Finance Flashcards
How do Companies raise finance?
- Debt – loans or debt securities such as bonds
- Equity – ownership interests or shares
What is the process for raising finance when forming a company?
Subscribers agree to buy a certain number of shares, the board of directors will allot the agreed shares to the subscribers and receive payment for the shares.
The money received becomes the company’s share capital which cannot be returned to the shareholders.
What are the general conditions for allotting additional shares?
Generally directors have this power if only one class of shares and no restriction in the articles (model articles doesn’t have this restriction).
What are the conditions for allotting additional shares if more than one class of shares or there is a restriction in the articles?
The directors will need permission from the existing shareholders through an ordinary resolution.
What is the pre-emption right?
When a company proposes to issue additional shares in exchange for cash unless the articles provide otherwise (model articles don’t) the shares must first be offered to the existing shareholders
What is the purpose of the pre-emption right?
Existing shareholders can maintain their proportional share of ownership and voting strength.
What are the conditions of the pre-emption right?
- Shares must be offered on same terms as would in the open market
- Existing shareholders must be given at least 14 days to accept
- Doesn’t apply for shares issued for non-cash consideration
- Pre-emption right may be disapplied by special resolution
What is the transfer of shares?
Shareholder selling shares to a third party
How is the right to transfer shares governed?
Is governed by the companies articles
How is the right to transfer shares governed under the Model Articles for private companies?
The directors have an absolute power to refuse to allow a transfer of shares.
Who decides how much money to borrow on behalf of the company?
Model Articles gives the directors the power to decide
What is an unsecured loan?
A promise (contract) to repay the money borrowed.
What is a secured loan?
A promise to repay a loan with the right of the lender to take collateral (property) specified in the load if it is not repaid.
Types of secured loans?
- Mortgage
- Fixed charge
- Floating charge
What is a mortgage?
Type of secured loan for high value assets the title is transferred to the lender who has the right to take possession if there is a default
What is a fixed charge?
Type of secured loan – loan secured by an interest in an asset the company will hold for a long time eg. machinery or shares, allows the charge holder to sell the asset if company defaults on the loan
What is a floating charge
Type of secured loan – loan secured by an interest in a group of assets that change regularly eg inventory, this crystallises in the assets on hand if the company defaults on the secured loan
What must be registered at Companies House within 21 days of their creation?
Charges and mortgages against company assets
What is the order of priority for types of security?
Fixed charges take priority in date order of their creation, followed by floating charges also in date order of their creation.
What is a debt security?
A document which evidences that a loan was made to a company, this may be traded and is not secured.
How are profits and gains distributed?
Via dividends to its shareholders. Dividends can only be paid from profits available for this purpose.
How do classes of shares impact profits?
Different classes of shares can have varying rights to dividends for example preference shares have a right to be paid the stated preference before dividends can be paid to common shareholders.
Who decides the amount of profits distributed?
Directors will decide if there are profits available for dividends and will recommend a dividend for approval by the shareholders. This is under an ordinary resolution. Shareholders may approve a smaller dividend than recommended but not a larger one.
When are dividends unlawful?
If paid out of funds other than profits available for the purpose. A shareholder who has reason to know it is unlawful is liable to repay it.
Which companies must prepare accounts?
All companies
Which companies must hire auditors to prepare accounts?
Large companies (annual turnover greater than £10 million and more than 50 employees)
