Shares Flashcards
What is meant by the term ‘capital’?
Refers to funds available to run the business of a company
What is meant by share capital?
Refers to money raised by the issue of shares
What is a share?
A bundle of rights
Why would someone buy shares in a company?
- for receipt of income
- for capital gain when they come to sell their shares
What is nominal value for shares?
Nominal value is the minimum subscription price for that share.
Nominal value represents a unit of ownership rather than the actual value of the shares
Must shares have a nominal value?
Yes for a company limited by share capital.
What happens if shares that do not have a nominal value are allowed?
The allotment is void
Can shares be issued/allotted for less than their nominal value?
No
Can shares be issued/allotted for more than their nominal value?
Yes - excess over the nominal value is known as premium.
What is meant by issued share capital?
Refers to the amount of shares in issue at any one time. It is made up of:
- shares purchased by first members of the company (subscriber shares)
- further shares issued after the company has been incorporated
What is meant be allotment?
Where shares are allotted to new shareholders
When does full legal title to shares pass?
When a person’s name is entered in the company’s register of members
Do shareholders have to pay the full amount for their shares immediately?
No.
Any amount paid is known as ‘paid-up’ share capital
What are treasury shares?
Treasury shares are shares that have brought back by the company out of distributable profits and are held by the company ‘in treasury’. The company holds them in their own name and can sell them on, cancel them or transfer them.
How do you determine what rights attach to a class of shares?
No legal definition of any share other than ordinary.
Label attached are not determinative.
Need to look at the articles
What are ordinary shares?
Shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in distribution’
If a company’s share are issued without differentiation they will all be ordinary shares.
What rights normally attach to ordinary shares?
- right to vote in GM
- right to dividend (if one declared)
- right to portion of any surplus assets of the company on a winding-up
What is a preference share?
Share will give holder a preference as to payment of dividend or return of capital on winding up of company
Payment will therefore rank higher in priority than any equivalent payment to ordinary shareholders and will be paid before ordinary shareholders
What are cumulative preference shares?
If dividend is not declared for particular year, the right to the preferred amount on the share is carried forward and will be paid together with any other dividends due, when there are available profits
What are participating preference shares?
Allows holders to participate alongside ordinary shares in:
- surplus profits available for distribution after they have received their own fixed preferred dividend and/or
- surplus assets of the company on winding up
What are deferred shares?
- No voting rights
- No right to ordinary dividend
- Sometimes entitled to share of surplus profits after dividends have been paid
What are redeemable shares?
Shares which are issued with the intention that the company will, or may buy them back and cancel them, usually on specified terms
What are convertible shares?
Will usually carry option to ‘convert’ into a different class of share according to stipulated criteria
How are variations made to class rights?
- first check with articles to see what rights attach to what shares
- if articles contain no special procedure, the rights may be varied by special resolution at GM or where at least 75% of members give consent in writing
What rights do shareholders have to challenge a decision where their rights have been varied?
If they hold 15% of the relevant shares, they can apply to court within 21 days of resolution to have variation cancelled.
Variation will not take effect unless confirmed by the court
Court will not confirm the variation if it feels variation unfairly prejudices the shareholders of the class in question
What are dividends paid out of?
Distributable profits
What are distributable profits?
Means the company’s accumulated realised profits less its accumulated realised losses
What is a final dividend?
Final dividends are recommended by the directors and declared by the company by an ordinary resolution of the shareholders following the financial year end
What is an interim dividend?
Interim dividends can be paid where company has sufficient distributable profits and without need for ordinary resolution. Often paid where company has realised an investment
What is the difference between allotting and transferring shares?
Allotment process whereby company issues new shares.
Transfers is where existing shares are exchanged.
What restrictions are there on private companies when it comes to allotting shares?
A private company cannot offer its shares to the public
What is meant by offer to the public?
Any offer to any section of the public excluding offers which are intended only for the person receiving them and offers which are a private concern of the persons making and receiving them
Offers can be made to
- existing shareholders
- employees
- certain family members
What must a prospectus detail if one is required under FSMA?
Should detail all information necessary to enable investors to make an informed assessment of the financial status of a company and rights attaching to the shares
What is a transmission of shares?
It is an automatic process whereby shares are transferred
What events will trigger transmission of shares?
- death of shareholder - shares transferred to PRs
- bankruptcy of shareholder - shares automatically vest in their trustee in bankruptcy
Are shareholders free to transfer their shares?
Yes - by sale or gift - subject to any restrictions in the articles
What restrictions are there on transfer?
- directors’ can refuse to register
- pre-emption clauses
What must directors do if they refuse to register a proposed shareholder?
- they must return instrument of transfer to transferee with notice of refusal (unless fraudulent transaction)
- must give reasons why they refused to register transfer
How do pre-emption impose a restriction on transfer?
Articles may specifically contain pre-emption rights
Will often require shareholder who is selling to offer shares to existing shareholders before selling to outsider
What is the method of transfer for transferring shares?
A stock transfer form which must be signed by the transferor and submitted with the share certificate to the new shareholder.
New shareholder will need to be registered in register of members by the company.
Company will need to send the shareholder a new share certificate in their name within two months
When will equitable ownership pass when transferring a share?
When the stock transfer form is executed
When does legal title transfer?
On registration of the member as the owner of those shares in the register of members by the company
When will stamp duty need to be paid and at what level?
Stamp duty on the stock transfer form will only need to be paid where consideration is more than £1,000.
Current level is 0.5%.
Will the procedure for allotting shares differ if the company was incorporated under the 2006 or 1985 Act?
Yes - differences between the two statutory regimes
Step one for allotting new shares is to check any cap on the number of shares that may be issued. How is that done?
- first check the articles for any cap or limit on the number of shares that may be issued
- all companies under the 1985 act had a cap and will continue too have one unless modified by the articles
- companies under the 2006 act will not have one unless one has been inserted into the articles
If there is a cap on the number of shares that may be issued, how can it be removed?
- companies under the 1985 act - may remove cap by ordinary resolution or adopt new articles altogether
- if company under 2006 act has provision in articles for a cap, then special resolution required to amend articles
Who is responsible for the actual allotment of shares?
Directors
How will directors resolve to allot the shares?
Board resolution
If the company allotting shares is a private company with only one class of share, will the directors need shareholder approval to allot the shares?
No - they will have automatic authority to allot new shares of the same class
Provided there is nothing in the articles to the contrary
In all other instances (ie company allotting shares is not a private company with only one class of share issuing more shares of that same class) what approval do the directors need?
Directors need authority by way of an ordinary resolution or authority under the company’s articles.
Are there limits on the authority that can be given to directors for the granting of new shares? If so, what are they
Yes, must be limited in terms of time and number of shares to be allotted. No authority can last more than 5 years.
In allotting new shares, need to check that no pre-emption rights apply. How can these pre-emption rights be disapplied?
By special resolution of existing shareholders
What shares are pre-emption rights relevant for?
Equity securities
What are equity securities?
They are ordinary shares or rights to subscribe for or convert securities into ordinary shares.
So any share that is capped as to dividend AND is capped as to capital will not be an equity share
How may pre-emption rights be disapplied?
Approval via special resolution of shareholders.
Private companies can permanently get rid of pre-emption rights by amending the articles.
What must be done if the new shares are to be new class?
Company will need to amend its articles to make provision for the rights of the new class of shares
Will require special resolution
What must the directors finally do to allot shares?
They must pass a board resolution to allot the new shares
When will a GM not be needed in advance of a board meeting to allot new shares?
- where a company has no limits in its constitution on the number of shares which can be issued by the company
AND
- company does not require director’s to be authorised because the company is a private company with only one class of shares and there is no restriction in the company’s articles - s 550 CA 2006 - or the directors already have authority to allot the shares
AND
- the company is issuing shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 or has already diss applied s 561 or is a private company and has taken advantage of s 567 CA 2006
AND
- has the relevant class rights in its articles
When is financial assistance relevant?
- relevant when there is an acquisition (or proposed acquisition) of shares
- issue of new shares
What companies are prohibited from giving financial assistance?
- if target company is a public company then target company and any subsidiaries of that company are prohibited
- if a target company is a private company, then only any public company subsidiary is prohibited (so not even the target company itself)
What qualifies as financial assistance?
Very broad definition under CA 2006 includes:
- gifts
- guarantees, securities or indemnities, releases or waivers
- loans or similar agreements
- any other financial assistance whereby the net assets of the company are reduced to a material extent by giving at the financial assistance or the company has no net assets
Does financial assistance have to be direct?
Not necessarily - can be direct or indirect
Does financial assistance have to be before the acquisition to be caught?
Not necessarily - can be given before or at the same time or after as the acquisition to be caught
What is the purpose exception to the financial assistance rule?
Giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose is only an incidental part of some larger purpose
What is an example of an unconditional exception to the financial assistance rules?
If financial assistance was as a result of a dividend
What conditional exceptions are there to the financial assistance rules?
- money lending in the ordinary course of business
- assistance in respect of employee
AND
Satisfy conditions:
- company giving assistance is a private company OR
- company giving the assistance is a public company and the net assets of that company are not reduced by giving of the assistance or the extent that they are reduced the assistance is provided out of distributable profits
What are the consequences of carrying out prohibited financial assistance?
- company - fined
- officers of a company - fine/imprisonment
- transaction amounting to financial assistance would be void
- acquisition of shares may also be void
What is the doctrine of maintenance of share capital?
Share capital of company is not be kept separate, whilst it can be used to carry out business of the company it cannot be used to release sums to shareholders. The sums should be a permanent fund available to creditors in case of winding up.
Generally companies are not allowed to purchase their own shares. What exceptions are there to this rule?
- a company may buyback its own shares (or redeem its own redeemable shares) provided it follows certain rules
- a company may purchase its own shares where a court order is made for this following a successful shareholder petition for unfair prejudice
When does a buyback of shares take place?
When a company buys back its own shares from an existing shareholder
What approval will a company need to buy back its own shares?
OR from shareholders for contract to buyback shares
Contract must be available for inspection at company’s registered office for a period of 15 days before the GM and also at GM or copy sent with any written resolution
What are the three possible funding ways that a company can use to fund a buyback of shares?
- distributable profits
- proceeds of a fresh issue shares made for the purpose of financing a buyback
- capital (only if private company, only if all distributable profits and proceeds of fresh issue have been used up)
What conditions must be met for a company to buyback shares out of profits/proceeds of a fresh issue?
- Must not be any restrictions in articles
- shares being purchased by company are fully paid up
- company must continue to have issued shares other than redeemable and treasury shares
What additional conditions must be met for a company to buyback shares out of capital?
- not restrictions in articles
- accounts cannot have been prepared three months before directors’ statement
- profits and proceeds of fresh share issue must be used up first
- directors statement of solvency must be prepared with auditors’ report
- special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency
What requirements are there for the directors’ statement of solvency for buyback of shares out of capital?
- it must be made no earlier than one week before GM
- statement must confirm company is solvent and able to pay its debts as they fall due and that company will remain solvent for 12 months after buyback
- a copy of both must be available to members (either at GM or sent with written resolution)
What consequences are there for the directors if their statement of solvency in relation to a buyback is not accurate?
If not accurate and they had no reasonable grounds for making statement of solvency, then can be made to contribute to assets of company and may face criminal sanctions
What must the auditor’s report contain for buyback of shares out of capital?
It must confirm the auditors are not aware of anything to indicate the directors opinion in their statement of solvency is not reasonable
What steps must be taken after the special resolution has been passed for buyback of shares out of capital with regards to notifications?
Within seven days of passing special resolution for approving payment out of capital, company must give notice to its creditors by:
- publishing notice in Gazette stating (i) company has approved payment out of capital for purpose of purchasing its own shares (ii) where the directors’ statement and auditor’s report are available for inspection and (iii) a creditor within five weeks of resolution may apply to court for order preventing the payment
- publishing notice in same form as Gazetter notice in appropriate national newspaper or writing to each of its creditors
- filing copies of the directors’ statement and auditor’s report at Companies House for inspection by creditors
What timing requirements are there with regards to buyback of shares out of capital after special resolution has passed?
Buyback must take place no earlier than five weeks and no later than seven weeks after date of special resolution
Period cannot be reduced
What must a company do after shares have been bought back?
Within 28 days of buyback, company must send return to Companies House and notice of cancellation and statement of capital
What procedure is there for a company to redeem redeemable shares?
Procedure will be set out in the articles
Is a contract required for redeeming redeemable shares?
No - all terms should be set out in the articles so not additional contract required
