Financing a Business

Question 1

What is equity finance?

Answer 1

A company may issue different classes of shares to raise finance from members (shareholders).

Shares have a nominal (par) value but can be issued for more than nominal value

Share value fluctuates upwards or downwards

Question 2

How are new shares issued?

Answer 2

Shares are issued or allotted to individuals who contract to buy them

Payment can be in cash or non-cash consideration

Question 3

payment process for shares at time of allotment?

Answer 3

Fully paid shares: Full amount paid at allotment

Partly paid shares: Outstanding amount can be requested by the company

Question 4

what happens happens to partly paid shares if the company goes into liquidation?

Answer 4

shareholders must pay the outstanding unpaid amount

Question 5

what are some examples of distributions?

Answer 5

dividends

gifts

transactions at an undervalue

intra-group loans on favourable terms

Question 6

what must a company proposing to make a distribution do?

Answer 6

Have profits available (distributable profits or reserves)

Justify the distribution with relevant accounts

Question 7

What is step 1 for allotment and issuing of shares and disapplying of pre-emption rights for companies?

Answer 7

STEP 1: Check If Any Constitutional Restrictions On Allotment

Check Articles of Association for restrictions.

Note: No restrictions in MAs. If restrictions exist in Articles, amend by Special Resolution.

Question 8

What is step 2 for allotment and issuing of shares and disapplying of pre-emption rights for companies?

Answer 8

STEP 2: Check If Directors Have Authority To Allot Shares

One class of shares: private company does not need shareholder authority. Board Resolution is sufficient.
AND
If restrictions exist in Articles on directors, remove by Special Resolution under s.551, Companies Act 2006.

Multiple classes of shares: Ordinary Resolution is needed.

Question 9

What is step 3 for allotment and issuing of shares and disapplying of pre-emption rights for companies?

Answer 9

STEP 3: Check If Any Pre-Emption Rights Apply

‘Equity securities’ must be first offered proportionally to existing members on favorable terms.

They have a minimum 14-day ‘right of first refusal’.

Question 10

How does a share buyback work?

Answer 10

A company may buy back shares out of:

Profits/fresh issue of shares; or
Capital (if no distributable profits available and conditions met).

Question 11

How does a transfer/transmission of shares occur?

Answer 11

If a shareholder wants to sell their investment , they must ‘transfer’ the shares

Transferee submits a share transfer to the company

Question 12

when does the transferee of a share transfer become a shareholder?

Answer 12

when their name is entered onto the in the register of member.

Question 13

what is share transmission?

Answer 13

the transfer of shares by:

operation of law upon death to: the PRs

OR on bankruptcy to: the trustee in bankruptcy

Question 14

explain debt finance:

Answer 14

where a company borrows money

debt finance may be secured or unsecured on the assets of the company

Question 15

are there limitations on a company borrowing money through debt finance?

Answer 15

company will have the power to borrow money and grant security unless:

limitation exists (i.e a cap)
OR
or articles prohibit this.

Question 16

how can a company amend its articles to remove a prohibition/limitation?

Answer 16

by special resolution

Question 17

what are the main types of borrowing facilities for a company?

Answer 17

overdraft facility

term loan

revolving credit facility

Question 18

types of security?

Answer 18

lien

pledge

fixed/floating charge

mortgage

mortgage over land (equitable or legal)

legal assignment (by way of security)

Question 19

What is the priority of security between charge holders?

Answer 19

if charges are properly registered:

• successive mortgages, fixed charges and floating charges rank in order they were created if registered
• next in line is a floating charge (unless there is negative pledge clause).

Question 20

Process for registration of security?

Answer 20

documents should be delivered to CH within 21 days (starting day after creation of the charge)

• Form MR01
• verified copy of charge document
• applicable fee

Question 21

failure to register a charge means?

Answer 21

renders the charge void against:

liquidator, administrator or company’s other creditors.

Question 22

why should a charge be created?

Answer 22

to protect the order of priority

Question 23

what needs to happen if there is a charge over land?

Answer 23

charging doc should also be sent to HM Land Registry for registration.

Question 24

what are the statutory books companies are required to maintain?

Answer 24

register of members

register of director’s interests

register of charges

Question 25

how long must minutes of directors’ meetings be kept?

Answer 25

10 years

Question 26

how long must a copy of a directors’ service contract be kept?

Answer 26

must be kept for 1 year after expiry of contract.

Question 27

What are the accounting requirements for directors?

Answer 27

prepare balance sheet

prepare profit and loss account

prepare directors’ report for each financial year

file within 9 months of end of accounting reference period

appoint auditors

send auditor’s report to every member of the company