equity finance (week 5)

Question 1

what is capital?

Answer 1

Capital is used to refer to the funds available to run the business of a company.

Question 2

what is share capital?

Answer 2

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

Question 3

what is working capital?

Answer 3

Funds that are needed to keep the business going

Question 4

how can a company fund its business (3 different ways)?

Answer 4

 Issuing shares: equity finance
 Borrowing: debt finance
 Retaining its profits for use in the business (rather than paying the profits to the shareholders)

Question 5

what is issued share capital?

Answer 5

The amount of shares in issue at any time

Question 6

what is the common nominal value for ordinary shares?

Answer 6

common nominal value for ordinary shares are 1p, 5p or £1

Question 7

can a company sell its shares at a discount to its nominal value?

Answer 7

no - company cannot sell them at a discounted rate

Question 8

can a company sell its shares that are in excess to over the nominal value?

Answer 8

yes - they can (it is called a premium)

Question 9

what does issued share capital mean?

Answer 9

the amount of shares in issue at any time

Question 10

what is a company’s issued share capital made up of?

Question 11

what is a subscriber share?

Answer 11

shares purchased by the 1st members of the company

Question 12

what is allowed shares?

Answer 12

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.

Question 13

when does a person gain full legal title to shares?

Answer 13

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)

Question 14

what is treasury shares?

Answer 14

shares that have been bought back by the company itself, and are held by the company ‘in treasury’

Question 15

what are the 5 steps to issuing shares?

Answer 15

1. any cap on the number of shares that can be issued?
2. do directors need authority to allot these shares? (ordinary resolution needed if shares are different class)
3. do pre-emption rights need to be disapplied?
4. new class rights to be created for the shares
5. directors must pass a board resolution

Question 16

do special resolutions need to be filed at company’s house?

Answer 16

yes all special resolutions need to be filled at companies house

Question 17

what are the features which make something NOT an equity security?

Answer 17

if share has capped right to dividend and capped right to capital return then they are not equities securities.

Question 18

what 4 features do ordinary shares have?

Answer 18

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

Question 19

what is a preference share?

Answer 19

gives the holder preference to payment of a dividend and/or return of capital on winding up of the company

Question 20

what is a cumulative share?

Answer 20

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.

Question 21

what is a redeemable share?

Answer 21

issued with the intention that the company will buy them back and cancel them

Question 22

what is a convertible share?

Answer 22

carries an option to ‘convert’ shares into a different class of share

Question 23

what 3 features does a deferred share have?

Answer 23

no voting right
no ordinary dividend
sometimes get share of surplus profit after the dividends have been paid

Question 24

if a company wants to vary the class rights of the shares - how must they do this?

Answer 24

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

Question 25

can a shareholder have a variation in shares cancelled?

Answer 25

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.

Question 26

what are the 2 ways a shareholder can receive a return for their investment? (dividends)

Answer 26

1. by receipt of dividends (income receipts)
2. an increase in capital value of shares

Question 27

what are the 2 types of dividends?

Answer 27

1. final dividends
2. interim dividends

Question 28

what is a final dividend?

Answer 28

recommended by directors and declared by company via ordinary resolution to give shareholders dividends following the financial year end

Question 29

what is an interim dividend?

Answer 29

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

Question 30

what are the 2 restrictions on transferring shares?

Answer 30

1. directors’ power to refuse to register transfer of shares (must give reasons why)
2. pre-emption clauses - must be specifically inserted into articles of company

Question 31

what are the 2 transactions that have rules on financial assistance?

Answer 31

acquisition or sale of shares
issue of shares

Question 32

what is the doctrine of maintenance of share capital?

Answer 32

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.

Question 33

what are the 3 ways that a company can fund a buyback of shares?

Answer 33

1. distributable profits
2. proceeds of a fresh issue of shares made for the purchase of financing the buyback
3. capital (can only use capital if private company)