Equity finance

Question 1

Is receipt of income through dividends and capital gain by way of growth in value of the company guarantees?

Answer 1

NO

Question 2

nominal value vs premium

Answer 2

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

Question 3

When is a person’s full legal title to shares acquired?

Answer 3

full legal title to shares is only achieved once a person’s name is entered in the company’s register of members

Question 4

Called up vs paid up shares

Answer 4

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

Question 5

Treasury shares

Answer 5

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.

Question 6

Where can you find information about the rights attached to a class of shares?

Answer 6

Articles of association

Question 7

Ordinary shares - what rights are attached to them?

Answer 7

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.

Question 8

Preference shares - what rights do they give to a shareholder?

Answer 8

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

Question 9

Cummulative preference shares - what are they?

Answer 9

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.

Question 10

Participating preference shares - what rights are attached to them?

Answer 10

‘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

Question 11

Redeemable shares - what are they?

Answer 11

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.

Question 12

Convertible shares - meaning

Answer 12

Such shares will usually carry an option to ‘convert’ into a different class of share according to stipulated criteria.

Question 13

How to vary class rights attached to shares?

Answer 13

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

Question 14

How can a shareholder cancel a variation of shares?

Answer 14

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.

Question 15

Interim vs final dividends

Answer 15

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.

Question 16

Allotment vs transfer of shares

Answer 16

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).

Question 17

Can private companies offer their shares to the public?

Answer 17

NO

Question 18

Restrictions on power of shareholders to transfer shares

Answer 18

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

Question 19

What is the instrument of transfer of shares?

Answer 19

Stock transfer form (signed and submitted by the transferor with a share certificate to the new shareholder)

Question 20

When does the beneficial and legal title pass to the new shareholder on a transfer of shares?

Answer 20

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

Question 21

Procedure for the allotment of shares

Answer 21

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.

Question 22

If there is a cap on the number of shares that can be issued in AA - how to remove it or increase the limit?

Answer 22

Special resolution for CA 2006
Ordinary resolution for CA 1986

Question 23

In what cases the company directors need and do not need authority to allot shares? + how to give directors authority to allot?

Answer 23

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.

Question 24

Pre-exmption rights - meaning

Answer 24

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

Question 25

What resolution is needed to misapply pre-emption rights?

Answer 25

Special resolution

Question 26

What type of shares are pre-emption rights relevant to?

Answer 26

Equity securities

Question 27

What are equity securities?

Answer 27

both right to receive dividents and capital payments of winding up are NOT capped

Question 28

Can the company misapply pre-emption rights for a specific transaction or permanently?

Answer 28

It can choose either way

Question 29

How to create a new class of shares?

Answer 29

insert new provisions in its Articles dealing with the rights attached to those new shares by special resolution

Question 30

Do directors always need to pass a board resolution to allot shares?

Answer 30

YES

Question 31

What do you need to send to companies house on allotment?

Answer 31

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)

Question 32

To which transactions are the rules on financial assistance applicable?

Answer 32

Acquisition or sale of shares Issue of shares

Question 33

What is the target company? (financial assistance)

Answer 33

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.

Question 34

Prohibition on financial assistance for public companies?

Answer 34

Prohibition on financial assistance applies to The target itself Ant subsidiary of the target (whether private or public)

Question 35

Prohibition on financial assistance for private companies?

Answer 35

Prohibition applies to any public subsidiary of the target

Question 36

Financial assistance - meaning

Answer 36

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

Question 37

Financial assistance - requirements

Answer 37

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)

Question 38

Purpose exception to the prohibition on financial assistance

Answer 38

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.

Question 39

Conditional exception to the prohibition on provision of financial assistance

Answer 39

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

Question 40

Consequences of carrying out prohibited financial assistance

Answer 40

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.

Question 41

Share capital maintenance doctrine

Answer 41

A company is not usually permitted to return capital to its shareholders

Question 42

Consequences of the share capital maintenance principle

Answer 42

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

Question 43

When can a company buy back its own shares?

Answer 43

Redemption of redeemable shares Purchase of own shares (buyback)

Question 44

Buyback of shares - meaning

Answer 44

A buyback of shares takes place when a company purchases its own shares from an existing shareholder

Question 45

What are 3 ways to fund a buyback of shares and in what order can they be used?

Answer 45

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

Question 46

Procedure for buyback of shares and what resolution is required

Answer 46

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

Question 47

Can shareholders whose shares are subject to a buyback eligible to vote on the OR to approve the transaction?

Answer 47

no

Question 48

What resolution needs to be passed and when to approve payment out of capital to fund a buyback of shares?

Answer 48

A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency

Question 49

What companies can fund a buyback of shares out of capital?

Answer 49

only private companies

Question 50

Buyback of shares out of capital - requirements

Answer 50

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

Question 51

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?

Answer 51

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.

Question 52

Buyback out of capital - notification requirement

Answer 52

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

Question 53

Buyback out of capital - timing

Answer 53

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).

Question 54

Redemption of redeemable shares

Answer 54

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