directors need authority to allot the shares.
Step 3 – are the shares equity securities? You will be able to work this out by looking at the dividend and capital payout on the shares. If both are capped, the share is not an equity security and therefore pre-emption rights are not relevant. If the shares are equity securities, consider whether the company needs to disapply pre-emption rights.
Step 4 – is the company creating a new class of share? If so, the Articles will need to be amended to incorporate the new class rights.
Step 5 – Board will resolve to allot the shares. This step will always be required, regardless of the other steps.
If there is a cap on the number of shares that can be issued in AA - how to remove it or increase the limit?
Special resolution for CA 2006
Ordinary resolution for CA 1986
In what cases the company directors need and do not need authority to allot shares? + how to give directors authority to allot?
s 550 CA 2006: for private companies with only one class of shares in existence, the directors will have automatic authority to allot new shares of the same class (unless prohibited by AA), or
s 551 CA 2006: for all other companies, the directors will need to be granted authority to allot the new shares by the shareholders by way of ordinary resolution
Authority to allot under s 551(1) CA 2006 can only be given subject to limits in terms of both time and number of shares (s 551(3) CA 2006). This means that if the company has already granted its directors a s 551(1) CA 2006 authority, it must be checked to ensure it is still valid.
Pre-exmption rights - meaning
Pre-emption rights - New shares should be offered pro rata (in proportion in nominal value held by them) to existing shareholders before any new investor
What resolution is needed to misapply pre-emption rights?
Special resolution
What type of shares are pre-emption rights relevant to?
Equity securities
What are equity securities?
both right to receive dividents and capital payments of winding up are NOT capped
Can the company misapply pre-emption rights for a specific transaction or permanently?
It can choose either way
How to create a new class of shares?
insert new provisions in its Articles dealing with the rights attached to those new shares by special resolution
Do directors always need to pass a board resolution to allot shares?
YES
What do you need to send to companies house on allotment?
Copies of resolutions to be sent to Companies House within 15 days (s 29, s 30(1), s 26(1))
CA 1985 companies: need to file any ordinary resolution removing the cap on authorised share capital and any ordinary resolution allowing the company to use s 550 CA 2006 if passed
Any s 551 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
Company forms to be sent to Companies House
Return of allotment (Form SH01) and statement of capital within one month
If the persons with significant control have changed as a result of allotment, the relevant forms (PSC01, PSC02, PSC04, PSC07)
To which transactions are the rules on financial assistance applicable?
Acquisition or sale of shares
Issue of shares
What is the target company? (financial assistance)
On a share sale this will be the company which is the subject of the acquisition.
On an issue of shares this will be the company doing the issuing of the shares.
Prohibition on financial assistance for public companies?
Prohibition on financial assistance applies to
The target itself
Ant subsidiary of the target (whether private or public)
Prohibition on financial assistance for private companies?
Prohibition applies to any public subsidiary of the target
Financial assistance - meaning
Gift
Guarantee, security, indemnity, release or waiver
Loan
Any other financial assistance given by a company where the net assets of the company are reduced to a material extent by the giving of the financial assistance or the company has no net assets
Financial assistance - requirements
assistance must be being given; and
the assistance must be financial in nature.
Can be before, at the time, or after the acquisition
Financial assistance must be given for the purpose of the acquisition (or, if given after the acquisition, for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition)
Purpose exception to the prohibition on financial assistance
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 (the acquisition) is only an incidental part of some larger purpose.
Conditional exception to the prohibition on provision of financial assistance
Money lending in the ordinary course of business
Assistance in respect of employee share schemes
The conditions are that (i)the company giving the assistance is a private company or (ii) the company giving the assistance is a public company and the net assets of that company are not reduced by the giving of the assistance or to the extent that they are reduced the assistance is provided out of distributable profits
Consequences of carrying out prohibited financial assistance
The company - a fine
The officers of the company - fine or imprisonment
In addition to the criminal penalties, under case law the transaction amounting to prohibited financial assistance (eg the loan made to the buyer) would be void and the wider transaction (eg the share acquisition itself) may be void as well.
Share capital maintenance doctrine
A company is not usually permitted to return capital to its shareholders
Consequences of the share capital maintenance principle
Dividends may only be paid out of distributable profits, not capital
Companies generally must not purchase their own shares
Exception: A company may buyback its own shares (or redeem redeemable shares) provided it follows the procedures set out in CA 2006 or where a court order is made following a petition for unfair prejudice
When can a company buy back its own shares?
Redemption of redeemable shares
Purchase of own shares (buyback)
Buyback of shares - meaning
A buyback of shares takes place when a company purchases its own shares from an existing shareholder
What are 3 ways to fund a buyback of shares and in what order can they be used?
Distributable profits
Proceeds of a fresh issue of shares made for the purpose of financing the buyback
Capital (ONLY for private companies)
NOTE: Companies must first use any money available either in the form of distributable profits or the proceeds of a fresh issue of shares to fund the purchase before using capital
Procedure for buyback of shares and what resolution is required
a contract to purchase own shares is required (s 694(1)); and the terms of the contract need to be approved by ordinary resolution (s 694(2)).
The contract must be available for inspection at the company’s registered office for a period of 15 days before the GM and also at the GM. If a written resolution is used, a copy of the contract must be sent together with the copy of any written resolution
Can shareholders whose shares are subject to a buyback eligible to vote on the OR to approve the transaction?
no
What resolution needs to be passed and when to approve payment out of capital to fund a buyback of shares?
A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency
What companies can fund a buyback of shares out of capital?
only private companies
Buyback of shares out of capital - requirements
The purchase of own shares out of capital is not restricted or prohibited in the company’s Articles;
Check that the accounts were prepared no more than three months before the directors’ statement;
Check if the company has any distributable profits available. If so, those profits (or funds from a fresh issue of shares for the purpose) must be used to fund the buyback before capital can be used (s 710);
A directors’ statement of solvency must be prepared together with an auditors’ report (s 714);
A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency
Buyback of shares out of capital for private companies - statement of solvency: what is it, who makes it and when do they need to make it?
The directors’ statement of solvency must be made no earlier than one week before the GM. The statement confirms that the company is solvent and able to pay its debts as they fall due and that it will remain solvent for a period of 12 months after the buyback
if the company does become insolvent and is wound up within one year, they may be required to contribute to the assets of the company and may face criminal sanctions if they had no reasonable grounds for making the statement of solvency.
Buyback out of capital - notification requirement
Within seven days of the passing of the special resolution approving the payment out of capital, under s 719 CA 2006 the company must give notice to its creditors by:
Publishing a notice in the Gazette. The notice must state:
that the company has approved a payment out of capital for the purpose of purchasing its own shares;
where the directors’ statement and auditors’ report are available for inspection; and
* that any creditor of the company may, at any time within the five weeks immediately following the date of the resolution, apply to the court under s 721 CA 2006 for an order preventing the payment.
Publishing a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to each of its creditors, and Filing copies of the directors’ statement and auditors’ report at Companies House
Buyback out of capital - timing
The share purchase can take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution
Within 28 days of the date on which the shares that are bought back are delivered to the company, the company must send a return to Companies House under s 707(1) CA 2006 and a notice of cancellation under s 708(1) CA 2006, together with a statement of capital (s 708(2) CA 2006).
Redemption of redeemable shares
Redeemable shares are shares which are issued as redeemable shares
Redeemable shares effectively give the holder temporary membership in the company. They are issued to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder.
Contract is NOT required to redeem shares
