Equity Finance Flashcards
1
Q
Describe share capital.
A
Share capital is the money raised by the issue of shares, contributed by investors and represented by shares issued to them.
2
Q
How can a company fund its business operations?
A
A company can fund its operations by issuing shares (equity finance), borrowing (debt finance), or retaining profits for reinvestment.
3
Q
Define the typical return on investment for shareholders.
A
The typical returns for shareholders include income received through dividends and potential capital gains from the growth in the value of the company and its shares.
4
Q
How do different classes of shares affect shareholder rights?
A
Different classes of shares may carry different rights and entitlements, which are outlined in the company’s Articles.
5
Q
What should investors check regarding their shares?
A
It is imperative for investors to check the Articles to understand the rights and entitlements associated with their shares.
6
Q
Describe the nominal or par value of a share according to Section 542(1) CA 2006.
A
The nominal or par value of a share is the fixed minimum subscription price for that share, representing a unit of ownership rather than its actual market value.
7
Q
Define the consequences of allotting a share without a fixed nominal value as per Section 542(2) CA 2006.
A
Any allotment of a share that does not have a fixed nominal value is considered void.
8
Q
How does Section 580 CA 2006 regulate the issuance of shares in relation to their nominal value?
A
Section 580 CA 2006 prohibits a company from allotting or issuing a share at a discount to its nominal value.
9
Q
What is the term used for the amount exceeding the nominal value when a share is issued at a higher price?
A
The excess over the nominal value when a share is issued at a higher price is known as the ‘premium’.
10
Q
Explain the relationship between nominal value and market value of a share.
A
The market value of a share is often much higher than its nominal value.
11
Q
List common nominal values for ordinary shares.
A
Common nominal values for ordinary shares are 1p, 5p, or £1.
12
Q
Define issued share capital (ISC).
A
Issued share capital (ISC) is the amount of shares in issue at any time, which is reflected in the company’s balance sheet.
13
Q
Explain the term ‘subscriber shares’.
A
Subscriber shares are the shares purchased by the first members of the company.
14
Q
Describe the difference between ‘allotment’ and ‘issue’ of shares.
A
Allotment refers to the right to be included in the register of members, while issue refers to the actual registration of shares in the company’s register, which completes the shareholder’s title.
15
Q
How is full legal title to shares achieved according to CA 2006?
A
Full legal title to shares is achieved once a person’s name is entered in the company’s register of members, as confirmed by Section 112(2) CA 2006.
16
Q
What is ‘paid-up share capital’?
A
Paid-up share capital is the amount of nominal capital that shareholders have paid for their shares, which may not necessarily be the full amount due immediately.
17
Q
Explain the term ‘called-up share capital’ as per CA 2006.
A
Called-up share capital, defined in s 547 CA 2006, is the aggregate amount of the calls made on a company’s shares and the existing paid-up share capital.
18
Q
Do shareholders need to pay the full nominal value of their shares immediately?
A
No, it is not necessary for shareholders to pay the full amount due on their shares immediately; the company can demand the outstanding amount at any time.
19
Q
What happens when a payment for shares is demanded by the company?
A
When a payment for shares is demanded by the company, it is referred to as being ‘called’.
20
Q
Describe treasury shares.
A
Treasury shares are shares that have been bought back by the company itself and are held in the company’s own name, allowing the company to sell them later.
21
Q
How can a company utilize treasury shares after buying them back?
A
A company can sell treasury shares out of treasury, cancel them, or transfer them to an employee share scheme.
22
Q
Define the legal implications of selling treasury shares according to CA 2006.
A
The sale of treasury shares is considered a transfer, not an issue of shares, and is subject to pre-emption rights as outlined in s 561 CA 2006 and disapplication of pre-emption rights in s 573 CA 2006.
23
Q
What happens to treasury shares if a company decides to cancel them?
A
If a company decides to cancel treasury shares, those shares are permanently removed from circulation and cannot be sold or transferred.
24
Q
How are the rights attached to a class of shares determined?
A
The rights attached to a class of shares are determined in the company’s Articles.
25
What are preference shares?
Preference shares are a class of shares that typically have preferential rights over ordinary shares, particularly regarding dividends and capital return.
26
What are redeemable shares?
Redeemable shares are shares that can be bought back by the company at a future date.
27
What are cumulative shares?
Cumulative shares are a type of preference share that entitles the holder to receive dividends that are in arrears.
28
What are convertible shares?
Convertible shares are shares that can be converted into another class of shares, usually at the option of the shareholder.
29
What are non-voting shares?
Non-voting shares are shares that do not grant the holder any voting rights in company decisions.
30
What are deferred shares?
Deferred shares are shares that typically have a lower priority for dividends and capital return compared to other classes of shares.
31
Describe the characteristics of ordinary shares.
Ordinary shares are the most common form of shares, carrying rights to vote in general meetings, receive dividends if declared, and a portion of surplus assets upon winding up. They are the default position for shares issued without differentiation.
32
Explain the difference between ordinary shares and preference shares regarding dividends.
Ordinary shareholders receive dividends after preference shareholders, but their entitlement to dividends is unrestricted, meaning they can participate fully in any declared dividends.
33
How is the preferred dividend amount typically expressed for preference shares?
The preferred dividend amount is usually expressed as a percentage of the par (nominal) value of the share, for example, 5% of a £1 preference share.
34
What happens to the payment of dividends if preference shares are issued at a premium?
If preference shares are issued at a premium, the dividend must be calculated as a percentage of the total subscription price per preference share, not just the par value.
35
Explain the voting rights associated with preference shares.
Preference shares are normally non-voting, but it is possible to issue them with voting rights as specified in the Articles.
36
How does the entitlement to dividends work for a 5% £1 preference share?
A 5% £1 preference share entitles the holder to receive 5p per share by way of dividend each year, provided a dividend is declared.
37
Describe cumulative preference shares.
Cumulative preference shares are presumed to carry forward unpaid dividends to future periods, ensuring that if a dividend is not declared in a given year, it will be paid later when profits are available.
38
Define participating preference shares.
Participating preference shares allow shareholders to receive fixed preferred dividends and also participate in surplus profits and assets alongside ordinary shareholders.
39
What are the characteristics of fixed rate participating cumulative preference shares?
Fixed rate participating cumulative preference shares are issued with a fixed dividend, can accumulate unpaid dividends, and allow participation in surplus profits and assets.
40
How do participating preference shareholders benefit during a company's winding up?
Participating preference shareholders can claim a share of the surplus assets of the company after receiving their fixed preferred dividend during a winding up.
41
Describe deferred shares.
Deferred shares carry no voting rights and no ordinary dividend but may be entitled to a share of surplus profits after other dividends have been paid.
42
How can a company alter the rights of existing share classes?
A company can alter the rights of existing share classes by following the provisions in the Articles for variation or obtaining written consent from at least 75% of the issued shares of that class, or by passing a special resolution at a separate general meeting of that class.
43
Define the process for shareholders to challenge a variation of class rights.
Shareholders holding 15% of the relevant shares may apply to court within 21 days of the resolution to have the variation cancelled, provided they did not vote in favor of it.
44
What happens if a court confirms a variation of class rights?
The variation will take effect only if it is confirmed by the court, which will not confirm it if it believes the variation unfairly prejudices the shareholders of the class.
45
Define 'distributable profits' according to s 830(2) CA 2006.
Distributable profits refer to a company's accumulated realised profits less its accumulated realised losses.
46
What are the two types of dividends?
The two types of dividends are final dividends and interim dividends.
47
Do final dividends require shareholder approval?
Yes, final dividends are declared by the directors and must be approved by an ordinary resolution of the shareholders.
48
How are interim dividends decided?
Interim dividends are typically decided by the directors if the company has sufficient distributable profits, without needing an ordinary resolution of the shareholders.
49
When are interim dividends often paid?
Interim dividends are often paid when the company has realised an investment.
50
Explain the role of directors in declaring final dividends.
Directors declare final dividends, which must then be approved by an ordinary resolution of the shareholders after the financial year end.
51
What is the main difference between allotting and transferring shares?
The main difference is that allotting shares involves issuing new shares by the company, while transferring shares involves selling existing shares between shareholders without the company's involvement.
52
How does section 755 affect the ability of private companies to allot shares?
Section 755 restricts private companies from offering shares to the public, which must be carefully considered when proposing to allot shares.
53
What types of offers are excluded from the restrictions of section 755?
Excluded offers from section 755 restrictions include those made to existing shareholders, employees of the company, certain family members, and shares held under an employee’s share scheme.
54
Do private companies have any flexibility in offering shares under section 755?
Yes, private companies can offer shares to targeted investors such as existing shareholders and employees, as these offers are excluded from the public offering restriction.
55
Describe the purpose of a prospectus in share offerings.
A prospectus serves as an explanatory circular that provides investors with details about the company and the investment, enabling them to make informed investment decisions.
56
How does the requirement for a prospectus vary for private companies?
In most cases, a prospectus is not required for offers of shares by private companies, but the specific rules must be considered each time.
57
How does preparing a prospectus impact a company?
Preparing a prospectus is an expensive and time-consuming process, as it must contain all necessary information for investors to assess the company's financial status and share rights.
58
Describe the automatic process of share transmission in the event of a shareholder's death.
Shares will automatically pass to the personal representatives of the deceased shareholder.
59
Explain what happens to a shareholder's shares in the case of bankruptcy.
The shares automatically vest in the trustee in bankruptcy.
60
How can shares be transferred from one shareholder to another?
Shares may be transferred by way of sale or gift.
61
Describe the directors' power regarding share transfer registration.
Directors may refuse to register the transfer of a share according to Article 26(5) of the MA, and if they do so, they must return the instrument of transfer to the transferee with a notice of refusal unless they suspect the transfer may be fraudulent.
62
How must a company respond if it refuses to register a share transfer?
Under section 771 of the CA 2006, a company must provide reasons for refusing to register a transfer.
63
Define pre-emption clauses in the context of share transfers.
Pre-emption clauses, or rights of first refusal, require that a shareholder wishing to sell shares must first offer them to existing shareholders before offering them to outsiders.
64
What is the relationship between pre-emption rights and the articles of a company?
Pre-emption rights on transfer must be specially inserted into the Articles of any company, as the CA 2006 and MA do not contain any default pre-emption rights on transfer.
65
Describe the process of transferring shares.
A transfer of shares is made using a stock transfer form, which must be signed by the transferor and submitted with the share certificate to the new shareholder.
66
Define the difference between legal and equitable ownership of shares.
Beneficial title to the shares passes upon execution of the stock transfer form, while legal title passes upon registration of the member as the owner in the register of members.
67
How does a company notify a new shareholder after a transfer of shares?
The company sends a new share certificate to the shareholder's name within two months after the transfer.
68
What is the stamp duty rate for transferring shares?
Stamp duty is payable at 0.5% of the consideration, rounded up to the nearest £5.
69
When is no stamp duty payable during a share transfer?
No stamp duty is payable if the consideration is £1000 or less.
70
Define 'share capital' in company law.
Share capital refers to the money raised by the issue of shares, contributed by investors in the company and represented by the shares issued to them.
71
Describe the importance of checking a company's Articles before issuing new shares.
It is crucial to check the company's Articles for any cap or limit on the number of shares that may be issued, as exceeding this cap requires its removal or an increase in the limit.
72
Define 'authorised share capital' (ASC) in the context of companies incorporated under CA 1985.
Authorised share capital (ASC) acted as a ceiling on the number of shares a company could issue, which was originally required for companies incorporated under CA 1985.
73
How has the requirement for authorised share capital changed under CA 2006?
Under CA 2006, the requirement for a company to have an authorised share capital no longer exists.
74
Describe the process for shareholders to remove or amend a deemed restriction in a company's Articles under CA 1985 - so prior to CA 2006
Shareholders can remove or amend the deemed restriction by passing an ordinary resolution.
75
How can a restriction on the number of shares be removed for companies under CA 2006?
A restriction can be removed or the limit increased by passing a special resolution under s 21(1) CA 2006.
76
How can you verify if any shares have been issued by a company?
You can verify if any shares have been issued by checking the register of members or the most recent confirmation statement filed at Companies House, along with any subsequent forms filed on allotments of shares, such as Form SH01 under s 555 CA 2006.
77
Explain the automatic authority of directors in private companies regarding share allotment.
For private companies with only one class of shares, directors have automatic authority to allot new shares of the same class under s 550 CA 2006.
78
What is required for directors of other companies to allot new shares?
For all other companies, directors need to be granted authority to allot new shares by shareholders through an ordinary resolution as per s 551 CA 2006.
79
How do pre-emption rights protect existing shareholders?
Pre-emption rights allow existing shareholders to maintain their ownership percentage and prevent dilution of their voting power and dividend entitlements.
80
Do pre-emption rights need to be disapplied on allotment?
The disapplication of pre-emption rights is not mandatory; it is typically done through a special resolution if the company chooses to issue new shares.
81
How does section 561 of the Companies Act 2006 regulate the allotment of equity securities?
Section 561 states that a company must offer equity securities to existing ordinary shareholders on the same or more favorable terms before allotting them to others.
82
Define 'equity securities' as per s 560(1) CA 2006.
Equity securities are defined as (i) ordinary shares or (ii) rights to subscribe for, or convert securities into, ordinary shares.
83
How do shares with capped rights to dividends and capital payments relate to 'equity securities'?
Shares that carry a right to receive dividends and capital payments but have capped rights do not fall within the definition of 'equity securities' and are not subject to pre-emption rights. - both must be capped. If only one is capped, then they are an equity security and subject to pre-emption rights
Both capped, cannot be equity security so no pre emption rights apply
84
What are the implications of a share being classified as 'equity securities' under s 561 CA 2006?
Shares classified as 'equity securities' are subject to pre-emption rights under s 561 CA 2006.
85
How can a company disapply pre-emption rights according to CA 2006?
A company can disapply pre-emption rights by passing a special resolution or including the disapplication in its articles, which is permitted under s 570(1) CA 2006.
86
What is the temporary nature of disapplication of pre-emption rights?
The disapplication of pre-emption rights is not permanent; it is attached to a specific, pre-existing s 551 authority and must be renewed or re-established for future allotments.
87
What is the difference between general and specific disapplication of pre-emption rights?
General disapplication is simpler and applies broadly, while specific disapplication is more complex and pertains to a particular allotment of shares, requiring additional documentation and justification.
88
What must directors provide to shareholders when seeking specific disapplication of pre-emption rights?
Directors must provide a written statement to shareholders that includes the reasons for the specific disapplication and the amount to be paid to the company, along with justification for that amount.
89
How do subsidiary companies typically handle statutory pre-emption rights in their Articles?
Subsidiary companies commonly exclude statutory pre-emption provisions in their Articles.
90
What is a common practice regarding the exclusion of pre-emption rights in private companies?
It is uncommon for private companies to exclude pre-emption rights permanently, as this would leave existing shareholders unprotected from dilution.
91
How does a company alter its Articles to create a new class of shares?
The company must insert new provisions regarding the rights of the new shares and pass a special resolution from the shareholders.
92
What are the typical rights that may be attached to different classes of shares?
Typical rights can include voting rights, dividend rights, and rights to assets upon liquidation.
93
Define the conditions under which a private company can allot shares without a general meeting.
A private company can allot shares without a general meeting if it has no limit on share issuance, does not require directors' authorization, issues shares to existing shareholders proportionally, and has the relevant class rights in its Articles.
94
Describe the administrative requirements for allotment of shares.
Copies of resolutions must be sent to Companies House within 15 days, including all special resolutions and any ordinary resolution granting directors authority to allot.
95
Define the types of resolutions that need to be filed with Companies House after share allotment.
All special resolutions, any ordinary resolution granting directors authority to allot, and for CA 1985 companies, any ordinary resolution removing the cap on authorised share capital.
96
How long do companies have to file the return of allotment and statement of capital with Companies House?
Companies must file the return of allotment (Form SH01) and statement of capital within one month.
97
What must be done if the persons with significant control change due to share allotment?
The relevant forms (PSC01, PSC02, PSC04, PSC07) must be submitted to Companies House.
98
Explain the timeline for updating the register of members after share allotment.
The register of members must be updated within two months after the allotment.
99
What is required if a new class of shares is created during the allotment process?
Amended Articles must be sent to Companies House if a new class of shares has been created.
100
How soon must share certificates be prepared and sent to new shareholders?
Share certificates must be prepared and sent to new shareholders within two months.
101
What forms are required to be sent to Companies House if there is a change in significant control?
Forms PSC01, PSC02, PSC04, PSC07 are required to be sent to Companies House.
102
Describe the statutory rules regarding financial assistance in share acquisitions.
The statutory rules prohibit certain companies involved in an acquisition from providing assistance for the purpose of the acquisition, particularly relevant to public companies and private companies in groups containing public companies.
103
Give an example of a situation involving financial assistance in share acquisitions.
An individual wishing to purchase shares in a public company may seek a loan from that company to finance the purchase, but this could be illegal if it constitutes financial assistance.
104
Define the target company in the context of financial assistance prohibitions.
The target company is the company whose shares are being acquired, whether by transfer or issue.
105
Explain the implications of a company being a public company in the share sale scenario.
As a public company, it is subject to the prohibition on giving financial assistance, which also extends to its subsidiary, a Ltd.
106
Do subsidiaries of a public target company also face restrictions under CA 2006?
Yes, any subsidiary of a public target company, whether private or public, is subject to the same prohibition on giving financial assistance.
107
How does the status of a private company with a plc subsidiary affect the financial assistance prohibition?
As a private company, it is not itself subject to the prohibition on giving financial assistance; it only applies to its public company subsidiary,
108
Describe the types of financial assistance defined in s 677 CA 2006.
Financial assistance can be given by way of gift, guarantee, security or indemnity, loan or similar agreement, or any other means that materially reduces a company's net assets or if the company has no net assets.
109
Explain the significance of the catch-all provision in s 677 CA 2006 regarding financial assistance
The catch-all provision allows for any type of financial assistance not explicitly listed, as long as it materially reduces the company's net assets or if the company has no net assets.
110
What is the significance of the timing of financial assistance in relation to an acquisition?
Financial assistance is covered by the rules whether it is given before, at the same time, or after the acquisition.
111
How do the purpose exceptions relate to financial assistance in CA 2006?
The purpose exceptions indicate that financial assistance can be lawful if its main intent is not to facilitate an acquisition, or if the acquisition is a minor aspect of a broader objective.
112
How does money lending relate to the conditional exceptions in Section 682 CA 2006?
Money lending in the ordinary course of business is one of the transactions exempt under Section 682(2)(a) CA 2006, provided certain conditions are satisfied.
113
Explain the significance of distributable profits in the context of Section 682 CA 2006.
Distributable profits are significant in Section 682 CA 2006 as they determine whether a public company can provide assistance without reducing its net assets, thus qualifying for the conditional exception.
114
List examples of transactions that fall under the conditional exceptions of Section 682 CA 2006.
Examples include money lending in the ordinary course of business and assistance in respect of employee share schemes.
115
What are the potential consequences for a company engaging in prohibited financial assistance?
Consequences include criminal penalties, such as fines for the company, and the possibility of the transaction being declared void.
116
Do officers of a company face penalties for breaching sections 678 or 679 of the CA 2006?
Yes, officers can face fines or imprisonment for breaching these sections.
117
How must a company notify its creditors about the payment out of capital after a special resolution?
The company must notify its creditors by publishing a notice in the Gazette, publishing a similar notice in a national newspaper or notifying each creditor in writing, and filing copies of the directors’ statement and auditors’ report at Companies House.
118
Describe the doctrine of maintenance of share capital.
The doctrine of maintenance of share capital is a principle in company law that prevents companies from returning capital to shareholders, ensuring that the share capital remains a permanent fund available to creditors.
119
How is a shareholder's investment recorded in a company's accounts?
A shareholder's investment is recorded in the bottom half of the balance sheet, specifically in the equity account and the share premium account.
120
Define the restrictions on returning capital to shareholders.
Companies are generally not permitted to return capital to shareholders; all payments must come from distributable profits.
121
Do companies have the ability to use share capital for business operations?
Yes, the money represented in the equity account and share premium account can be used as working capital for the company's operations, but it cannot be returned to shareholders.
122
Define the conditions under which dividends can be paid according to the maintenance of share capital principle.
Dividends may only be paid out of distributable profits, not from capital.
123
What are the exceptions to the rule against companies purchasing their own shares?
A company may buy back its own shares if it follows legal procedures or if a court order is made after a successful shareholder petition for unfair prejudice.
124
Describe the two types of situations when a company can buy its own shares.
The two types of situations are redemption of redeemable shares and purchase of own shares (buyback).
125
How can a company assist a shareholder who wants to leave but cannot find a buyer for their shares?
The company can purchase or redeem the shares to prevent the shareholder from being locked into the company.
126
How do public companies differ from private companies in terms of share buybacks?
Both private and public companies can buy back their own shares, but public companies have more options for selling shares to the public.
127
What additional regulations apply when a company uses capital for a buyback?
When a company uses capital to fund a buyback, it is subject to more stringent regulations and procedures.
128
Explain the role of shareholders in the buyback process.
Shareholders must approve the contract for the buyback through an ordinary resolution.
129
Identify the type of companies typically involved in share buybacks discussed in this module.
The companies discussed in this module are generally those making 'off-market' purchases of their own shares.
130
Describe the three ways a company can fund a buyback of its own shares.
A company may fund a buyback of its own shares using distributable profits, proceeds from a fresh issue of shares made for the purpose of financing the buyback, or capital.
131
Define the restrictions on using capital for share buybacks.
The use of capital to fund a buyback is strictly regulated, and is only available to private companies. Public companies cannot use capital to purchase their own shares.
132
How must companies prioritize funding sources for share buybacks?
Companies must first use any available money in the form of profits or proceeds from a fresh issue of shares before using capital to fund the purchase.
133
Describe the conditions under which a company can purchase its own shares.
A company may purchase its shares if: the purchase is not restricted in the company’s Articles, the shares are fully paid up, and the company continues to have issued shares other than redeemable and treasury shares.
134
Define the requirements for a contract to purchase own shares.
A contract to purchase own shares is required and must be approved by ordinary resolution.
135
How long must the contract for purchasing own shares be available for inspection?
The contract must be available for inspection at the company’s registered office for a period of 15 days before the general meeting and also at the general meeting.
136
Define the voting eligibility of shareholders during the buyback approval process.
Holders of shares being bought back are not eligible to vote on the Ordinary Resolution (OR) to approve the contract.
137
What actions must the Board take after the General Meeting or Written Resolution?
The Board must enter into the contract, appoint a director(s) to sign the contract, and file a return, notice of cancellation, and statement of capital within 28 days.
138
How long must a company keep a copy of the buyback contract?
A company must keep a copy of the buyback contract for 10 years.
139
What updates must be made to the company records after a share buyback?
The company must cancel the shares and update the register of members, as well as the Persons with Significant Control (PSC) register if applicable.
140
Describe the conditions under which private companies can fund a purchase of their own shares out of capital.
Private companies can fund a purchase of their own shares out of capital if the purchase is not restricted in the company’s Articles, the accounts were prepared no more than three months before the directors’ statement, there are no distributable profits available (or funds from a fresh issue must be used first), a directors’ statement of solvency is prepared with an auditors’ report, and a special resolution to approve payment out of capital is passed within a week after the directors sign the written statement of solvency.
141
How must the accounts be prepared before a directors’ statement for a buyback of shares out of capital?
The accounts must be prepared no more than three months before the directors’ statement.
142
What is required alongside the directors’ statement of solvency for a buyback of shares out of capital?
An auditors’ report must be prepared alongside the directors’ statement of solvency.
143
Explain the significance of a special resolution in the buyback process.
A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency, which is crucial for the legality of the buyback.
144
Describe the purpose of the directors' statement of solvency.
The directors' statement of solvency confirms that the company is solvent, able to pay its debts as they fall due, and will remain solvent for 12 months after the buyback.
145
How soon before the General Meeting must the directors' statement of solvency be made?
The directors' statement of solvency must be made no earlier than one week before the General Meeting.
146
Define the consequences for directors if the company becomes insolvent after making a statement of solvency.
If the company becomes insolvent and is wound up within one year, directors may be required to contribute to the company's assets and could face criminal sanctions if they had no reasonable grounds for the statement.
147
What must accompany the directors' statement of solvency?
An auditors' report must be annexed to the written statement of solvency, confirming that the auditors are not aware of anything that indicates the directors' opinion is unreasonable.
148
How should the directors' statement and auditors' report be made available to members?
A copy of the directors' statement and auditors' report must be sent with the written resolution or made available for inspection at the General Meeting.
149
Describe the notification requirements for a company after passing a special resolution for payment out of capital.
The company must notify its creditors within seven days by publishing a notice in the Gazette, which states the approval of payment out of capital for purchasing its own shares, where the directors' statement and auditors’ report can be inspected, and that creditors can apply to the court within five weeks to prevent the payment. Additionally, the company must publish a similar notice in a national newspaper or notify each creditor in writing, and file copies of the directors’ statement and auditors’ report at Companies House.
150
How long do creditors have to apply to the court to prevent the payment after the resolution?
Creditors have five weeks immediately following the date of the resolution to apply to the court for an order preventing the payment.
151
Describe the time frame for a share purchase out of capital after a special resolution is passed.
The share purchase can take place no earlier than five weeks and no later than seven weeks after the date of the special resolution.
152
Define the purpose of the five-week delay in share purchases.
The five-week delay allows shareholders and/or creditors to object to the payment out of capital by lodging an application at court for cancellation of the resolution.
153
What must a company do within 28 days after the shares are bought back?
The company must send a return to Companies House and a notice of cancellation, along with a statement of capital.
154
What is the role of shareholder approval in the buyback process?
Shareholder approval is necessary for the buyback contract, which must be approved by Ordinary Resolution (OR) for buybacks out of profits, and both OR and Special Resolution (SR) for buybacks out of capital.
155
Define the process of redeeming shares.
Redeeming shares does not require a separate contract because the redemption terms are already established in the company's Articles or by the directors.
156
What happens when a company uses capital to fund the redemption of shares?
When a company uses capital to fund the redemption of shares, it is subject to more regulation and procedures, similar to the buyback of shares out of capital.
157
Do redeemable shares provide permanent membership in a company?
No, redeemable shares provide temporary membership in the company.
158
How can redeemable shares be redeemed?
Redeemable shares can be redeemed on a fixed date, at a fixed price, or at the option of either the issuing company or the shareholder.
159
Define what is meant by 'financial services'.
Financial services refer to a range of services related to advising, dealing, and arranging investment products on behalf of clients, including bank deposits, pensions, shares, and bonds.
160
How should solicitors approach financial services regulation in the UK?
Solicitors should be aware of the scope of financial services regulation in the UK to ensure compliance and to effectively advise their clients in the corporate sector.
161
What types of activities are included in financial services?
Financial services activities include advising on investment products, dealing in investment products, and arranging investment products on behalf of clients.
162
How might a judge decide to make no order as to costs?
A judge might decide to make no order as to costs if both parties have acted reasonably and the circumstances of the case do not warrant a costs order, indicating that neither party should bear the financial burden of the other's legal expenses.
163
Explain the significance of FSMA for solicitors in their practice.
FSMA is significant for solicitors as it ensures they do not commit offences while practicing and helps them understand the statutory constraints that may affect their clients' proposed deals.
164
What challenges do law firms face regarding FCA authorisation?
Law firms face challenges in obtaining FCA authorisation due to stringent regulations and the limited proportion of work requiring such authorisation, making it cost-inefficient.
165
Define the term 'regulated activity' as per s 22(1) FSMA.
A regulated activity is an activity of a specified kind that is carried on by way of business and relates to an investment of a specified kind.
166
Describe the general prohibition under s 19(1) FSMA.
The general prohibition under s 19(1) FSMA states that no person may carry on a regulated activity in the United Kingdom unless they are an authorised person or an exempt person.
167
How can a solicitor avoid criminal liability under s 19(1) FSMA?
A solicitor can avoid criminal liability by assessing whether the activity they propose to carry out for a client is governed by s 19(1) FSMA.
168
Explain the consequences of breaching s 19(1) FSMA.
Breaching s 19(1) FSMA is considered a criminal offence.
169
Identify the two categories of persons allowed to carry on regulated activities under s 19(1) FSMA.
The two categories are authorised persons and exempt persons.
170
Describe the first step to consider regarding investment under FSMA.
Determine if the investment is 'specified' under FSMA by referring to Part III of the RAO.
171
What should be assessed after confirming the investment is specified under FSMA?
Evaluate if the activity is a 'specified activity' under FSMA, as outlined in Part II of the RAO.
172
Define the next step if the activity is identified as a specified activity under FSMA.
Check if the activity is excluded under FSMA according to Part II of the RAO.
173
How do you proceed if the activity is not excluded under FSMA?
Assess whether the activity meets the basic conditions in section 327 of FSMA and SRA Scope Rule 2.
174
What are the possible outcomes after evaluating the basic conditions of an activity under FSMA?
If the conditions are fulfilled, exemption is possible; if not, authorisation is required.
175
List some examples of specified investments as per the RAO.
Examples of specified investments include shares, instruments creating or acknowledging indebtedness (like bonds), and regulated mortgage contracts.
176
Describe the conditions under which a person requires authorisation in relation to specified activities.
A person requires authorisation if they are carrying out a ‘specified activity’ by way of business in relation to the ‘specified investment’.
177
Define 'specified activities' as listed in Part II of the RAO.
Specified activities include dealing in investments as principal or agent, arranging deals in investments, managing investments, and advising on the merits of investments.
178
How does dealing in investments as principal differ from dealing as an agent?
Dealing in investments as principal involves buying, selling, subscribing for, or underwriting securities directly, while dealing as an agent involves facilitating transactions on behalf of others.
179
Explain the role of a corporate lawyer in advising on investments.
A corporate lawyer is likely to engage in advising on the merits of investments, which is one of the specified activities under the RAO.
180
Define the difference between generic advice and specific advice in the context of investment.
Generic advice refers to broad recommendations, such as investing in a region like China, while specific advice involves tailored recommendations regarding particular securities or actions.
181
Explain when a solicitor's advice requires FCA authorization.
A solicitor's advice requires FCA authorization when it includes specific recommendations to purchase particular securities or financial products.
182
Do solicitors need FCA authorization for generic investment advice?
No, solicitors do not need FCA authorization for providing generic investment advice, such as explaining legal rights related to different classes of shares.
183
Describe the concept of excluded activities in the context of the RAO.
Excluded activities can be carried on without the need for further authorisation.
184
Define what is meant by 'necessary part' of other services in the context of regulated activities.
The term 'necessary part' refers to activities that must be provided in order for the other services to be delivered. If the dealing, arranging, or advising cannot occur without these activities, they may be considered necessary.
185
Explain the implications of separate remuneration for specified activities in relation to other services.
If a specified activity is remunerated separately from other services, the exclusion from being considered a regulated activity does not apply.
186
Give an example of a situation where a solicitor's activity would be considered a necessary part of their services.
An example is when a client is selling a leasehold flat, and the transaction involves the transfer of shares in a management company. Arranging the sale of these shares is a necessary part of the property work the solicitor is conducting.
187
Describe the conditions under which a solicitor is not considered to be 'dealing as principal' in the sale of a body corporate.
A solicitor is not considered to be 'dealing as principal' if the activity is related to the purchase or sale of shares in a company, provided that: i) the shares consist of or include 50% or more of the voting shares in the company and the transaction is between parties that are bodies corporate, partnerships, single individuals, or groups of connected individuals; ii) the shares, along with any already held by the purchaser, consist of or include 50% or more of the voting shares and the transaction is between the same types of parties; or iii) the transaction is reasonably regarded as acquiring day-to-day control of the body corporate.
188
What is the significance of holding 50% or more of the voting shares in a company during a transaction?
Holding 50% or more of the voting shares is significant because it determines whether the transaction qualifies for certain exemptions under the regulations, indicating a substantial level of control over the company.
189
Explain the role of a solicitor in the context of regulated activities related to body corporate sales.
A solicitor's role in regulated activities related to body corporate sales involves ensuring compliance with legal requirements and regulations, particularly in transactions involving the sale or purchase of shares, while also determining whether their actions fall under specific exemptions.
190
Describe the conditions for regulated activities to be considered exempt under FSMA.
The conditions include: 1. The person must be a member of a profession, such as a solicitor. 2. The person must not receive commission from a third party unless they account for it to their client. 3. The specified activity must be incidental to the provision of professional services. 4. The person must comply with the rules set by their relevant designated professional body.
191
How does the FCA determine if regulated activities are incidental?
The FCA assesses whether the regulated activities constitute a small part of the overall services provided by the firm. If they do, they are considered incidental.
192
Define what the FCA means by 'separate business' in the context of incidental activities.
The FCA indicates that if regulated activities are conducted as a separate business, isolated from the firm's professional services, they do not qualify as incidental.
193
Explain the significance of having separate departments in a firm regarding regulated activities.
Having separate departments for regulated activities does not prevent the firm from being considered incidental, as long as these activities do not constitute a separate business.
194
Define what it means for an activity to be complementary to the work a solicitor is doing for a client.
An activity is complementary if it arises naturally out of the work the solicitor is doing for the client.
195
Give examples of activities that are considered complementary to a solicitor's work.
Examples include giving legal or tax advice, or drafting documents to effect the sale of shares or other specified investments.
196
Describe the requirements for a law firm to carry out an exempt regulated activity under s 327 FSMA and Scope Rule 2.
The law firm must ensure compliance with the Scope Rules and be authorised by the SRA in relation to the activity, while also adhering to any relevant SRA Financial Services (Conduct of Business) Rules 2019.
