Equity finance: financial assistance and buyback of shares Flashcards
what is financial assistance? what are examples of financial assistance? (7)
company providing financial assistance to the buyer for the purpose of purchase of its own shares (whether given before or after the purchase)
this includes:
- gift
- loan
- guarantee
- security
- indemnity
- waiver
- any method where the net assets of the company are reduced to a material extent or where the company has no net assets
what is the rule on providing financial assistance?
providing unlawful financial assistance is prohibited
what is the consequence of providing unlawful financial assistance?
- transaction is void
- company/officers may be liable to a fine or 2 years imprisonment
which companies are prohibited from giving financial assistance? (2)
- Where purchase of shares is in a public company (target), that company AND any of its private or public subsidiaries are prohibited from giving financial assistance
- Where purchase of shares is in a private company (target), its public subsidiary is prohibited from giving financial assistance
when is financial assistance allowed? (3)
- private company giving FA to purchase shares in itself or a private subsidiary or parent company
- public company giving FA to purchase shares in its private subsidiary
- private company giving FA for purchase of shares in its private/public subsidiary
what are the exceptions to the prohibition on financial assistance?
1) where the principal purpose of giving assistance is not for the purpose of the acquisition
2) FA is for redeeming shares, reducing capital, or paying dividends
3) money lending in the ordinary course of business and for employee share schemes- only if:
- the company providing the assistance is private, or
- the company providing the assistance is public but its net assets are not reduced by providing assistance, or if they are reduced the assistance is provided out of distributable profit
what is the general obligation with regards to capital?
there are 2 consequences of this
a company must maintain and not reduce its share capital (as this is a fund for creditors)
consequences:
- dividends can only be paid out of distributable profits not capital
- companies must not purchase their own shares = unless buyback via contract or redeeming redeemable shares
out of what accounts can companies not pay dividends from?
- equity account and share premium account = cannot be used to pay dividends (only from distributable profits not capital)
- money in these accounts can be used to carry business as working capital
- only from ‘retained earnings’ in bottom half of balance sheet
what 3 methods are there to fund a buyback of shares?
- using distributable profits
- using proceeds of a fresh issue of shares made for the purpose of financing the buyback
- capital (only private companies and only if there are no distributable profits)
buyback of shares using distributable profits / proceeds of fresh issue of shares
what are the conditions (3) and procedure (7)?
CONDITIONS:
- articles do not prohibit purchase of own shares
- shares to be bought are fully paid up
- there will be shares left after the purchase (other than the treasury shares)
PROCEDURE:
- contract required
- BM to approve contract and call a GM / circulate the written resolution
- contract must be present for inspection at company registered office 15 days before GM (or circulated with written resolution)
- shareholders vote to approve by ORDINARY RESOLUTION = but holders of the shares being bought are not eligible to vote
- BM held to enter into the contract and authorise a director to sign
- filed at company house within 28 days = return, notice of cancellation, statement of capital
- cancel shares + update register of members
buyback of shares using capital
what are the conditions (5) and what is the procedure (10)?
CONDITIONS:
- PRIVATE COMPANIES ONLY
- articles do not prohibit this
- shares to be bought are fully paid up
- there will be shares left after the purchase
- there are no distributable profits to use
PROCEDURE:
- Director’s statement of solvency (DSS) and auditors report (AR) must be signed no more than 1 week before the GM/WR = states company is not insolvent and will not be insolvent for the next year (always available for inspection at registered office)
- Accounts must have been prepared no earlier than 3 months before DSS (this confirms there are no distributable profits)
- contract for buyback must be agreed at a BM and available for inspection at least 15 days before GM / circulated with written resolution
- shareholders pass: (1) Special Resolution to approve the buyback and (2) Ordinary Resolution to approve the contract
- BM is required to enter into the contract, authorise directors to sign the contract, deal with post-meeting matters and arrange for payment out of capital
- within 7 days of GM/WR : place notices in Gazette and national newspaper, give notice to creditors, and file DSS and AR at Companies House
- within 15 days of GM/WR : file special resolution at Companies House
- For 5 weeks after date of special resolution : creditors and shareholders have right to object
- File return, notice of cancellation & statement of capital within 28 days
- payment out of capital must take place not before 5 weeks before special resolution and not after 7 weeks after special resolution
what resolutions need to be passed when buying back shares out of capital?
- special resolution to authorise buyback out of capital
- ordinary resolution to approve contract
(the member whose shares are being bought back cannot vote on these resolutions)
what resolutions need to be passed when buying back shares out of distributable profits?
ordinary resolution to approve contract
BUT holders of the shares being bought are not eligible to vote
for how long must the contract to buyback be available for inspection? where?
contract must be present for inspection at company registered office 15 days before GM
(or circulated with written resolution)
what must be filed at companies house after buyback of shares out of distributable profits / fresh issue / capital? When? (3)
- copies of directors solvency statement and auditor’s report (capital only) –> 7 days after GM
- special resolution (capital only) –> 15 days after the GM
- return of allotment form, notice of cancellation form, and statement of capital (all) –> 28 days after GM
