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Shares Flashcards

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1
Q

What is meant by the term ‘capital’?

A

Refers to funds available to run the business of a company

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2
Q

What is meant by share capital?

A

Refers to money raised by the issue of shares

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3
Q

What is a share?

A

A bundle of rights

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4
Q

Why would someone buy shares in a company?

A
  • for receipt of income
  • for capital gain when they come to sell their shares
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5
Q

What is nominal value for shares?

A

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

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6
Q

Must shares have a nominal value?

A

Yes for a company limited by share capital.

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7
Q

What happens if shares that do not have a nominal value are allowed?

A

The allotment is void

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8
Q

Can shares be issued/allotted for less than their nominal value?

A

No

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9
Q

Can shares be issued/allotted for more than their nominal value?

A

Yes - excess over the nominal value is known as premium.

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10
Q

What is meant by issued share capital?

A

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
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11
Q

What is meant be allotment?

A

Where shares are allotted to new shareholders

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12
Q

When does full legal title to shares pass?

A

When a person’s name is entered in the company’s register of members

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13
Q

Do shareholders have to pay the full amount for their shares immediately?

A

No.

Any amount paid is known as ‘paid-up’ share capital

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14
Q

What are treasury shares?

A

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.

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15
Q

How do you determine what rights attach to a class of shares?

A

No legal definition of any share other than ordinary.

Label attached are not determinative.

Need to look at the articles

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16
Q

What are ordinary shares?

A

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.

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17
Q

What rights normally attach to ordinary shares?

A
  • 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
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18
Q

What is a preference share?

A

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

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19
Q

What are cumulative preference shares?

A

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

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20
Q

What are participating preference shares?

A

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
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21
Q

What are deferred shares?

A
  • No voting rights
  • No right to ordinary dividend
  • Sometimes entitled to share of surplus profits after dividends have been paid
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22
Q

What are redeemable shares?

A

Shares which are issued with the intention that the company will, or may buy them back and cancel them, usually on specified terms

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23
Q

What are convertible shares?

A

Will usually carry option to ‘convert’ into a different class of share according to stipulated criteria

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24
Q

How are variations made to class rights?

A
  • 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
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25
Q

What rights do shareholders have to challenge a decision where their rights have been varied?

A

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

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26
Q

What are dividends paid out of?

A

Distributable profits

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27
Q

What are distributable profits?

A

Means the company’s accumulated realised profits less its accumulated realised losses

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28
Q

What is a final dividend?

A

Final dividends are recommended by the directors and declared by the company by an ordinary resolution of the shareholders following the financial year end

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29
Q

What is an interim dividend?

A

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

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30
Q

What is the difference between allotting and transferring shares?

A

Allotment process whereby company issues new shares.

Transfers is where existing shares are exchanged.

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31
Q

What restrictions are there on private companies when it comes to allotting shares?

A

A private company cannot offer its shares to the public

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32
Q

What is meant by offer to the public?

A

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
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33
Q

What must a prospectus detail if one is required under FSMA?

A

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

34
Q

What is a transmission of shares?

A

It is an automatic process whereby shares are transferred

35
Q

What events will trigger transmission of shares?

A
  • death of shareholder - shares transferred to PRs
  • bankruptcy of shareholder - shares automatically vest in their trustee in bankruptcy
36
Q

Are shareholders free to transfer their shares?

A

Yes - by sale or gift - subject to any restrictions in the articles

37
Q

What restrictions are there on transfer?

A
  • directors’ can refuse to register
  • pre-emption clauses
38
Q

What must directors do if they refuse to register a proposed shareholder?

A
  • they must return instrument of transfer to transferee with notice of refusal (unless fraudulent transaction)
  • must give reasons why they refused to register transfer
39
Q

How do pre-emption impose a restriction on transfer?

A

Articles may specifically contain pre-emption rights

Will often require shareholder who is selling to offer shares to existing shareholders before selling to outsider

40
Q

What is the method of transfer for transferring shares?

A

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

41
Q

When will equitable ownership pass when transferring a share?

A

When the stock transfer form is executed

42
Q

When does legal title transfer?

A

On registration of the member as the owner of those shares in the register of members by the company

43
Q

When will stamp duty need to be paid and at what level?

A

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%.

44
Q

Will the procedure for allotting shares differ if the company was incorporated under the 2006 or 1985 Act?

A

Yes - differences between the two statutory regimes

45
Q

Step one for allotting new shares is to check any cap on the number of shares that may be issued. How is that done?

A
  • 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
46
Q

If there is a cap on the number of shares that may be issued, how can it be removed?

A
  • 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
47
Q

Who is responsible for the actual allotment of shares?

A

Directors

48
Q

How will directors resolve to allot the shares?

A

Board resolution

49
Q

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?

A

No - they will have automatic authority to allot new shares of the same class

Provided there is nothing in the articles to the contrary

50
Q

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?

A

Directors need authority by way of an ordinary resolution or authority under the company’s articles.

51
Q

Are there limits on the authority that can be given to directors for the granting of new shares? If so, what are they

A

Yes, must be limited in terms of time and number of shares to be allotted. No authority can last more than 5 years.

52
Q

In allotting new shares, need to check that no pre-emption rights apply. How can these pre-emption rights be disapplied?

A

By special resolution of existing shareholders

53
Q

What shares are pre-emption rights relevant for?

A

Equity securities

54
Q

What are equity securities?

A

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

55
Q

How may pre-emption rights be disapplied?

A

Approval via special resolution of shareholders.

Private companies can permanently get rid of pre-emption rights by amending the articles.

56
Q

What must be done if the new shares are to be new class?

A

Company will need to amend its articles to make provision for the rights of the new class of shares

Will require special resolution

57
Q

What must the directors finally do to allot shares?

A

They must pass a board resolution to allot the new shares

58
Q

When will a GM not be needed in advance of a board meeting to allot new shares?

A
  • 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
59
Q

When is financial assistance relevant?

A
  • relevant when there is an acquisition (or proposed acquisition) of shares
  • issue of new shares
60
Q

What companies are prohibited from giving financial assistance?

A
  • 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)
61
Q

What qualifies as financial assistance?

A

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
62
Q

Does financial assistance have to be direct?

A

Not necessarily - can be direct or indirect

63
Q

Does financial assistance have to be before the acquisition to be caught?

A

Not necessarily - can be given before or at the same time or after as the acquisition to be caught

64
Q

What is the purpose exception to the financial assistance rule?

A

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

65
Q

What is an example of an unconditional exception to the financial assistance rules?

A

If financial assistance was as a result of a dividend

66
Q

What conditional exceptions are there to the financial assistance rules?

A
  • 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
67
Q

What are the consequences of carrying out prohibited financial assistance?

A
  • company - fined
  • officers of a company - fine/imprisonment
  • transaction amounting to financial assistance would be void
  • acquisition of shares may also be void
68
Q

What is the doctrine of maintenance of share capital?

A

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.

69
Q

Generally companies are not allowed to purchase their own shares. What exceptions are there to this rule?

A
  • 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
70
Q

When does a buyback of shares take place?

A

When a company buys back its own shares from an existing shareholder

71
Q

What approval will a company need to buy back its own shares?

A

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

72
Q

What are the three possible funding ways that a company can use to fund a buyback of shares?

A
  • 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)
73
Q

What conditions must be met for a company to buyback shares out of profits/proceeds of a fresh issue?

A
  • 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
74
Q

What additional conditions must be met for a company to buyback shares out of capital?

A
  • 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
75
Q

What requirements are there for the directors’ statement of solvency for buyback of shares out of capital?

A
  • 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)
76
Q

What consequences are there for the directors if their statement of solvency in relation to a buyback is not accurate?

A

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

77
Q

What must the auditor’s report contain for buyback of shares out of capital?

A

It must confirm the auditors are not aware of anything to indicate the directors opinion in their statement of solvency is not reasonable

78
Q

What steps must be taken after the special resolution has been passed for buyback of shares out of capital with regards to notifications?

A

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
79
Q

What timing requirements are there with regards to buyback of shares out of capital after special resolution has passed?

A

Buyback must take place no earlier than five weeks and no later than seven weeks after date of special resolution

Period cannot be reduced

80
Q

What must a company do after shares have been bought back?

A

Within 28 days of buyback, company must send return to Companies House and notice of cancellation and statement of capital

81
Q

What procedure is there for a company to redeem redeemable shares?

A

Procedure will be set out in the articles

82
Q

Is a contract required for redeeming redeemable shares?

A

No - all terms should be set out in the articles so not additional contract required

Business Law and Practice (22 decks)

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