Maintenance of share capital Flashcards
Why is share capital important to a business?
- It is used to run business activities
- Acts as a form of security for creditors in the event of winding up
The law provides mechanisms for maintaining share capital, what are they?
- A company is not allowed to return its paid-up share capital to its members or reduce their liability.
- Capital repayment can only occur on winding up and after creditors have been paid.
What are the exceptions to reduction in share capital?
- Share capital can be reduced if a company issued redeemable shares.
- Reduction of capital can occur by special resolution, through a provision in the Act (Section 100).
Explain the Moxham v Grant Case?
**Issue: **The directors of a company distributed a portion of its capital among its shareholders. On winding up the liquidator applied for a court order that the directors should repay the money.
Conclusion: It was held that the directors were liable to replace the money and since the shareholders received the funds knowing they were made out of the share capital, the shareholders had to indemnify the directors.
Special Notice Cancels Liability
Reduction of capital can occur by special resolution, through a provision in the Act (Section 100). Discuss section 100?
- Section 100 of the act allows a company through a special resolution to reduce its stated capital to such amount as it thinks fit.
- The company must issue a public notice of the proposed reductions of its stated capital not less than 30 days before the resolution to reduce its stated capital is passed.
- A company which has reduced its stated capital shall within 14 days of the reduction give notice of the reduction to the registrar, specifyinf the amount of the reduction and the reduced amount of its stated capital.
- Where a company alters it’s constitution or acquires shares issued by it or redeems shares and the same results into a cancellation or reduction of shareholders liability the cancellation or reduction of liability is considered as a distribution (dividend).
Discuss the prohibition of financial assistance for the purchase of shares.
Section 124 (1) of the Act prohibits a company from giving financial assistance directly or indirectly for the purpose of or in connection with the acquisition of its own shares.
What is financial assistance in the context of section 124 (1)?
Financial assistance involves a company providing a loan, guarantee or security to an individual who wishes to purchase shares in the company.
It does not include distributions to shareholders.
Section 124 (2)
What must satisy the board in-order for the company to give financial assistance for the purpose of or in connection with the acquisition of its own shares?
- Giving the assistance is in the best interests of the company.
- The terms and conditions on which the assistance is given are fair and reasonable to the company and to any shareholders not receiving that assistance.
- Immediately after giving the assistance, the company shall satisfy the solvency test.
What is the solvency test?
It is a tool used in corporate law to assess whether a company is financially healthy enough to carry out certain actions, such as distributing dividends, redeeming shares, etc.
What is section 109 (1) about?
It talks about companies being prohibited from acquiring their own shares.
Court orders Unanimous Redemption
What are the exceptions under section 109?
A court order instructing the company to purchase or acquire its own shares in accordance with the Act.
Where a unanimous approval of shareholders is passed.
It issues redeemable shares.
What is a dividend?
It is a portion of a companys profits that is legally available for distribution to its members, which is received by each of them in accordance to the constitution of the company.
Identify and explain the types of dividends.
- Interim dividend
* This is a dividend paid between annual general meetings, it is paid by directors.
* It is based on midyear financial accounts, reflecting the companys performance for the first half of the year
* It is usually smaller than the final dividend to manage financial prudence in case profits decline in the second half of the year - Final dividend
* This is a dividend declared after the financial year ends, at the AGM, based on the companys full-year audited accounts.
* It requires approval from shareholders
* It is typically larger, reflecting the companys overall annual performance.
Are dividends always required to be paid in cash? What exceptions might apply, and where are these exceptions typically found?
Yes, unless a provision is made contrary to, in the companys articles of association.
Explain the consequences for a company that pays dividends without satisfying the solvency test.
- Liquidity issues
- Poor operational efficiency
If a company’s articles provide for non-cash dividend payments, can a shareholder demand payment in cash instead?
Yes, a member can enforce a payment in cash.
When does a declared dividend become enforceable as a debt against the company?
When it is lawfully declared by the board.
For a public company, what information must be included in the agenda and notice for a shareholders’ meeting where dividends will be declared?
An item on the declaration of dividends.
Under what circumstances might the distribution of dividends require approval by an ordinary resolution of shareholders?
Subject to the constitution of a company.
What does section 99 talk about?
It provides rules on net asset restriction on distribution.
What is net asset restriction on distribution?
A public company is prohibited from making a distribution if, among other things, the amount of its net assets is less than the aggregate of its called up share capital and undistributable assets.
What is a bonus issue of shares?
This is when a company provides existing shareholders with additional shares for free.
It is also called a capitalisation issue.
What is the Journal Entry for a Bonus issue of shares?
When shares declared
Debit: Reserves
Credit: Bonus Share account
When shares are issues
Debit: Bonus Share account
Credit: Share Capital account
Why would a company declare a bonus issue of shares?
- To improve the stocks liquidity
- To reward shareholders
- To make shares more affordable for investors
Shareholder discounts, what are they?
These are discount schemes offered to members of a company on all or some of the goods and services provided by the comapny.
Who has the authority to issue shaeholder discounts?
The Board of directors
What are the conditions for offering shareholder discounts?
- They must be made available to all or all shareholders of the same class on the same terms
- They must satisfy the solvency test
- where the offering is fair and reasonable to the company and shareholders
