Equity Finance MCQs Flashcards
A company wishes to issue preference shares to a new shareholder. The preference shares carry a right to participate in profit and capital on winding up. The company currently has only ordinary shares in issue and articles in the form of unamended model articles.
Which of the following statements sets out the shareholder resolutions which are required?
An ordinary resolution to give directors authority to allot the shares and a special resolution to amend the articles.
An ordinary resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights, an ordinary resolution to amend the articles.
A special resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights, a special resolution to amend the articles.
An ordinary resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights and a special resolution to amend the articles.
A special resolution to disapply pre-emption rights and a special resolution to amend the articles.
An ordinary resolution to give directors authority to allot the shares, a special resolution to disapply pre-emption rights and a special resolution to amend the articles.
Correct. The company has no cap as it has unamended Model Articles. An OR is required to give directors authority to allot as there are more than one class of shares in issue (s 550 does not apply). The preference shares are equity securities (s 560) as they carry a right to participate so pre-emption rights must be disapplied by SR (s 570(1). As the Company has only ordinary shares in issue the articles must be amended by SR to create the rights to the preference shares.
A company (the ‘Buyer’) is looking to purchase the entire issued share capital of a private limited company (the ‘Target’) for £1,500,000. The Buyer has an existing wholly owned subsidiary company which is a PLC. The Buyer is proposing to fund the acquisition partly with a loan from the bank of £750,000. In return for the loan, the bank requires security over the assets of the Target, the Buyer and the Buyer’s subsidiary PLC.
Which of the following statements is correct in respect of prohibited financial assistance?
The proposed security over the assets of the Buyer’s subsidiary PLC potentially falls within the prohibited financial assistance provisions.
The proposed security over the assets of the Target potentially falls within the prohibited financial assistance provisions.
The proposed security over the assets of all three companies potentially falls within the prohibited financial assistance provisions.
The proposed security over the assets of the Buyer and the Buyer’s PLC subsidiary potentially falls within the prohibited financial assistance provisions.
None of the proposed security would fall within the prohibited financial assistance provisions.
None of the proposed security would fall within the prohibited financial assistance provisions.
Correct. As the target company is a private limited company, ONLY PLC subsidiaries of the TARGET are caught by the prohibited financial assistance provisions.
A private limited company, which was incorporated in January 2012, currently has an issued share capital of £1000 made up of 1000 £1 ordinary shares. The shares are held equally by four shareholders.
The company now wishes to issue 150 £5 1% preference shares to a fifth shareholder. The preference shares entitle the shareholder to receive only a fixed dividend of £0.01 per share, with no right to share in any surplus profits. Further the shareholder is only entitled to the return of the nominal value of the shares on winding up of the company.
The company has Model Articles with one amendment; this new preference share has already been included in the Articles.
Which of the following statements represents the relevant shareholder resolution(s) required to be passed in order to make the proposed share allotment?
The company will need to pass an ordinary resolution to remove or increase the authorised share capital.
The company will need to pass a special resolution to disapply pre-emption rights which attach to the shares.
The company will need to pass a special resolution to amend the articles of association of the company.
The directors of the company will require an ordinary resolution to authorise them to allot the preference shares.
The company can allot the preference shares without obtaining any further authority from the shareholders.
The directors of the company will require an ordinary resolution to authorise them to allot the preference shares.
Correct. As this is NOT a situation where s 550 CA 2006 applies the company will need further authorisation to allot shares under s 551 CA 2006. The company is a CA 2006 company with no relevant amendments in the articles so there will be no limit on the authorised share capital. The new shares are not equity securities so there is no need to disapply pre-emption rights. The new preference shares are already included in the articles so there is no need to amend the articles.
A new investor is keen to buy shares in a public limited company (the “Target”) but does not have the necessary funds to purchase the shares without the aid of a bank loan. The bank has requested security for the bank loan from the Target, the Target’s public limited company subsidiary (the “Public Subsidiary”) and the Target’s private limited company subsidiary (the “Private Subsidiary”).
Which would be the best advice to the Target?
Only the security given by the Target will be unlawful financial assistance.
Only the security given by the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
The security given by the Target, the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
Only the security given by the Private Subsidiary would be unlawful financial assistance.
The security given by the Target, the Public Subsidiary and the Private Subsidiary would be unlawful financial assistance.
Correct. By virtue of s 678(1) CA 06 where a person is acquiring or proposing to acquire shares in a public limited company it is not lawful for that company (ie the Target) or a company that is a subsidiary of that company (ie the Public Subsidiary and the Private Subsidiary) to give financial assistance either directly or indirectly for the purpose of the acquisition.
A private limited company with unamended model articles has 100 ordinary £1 shares as its issued share capital. The company would like to issue an additional 100 ordinary £1 shares to a new shareholder as quickly as possible, so ideally without needing to obtain shareholder approval.
Would it be possible to issue the shares without passing any shareholder resolutions?
No, since an ordinary resolution giving the directors authority to allot the new shares is required together with an ordinary resolution to disapply pre-emption rights.
No, since an ordinary resolution is required to disapply pre-emption rights in relation to the new shares.
No, since a special resolution is required to disapply pre-emption rights in relation to the new shares.
Yes, since the directors will have automatic authority to issue the new shares because the company has only one class of shares in issue and the new shares to be issued are of the same class.
No, since an ordinary resolution giving the directors authority to allot the new shares is required.
No, since a special resolution is required to disapply pre-emption rights in relation to the new shares.
Correct. As the company has model articles there is no limit on the number of shares that can be issued so no shareholder approval is needed in respect of that, the directors have authority to allot the new shares under s550 CA 06 as the company only has one type of shares in issue and more of the same are being issued. As the shares are ordinary shares there is no limit on the amount of dividends that the shareholder might receive and no limit on the amount of capital on a solvent winding up of the company so the shares are equity securities by virtue of s560 CA 06. This means to protect the existing shareholders rights of pre-emption can only be disapplied by those existing shareholders passing a special resolution.
Question 1
A private company was incorporated in 2015 and has the Model Articles of Association with
no amendments. The directors of the company propose to allot 1,000 ordinary shares for
cash consideration. To date, no resolutions concerning the allotment of shares have been
passed.
Which of the following statements best explains why the shareholders of the company
do not need to pass an ordinary resolution to give the directors authority to allot the
shares?
A Because the company is allotting shares in return for cash so no authority is required.
B Because the company is a private company with one class of shares so the directors
already have permission to allot shares.
C Because company directors can always allot ordinary shares without permission from
the shareholders.
D Because the shares to be allotted are not equity securities.
E Because directors are permitted to allot up to 1,000 shares without shareholder
approval.
Answer
Option B is correct. The company was incorporated after the Companies Act 2006 (‘CA
2006’) came into force and is a private company with only one class of shares – this must
be the case because it has the Model Articles and no resolutions relating to allotment
have been passed, so there cannot be any other types of share. No amendments have
been made to the articles that might restrict the directors’ authority to allot. The directors
therefore already have authority to allot the shares under s 550 CA 2006. Option A is wrong
because the fact that the shares are being allotted for cash does not change whether
authority is required or not. Option C is wrong because sometimes directors do need
permission to allot shares, depending on the company’s articles, the type of share and
company, and when it was incorporated. Option D is wrong because ordinary shares are
equity securities. Option E is wrong because there is no such rule that directors can allot up
to 1,000 shares without shareholder approval.
Question 2
A private company incorporated in 2015 has the Model Articles of Association with no
amendments. It has two shareholders, a woman and a man, who are also the only
two directors of the company. Each shareholder holds 50,000 ordinary £1 shares. The
shareholders have agreed in principle that the company will buy back 25,000 shares from
the man for £40,000. The company’s distributable profits are £175,000 and its net assets are
£800,000.
Assume that the shareholders have not passed any relevant resolutions.
Which of the following best describes what shareholders’ resolutions would be required
to effect the buyback described above?
A One ordinary resolution, to authorise the buyback.
B One ordinary resolution to authorise the buyback and one special resolution to
authorise the use of capital.
C One ordinary resolution to authorise the buyback and a second ordinary resolution to
authorise the use of capital.
D No shareholders’ resolutions would be required because the company has the Model
Articles of Association.
E One special resolution, to authorise the buyback.
Answer
Option A is correct. This is clearly a buyback out of profits, not capital, because the company’s
distributable profits of £175,000 are enough to cover the agreed price for the buyback
(£40,000). The net assets figure does not change the position. Accordingly, only one ordinary
resolution is needed (s 694 CA 2006) to authorise the buyback. Options B and C are wrong
because this is not a buyback out of capital. Options D are E are wrong because one ordinary
resolution is required.
Question 3
A private company has four shareholders, a chemist, a translator, a software developer and
a biologist, who are also the four directors of the company. The company has the Model
Articles of Association with no amendments. It has an issued share capital of £100,000
ordinary £1 shares. The chemist owns 25,000 shares, the translator owns 50,000 shares, the
software developer owns 15,000 shares and the biologist owns 10,000 shares. The software
developer then sells 5,000 shares to each of the other three shareholders.
Which of the following describes the chemist, the translator and the biologist’s
percentage shareholdings following the transfer of the software developer’s shares as
described above?
A The chemist owns 25%, the translator owns 50% and the biologist owns 10% of the
company’s shares.
B The chemist owns 35%, the translator owns 65% and the biologist owns 12% of the
company’s shares.
C The chemist owns 29%, the translator owns 59% and the biologist owns 12% of the
company’s shares.
D The chemist owns 30%, the translator owns 55% and the biologist owns 15% of the
company’s shares.
E The chemist owns 25%, the translator owns 50% and the biologist owns 15% of the
company’s shares.
Answer
Option D is correct. Each of the remaining shareholders obtains 5,000 more shares of the
100,000 in issue, giving the chemist 30,000, the translator 55,000 and the biologist 15,000
shares. So the chemist has 30,000/ 100,000, ie 30% of the shares, the translator has 55,000/
100,000, ie 55% of the shares, and the biologist has 15,000/ 100,000, ie 15% of the shares.
Evans Ltd is acquiring the entire issued share capital in PMR Ltd – target company. Evans Ltd is a wholly owned subsidiary of Evans Clothing Plc. PMR Ltd has a wholly owned subsidiary, PMMR Plc – target’s subsidiary.
Evans Ltd is taking out a bank loan to finance the acquisition. The bank will require security in respect of the loan over the assets of Evans Ltd, Evans Clothing Plc, PMR Ltd and PMMR Plc.
Which of the following statements is correct in respect of prohibited financial assistance?
A. All of the security options fall within the prohibited financial assistance regime
B. Only the security from Evans Clothing Plc and PMMR Plc is caught by the prohibited financial assistance regime
C. Only the security from PMR Ltd and PMMR Plc are caught by the prohibited financial assistance regime
D. Only the security from PMMR Plc is caught by the prohibited financial assistance regime
E. Only the security from PMR Ltd is caught by the prohibited financial assistance regime
D. Only the security from PMMR Plc is caught by the prohibited financial assistance regime
