Shares Flashcards
How can companies raise working capital to grow their business?
A company is owned by its members. The vast majority of companies have a share capital consisting of one or more classes of share. Larger companies often require additional working capital to fund business acquisitions or to grow their business.
This can be funded via BANK FINANCING or OTHER FORMS OF DEBT FINANCING, raising funds through the ISSUE OF ADDITIONAL SHARES remains a popular option.
What 5 interacting bodies make up the regulatory structure for shares?
- The Treasury
- The Bank of England
- The Financial Conduct Authority (FCA)
- The Financial Policy Committee
- Prudential Regulation Authority
In addition to the CA2006, what other legislation and guidance are fully listed companies governed by?
The Financial Services and Markets Act 2000 (FSMA2000) and the List Rules.
Trading on the Stock Exchange is also subject to the Stock Exchange Rules.
What is the differences between PLCs, Listed, Quoted and Traded companies?
Public company (plc)
A company that meets specified requirements as to its minimum share capital and which is registered as a public company. Only public companies can offer shares and debentures to the public.
Listed company
A company whose shares are listed by the Financial Services Authority on the Official List of the UK and admitted for trading on the London Stock Exchange or PLUS Listed markets
Quoted
A publicly traded / held company who lists their securities in stock exchanges or markets to raise funds through the sale of securities in the primary or secondary markets
Traded
Company as above, once listed has been admitted to trading
What is the SMCR (Senior Managers and Certification Regime) and who is this supervised by?
The Senior Managers and Certification Regime “regime” is supervised by the FCA.
The FCA supervises the qualification and experience of those persons charged with running or having crucial roles in financial services firms through a process known as Senior Managers and Certification Regime.
The main feature of this regime is that, subject to certain exceptions, only authorised or exempt persons may carry on a regulated activity (FSMA2000 s.19)
Regulated investment activities are defined in FSMA2000 ss 21, 22 and Sch. 2.
Financial promotion and investment activity includes giving any form of investment
promotion and advice and investment management, as well as undertaking
securities transactions as broker dealer and/or principal within the UK.
What is an authorised firm and who may be authorised to be such?
Authorised Firms
The status of being an authorised or exempt person is conferred on application to the FCA by an individual or firm.
Members of professional bodies such as solicitors and accountants may be authorised by their relevant professional body (FSMA2000 ss. 325 333).
A person carrying on a regulated activity who is not authorised or not exempted is committing an offence (FSMA2000 s. 20).
Agreements made in respect of the regulated activity may be unenforceable by the unauthorised person (FSMA2000 ss. 26, 27 and 28), and they may be restrained by injunction or be made subject to a restitution order.
List the types of capital available to a company
- Authorised - ABOLISHED BY THE ACT for new Co’s! Pool of shares both issued and available to be issues to investors
- Allotted - Allotted when a person acquires the right to be included in the Register of
Members (“ROM”) - Issued - Issued is generally accepted when entered onto ROM
250 shares of £1 each = £250 of Issued share capital - Paid up - 500 shares of 50p in issue = £250 issued capital. If fully paid up = £250, but if only partly paid up to 25p, the paid up capital is £125
- Called up - The amount equal to the aggregate amount of calls made on shares.
£1 shares with 50p payable immediately, further 25p and the final 25p. - Equity - Issued share capital minus any shares that have the right to participate in a dividend or return on capital only up to the specified amount.
THINK AAIPCE
What is the process to increase capital?
- Refers to the nominal capital in the memorandum.
- Increase is possible only if authorised by Articles.
- Increase is necessary when company is issuing further shares.
- Authority needed is ordinary resolution of members in general meeting.
- Copy of resolution must be delivered to Registrar within 15 days.
What is the process for a reduction of capital?
Possible if:
1. Articles permit
2. Special resolution is passed
3. Consent of court is obtained.
The reduction may be for any reason, including:
1.To extinguish or reduce the liability of members for shares not fully paid up
2.To cancel paid up capital no longer represented by available assets
3.To return paid up capital to shareholders in excess of needs of company
In what ways are changes to capital permitted according to s178 of the CA2006?
Companies Act s 178 and 18.
A company may:
1. increase its share capital by allotting new shares;
2. subdivide or consolidate all or any of its share capital;
3. reconvert stock into shares;
4. redeem shares;
5. purchase its own shares;
6. redenominate its share capital;
7. cancel its shares (duty to cancel shares held by or for a public company);
8. reduce its share capital (CA2006 s. 617)
No other alterations are permitted.
What is important to remember when issued new shares?
Issuing new shares:
It is important to ensure that there is SUFFICENT CURRENT AUTHORTY in terms of CA2006 ss. 550 or 551 for the DIRECTORS to approve the issue and that any rights of pre emption , whether as set out in the Act or in the company’s Articles, are observed or waived.
Directors must not exercise the company’s powers to allot shares or grant rights to
subscribe for shares unless authorised by CA2006 ss549, 550 or 551.However, does not apply to:
Allotment of shares or grant of rights to subscribe for shares allotted under an employee share scheme; or
Allotment of shares arising on the conversion of a security into shares (s549)
Directors of a PRIVATE company with only ONE CLASS of shares can exercise the
company’s powers to allot shares or grant rights to subscribe for shares without any
additional member consent, subject to any restrictions in the company’s articles.
(s550)
Once a company has issued shares, there are only limited circumstances under which they can be returned to the company. What are they?
purchase by the company;
redemption;
reduction of capital; and
forfeiture
Authority for allotment - How long does authority for allotment expire?
May be given in general terms or made subject to conditions
Must state the maximum amount of the relevant securities that may be issued; and
Must specify the date on which the authority will expire, which must NOT BE MORE THAN 5 YEARS AFTER THE AUTHORITY WAS GRANTED (private companies with a few members often go for the full 5 years). (s5519)
The Authority can be revoked, varied or renewed by ORDINARY resolution , if the authority
was given by SPECIAL RESOLUTION or contained in the articles. The resolution must state
the aggregate number of shares being allotted and an expiry date within 5 years.
What are pre-emption rights?
The offer of shares to existing shareholders first (CA2006 ss 561 573)
The Act provides that, unless disapplied in whole or in part by the Articles, whenever new shares are to be allotted, they must be offered first to existing shareholders in proportion to their existing holdings (s561)
Communication of the offer - members must be given not less than 14 days to accept.
Record date to determine members entitlement under the offer must not be more than 28 days before the date of the offer
Can pre-emption rights be excluded?
Yes - Many companies EXCLUDE pre-emption rights by the Articles or are waived by special resolution of the members either annually at AGM or on an ad hoc basis.
Listed companies will routinely seek a waiver of the pre emption provisions from members at each AGM for small issues of new shares.
Any pre emption rights contained in a company’s Articles take precedence over
the statutory pre emption rights.
What is the guidance around disapplication of pre-emption rights for Private, public and listed companies?
Private companies may disapply preemption rights permanently by Articles.
Public and private companies may disapply preemption rights for a specific allotment subject to special resolution, and directors make statement giving reasons for recommendations
Listed companies sometimes disapplication of pre emption rights included as routine business of AGM.
Pre Emption Group guidelines recommend:
General authority is restricted to an additional 5% of issued share capital
Authority for a further 5% may be sought provided it is only used in connection with an acquisition or specified capital investment; and
Authority lapses at the earlier of the next AGM or 15 months after the date ofthe resolution
Any rolling 3 year period use of preemption waivers should be restricted to 7.5% of the issued capital excluding any specific waivers or use of an additional 5% waiver for an acquisition or capital investment.
What is the process for the allotment of shares?
BEFORE ALLOTMENT DIRECTORS MUST ENSURE THEY HAVE SUFFICIENT AUTHORITY TO ALLOT AND THAT ANY PRE EMPTION RIGHTS ARE NOT INFRINGED
Application form (care taken as not to suggest invitation to the public to subscribe)
Board resolution to allot shares and authorise issue of share certificates
Directors meeting
Smaller companies (e.g. where shareholders and directors are the same can arrange allotment on a single day: board meeting to consider, adjourn board meeting to hold (short notice) general meeting, pass resolutions, reconvene board meeting.
Listed companies
Required to send shareholders an explanation with resolution to grant directors authority to allot shares
often pass special resolution as part of routine AGM business to disapply pre emption rights up to specified limit
(1) Complete applications for official list and London Stock Exchange
(2) Provide explanatory letter with reasons for issue
(3) Pass board resolution confirming share allotment
(4) Letter to London Stock Exchange confirming not offered to public
(5) Prepare Stock Exchange announcement
Issue share certificates and letters of allotment, update Register of Members, file with Registrar within 1 month of allotment , and register within 2 months
What provisions are listed in the CA2006 around share issue pricing?
There are no provisions regarding the price at which shares should be issued other than a
general rule that shares cannot be issued below their nominal value (CA2006 s.580)
Contravention of this rule is the issue of bonus shares where no payment is required
from the members with shares being issued ‘for free’. These shares are issued as fully
paid with the amount due being paid out of the company’s distributable reserves rather
than by the injection of new funds by members.
What are the two ways in which shares can be paid for?
Two ways shares paid for:
in money or money’s worth, including goodwill and know how (CA2006 s. 582(1));
by way of capitalisation of the company’s existing reserves (CA2006 s.582(2)).
Payment in money (cash) is defined in CA2006 s. 583 and means:
cash received by the company;
a cheque received by the company in good faith that the directors have no reason for suspecting will not be paid;
a release of a liability of the company for a liquidated sum;
an undertaking to pay cash to the company at a future date; or
payment by any other means giving rise to a present or future entitlement (of the company or a person acting on the company’s behalf) to a payment, or credit equivalent to payment, in cash.
Can shares be issued at a discounted price?
No - The allotment of shares at a discount, or in exchange for an undertaking to perform
work or services is prohibited (CA2006 ss. 580, 552, 553 and 585)
Subsequent holders of shares may incur liability if any of the provisions relating to the
payment for shares are contravened (CA2006 s. 588).
Model Articles Ltd regulation 21 does not permit the company to issue nil or partly paid
shares (other than bonus shares)
What guidance exists around the issuing of shares for non cash consideration in public and private companies?
Public companies are prohibited from allotting shares for payment other than for cash, unless the consideration has been valued by an appointed valuer within the six months prior to the
allotment. There are 3 exceptions to this rule (allotment of shares made in a takeover, allotment of shares made in a merger, shares alloted under a capitalisation)
Private limited companies do not need to have non cash consideration independently
valued. Directors can apply their own valuation, if this is acceptable to
the allottee.
In a public company, what rules exist around the valuation of shares for non - cash consideration?
Valuation report must be made by independent person , who is qualified to be an auditor of the company (or other person with required knowledge or experience).
Person must be independent and not an officer or servant of the company.
Report must state :
1. nominal value of shares in question
2) amount of any premium payable
3) consideration that has been valued and method used
4) amount of nominal value and premium treated as paid up for non cash consideration
MUST
send copy of report to Companies House with SH01
Usual to draw up formal contract
Can a public company provide financial assistance for the purchase of its own shares?
No - A public company must not provide financial assistance for the purchase of its own shares or the shares of its holding company, public or private, whether at the same time as the acquisition of the shares or before.
Can a private company provide financial assistance for the purchase of its own shares?
Yes - there are no such restrictions for the purchase of its own shares by a
private company except that a private company may not provide financial assistance for the acquisition of shares in its holding company if that company is a public company (CA2006 678).
What would be considered as financial assistance?
- Financial assistance by way of GIFT;
- Financial assistance given by way of GUARANTEE, SECURITY or INDEMNITY, other than an indemnity in respect of the indemnifier’s own neglect or default, or by way of waiver or release;
3.Financial assistance by way of LOAN OR OTHER AGREEMENT under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party remains unfulfilled or by way of novation of or
assignment of rights arising under such loan or agreement; or - ANY OTHER FINANCIAL ASSISTANCE given by a company, the net assets of which are thereby reduced by a material extent or which has no net assets.
The following transactions are excluded from the general prohibition (CA2006 s. 681):
- distribution of assets by way of dividend;
- distribution on a winding up;
- allotment of bonus shares;
- redemption or repurchase by a company of its shares.
When is financial assistance for a public company permitted?
Financial assistance by or for a public company is permitted by CA2006 s. 682 if the following conditions are met:
- if being provided that the COMPANY’s NET ASSETS NOT REDUCED or to the extent that the assistance is provided out of distributable profit;
- the LENDING OF MONEY IS PART OF THE COMPANY’S ORDINARY BUSINESS and the loan is made in the ordinary course of business;
- the loan is given in good faith in the interests of the company or its holding company for the purposes of AN EMPLOYEE SHARE SCHEME;
- where the LOAN IS MADE TO THE EMPLOYEES, but NOT A DIRECTOR, in good faith for the purpose of acquiring shares in the company or its holding company.
The above is only available to a public company if its net assets are not
reduced or, if they are reduced, that the payment is made out of
distributable profit.
