Equity Finance Flashcards
What does the nominal value of a share refer to?
It refers to the minimum subscription price for that share.
Can a share be allotted by a company at a discount to its nominal value?
s580 - share may not be allotted by a company at a discount to its nominal value
What is an issued share capital?
It is the nominal value of shares in issue at any one time
What are Subscriber shares?
The first shares bought in the company.
What is the subscription price of a share?
Generally the price paid for a share is higher than the nominal value - this is known as the subscription price
The difference between the nominal value and the subscription price = the premium
What rights are attached to an ordinary share?
Most common share - unless otherwise stated.
It gives each holder the right to attend a general meeting and to:
One vote when voting on a show of hands;
One vote per share when voting on a poll
What rights are attached to a preference share?
Holders with preferential shares will have some sort of preferential right in advance of the other shareholders -
For example, someone with a preference share may (before holders of ordinary shares):
- Receive a dividend; and/or
- Recover his capital when the company is being wound up
Preferences to dividends, are usually expressed as a % - e.g. a 5% preference share - indicates the % of the share the holder will be able to receive as a dividend
- NB - make sure you are clear whether the % relates to the nominal value or subscription price!
- Preference dividends will be be paid out before any other dividends are paid
- NB - preference shares will normally be stated to be cumulative - this means that if any dividend isn’t paid for a year, the amount owed to the shareholder will be carried forward to the next year
Those with preference shares only carry the right to the percentage of dividend prescribed and there is no right for the holders of those shares to participate in dividends or capital beyond the specified amount.
These shares are not considered equity securities as the ordinary dividend they recieve are fixed.
What rights are attached to participating preference shares?
In addition to the preferential rights outlined above, the holder of a ‘participating’ preference share will also be allowed to receive any ordinary dividend in addition to the preferential dividend received.
Therefore since it is not just a fixed dividend, these shares are also considered equity securities.
What rights are attached to redeemable shares?
Shares that are issued with the intention that the company may, at some time in the future, wish to redeem them and return the shareholder’s investment
- NB redeemable shares must be issued as redeemable - you cannot convert non-redeemable to redeemable
What rights are attached to convertible shares?
It carries an option to convert the share into a share of a different class in given circumstances.
What rights are attached to treasure shares?
are shares which a company’s has issued and bought back from a shareholder.
What are the 6 steps in the statutory procedure for issuing shares?
STEP 1: Is there any cap on the number of shares that may be issued? (Check the company’s articles)
STEP 2 - do the company’s directors need authority to allot?
STEP 3 - are there any pre-emption rights which need to be disapplied?
STEP 4 - Does the company need to create a new class of shares?
STEP 5 - directors to pass a board resolution to allot the shares
STEP 6 - Directors allot the shares and deal with the following post-meeting matters (PMMs)
When on stage 1 where you’re checking to see whether there is any cap on the number of shares that may be issued, what must you first consider?
You must first check the company’s articles or memorandum to see if there is a cap.
Then you must consider whether the co. is incorporated under the 1985 Act (Pre October 2009) or whether they were incorporated under the CA 2006?
Why is it important to consider whether a company is incorporated under the 1985 CA or 2006 CA when determining whether there is a cap on the number of shares which may be issued?
Companies incorporated under the 1985 Act will have an authorised share capital (ie a cap on the number of shares allowed to be issued).
s28 CA 2006 are transitional provisions which effectively transfers this cap to the company’s articles of association.
In companies incorporated under the CA 2006, usually no provision for a cap exists in the company’s articles. Therefore under s617 CA 2006, the company’s share capital will automatically increase each time new shares are issued.
What happens if you find in the articles of association that there is a cap in:
- a company incorporated under 1985
- a company incorporated under 2006 CA?
If it is a company incorporated under CA 1985, the cap must be removed by an ordinary resolution under paragraph 42(2)(b) of Schedule 2 to the Eighth Commencement Order (ECO) (note that this ordinary resolution must also be registered in the post meeting matters).
If it is a company incorporated under 2006 CA, the cap must be removed by a special resolution under s.21 CA 2006.
In a nutshell, what are the first things you need to check in step 1 of the statutory process for issuing new shares?
You would first need to check:
1) The constitution to see whether there have been any resolutions passed to remove, impose or change any cap
2) Whether any shares have been issued by checking -
- register of members or
-most recent
Annual Return filed at Companies House using form AR01 (under s855 CA 2006) together with any subsequent forms SH01 (under s555 CA 2006) filed on allotments of shares
When on step 2, how can you determine whether directors would have the authority authority to allot new shares?
s549 CA 2006 says that directors of a company must not exercise any power of the company to allot shares except in accordance with:
1)s551 CA 2006 (companies created under CA 2006 with more than one class of shares)
needs an ordinary resolution by the shareholders to allow directors allot new shares or it must be stated in the articles 281.3
2) s550 CA 2006 (private company incorporated under 2006 CA, with only one class of shares)
will give directors the automatic authority to allot -unless expressly prohibited in articles-no resolution needed!)
3) if it is a company incorporated before october 2009, the board will need SH to pass an OR resolution to opt in under s. 550 to allot new shares
If there is no authority for the directors to issue new shares on any of these two provisions, then authority must be provided by an ordinary resolution of the shareholders.
What are preemption rights?
And why are they important?When allotting new shares, why do pre-emption rights matter?
Pre emption rights are rights of first refusal. That is, if new shares are offered, they should be offered to existing shareholders before being offered to any new investors.
When a company allots shares to new investors, this may dilute the shareholdings, voting power and dividends of existing shareholders.
under s 561(1) CA 2006 a company must not allot EQUITY SECURITIES to a person unless it has first offered them to existing shareholders in proportion to their existing shares.
Therefore if it is not an equity security, then there would be no preemption rights and no need to disapply.
When equity securities are to be issued wholly or partly for non cash consideration, then preemption rights will not apply s565 CA 2006
So first question to ask when determining whether preemption rights should be disapplied, need to ask if they are equity securities or not.
What are equity securities defined as in s.560?
Equity securities are defined as all shares except those with a fixed right to dividends (i.e preferential shares) and assets on winding up.
When alloting new equity securities, why must preemption rights be disapplied?
Sometimes it is not practical to follow the pre-emption rights set out in CA 2006, for example, where the company wishes to bring in a new shareholder or does not want to follow the lengthy pre-emption procedure. Therefore permission of the company’s existing shareholders is required first.
How do you disapply preemption rights when dealing with equity securities or shares for cash consideration?
You can disapply preemption rights by first determining the type of authority the directors have to allot new shares:
i) if the directors have GENERAL AUTHORITY under section 551 to allot new shares in a company with more than one class of shares, a company may disapply preemption rights under s 570(1) by:
- a special resolution or; by
- giving the directors power under the company’s articles.
ii) if you have SPECIFIC AUTHORITY under section 551 for a particular allotment s 551(2), preemption rights can be disapplied by:
- a special resolution under s571 for that specific allotment of shares
- in this case directors are required to provide a written statement explaining the reasons for the specific disapplication under s 571(6) CA 2006
iii) if you have general authority under section 550 to allot shares in a limited company with only one class of shares, you can disapply preemption rights under s569 CA 2006 by:
- a provison in the articles or
- by a special resolution
iv) s567 CA 2006 allows a private company’s articles of association to exclude preemption rights permanently. Disapplication under this
section, operating together with s.550 CA 2006, would mean that the directors
could allot shares without making any reference to shareholders at all. This
would not be desirable in many cases.
What happens if a company wants to create a new class of shares such as preference shares?
The company will need to insert new provisions in its articles of association to cover the new rights attached to the new class of shares.
Amending the articles of association requires a special resolution under s 21.
Who is responsible for the allotment of shares and what is required at the end to allot the shares?
The allotment of shares is the responsibility of the directors. The directors will pass a board resolution at the end after any necessary shareholder resolutions have been passed.
When will a shareholder resolution not be needed before the board resolution to allot new shares?
If the constitution has no cap on the number of shares to be allotted; AND
If it is a private company with only one class of shares and the directors are not prohibited from allotting shares by the company’s articles;
OR
The directors already have authority to allot shares; AND
is issuing the shares to exisiting shareholders in proportion to their existing shareholdings and follows the procedure in s.562 CA 2006;
OR
has already disapplied the pre-emption rights under s 561 CA 2006 pursuant to s570 or s571 CA 2006 or in the case of a private company with one class of shares only, s.569 CA 2006;
OR
is a private company and the preemption rights have been excluded under s.567 CA 2006;
OR
the shares are being issued wholly or partly for non-cash consideration; AND
is not creating a new class of shares.
What must the directors do once shares are allotted?
Directors must deal with post meeting matters.
What must be dealt with in Step 1 of post meeting matters in relation to removing a cap on the number of shares which can be issued?
Companies incorporated under CA 1985:
- Must File copy of the ordinary resolution removing or increasing the cap; and
- File copy of the new articles of association (if applicable)
Companies inorporated under the CA 2006 companies with cap provisions in their articles:
- Must File a copy of the special resolution removing or increasing the cap; and
- File a copy of the new articles of association.
What must be dealt with in Step 2 of post meeting matters in relation to granting the directors authority to allot the shares?
The directors must
File copy of the ordinary resolution granting directors authority to allot at Companies House within 15 days after it is passed - s551(9) and s30(1) CA 2006
What must be dealt with in Step 3 of post meeting matters in relation to the disapplication of preemption rights?
File copy of the special resolution disapplying pre-emption rights at Companies House within 15 days after it is passed - s30(1) CA 2006
What must be dealt with in Step 4 of post meeting matters in relation to the creation of a new class of shares?
File a copy of the special resolution amending the articles of association at Companies House within 15 days after it is passed - s30(1) CA 2006
File a copy of the amended articles of association within 15 days after the amendment takes effect - s26(1) CA 2006
What must be dealt with in Step 5 of post meeting matters in relation to the allotment of shares by board resolution?
- File return of allotment in the prescribed form at Companies House within one month of the allotment - s555(2) CA 2006
- File a statement of capital in the prescribed form at Companies House within one month of the allotment - s555(3) CA 2006
- Update register of members within two months - s554 CA 2006
- Send new share certificate to new members - s769 CA 2006
If the directors of a company were to allot shares in the company without being authorised to do so under either s 550 or s 551 CA 2006, would the allotment still be valid?
What would be the position of the directors if they have no authorisation?
Yes it would still be valid under s 549(6).
The directors would have committed a criminal offence and would be liable to a fine s549(4) and (5).
If directors are given authority under s 551 to allot what is the maximum period for which that authority may be given?
The maximum authority given would be 5 years. s551(3)(b) CA 2006
How is an existing s 551 authority revoked?
It may be revoked by an ordinary resolution s551(4)(b)
If you revoke s551 that gives directors the authority to allot, what happens to the dis application of preemption rights under s561?
s561 dis application will no loner be valid for new offers of securities.
When doing an online search at co.’s house in respect of a company proposing to allot shares, which documents would you need to examine in order to advise on a procedure for alloting shares and why?
The date of incorporation of the company.
The articles and all filed resolutions to ascertain:
- whether a cap on the number of shares which may be issued has been inserted in the articles
- whether there is an existing s551 authority or a restriction to allot pusuant to s550 (depending on the classes of shares the company can allot)
- how many classes of share have been created;
- and whether there is a subsisting disapplication of s.561
- the latest Annual REturn STatement of captial
- whether a shareholders’ agreement has been put in place
In which document would the rights attaching to the perference shares be set out?
In the articles of assoication
