equity finance (week 5) Flashcards
what is capital?
Capital is used to refer to the funds available to run the business of a company.
what is share capital?
Relates to the money raised by the issue of shares. Share capital is contributed by investors in the company and is represented by shares that are issued to such investors
what is working capital?
Funds that are needed to keep the business going
how can a company fund its business (3 different ways)?
Issuing shares: equity finance
Borrowing: debt finance
Retaining its profits for use in the business (rather than paying the profits to the shareholders)
what is issued share capital?
The amount of shares in issue at any time
what is the common nominal value for ordinary shares?
common nominal value for ordinary shares are 1p, 5p or £1
can a company sell its shares at a discount to its nominal value?
no - company cannot sell them at a discounted rate
can a company sell its shares that are in excess to over the nominal value?
yes - they can (it is called a premium)
what does issued share capital mean?
the amount of shares in issue at any time
what is a company’s issued share capital made up of?
what is a subscriber share?
shares purchased by the 1st members of the company
what is allowed shares?
shares are allotted when a person acquires the unconditional right to be included in the company’s register of members in respect of those shares.
when does a person gain full legal title to shares?
full legal title to shares is only achieved once a person’s name is entered in the company’s register of members (s112(2) CA 2006)
what is treasury shares?
shares that have been bought back by the company itself, and are held by the company ‘in treasury’
what are the 5 steps to issuing shares?
- any cap on the number of shares that can be issued?
- do directors need authority to allot these shares? (ordinary resolution needed if shares are different class)
- do pre-emption rights need to be disapplied?
- new class rights to be created for the shares
- directors must pass a board resolution
do special resolutions need to be filed at company’s house?
yes all special resolutions need to be filled at companies house
what are the features which make something NOT an equity security?
if share has capped right to dividend and capped right to capital return then they are not equities securities.
what 4 features do ordinary shares have?
carry right to vote in GMs
right to a dividend if one is declared
right to a portion of any surplus assets of the company on winding-up
entitlement of dividend is unrestricted
what is a preference share?
gives the holder preference to payment of a dividend and/or return of capital on winding up of the company
what is a cumulative share?
if a dividend is not declared for a particular year, the right to the preferred amount on the share is carried forward and will be paid, together with other dividends due, when there are available profits.
what is a redeemable share?
issued with the intention that the company will buy them back and cancel them
what is a convertible share?
carries an option to ‘convert’ shares into a different class of share
what 3 features does a deferred share have?
no voting right
no ordinary dividend
sometimes get share of surplus profit after the dividends have been paid
if a company wants to vary the class rights of the shares - how must they do this?
pass resolution of shareholders of at least 75% of the issued shares of that class or by means of special resolution passed at separate GM
can a shareholder have a variation in shares cancelled?
yes they can - need to hold 15% of relevant shares (cannot vote in the variation) apply to court within 21 days of resolution to have the variation cancelled.
what are the 2 ways a shareholder can receive a return for their investment? (dividends)
- by receipt of dividends (income receipts)
- an increase in capital value of shares
what are the 2 types of dividends?
- final dividends
- interim dividends
what is a final dividend?
recommended by directors and declared by company via ordinary resolution to give shareholders dividends following the financial year end
what is an interim dividend?
articles give directors power to decide to pay interim dividend if company has sufficient distributable profits. can be paid without need for ordinary resolution of shareholders
what are the 2 restrictions on transferring shares?
- directors’ power to refuse to register transfer of shares (must give reasons why)
- pre-emption clauses - must be specifically inserted into articles of company
what are the 2 transactions that have rules on financial assistance?
acquisition or sale of shares
issue of shares
what is the doctrine of maintenance of share capital?
A company cannot release the sums represented in the equity account and the share premium account to value shareholders. This money can be used by the business as working capital but it cannot be returned to the shareholders. It is a fundamental concept that the share capital of a company is seen as a permanent find available to its creditors.
what are the 3 ways that a company can fund a buyback of shares?
- distributable profits
- proceeds of a fresh issue of shares made for the purchase of financing the buyback
- capital (can only use capital if private company)
does a private company need to issue a prospectus to allot shares?
no but will need to consider the rules each time
when is stamp duty payable on transfer of shares?
payable at 0.5% (subject to min payment of £5) where sale price exceeds £1,000
when do pre-emption rights apply?
when shares are not capped on dividend or capital (not equity’s security)
