Share/raising capital Flashcards
what are the issues to consider when raising finance
Companies need assets (factory, chairs,
computer, people)
Directors role – to maximise shareholder
wealth – i.e. the flow of dividends to the
shareholder over a continued period
Investment decisions will have to be made
what is a business angel
Business Angels: When a medium-sized company needs more money but isn’t ready to become a public company, they might turn to business angels. These are wealthy individuals who invest their own money into promising businesses in exchange for a stake in the company.
Venture capital firms
Venture Capital Firms: Another option is to seek funding from venture capital firms like 3I Group plc. These firms pool money from investors like pension funds and banks, and then invest it into high-potential businesses in exchange for ownership stakes
what are redeemable shares
Redeemable Shares: When companies issue shares to raise money, there’s a risk of losing control if too many shares are sold. To avoid this, companies can issue redeemable shares. These shares can be bought back by the company at a later date, allowing them to regain control over their ownership structure if needed. It’s like borrowing money from investors, but with the promise to buy back their shares later on.
Initial start ups - entrpreneur /banks
(A) Initial start ups - entrepreneur /banks
cash from entrepreneur or promoter (mortgage, savings,
redundancy, relatives (dilute control)
bank loans (secured on house, floating charge over the
companies assets)
promoters will obviously get shares in the company
(B) Medium sized - venture capitalists
Company needs more capital but it is not ready to list:
Business angels
Venture Capital Firms (i.e. 3I Group plc) – get money from
pension funds, banks)
Potential loss of control – so – issue REDEEMABLE SHARES.
C. Large - public offering
Company needs large amount of cash –
shares publicly quoted on a stock exchange (LSE, Tokyo,
New York, etc)
Good because: -
possible unlimited amounts of equity available
liquid market – i.e. shareholders can get out quickly
Bad because: -
UK Corporate Governance Code
Disclosure Transparency Rules, etc
Financial press
Costs
Wide ownership – hostile takeover bids
Raising money from the public
The company must choose the way to sell its
shares to the general public:
1. the company offers shares for
subscription/ an offer for sale
2. a placing
3. rights issue
Obligations when listing
the Listing Rules focus specifically on the information
that must be made available to the public by a
company when its shares are being listed
‘Contain all such information as investor sand their
professional advisers would reasonably require, and
reasonably expect to find there for the purpose of
making an informed assessment of: (a) the assets and
liabilities, financial position profits and losses, and
prospects of the issuer of the securities; and (b) the
rights attaching to those securities.’ S.80(1) FSMA 2000
Continuing obligations
publication of half-yearly reports on companies’
activities
information on profits and losses made during
the first six months of each financial year
duty to issue full annual accounts and reports
‘fair business review’
Paradigm for English registered
company
aradigm for English registered
company
(A) London Stock Exchange (LSE)
UK Corporate Governance Code
FSMA 2000; FCA and PRA
Prospectus Rules
Disclosure Rules
Transparency Rules
Listing Rules
first stage
(that
there is a wide safe market
Two markets at the LSE
1) main market (FTSE 100 companies) –
(2) alternative investment market – smaller
companies – less well regulated so higher risk
The legal concept of a share
An interest in the company, made up of rights
shares or other interests in a company are personal
property and are not in the nature of real estate [s
541]
Borland’s Trustee v Steel Bros & Co Ltd [1901]:
the
interest of a shareholder in the company measured
by a sum of money, for the purpose of liability in
the first place, and of interest in the second
Cumbrian Newspapers Group v Cumberland &
Westmorland Herald
Facts: The claimant and the defendant were both publishers of
newspapers. They negotiated a transaction whereby D would
acquire one of C’s papers and C would acquire 10 per cent of D’s
share capital. D issued the 10 per cent share holding and as part of
the agreement under which the shares were issued amended its
articles to give C certain rights including preemption rights over
other ordinary shares. The purpose of such rights was to enable C
as a shareholder to prevent a takeover. Subsequently, a few years
later D called a meeting to pass a special resolution to cancel the
articles which gave special rights to C. C sought a declaration that
the rights were class rights which could not be cancelled without
his consent.
Decision: The declaration was granted. The special rights granted
were rights which could not be varied or cancelled without C’s
consent
Maintenance of Share Capital for
Creditor protection
The principle of capital maintenance is at least as old as the
limited liability company. The law gave the shareholder the
privilege of limiting his liability, so that once he had paid , or
promised to pay on call [in the case of partly paid shares], an
amount equal to the nominal value of the shares he too k up he
had no further responsibility for the debts of the company. In
order to protect members and creditors, however, a body of
rules was erected; such rules were designed to prevent the
capital so provided from being extracted or otherwise eroded,
save as a result of trading or other business events.
Maintenance of Share Capital Rules
no shares at a discount
dividends only out of profits
company must not purchase its own shares
a public company must not give financial
assistance for the purchase of its own shares
a company may not own shares in its holding
company
share capital cannot be reduced
Reduction of capital
The company must be authorised by the articles to reduce
capital
s.641CA 2006 Circumstances in which a company may reduce
its share capital
Two ways of reducing the capital
Court order
Solvency statement, new under CA 2006
Why would you need to reduce the ‘legal capital’?
1. return capital to shareholders if no longer needed
2. issued share capital may not be paid, but the company
already has the money it needs
3. the company has to restore reality to balance sheet
position
Purchase of own shares
Maintaining share capital
Company purchasing its own shares
Section 658 CA 2006 General rule against company acquiring
own shares
(1) A limited company must not acquire its own shares,
whether by purchase, subscription or otherwise, except in
accordance with the provisions of this part.
S. 658 confirms but does not replace the common law rule
Companies cannot purchase their own shares
Trevor v. Whitworth (1887) 12 App Cas 409
When can a company purchase its own
shares
Section 690 ff CA 2006 - provides that a company may
purchase its own shares, subject to any restrictions or
prohibitions in the company’s articles
The CA 2006 provides that cam buy back shares unless their
articles provide otherwise = reversal of the position in the CA
1985, were a special authorization via the articles was required
Must have shares also that are NOT redeemable
Terms of redemption must be set out in the company’s articles
Redeemable shares can be redeemed only out of distributable
profits or out of the proceeds of a fresh issue of shares made
for the purpose
‘the capital redemption reserve’
Dividends
Only paid out of distributable profits
why might a public company not able to pay out dividends
It may not have money left over due to paying debts and expenses or when it wants prioritize future growth and financial stability
