Equity Finance Flashcards
Describe share capital.
Share capital is the money raised by the issue of shares, contributed by investors and represented by shares issued to them.
How can a company fund its business operations?
A company can fund its operations by issuing shares (equity finance), borrowing (debt finance), or retaining profits for reinvestment.
Define the typical return on investment for shareholders.
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.
How do different classes of shares affect shareholder rights?
Different classes of shares may carry different rights and entitlements, which are outlined in the company’s Articles.
What should investors check regarding their shares?
It is imperative for investors to check the Articles to understand the rights and entitlements associated with their shares.
Describe the nominal or par value of a share according to Section 542(1) CA 2006.
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.
Define the consequences of allotting a share without a fixed nominal value as per Section 542(2) CA 2006.
Any allotment of a share that does not have a fixed nominal value is considered void.
How does Section 580 CA 2006 regulate the issuance of shares in relation to their nominal value?
Section 580 CA 2006 prohibits a company from allotting or issuing a share at a discount to its nominal value.
What is the term used for the amount exceeding the nominal value when a share is issued at a higher price?
The excess over the nominal value when a share is issued at a higher price is known as the ‘premium’.
Explain the relationship between nominal value and market value of a share.
The market value of a share is often much higher than its nominal value.
List common nominal values for ordinary shares.
Common nominal values for ordinary shares are 1p, 5p, or £1.
Define issued share capital (ISC).
Issued share capital (ISC) is the amount of shares in issue at any time, which is reflected in the company’s balance sheet.
Explain the term ‘subscriber shares’.
Subscriber shares are the shares purchased by the first members of the company.
Describe the difference between ‘allotment’ and ‘issue’ of shares.
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.
How is full legal title to shares achieved according to CA 2006?
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.
What is ‘paid-up share capital’?
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.
Explain the term ‘called-up share capital’ as per CA 2006.
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.
Do shareholders need to pay the full nominal value of their shares immediately?
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.
What happens when a payment for shares is demanded by the company?
When a payment for shares is demanded by the company, it is referred to as being ‘called’.
Describe treasury shares.
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.
How can a company utilize treasury shares after buying them back?
A company can sell treasury shares out of treasury, cancel them, or transfer them to an employee share scheme.
Define the legal implications of selling treasury shares according to CA 2006.
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.
What happens to treasury shares if a company decides to cancel them?
If a company decides to cancel treasury shares, those shares are permanently removed from circulation and cannot be sold or transferred.
How are the rights attached to a class of shares determined?
The rights attached to a class of shares are determined in the company’s Articles.
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.
What are redeemable shares?
Redeemable shares are shares that can be bought back by the company at a future date.
What are cumulative shares?
Cumulative shares are a type of preference share that entitles the holder to receive dividends that are in arrears.
What are convertible shares?
Convertible shares are shares that can be converted into another class of shares, usually at the option of the shareholder.
What are non-voting shares?
Non-voting shares are shares that do not grant the holder any voting rights in company decisions.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
What are the two types of dividends?
The two types of dividends are final dividends and interim dividends.
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.
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.
When are interim dividends often paid?
Interim dividends are often paid when the company has realised an investment.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Explain what happens to a shareholder’s shares in the case of bankruptcy.
The shares automatically vest in the trustee in bankruptcy.
How can shares be transferred from one shareholder to another?
Shares may be transferred by way of sale or gift.
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.
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.
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.
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.
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.
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.
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.
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.
When is no stamp duty payable during a share transfer?
No stamp duty is payable if the consideration is £1000 or less.
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.
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.
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.
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.
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.
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.
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.
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.
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.
