Shares

Question 1

What are the rules about nominal/par value?

Answer 1

Shares in a limited company having a share capital must have a fixed nominal value. s525(2) CA 2006 provides that any allotment of. share that does not have a fixed nominal value is void.

Nominal/par value of a share is the minimum subscription price for that share. Represents a unit of ownership rather than the actual value of the share.

Question 2

Can a share be allotted at a premium?

Answer 2

Yes but not a discount

Question 3

What are issued shares?

Answer 3

Amount of shares in issue at any time is known as the issued share capital.

ISC is made up of subscriber shares - purchased by the first members of the company, and further shares issued after incorporation.

Question 4

What are allotted shares?

Answer 4

Shares are said to be allotted when a person acquires the unconditional right to be included in the company’s register of members in respect of those shares.

Question 5

Called-up/Paid-up shares

Answer 5

Amount of nominal capital paid is known as the paid-up share capital. Amount outstanding can be demanded by the company at any time. Once demanded, payment has been called.

Question 6

What are treasury shares?

Answer 6

Shares that have been bought back by the company itself out of distributable profits and are held bu the company in ‘treasury’.

Question 7

What are the main classes of shares?

Answer 7

Ordinary, preference, redeemable, non-voting, employees, cumulative, convertible, deferred.

Question 8

What are ordinary shares?

Answer 8

Default position under MA - carry a right to vote in GMs, right to dividend if declared, right to a portion of any surplus assets of the company on a winding up. Company may have more than one class of ordinary share with differing rights and perhaps differing nominal values.

Question 9

What are preference shares?

Answer 9

May give the holder a preference as to payment of dividend or to return of capital on winding up - payment will rank as higher priority than any equivalent payment to ordinary shareholders.

Question 10

What are cumulative preference shares?

Answer 10

It is presumed that a preference share is cumulative unless otherwise stated. This means that if a dividend is not declared for a 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.

Question 11

What are participating preference shares?

Answer 11

Holder maay participate with the holders of 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 a winding up. Almost always issued with a fixed dividend and can be cumulative if stated as such in articles.

Question 12

What are deferred shares?

Answer 12

Carry no voting rights, no ordinary dividend, sometimes entitled to a share of surplus profits after any other dividends have been paid.

Question 13

What are redeemable shares?

Answer 13

Issued with the intention that the company will or may wish to buy back and cancel them at some time in the future.

Question 14

MA about varying class rights?

Answer 14

By consent in writing of holders of at least 75% of the issued shares of that class, or by special resolution passed at a separate general meeting of holders of that class.

Holding 15% of relevant shares may apply to court within 21 days to have the variation cancelled. Following application, variation will not take effect unless it is confirmed by the court.

Question 15

What are final dividends?

Answer 15

Recommended by directors and declared by company by an ordinary resolution of the shareholders following the financial year end.

Question 16

What are interim dividends?

Answer 16

Articles normally give directors power to decide to pay interim dividends if company has sufficient distributable profits. Can be paid without the need for an OR. Often pay where co has realised an investment.

Question 17

What is the difference between allotting and transferring shares?

Answer 17

Allotment = contract between new company and new/existing shareholder under which company agrees to issue new shares in return for the purchaser paying subscription price.

Transfer = contract to sell existing shares between an existing shareholder and purchaser. Company is not a party to the contract.

Question 18

What needs to be considered on the allotment of new shares?

Answer 18

1. s755 restriction on private companies offering shares to the public.
2. Requirement for a prospectus. (self explanatory circular giving investors details about company and investment itself on which to base their investment decision - usually not needed for private company).

3.Financial Promotions are prohibited unless certain requirements set out in FSMA 2000 are fulfilled. Communications when issuing shares must be within a s21 FSMA exemption or issued or approved by an authorised person.

Question 19

What are the most common forms of restriction on transfer?

Answer 19

1. Director’s power to refuse to register. IF they do this, instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent. Must give reasons if ti refuses to register a transfer.
2. Pre-emption clauses - if these are set out in the articles.

Question 20

What is the method of transfer of shares?

Answer 20

Stock transfer form needs to be signed by the transferor and submitted with the new share certificate to the new shareholder.

Beneficial title passes on execution of stock transfer form and legal title passes on registration of the member in register. Company will also send a new share certificate within two months.

Stamp duty payable by the buyer, but not when the consideration is £1000 or less. If it is more, a minimum £5 stamp duty fee is payable.

Question 20

What is the transmission of shares?

Answer 20

Automatic process in the death or bankruptcy of a shareholder.

Death = automatically pass to PRs.

Bankruptcy = shares automatically best in their trustee in bankruptcy.

Question 21

What is the procedure for allotment of shares in summary?

Answer 21

1. Any cap on number of shares that can be issued? Can cap be removed?
2. Do company’s directors need authority to allot?
3. Must pre-emption rights be disapplied on allotment?
4. Must new class rights be created?
5. Directors must pass board resolution to allot the shares.
6. Administrative requirements

Question 22

Allotment step 1: Any cap on the number of shares that can be issued?

Answer 22

A company under CA 1985 would have had an authorised share capital. This requirement no longer exists.

For companies under CA 1985, shareholders can remove the restriction by ORDINARY RESOLUTION.

If a CA 2006 company has already put an ASC restriction in their articles, they will need to amend this by SPECIAL RESOLUTION.

Question 23

Allotment step 2: Do the company’s directors need authority to allot?

Answer 23

s 550 CA 2006: Private companies with only one class of shares in existence, directors have automatic authority to allot new shares of the same class.

s551: For all others, directors need to be granted ordinary resolution authority to allot the new shares.

Question 24

Allotment step 3: Must pre-emption rights be disapplied?

Answer 24

When they apply, special resolution to disapply. This s561 applies to all equity securities.

SO if a class of shares carries a right to receive dividends and on a winding up, capital payment, and both of these rights are CAPPED, the shares will NOT fall within the definition of ‘equity securities’ and will not need to be offered pre-emptively.

Question 24

Can a company misapply pre-emption rights?

Answer 24

General disapplication = passing special resolution or including disapplication in its articles. Not a permanent disapplication, but attaches to a particular, pre existing s551 authority.

Private companies with one class of share = disapplicaiotn by special resolution.

Private companies can also exclude pre-emption rights in the Articles.

Specific disapplication of pre-emption rights = relation to a specific allotment of shares by passing ST under s 571. e.g. particular person. This will need to be by directors providing shareholders with a written statement explaining the reasons for the specific disapplication and the amount to be paid to the company pursuant to the allotment along with justification for the amount.

Question 25

Step 4 Allotment = Must new class rights be created for the shares?

Answer 25

Special resolution.

Question 26

Allotment step 5 = Directors pass a board resolution to allot the shares.

Answer 26

GM will not be needed in advance of the BM if the following apply =
1. Has no limit in its constitution on the number of shares which can be issued by the company
2. Does not require D authorisation because company is private company with one class of shares and there is no restriction in articles s550.
3. Is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 CA/has already disapplied s 561.
4. Has relevant class rights in articles.

Question 27

What are the administrative requirements on allotment?

Answer 27

1. COPIES OF RESOLUTIONS TO CH WITHIN 15 DAYS. and amended articles.
2. SEND TO CH: Return of allotment and statement of capital within one month. PSCs changed PSC01,2,4,7 if necessary.
3. UPDATE REGISTERS: Members within 2 months of allotment and PSC if necessary.

4.SHARE CERTIFICATES must be prepared and sent within two months of the allotment.