Shares Flashcards
What is capital?
The long-term financing of the company
Long-term sources of external finance / Capital
Share Capital
- funds are raised by selling shares in the company
- the shareholders are the owners of the company
Long-term sources of external finance / Capital
Loan Capital
- funds are raised by obtaining a loan
- lenders are not owners but creditors of the company
What is a share?
-a transferable form of personal property
-carrying rights and obligations
by which the interest of a member of a company limited by shares is measured.
What are share classes (5 types)?
Ordinary (most common type) Preference (most common type) Redeemable Convertible Cumulative
Shares
Constitution of a Company
If the constitution of a company states no differences between shares → it is assumed that they are all ordinary shares
Classes of shares (rights)
Often, different classes of shares have different rights; details of this will be stated in the
- Statement of capital (Part of the registration of companies)
- Articles of Association
Class rights of shares
The details of particular types of shares will be in the company’s constitution (Articles of Association, special resolution).
Classes of shares which have different rights from others are grouped together with other shares carrying identical shares to form a class.
Every share in a particular class will carry the same rights.
Class rights of shares
Special rights
A company may at its option attach special rights to different shares regarding
- dividends
- return of capital on a winding-up
- voting
- right to have shares bought back
- right to convert shares into debentures / debt instruments
Ordinary (equity) Shares
Dividends
The dividends from these shares are not fixed and could vary considerably on the profitability of the business.
The declaration of dividends are made by the directors
Dividends paid on ordinary shares are not cumulative
Dividend paid on ordinary shares are ranked after preference shares (Preference dividends are paid first)
Ordinary (equity) Shares
Dividends (in the event of winding up)
Automatic right to have their capital repaid & to participate in the distribution of profit, when the company is wound up (if the company has surplus assets once the creditors have been satisfied).
Capital repayment is also paid to the preference shareholders first then ordinary.
Ordinary (equity) Shares
Dividends
Ordinary shareholders normally offered the benefit of right issues and bonus issues
Statutory pre-emption rights. If the model articles of association adopted then the existing shareholders are automatically offered statutory pre-emption rights on the allotment of ordinary shares (issuing new ordinary shares). The ordinary shareholders must be offered these new shares first.
Preference Shares
Shareholders have the right to receive a fixed dividend. For example the right to receive a 5% annual dividend.
Receive dividend at the specified rate before any other dividend is paid or declared (to other shareholders eg ordinary)
Cumulative right (unless the contrary is stated)
(e.g 10% preference share (fixed) received dividends of 5% in 20X3, 5% in 20X4, nothing in 20X5 →
would be entitled 30 % (5%+5%+10%+10%) at the end of 20X6)
Until this amount is paid to the preference shareholders then nothing will be paid to the ordinary shareholders.
Preference Shares
In the case of liquidation
On liquidation, the preference shareholders cease to be entitled to any unpaid preference dividends unless
- A dividend has been declared though not yet paid when liquidation commences and
- The articles (or term of issue) expressly provide that in liquidation it is paid in priority to return of capital to members
Preference Shareholders
They are not entitled to participate in any additional dividend over and above their specified rate (unless that is expressly provided)
Preference Shareholders Rights
Right to have their capital repaid on a winding up (unless the articles provide otherwise)
If there is a surplus after repayment of capital, ordinary and preference shareholders will share equally
Preference shares are usually expressed NOT to carry a right to vote; if there is no express provision, they carry the same voting rights as ordinary shares
NO pre-emption rights, unless it is specifically expressed in the company’s articles of association or terms of issue of the shares
Preference Shareholders Priority
Where preference shares are expressed to carry a priority or preferential right to return of capital → the amount paid up on each preference share is to be repaid before anything is repaid to ordinary shareholder
BUT in these circumstances, if there is a surplus after repayment of capital, the preference shareholders will have NO right to share in that surplus
Redeemable Shares
These shares are issued on terms that it can be bought back by the company at the option of the company or the shareholder
Only issued if there are non-redeemable shares
Only redeemed if fully paid up
Redeemable out of
- distributable profits or
- new issue of shares
Redeemable share rules are for the protection of the companies capital.
Financial Ratios
Gearing ratios
This calculates how the company is actually finances it activities in the longer term (eg equity finance or loan/debt finance).
Measures the proportion of debt to share capital and its affect on the shareholders.
Financial Gearing Ratio
High geared
The are predominantly financed by debt.
The higher the gearing ratio the riskier the investment as
- The company may not be able to raise additional funds
- Interest must be paid
Financial Gearing Ratio
Low geared
Rely primarily on equity finance
Share Capital
This relates to the bottom half of the Balance Sheet.
Share Premium, Revelation Reserve, and Retained Earnings are unrealised gains. (on paper) (only realised when assets are sold)
Net Assets
Share Capital
Statement of capital and Initial Shareholding (snapshot of opening capital)
This statement must be provided to the Registrar of companies.
Needs to be up to date as of the statement date.
Share Capital
Statement of capital and Initial Shareholding (snapshot of opening capital)
Details included in statement
Details about the share capital
- total number of shares of the company
- aggregate nominal value of the shares
For each class of shares
- prescribed particulars of any right attached
- total number of shares
- aggregate nominal value of shares in the class
- Amount paid up & amount unpaid
- Subscribers
- In respect of each subscriber: number, nominal value and class of shares taken by them on formation and the amount to be paid up
Share Capital
Paid up Example
Capital - X subscribes for 100 shares at £1 each.
X’s total liability = £100
X has paid up £100 to the company so therefore X has no further liability as the shares are fully paid and fully called up capital.
Share Capital
Unpaid Example
Capital - X subscribes for 100 shares at £1 each.
X’s total liability = £100
Unpaid - X only pays £60
The £60 will be paid up/called up capital
The remaining £40 is uncalled capital. The company can call X to pay the remaining £40 to pay the company’s debts.
The liability of the shareholders is up to the amount they haven’t paid for their shares.
Acquisition of shares
Original Acquisition
This is when shares are newly issued by the company
allotment
&
issue of shares
Acquisition of shares
Derivative Acquisition
Issued shares are acquired from an existing shareholder by another person.
Transfer of shares.
Original Acquisition
Allotment of shares
A share is allotted when the person to whom it is allotted acquires an unconditional right to be entered in the register of members as the holder of the shares.
Once the shares are allotted and the holder is entered in the register of members the holder becomes a member of the company.
Original Acquisition
Issue of shares
This is at a later stage at which the allottee
-receives a letter of allotment
or
-share certificate issued by the company as evidence of his title.
Allotment/Issue of Shares
Directors allotting shares
The share issue is the rights of the directors. So The directors of any company may allot shares on the following basis
1) There must be authority (general or specific; conditional or unconditional) given either
- by the articles or
- ordinary resolution
2) The authority must
- state the maximum number of shares to be allotted
- state the expiry date for the authority (not more than 5 years)
The authority may be given, varied, renewed or removed by an ordinary resolution.
Directors of a private company with only one class of shares may allot shares of that class unless it is prohibited by the AOA
Allotment / Issue of shares“prices”
Nominal Value (face value)
Represents the minimum amount which the members should pay to the company in return for the share
Allotment / Issue of shares“prices”
Market Value
This is the overall value of the shares on the market (stock exchange)
Allotment / Issue of shares“prices”
Issue Price
nominal value + share premium
Where: share premium is an extra amount paid to a company for a share in excess of the nominal value of the share
Could be equal or higher than the nominal value
Allotment / Issue of shares“prices”
Shares at discount Rules
Shares cannot be allotted at a discount to (or for a price which is less than) the nominal value
IF shares are allotted at a discount, the allottee is liable to pay the company an amount equal to the amount of discount + interest
≠ partially paid price (company may leave part of the share price paid later)
the unpaid capital passes with the shares, if they are transferred
Allotment / Issue of shares“prices”
Shares at a premium Rules
Shares may be issued at a premium
The premium on each share (issue price – nominal vale) must be transferred to the share premium account
Share premium account is treated as part of the company’s paid up share capital→ cannot be paid as a dividend
The difference between the issue price and the nominal value is going to be the share premium
Allotment/Issue of shares
Private Company
Simple & immediate
The name of the allottee is usually entered in the register of members soon after the allotment of shares to him → become a member
Allotment/Issue of shares
Public Company
Methods of selling shares to the public
Public offer: members of the public subscribes for shares directly to the company
Offer for sale: an offer to members (existing shareholders!) of the public to apply for shares
Placing: a method of raising share capital where shares are offered in a small number of large “blocks”, to persons or institutions who have previously agreed to purchase the shares at a predetermined price
Allotment/Issue of shares
Rights Issue
Is an allotment of additional shares made to existing members
Usually pro rata to their existing holding in the company’s shares (e.g. 1 for 2) (at a discount to the market price)
If the member do not wish to subscribe for additional shares under a right issue they may be able to sell their rights and so obtain the value of the option
The value of the capital increases
Dr: Cash
Cr: Share Capital (at nominal value)
Cr: Share Premium (issue price – nominal value)
Allotment/Issues of shares
Bonus Issue (CAPITALISATION ISSUE / SCRIP ISSUE)
Is the capitalisation of the reserves (eg share premium, returned earnings) of a company by the issue of additional shares to existing shareholders, in proportion to their holdings
Such shares are normally fully paid-up with no cash called for from the shareholders
NO change in the value of the capital only its STRUCTURE changes
Dr: Share premium / Retained earnings
Cr: Share Capital
Rights of pre-emption
The purpose of this is to protect the rights of the shareholders shares from being diluted.
Whenever a company proposes to allot “equity securities” (usually ordinary shares for cash), it is required
- To offer those shares first to holders of similar shares in proportion to their holdings
- On the same or more favourable terms
Rights of pre-emption
Exceptions and Exclusions
The pre-emption provision do not apply e.g.
- Exceptions (e.g. bonus shares, securities relating to employees’ share scheme (executive share options) )
- Exclusions (a private company may exclude all or any of the provisions in its articles)
Payment for Shares
Shares must be paid up in
- money (e.g. cash, cheque, a release of liability (convertible loans) )
- non-cash consideration (e.g. goodwill, know how)
- (additional rules apply to public companies)
Transfer of shares
Company’s first members → those who sign the memorandum of association. This will express the members interests
BUT … shares are generally freely transferable
subsequent members can acquire shares
- directly form the company
- from existing members
Transfer of shares
Unlisted Shares
The transferor holds the shares as trustee for the transferee until registration
Ones the transferee’s name is entered on the register of members, the transferor ceases to be a member and the transferee acquires all the member’s rights
Transfer of shares
Listed Shares
Securities may be transferred without a written instrument
CREST system (member → custodian broker → customer)
