Financing a business Flashcards
What can dividends be paid out of?
Cannot be paid out of capital, only distributable profits.
When can a company buy back its own shares?
- articles must not forbit buyback
- shares must be fully paid
- shares must be paid out of distributable profits of proceeds of fresh issue of shares made for purpose of financing purchase.
- Shareholders must pass ordinary resolution.
- Copy of buyback contract must be available for inspection at least 15 days before general meeting
- copy of buyback contract or written memorandum setting out its terms must be available for inspection at company’s written office.
When can a buyback out of capital be made?
o Directors must make statement of solvency no sooner than one week before general meeting and that it will remain solvent for year after buyback - risky for directors can face criminal sanctions for statement w/o reasonable grounds
o Statement of solvency must annex auditors report
o Must be approved by special resolution under s716 in addition to ordinary resolution under s694. WR not eligible. If general meeting and shareholder makes the difference their vote won’t count
o Statement of solvency and auditors report must be made available to members
o Within 7 days of resolution being passed - notice in London Gazette that it is approved. Must specify amount of capital to be used, date of SR and where reports available for inspection
o Must also state in notice in Gazette than creditors can apply for order preventing buyback out of capital within 5 weeks of resolution being passed
o Also publish notice in national newspaper or give notice to each creditor.
o File statement and report at companies house before or at same time as placing notice in London Gazette and paper
o Reports kept for inspection
o So long as no creditors object directors hold board meeting and pass board resolution to decide to enter into contract to buy back shares.
o Payment out of capital no earlier than 5 weeks than resolution.
What considerations should be made by a company prior to borrowing money?
- Must check permitted under articles
- MAs - no restrictions on borrowing
- Formed before 1 October 2009 and not updated articles need to check memorandum.
- If there are restrictions on borrowing then need to pass special resolution to change articles
- Directors must have authority to act - MA comes from MA2 - bespoke must check
- Partnership - check no restrictions in partnership agreement
What is a mortgage? - Equity debt
- Lender takes mortgage over high quality assets
- Mortgage with exception of land involves transfer of legal ownership to mortgagee
- Gives lender right to immediate possession this is held in reserve
- Title transferred back to borrower when money been repaid
- Separate mortgage over each assert
- Mortgage taken over land charged by deed expressed to be a legal mortgage - includes right to take possession of land and sell it.
What is a fixed charge?
- Separate charge for each asset
- Lender has control - borrower cannot dispose of asset without permission
- If chargor in difficulty fixed charge holder will have right to sell the asset and be paid out before unsecured creditors
- Can create more than one fixed charge of same asset - first creditor can sell first and take proceeds
Second pays itself out of the rest.
Can a director get a loan?
A company may not either
- make a loan to a director of the company or if its holding company, or
- give a guarantee or provide security in connection with a loan made by any person to such a director
UNLESS
the members approve the transaction
or if a holding company, the transaction must also be approved by a resolution of the members of the holding company
approval is not required if the loan does not exceed £10k
when is shareholder approval not required?
- a company is not registered in the UK or is a wholly owned subsidiary
- the funds are to be used to meet expenditure incurred on behalf of the company - must not exceed £50k
- the expenditure relates to the cost of defending civil or criminal legal proceedings in respect of negligence, default or breach of duty
- the expenditure relates to cost of defence in relation to investigation or action by regulatory authority
What is a quasi-loan?
Where a creditor pays or agrees to pay other than under an agreement for the borrower
on terms where the borrower or someone on their behalf repays the creditor or where an obligation repay arises
What is a credit transaction?
This arises where a loan commitment has been made for payment of goods, services or properties (sold or leased) to be made at a later date
Shares (and the rights attaching to them) can broadly be categorised into six groups:
· ordinary shares;
· preference shares;
· participating preference shares;
· deferred shares;
· redeemable shares; and
· convertible shares.
An allotment of shares is:
a contract between the company and a new/existing shareholder under which the company agrees to issue new sharesin return for the purchaser paying the subscription price.
(Shares) A transfer is a..
contract to sell existing shares in the company between an existing shareholder and the purchaser.The company is not a party to the contract on a transfer of shares (with the exception of a sale out of treasury of treasury shares).
Transmission of shares is an automatic process in the event of death or bankruptcy of a shareholder as follows:
If a shareholder dies, their shares will automatically pass to their personal representatives.
· If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy
procedure for issuing shares - how to work it out
· Step 1 – check whether there is a cap on the amount of shares that can be issued by the company.
· Step 2 – check whether company directors need authority to allot the shares.
· Step 3 – are the shares equity securities? You will be able to work this out by looking at the dividend and capital payout on the shares. If both are capped, the share is not an equity security and therefore pre-emption rights are not relevant. If the shares are equity securities, consider whether the company needs to disapply pre-emption rights.
· Step 4 – is the company creating a new class of share? If so, the Articles will need to be amended to incorporate the new class rights.
· Step 5 – Board will resolve to allot the shares. This step will always be required, regardless of the other steps.
