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.
