Raising finance – debt or equity Flashcards
What is equity in the context of a company?
Equity refers to ownership interests and raising capital by selling shares.
What happens once a company is formed in terms of share allotment?
Directors agree to allot shares to subscribers and receive payment for them. The nominal or par value becomes the company’s share capital, which cannot be returned to shareholders (SHs).
Can directors allot additional shares?
Yes, if the company has one class of shares and no restrictions in the articles (e.g., MA), directors can allot additional shares. In other situations, permission from SHs by Ordinary Resolution (OR) is required.
What is the general procedure for allotting shares?
Directors determine the price and number of shares and resolve to allot them. Shares are usually issued for cash, but directors may accept property in exchange. The full value of shares must be paid upon allotment.
What happens when shares have a nominal or par value?
The nominal or par value is added to the share capital account.
What is a share premium account?
Any amount received beyond the nominal or par value is recorded in a share premium account.
What is the pre-emption right?
It is the right of existing SHs to be offered additional shares on the same terms as offered in the open market before new shares are sold publicly. SHs have 14 days to accept. Pre-emption rights do not apply to non-cash considerations (e.g., property) and may be disapplied by Special Resolution.
How are share transfer rights governed?
Share transfer rights are governed by the articles of association. Directors have absolute power to refuse or allow a transfer unless limited by special articles. Finance from the transfer goes to the transferor, not the company.
What is debt in terms of company capital raising?
Debt refers to borrowing money to raise capital.
Who has the power to borrow money for the company?
Directors have the power to decide how much money to borrow on behalf of the company, according to the Model Articles (MA).
What is an unsecured loan?
An unsecured loan is a loan based solely on a promise to repay, without any collateral. It is usually more expensive as it is riskier for the lender.
What is a secured loan?
A secured loan is a loan with a promise to repay, along with collateral. The lender can claim the collateral if the loan is not repaid.
What is a mortgage in the context of secured loans?
A mortgage is a secured loan taken over land or property.
What is a fixed charge?
A fixed charge is a loan secured by an asset that the company will hold long-term (e.g., machinery). The company cannot dispose of the asset without the lender’s consent.
What is a floating charge?
A floating charge is a loan secured by a group or class of assets that changes regularly (e.g., inventory or stock). The charge crystallizes in the assets on hand if the company defaults.
