Equity finance Flashcards
1
Q
What is the general term ‘capital’ used to refer to?
A
The funds available to run the business of a company
2
Q
What does ‘share capital’ relate to in company law?
A
The money raised by the issue of shares
3
Q
Why does a company need funds?
A
To start the business, maintain working capital, and fund expansion
4
Q
What are the ways a company can raise funds?
A
- Issuing shares (equity finance)
- Borrowing (debt finance)
- Retaining profits
5
Q
How is a share often described?
A
A ‘bundle of rights’
6
Q
What rights might an investor have by investing in share capital?
A
- Voting rights
- Income through dividends
- Capital gain
7
Q
What is the nominal or par value of a share?
A
The minimum subscription price for that share
8
Q
What does Section 542(1) CA 2006 provide regarding shares?
A
Shares in a limited company must have a fixed nominal value
9
Q
What is a ‘premium’ in relation to shares?
A
The excess amount over the nominal value when a share is allotted/issued
10
Q
What is meant by ‘issued share capital’ (ISC)?
A
The amount of shares in issue at any time
11
Q
Define ‘allotment’ as per s 558 CA 2006.
A
When a person acquires the unconditional right to be included in the company’s register of members
12
Q
What is ‘paid-up share capital’?
A
The amount of nominal capital that has been paid by shareholders
13
Q
What are treasury shares?
A
Shares that have been bought back by the company and are held in treasury
14
Q
What are the common types of shares listed?
A
- Ordinary shares
- Redeemable shares
- Preference shares
- Non-voting shares
- Employees’ shares
- Cumulative shares
- Convertible shares
- Deferred shares
15
Q
What rights do ordinary shares carry?
A
- Right to vote in general meetings
- Right to a dividend if declared
- Right to a portion of surplus assets on winding-up
16
Q
What is the definition of preference shares?
A
Shares that may give the holder a preference as to payment of dividend or return of capital
17
Q
What are cumulative preference shares?
A
Preference shares that carry forward unpaid dividends to future years
18
Q
What do participating preference shares allow shareholders to do?
A
Participate in surplus profits and/or assets after receiving their fixed preferred dividend
19
Q
What are deferred shares?
A
Shares that carry no voting rights and no ordinary dividend
20
Q
What are redeemable shares?
A
Shares issued with the intention that the company may buy them back in the future
21
Q
What are convertible shares?
A
Shares that carry an option to convert into a different class of share
22
Q
What must be referred to for the rights attached to different classes of shares?
A
The company’s Articles
23
Q
What are the two types of dividends?
A
- Final dividends
- Interim dividends
24
Q
What is required for a company to pay dividends?
A
Sufficient distributable profits
25
What does 'distributable profits' mean?
The company's accumulated realised profits less its accumulated realised losses
26
What is the difference between allotting and transferring shares?
Allotment is a contract to issue new shares while transfer is a contract to sell existing shares
27
What does s 755 CA 2006 restrict for private companies?
Offering shares to the public
28
What is the definition of 'offer to the public' as per s 756 CA 2006?
Offers to any section of the public, excluding private offers
29
What is a 'private concern' in the context of share offers?
'Private concern' refers to offers made to existing shareholders, employees, and certain family members, which are excluded from restrictions under s 755.
30
What is a prospectus?
An explanatory circular that provides details about a company and the investment for potential investors to make informed decisions.
31
When is a prospectus usually required?
A prospectus is typically required when a company offers shares to the public, but private companies often do not need one.
32
Define 'financial promotion' under s 21 FSMA.
Any invitation or inducement in the course of business to engage in investment activity, including buying shares.
33
True or False: Financial promotions are always allowed for companies.
False.
34
What happens to shares automatically in the event of a shareholder's death?
The shares pass to their personal representatives.
35
What is the process of share transfer?
Shares may be transferred by sale or gift, subject to restrictions in the Articles.
36
What are the two common forms of restrictions on share transfer?
* Directors’ power to refuse registration
* Pre-emption clauses (rights of first refusal)
37
What is the required form for the transfer of shares?
A stock transfer form signed by the transferor and submitted with the share certificate.
38
What is the stamp duty rate on share transfers?
0.5% of the consideration, rounded up to the nearest £5.
39
What is 'share capital' in company law?
The money raised by the issue of shares, contributed by investors.
40
What must be checked before issuing new shares?
Check the company’s Articles for any cap or limit on the number of shares that may be issued.
41
How can a cap on share issuance be removed for companies under CA 1985?
By passing an ordinary resolution to remove or amend the deemed restriction.
42
What is the authority requirement for directors to allot shares under s 550 CA 2006?
Directors have automatic authority to allot shares of the same class unless prohibited by the Articles.
43
What is a 'pre-emption right'?
The right of existing shareholders to be offered new shares pro rata to their existing holdings before new investors.
44
What does s 561 CA 2006 state regarding allotment of equity securities?
A company must not allot equity securities unless it has offered them to existing ordinary shareholders in proportion to their holdings.
45
What defines 'equity securities' under s 560 CA 2006?
Ordinary shares or rights to subscribe for, or convert securities into, ordinary shares.
46
Can a company disapply pre-emption rights?
Yes, but the procedure can be lengthy and complicated.
47
What is the minimum stamp duty payable on share transfers exceeding £1000?
£5.
48
What happens to shares if a shareholder is made bankrupt?
The shares automatically vest in their trustee in bankruptcy.
49
What is required for a company to issue new shares under step 2?
Directors may need prior authority from shareholders to allot shares.
50
What action must be taken if a company has already granted authority to its directors to allot shares?
Check that the authority is still valid, subject to limits in terms of time and number of shares.
51
What is a stock transfer form used for?
It is used to transfer shares and must be signed by the transferor.
52
What is the significance of checking the register of members?
To determine if shares have already been issued and confirm current share capital.
53
What is the consequence of issuing new shares on existing shareholders?
Their ownership percentage and voting power may be diluted.
54
What does s 617(2)(a) CA 2006 state regarding share issuance?
Each time a company issues shares, its share capital increases automatically.
55
What are ordinary shareholders entitled to in the event of winding up?
Ordinary shareholders are entitled to any surplus assets on a winding up.
56
What defines shares as equity securities under s 560(1) CA 2006?
Shares are defined as equity securities if they have an uncapped right to participate in capital payments on a winding up, despite having capped dividends (at 5%).
57
Can a company disapply pre-emption rights?
Yes, a company can disapply pre-emption rights with the permission of its existing shareholders.
58
What is the procedure for giving effect to pre-emption rights according to s 562 CA 2006?
The procedure can be lengthy and complicated, especially for companies with numerous shareholders.
59
What is the general method for disapplying pre-emption rights?
A general disapplication can occur if directors are authorized under s 551 CA 2006 by a special resolution or by including it in the Articles.
60
What special resolution is required for private companies with one class of share regarding pre-emption rights?
A special resolution under s 569 CA 2006 is required for disapplication of pre-emption rights.
61
What is a specific disapplication of pre-emption rights?
It allows a company to disapply pre-emption rights for a specific allotment of shares by passing a special resolution under s 571 CA 2006.
62
What must directors provide to shareholders for a specific disapplication of pre-emption rights?
Directors must provide a written statement explaining the reasons for the specific disapplication and the amount to be paid to the company.
63
Can private companies permanently exclude statutory pre-emption rights?
Yes, but this is rare as it offers no protection from dilution for existing shareholders.
64
What is required to create a new class of shares?
New provisions must be inserted in the Articles dealing with the rights attached to the new shares.
65
What is required for altering the Articles to create a new class of shares?
A special resolution of the shareholders is required under s 21 CA 2006.
66
What must directors do to allot new shares?
Directors must resolve by board resolution to allot the new shares.
67
What are the conditions under which a general meeting is not needed before a board meeting for share allotment?
No limit on shares in the constitution, no restriction on directors' authority, shares issued to existing shareholders in proportion, and relevant class rights in Articles.
68
What administrative requirements must be fulfilled after allotting shares?
Resolutions must be sent to Companies House within 15 days, including Form SH01 and updated Articles if necessary.
69
What must be filed with Companies House within one month after allotment?
Return of allotment (Form SH01) and statement of capital.
70
What must be updated in company registers after share allotment?
Update register of members and PSC register if necessary.
71
What is the timeframe for sending share certificates to new shareholders?
Share certificates must be sent within two months of the allotment.
72
What are the five steps a company must follow to issue shares?
1. Check for cap on shares. 2. Check if directors need authority. 3. Determine if shares are equity securities. 4. Decide on creating a new class of shares. 5. Directors resolve to allot shares.
73
What is the significance of share capital in company law?
Share capital relates to the money raised by the issue of shares, contributed by investors.
74
What distinguishes companies incorporated under CA 2006 from those under CA 1985 regarding share capital?
CA 2006 companies do not have an authorised share capital, while CA 1985 companies originally had an authorised share capital.
75
How can a cap on shares be removed for companies under CA 1985?
Shareholders can remove or amend the cap by ordinary resolution.
76
What authority is required for directors to allot shares under s 551 CA 2006?
Authority may be provided by a provision in the company's Articles or by shareholder resolution.
77
What are pre-emption rights?
Pre-emption rights are the right of existing shareholders to be offered new shares pro rata before they are offered to new investors.
78
What is the effect of issuing new shares on existing shareholders?
It dilutes their ownership and entitlement to dividends and voting power.
79
What is required for shareholders to pass an ordinary or special resolution?
Support from at least one other shareholder.
80
Who can block special resolutions?
B can block special resolutions.
81
Who can block both ordinary and special resolutions?
C can block both ordinary and special resolutions.
82
What is the effect on B and A regarding dividends?
Both B and A are entitled to lower levels of dividends.
83
To what type of shares are pre-emption rights relevant?
Ordinary shares.
84
What does Section 561 CA 2006 state about allotting equity securities?
A company must offer equity securities to existing ordinary shareholders on the same or more favourable terms.
85
What constitutes 'equity securities' under s 560(1) CA 2006?
Ordinary shares or rights to subscribe for, or convert securities into, ordinary shares.
86
How is 'ordinary shares' defined for the purpose of s 560(1)?
Shares other than those that carry a right to participate only up to a specified amount.
87
What happens if shares carry capped rights regarding dividends and capital?
They do not fall within the definition of 'equity securities' and are not subject to pre-emption rights.
88
Example of shares that are considered equity securities?
Shares with a fixed preferential dividend of 5% and uncapped rights to participate in capital payments.
89
Can a company disapply pre-emption rights?
Yes, with the permission of the company’s existing shareholders.
90
What is a general disapplication of pre-emption rights?
A company may disapply pre-emption rights with a special resolution or inclusion in its articles.
91
What is required for private companies with one class of shares to disapply pre-emption rights?
A special resolution presupposing directors' authority to allot shares under s 550 CA 2006.
92
What is a specific disapplication of pre-emption rights?
Disapplication for a specific allotment by passing a special resolution under s 571 CA 2006.
93
What must be provided to shareholders for a specific disapplication?
Written statement explaining reasons and justification for the specific disapplication.
94
How can private companies permanently exclude pre-emption rights?
By a provision in their Articles.
95
What is the first step when issuing shares?
Check for a cap on the amount of shares that can be issued.
96
What must be checked second when issuing shares?
Whether company directors need authority to allot the shares.
97
What is the third step regarding equity securities?
Determine if the shares are equity securities and if pre-emption rights need to be disapplied.
98
What is the fourth step when issuing new shares?
Check if creating a new class of shares requires amending the Articles.
99
What is the fifth step in the share issuance process?
Directors must pass a board resolution to allot the shares.
100
What are the administrative requirements after an allotment?
Copies of resolutions must be sent to Companies House within 15 days.
101
What forms must be sent to Companies House after an allotment?
Form SH01 and statement of capital within one month.
102
What must be updated within two months of the allotment?
Register of members and PSC register if necessary.
103
When must share certificates be sent to new shareholders?
Within two months of the allotment.
104
What is the statutory rule regarding financial assistance in share acquisitions?
Prohibitions on financial assistance are relevant to public companies and private companies in groups with public companies.
105
What types of transactions do the financial assistance rules apply to?
Acquisition or sale of shares and issue of shares.
106
Which companies are prohibited from giving financial assistance?
Public target companies and their subsidiaries; private target companies and their public subsidiaries.
107
What does 'giving financial assistance' mean?
Assistance that reduces net assets materially or where the company has no net assets.
108
What types of transactions can constitute financial assistance?
* Gifts
* Guarantees, security, or indemnities
* Loans or similar agreements
* Any other assistance reducing net assets materially.
109
Does financial assistance apply if given after the acquisition?
Yes, if it reduces or discharges a liability incurred for the acquisition.
110
What sections of the CA 2006 relate to the acquisition of financial assistance?
Sections 678(1), 679(1), 678(3), and 679(3) CA 2006
## Footnote
These sections outline the statutory provisions related to financial assistance in the context of acquisitions.
111
What is required for financial assistance to fall within statutory provisions?
The assistance must be given for the purpose of the acquisition or for reducing/discharging a liability incurred for the acquisition
## Footnote
The company must have intended to facilitate the acquisition.
112
True or False: A loan from I Plc to J Ltd for purchasing shares in H Ltd constitutes prohibited financial assistance.
True
## Footnote
This is due to various reasons outlined in s 679(1) CA 2006.
113
List the reasons why the loan given by I Plc to J Ltd is prohibited financial assistance.
* There is an acquisition of shares in H Ltd by way of a share sale
* I Plc is a public company subsidiary of a private company
* A loan is a specified transaction under s 677(1)(c)(i) CA 2006
* The loan enables J Ltd to pay for the shares
* The loan is direct financial assistance
* The loan is given before or at the same time as the acquisition
* The loan's purpose is to facilitate the acquisition
114
What are the 'purpose' exceptions in financial assistance?
Sections 678(2), 678(4), 679(2), and 679(4) CA 2006
## Footnote
These exceptions state that financial assistance will not be unlawful if the principal purpose is not for the acquisition.
115
What types of exceptions to financial assistance are listed in s 681 CA 2006?
Unconditional exceptions
## Footnote
These include specific transactions like dividend payments.
116
What are the conditional exceptions under s 682 CA 2006?
* Money lending in the ordinary course of business
* Assistance in respect of employee share schemes
## Footnote
These exceptions require specific conditions to be met.
117
What are the consequences of prohibited financial assistance under s 680 CA 2006?
* The company may face fines
* Officers of the company may face fines/imprisonment
* The transaction may be void
* The wider transaction may also be void
118
What is the doctrine of maintenance of capital?
It states that a company cannot normally return capital to shareholders
## Footnote
All payments to shareholders should be made out of distributable profits.
119
What are the consequences of the principle of maintenance of share capital?
* Dividends may only be paid out of distributable profits
* Companies generally must not purchase their own shares
120
What are the two situations in which a company can buy its own shares?
* Redemption of redeemable shares
* Purchase of own shares (buyback)
121
What is a buyback of shares?
When a company purchases its own shares from an existing shareholder
## Footnote
This typically occurs when there are no other buyers available.
122
How can a company fund a buyback of its own shares?
* Distributable profits
* Proceeds of a fresh issue of shares
* Capital
123
What must a company ensure before buying back shares out of profits?
* No restriction in Articles on buying back shares
* Shares must be fully paid up
* Must continue to have issued shares other than redeemable and treasury shares
124
What is required for the buyback of shares out of capital?
* The purchase is not restricted in the company’s Articles
* A directors’ statement of solvency must be prepared
* A special resolution must be passed
125
What must the directors' statement of solvency confirm?
That the company is solvent and can pay its debts as they fall due
## Footnote
It must also state that the company will remain solvent for 12 months after the buyback.
126
What are the notification requirements after passing a special resolution for buyback out of capital?
* Publish a notice in the Gazette
* Notify creditors in a national newspaper or in writing
* File copies of the directors’ statement and auditors’ report at Companies House
127
What is the timing restriction for a share purchase after a special resolution?
It can take place no earlier than five weeks and no later than seven weeks after the resolution
## Footnote
This allows time for objections from shareholders or creditors.
128
What must be checked regarding the Articles before initiating a buyback of shares?
There is no limit in Articles on s 690 power to buyback shares or s 709 power to use capital to fund the buyback.
129
What accounts must be prepared no earlier than three months before the directors prepare the statement of solvency?
Accounts to ascertain available profits.
130
What must be confirmed about the shares before the buyback process?
Shares are fully paid.
131
What is the purpose of the Board Meeting in the buyback procedure?
To approve the directors’ statement of solvency, auditors’ report, draft contract, and to call a general meeting.
132
What must be done with the contract before a General Meeting (GM)?
The contract must be available for inspection at the company’s registered office for at least 15 days prior to and at GM.
133
What happens if a Written Resolution (WR) is used instead of a GM?
The contract must be circulated with the WR.
134
What must be signed no earlier than one week before the GM or passing of the WR?
Directors’ statement of solvency (DSS) and auditors’ report (AR).
135
What must shareholders do in a WR regarding the buyback?
Pass an ordinary resolution (OR) to approve the contract and a special resolution (SR) to approve payment out of capital.
136
Who is not eligible to vote during the buyback process?
Holders of shares being bought back.
137
What must be filed within 7 days after the GM or WR?
Notices in Gazette and national newspaper, and file DSS and AR at Companies House.
138
What must be filed within 15 days after the special resolution?
File special resolution (SR) at Companies House.
139
What rights do creditors and shareholders have after the SR is passed?
They have the right to object for five weeks after the date of SR.
140
What is required to be done with the contract after the Board Meeting?
Enter into the contract, appoint director(s) to sign it.
141
What is the time frame for payment out of capital after the SR is passed?
Payment must take place between 5-7 weeks after SR passed.
142
What must be filed within 28 days post-meeting?
Return, notice of cancellation & statement of capital.
143
What is the maximum duration for keeping a copy of the contract?
10 years.
144
What are redeemable shares?
Shares issued to be redeemed on certain circumstances or at the option of the issuing company or shareholder.
145
Is a contract required to redeem redeemable shares?
No, because the terms of redemption are already set out in the company’s Articles or determined by directors.
146
What must be prepared before redeeming shares using capital?
Directors’ statement of solvency and auditors’ report.
147
What must a company ensure before using capital for a buyback?
That there are no distributable profits available.
148
What is the doctrine of maintenance of share capital?
It states that a company cannot usually return capital to its shareholders.
149
What are the consequences of the principle of maintenance of share capital?
* Dividends may only be paid out of distributable profits
* Companies generally must not purchase their own shares.
150
What exceptions exist to the maintenance of share capital principle?
* A company may buyback its own shares following CA 2006 procedures
* A company may purchase shares under a court order after unfair prejudice petition.
151
What are the three ways a company may fund a buyback of shares?
* Distributable profits
* Proceeds of a fresh issue of shares
* Capital.
152
What is required for a buyback of shares out of profits?
* No restriction in Articles on buyback
* Shares are fully paid
* An ordinary resolution is passed to approve the contract.
153
What must be done if the buyback is out of capital?
* Ensure no restrictions in Articles
* Prepare accounts within three months
* Directors’ statement of solvency and auditors’ report are needed.
154
What notification is required for creditors after passing the special resolution for capital buyback?
* Publish a notice in the Gazette
* Publish in a national newspaper or notify creditors in writing
* File documents at Companies House.
155
What is the minimum and maximum time frame for share purchase after the special resolution?
No earlier than five weeks and no later than seven weeks.
156
What must be done within 28 days after the bought back shares are delivered?
Send a return to Companies House and a notice of cancellation.
157
What must the Board Resolution (BR) approve regarding the directors’ statement of solvency?
Directors’ statement of solvency (‘DSS’) and the auditors’ report (‘AR’)
## Footnote
The BR is responsible for approving key documents related to the financial health of the company.
158
What is required for a contract to be made available to shareholders if a General Meeting (GM) is held?
The contract must be available for inspection at the company’s registered office for at least 15 days prior to and at the GM
## Footnote
This ensures transparency and allows shareholders to review the contract before the meeting.
159
What must be circulated with the written resolution (WR)?
Contract, DSS, and AR
## Footnote
These documents provide essential information for shareholders voting on the WR.
160
True or False: Holders of shares being bought back are eligible to vote.
False
## Footnote
This rule is in place to prevent conflicts of interest during the voting process.
161
What must be done within 7 days after a GM or WR?
Place notices in Gazette and national newspaper and file DSS and AR at Companies House
## Footnote
This is part of the regulatory requirements following the approval of share buybacks.
162
What rights do creditors and shareholders have for five weeks after the date of the Special Resolution (SR)?
Right to object
## Footnote
Copies of DSS and AR must be available for inspection at the company’s registered office during this period.
163
How long must a company keep a copy of the contract after a share buyback?
10 years
## Footnote
This is important for record-keeping and compliance with regulatory requirements.
164
What must be checked in the Articles before a buyback of shares using profits/proceeds?
Any prohibition on buyback
## Footnote
The Articles of Association may contain specific rules regarding share buybacks.
165
What is required for a buyback out of capital for private companies?
Contract terms must be set out, DSS and AR required, and shareholder approvals needed
## Footnote
There are stricter regulations when using capital for buybacks compared to profits.
166
What are redeemable shares?
Shares issued to be redeemed on occurrence of certain circumstances or at the option of the issuing company or shareholder
## Footnote
They provide temporary membership in the company and have specific redemption terms.
167
What must be done after the passing of the Special Resolution for a buyback?
The buyback must take place within 5-7 weeks
## Footnote
This timing is essential for compliance with company law.
168
Fill in the blank: A buyback of shares may be funded out of _______.
distributable profits, proceeds of a fresh issue of shares, or out of capital
## Footnote
Companies have multiple options for funding share buybacks, each with specific requirements.
169
What is the fundamental concept of company law regarding share capital?
Share capital is seen as a permanent fund available to creditors
## Footnote
This principle protects creditors’ interests in the financial structure of a company.
