Equity Finance Flashcards
Capital
All the assets of the company.
Legal capital
The value received from investors who subscribe for the company’s shares. Also referred to as share capital.
Maximum/minimum legal capital?
- No maximum legal capital provision under CA 2006. Companies can have as much share capital as they wish.
- Private companies also have no minimum legal capital requirements - one share is sufficient (s 7, s 8 CA 2006)
- Public companies have a minimum legal requirement of £50,000. This is in order to protect creditors through the doctrine of maintenance of share capital.
Benefits for shareholders
- Shareholders share in the profits by way of dividends
- Shareholders may also receive a capital return where the value of their share increases
- Shareholders often have voting rights therefore some input in the management of the company.
Risks for shareholders
In the event of insolvency, creditors are paid first in the order of priority on winding up. This means that it is unlikely that shareholders will receive the full value of their investment.
Protection for shareholders
(1) Limitations on the power of directors to issue new shares: Directors require authorisation of the shareholders in order to issue new shares, which avoids the directors issuing and subscribing new shares in order to obtain a controlling majority.
(2) Pre-emption rights: Shareholders have rights of first refusal when the company issues new shares. This means that shareholders are able to retain the same proportion of shareholding in the company if they wish to do so.
(3) Class rights: Certain classes of shares may have particular rights e.g. rights of pre-emption, enhanced voting rights or greater dividends.
Limitations on the power of directors to issue new shares
- Firstly it is necessary to check whether there is a cap on the maximum number of shares that a company itself is authorised to issue. It is necessary to check the company’s articles since it is possible to insert a restriction (although this is rare for companies incorporated under CA 2006)
- The directors need to be authorised to issue shares.
Section 549 CA 2006
Directors have no power to issue shares except:
(1) In accordance with s 550: gives the directors of private companies which have only a single class of shares authorisation to issue further shares of the same class, provided there is nothing to the contrary in the articles
(2) Shareholders must authorise the directors to issue shares under s 551: the shareholders may grant the directors authorisation to issue new shares by ordinary resolution. This lasts for up to 5 years and for a certain number of shares (stated in the authorisation) only.
Pre-emption rights
Section 561 states that new shares should first be offered to the existing shareholders, who are given a right of first refusal. However, this only applies where the shares to be issued are “equity securities.”
Definition of “equity securities”
Section 560(1):
(a) ordinary shares in the company, or
(b) rights to subscribe for, or to convert securities into, ordinary shares in the company;
“ordinary shares” means shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount
- this encompasses shares which would not usually be described as ordinary shares e.g. participating preference shares
- pre-emption rights do not apply to preference shares that have capped preference rights as to both dividends and capital.
Exceptions and exclusion of the right to pre-emption
Exceptions to the right of pre-emption where the new shares to be issued are:
- bonus shares,
- issued under an employee share scheme,
- issued for non-cash consideration (s 564)
- a company may exclude the right of pre-emption by specific provision in the articles (s 567-568)
Disapplication of pre-emption rights
- May be disapplied in the company’s articles, but this is not common.
- More commonly, they may be disapplied by a special resolution of the shareholders.
Disapplication of pre-emption rights by special resolution of the shareholders (ss 569-571)
- Directors of a private limited company with one class of shares where the new shares to be issued are of the same class: shareholders may agree to disapply pre-emption rights by special resolution under s 569
- Pre-emption rights may also be disapplied by special resolution under s 570 where the directors of the company are acting under a general authority to issue shares. In this situation, pre-emption rights are disapplied for all shares issued in accordance with this general authority.
- Under s 571, shareholders may pass a special resolution to disapply pre-emption rights in relation to a particular share allotment only.
Pre-emption rights on transfer of shares
- Where shareholders transfer their shares, in general there are no rights of pre-emption for existing shareholders.
- However, a private company may provide for pre-emption rights on transfer of shares either in the articles or a shareholder agreement. This is quite common in small private companies, where it is important to keep control of the company
- If a private company has a corporate shareholder (company A), the transfer of the corporate shareholder’s own shares will not trigger these pre-emption rights provisions because as respects the company there will be no change in ownership (Re Coroin)
Issuing shares at a discount
- Shares may not be issued at a discount (e.g. issuing £1 shares for 75p each)
- This was held to be beyond the power of the company in Ooregum Gold Mining v Roper and is now prohibited by s 552 CA 2006
Issuing shares at a premium
- Shares can be issued at a premium (s 610) (e.g. issuing £1 shares for £2)