Shares/Membership/Borrowing Chp 11-15 Flashcards
What is the definition of a share? Quote case
The interest of a shareholder in the company measured by a sum of money Borlands v Steel Brothers 1901
What additional statutes/regulations are applicable to shares traded on the LSE?
Financial Services and Markets Act 2000
Prospectus Regulations 2005
Financial Services Act 2012
What is issued share capital?
Issued share capital is the total amount of share capital that has been allotted
private - no min.
public - £50k min.
What is called-up/paid-up capital?
Called-up/paid-up capital is the value of the issued share capital that has been paid for by shareholders
What is uncalled capital?
Uncalled capital is the value of the issued share capital that has not yet been called up by the company, and thus not yet paid for by the shareholders
Do directors have powers which automatically extend to allotting shares?
No, directors powers do not automatically extend to allotting shares (s549)
When can directors allot shares?
Directors can allot shares when:
- in employee share scheme s549
- private company with only one class of share s550
- Articles empower directors s551
- shareholders empower by ord. resolution s551
Within 1 month: File return of allotment & statement of capital
What are pre-emption rights on allotment?
s561 when company allots new ‘equity shares’ (ord. shares) it must first offer them to existing holders proportionate to their existing holdings.
Does not apply/disapplied when:
- bonus shares
- shares for non-cash consideration
- disapplying s561 rights by spec. res or provision in articles
What are the restrictions on allotting shares?
Cannot allot shares at discount to nominal value s580
Pubic - cannot accept as consideration:
- An undertaking to work/perform services
- Non-cash consideration unless independently valued
How do public companies offer their shares to the public?
Either on ad hoc basis or on one of the Stock Exchange’s markets.
Two principal markets are
Main Market - comply with
Part VI FSMA 2000
FCA’s Listing Rules
LSE’s Admission and Disclosure Standards
Alternative Investment Market (AIM)
less regulated, accounts must conform to UK/international accounting principles
companies with less than two years trading record, director must not sell shares for at least one year after admission
What four ways implement capital maintenance?
- Restricting freedom to reduce
- Controlling extent of buying own/giving financial assistance to another to buy
- Regulating consideration received
- Ensuring dividends paid from distributable profits
What is the basic rule on reduction of capital?
State and two cases
Companies cannot repay capital raised from shareholders except through winding up or other lawful exception Trevor v Whitworth 1887
Courts may set aside transactions that are dressed up as ordinary trading but are actually payments of capital Aveling v Perion 1989
What are the three permitted forms of capital reduction under s641 CA 2006?
Under s641 CA 2006 companies can reduce their capital
- Extinguish/reduce liability on partly paid shares (benefitting members)
- cancel paid-up capital that has been lost/not represented by available assets (net assets worth less than value of capital)
- pay off part of paid-up capital out of surplus assets (where company holds surplus assets to its needs, may return cash sum to each member & reduce nominal value, i.e. windfall)
What is the procedure to reduce share capital (where permitted)?
Any Company
spec. res / court confirms / subject to contrary procedure in AoA
court must ensure interests of creditor and shareholders are protected
Private Company
spec. res / directors declare solvency and will be able to continue to pay its debts for 12 months / subject to AoA
No need for court to confirm reduction
What is a ‘serious loss of capital’ under s656 CA 2006?
Where public company’s assets are 50% or less of called-up share capital.
Directors must call a general meeting to consider what steps to take to deal with situation, (i.e. develop plan to increase capital that will result in assets exceeding half the capital, or re-register as private).
Is there a general prohibition against voluntarily acquiring own shares?
Are there any exceptions?
Yes, under s658 there is a general prohibition against voluntary acquiring own shares
The exceptions are redemption** and **buy-back
What are the rules on redeeming shares?
A company may issue redeemable shares s684
Public - can only allot if AoA authorise
s687 Both - redemption must be paid out of:
distributable profits;
proceeds of new issue; or
private only - capital
Can only be redeemed if fully paid. Capital cannot consist of just redeemable shares.
Once redeemed, shares are cancelled
What are the rules on buy-back of shares?
Subject to AoA
Must be paid out of:
distributable profits;
proceeds of new issue; or
private - capital
Can only be bought back if fully paid. Capital cannot consist of just redeemable/treasury shares.
Buy backs are:
- market purchase (only for listed companies), auth by ord. resolution.
- off-market purchase (any company). Contract for repurchase approved by ord. resolution.
Once bought back, shares are cancelled or if treasury shares, company can hold them/sell them/transfer to emp. share scheme/cancel them later.
What are the two scenarios in which private companies can use capital to pay for shares they are repurchasing or redeeming?
s692 private company can use capital when amount paid in any financial year does not exceed £15k or nom. value of 5% share capital
When it exceeds, must first use profits available for distribution and is subject to provisions in AoA.
Solvency statement (12 months, supported by auditors report)
Approved by spec. resolution
What does s678 CA 2006 prohibit public companies from doing? Why?
s678 prohibits public companies from giving financial assistance for the purchase of their shares.
To stop company’s capital being used to encourage third parties to buy shares in the company.
What is the definition of ‘financial assistance’ in relation to purchasing own shares?
s677 CA 2006 defines ‘financial assistance’ as
- gift
- guarantee or security
- loan
- anything which results in net assets being materially reduced
What must the court look at to see if it counts as financial assistance (for purpose of purchasing shares under s677-678 CA 2006)?
The court must look at the commercial substance and reality of what the company has done
Chaston v SWP 2003 and Anglo Petroleum v TFB 2007
What are the consequences of a breach of s678 CA 2006 (prohibition on giving financial assistance for purchase of own shares)?
Breach of s678 criminal offence.
Any transaction in breach is void and unenforceable Heald v O’Connor 1971
Directors party to transaction liable to compensate company for loss and recipient of assistance liable to account for any money/property received In a Flap Envelopes 2004
What are the exceptions to the prohibition on financial assistance for own shares s678 CA 2006?
Unconditional:
dividend
allotment of bonus shares
reduction of capital
redemption of shares
Conditional ss678 & 679 CA 2006
Where does not reduce net assets or where assistance made out of distributable profits
Larger purpose exception S678 (company must have larger purpose in connection with assistance given and in good faith) Brady v Brady 1989
Can a company accept non-cash consideration for allotment of shares?
Private - yes, as long as consideration sufficient it need not be accurate
Public
future services cannot be accepted as consideration
any non-cash cons. must be independently valued
company must receive on allotment at least 25% of nominal value of shares it allots
What are two ways that ensure a company raises what it appears to raise on allotment?
Companies cannot allot shares at a discount s580 CA 2006
Public companies are restricted in the consideration they can accept for shares
When can companies pay dividends?
Companies can only pay dividends out of profits available for distribution s830 CA 2006
In determining what a dividend is what matters is not intention but the nature of the payments itself
Global Corporate v Hale 2018
What happens if s830 CA 2006 (dividends only being payable out of profits) is breached?
If s830 is breached:
Shareholders can be required to repay if knew/reasonable grounds unlawful
It’s a Wrap v Gula 2006 (enough to know circumstances around payment)
Directors can be made to repay on grounds they are in breach of fiduciary duty.
Bairstow v Queens 2002 (defence where accounts wrong but not where they are responsible for the errors)
How does someone become a member of a company?
- First members will be the subscribers to the memoradum
- Members may have shares allotted to them later
- Those who acquire shares from existing members (purchase or assignment on death of mem
What are the rules around a share register?
A company must keep a register of members s113 (private can use register at Co House)
Entitlement to rights of membership achieved by having name on register.
Register open to public inspection s116
PSC register (private can use register at Co House)
What can a person do who claims their name has wrongly been omitted from the share register?
They can request the register’s rectification. If company refuses the member can then apply to the court for rectification s125 CA 2006.
The court should only use s125 to give effect to existing legal rights, not settle disputes over ownership
Nilon v Royal Westminster 2015
What is a preference share?
Usually enjoy right to be paid fixed dividend before ordinary shareholders. The presumption is that it is cumulative.
Can only vote at class meeting of preferred holders.
What is an ordinary share?
Usually receive a dividend only if directors first resolve to recommend the payment of a dividend (shareholders can veto).
Rights to vote at all general meetings
What case defines a members ‘class rights’?
Cubrian Newspapers v Cumberland Herald 1986
How do you vary a class right?
- Class whose rights are being altered must meet and approve spec. resolution
- All shareholders then meet and approve spec. resolution s630 CA 2006
- Rule is subject to any special procedure laid down in AoA
A dissentient minority shareholder (15% + holder that has not voted in favour) can object by appealing to the court within 21 days, that the procedure is incorrect or unfairly prejudicial to the class s633
What is and isn’t a variation of class rights?
√ Probably:
- Reducing voting entitlement
- Changing terms on which dividend payable
X Probably not:
- Allotting more shares of class to outsiders White v Bristol Aeroplane 1953
- Subdividing shares Greenhalgh v Arderne Cinemas 1946
- Creating new class with priority over existing
- Reduction of capital through paying off class of preference shares House of Fraser v ACGE 1987
Company’s articles can expressly provide what changes are a variation.
What is the law behind transferring shares?
s770 shares must be transferred by proper instrument
Some mistakes/failure to have properly stamped is permitted Nisbet v Shepherd 1994
Merely entering name in the register will not constitute proper transfer International Credit v Adham 1994
What is the process to transfer shares?
Shareholder executes stock transfer form, gives to transferee with certificate
Transferee has it stamped and hands to company with certificate
Company replaces name in register and issues new certificate.
Private companies might have pre-emption rights or give directors right to refuse transfer.
What rules govern refusals to transfer shares?
Exercise of power to directors to refuse transfer is subject to duty to promote the success of the company
Also, the board must either register or give notice of refusal within 2 months. Non-compliance constitutes an offence and Swaledale Cleaners 1968 suggests that company then loses right to refuse the transfer.
What must a person with an interest of 3% or more in a public company’s shares do?
Under rules issued by FSA (Disclosure Rules and Transparency Rules) they must disclose their interest to the company in writing within 2 days of the acquisition.
When does company membership end? (four)
- Transfer
- Death (pass to personal rep)
- Bankruptcy
- Forfeiture
Do companies have the power to borrow? (four)
- Companies no longer need to state any objects, and if they don’t they have unlimited capacity s31 CA 2006 (includes power to borrow)
- Companies with objects clauses, most include express power to borrow
- Even those without capacity s39 applies (no act shall be called into question by reason of anything in constitution)
- Private - on incorporation, Public - once trading certs issued
Who can exercise company’s power to borrow?
Determined by AoA. If company has model articles then by Art 3, the board will have the power. Although the board may have delegated to individuals (MD, CFO).
What is the definition of a debenture?
s738 CA 2006 debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company.
Name four characteristics of a fixed charge
Fixed charges:
- apply to specific asset
- once subject to fixed charge, asset cannot be sold until charge released
- Either legal (deed, legal title) or equitable (no legal title, no need for deed)
- impractical for assets in which the company may want to trade, such as its products
Name four characteristics of a floating charge
Floating charges:
- Equitable charges
- Usually over class of present/future assets, such as products or current/future book debts Panama, New Zealand and Australian Royal Mail 1870
- Until it crystallises, the company may deal with assets without reference to the chargee Yorkshire Woolcombers 1903
- When certain event occurs (charge document will state events), it crystallises and becomes a fixed charge
Other than specific events in charging document, when do floating charges crystallise? (five)
- Winding-up
- Appointment of administrative receiver
- Possession of property being taken under another charge
- Sale/disposal by company of substantial part of its assets
- Cessation of company’s business Woodroffes (Musical Instruments) 1985
How is it decided whether a charge is fixed or floating?
Two stages to determine (Spectrum 2005)
- Language of charge (to see intent)
- Rights & obligations granted under the charge. How much control the lender retains (if company has too much control, inconsistent with fixed charge and would indicate floating charge).
Before Spectrum 2005 cases inconsistent re book debts Siebe v Barclays 1979 & New Bullas 1994
What are the strengths of a floating charge? (three)
- Allow company to continue dealing with property until charge crystallises
- Can be used for the types of asset over which would be impractical to give fixed charge (e.g. stock)
- Provide security for chargee and allow them to appoint admin. receiver for charge before Sept 2003 or administrator for charge after that date
What are the weaknesses of a floating charge?
- Company may dispose of much of the property covered by the charge, prior to its crystallisation (diminishing chargee’s security)
- Validity may be challenged by liquidator under s245 IA 1986
- Number of creditors take priority, including
- execution creditor if goods sold before charge crystallises Standard Manufacturing 1891
- landlord’s distress for rent, or Loc auth distress for unpaid business rates before crystallisation
- preferential creditors
- those creditors whose own security takes priority over the floating charge
Where a company creates several different charges over an asset, what order of priority do the chargees take?
As long as they are properly registered
- Legal charges, in date order
- Equitable charges (including floating), in date order
- A crystallised floating charge will take priority over later equitable fixed charge.
To reduce the risk of other charges being prioritised over floating charges it can include a clause precluding the company from giving further charges which rank parri passu or in priority (later chargee only bound if they have notice)
What are the rules dealing with registration of company charges?
s859 CA 2006
- registered within 21 days of creation
- registered by delivery prescribed particulars to Registrar who issues certificate
- if not registered under s859, it’s void against administrator, liquidator and any creditor but charge becomes payable as unsecured debt
What is a Romalpa clause?
Romalpa clauses come from the Romalpa case (to protect unsecured creditors who often add this in to their contracts) - AKA Retention of Title Clauses
Aluminium v Romalpa 1976 - even though possession of goods passes, legal title remains with the seller.
This clause can be impractical
- If goods are mixed with other goods and lose their separate identity
- Sometimes it operates as an equitable charge (which must be registered and often isnt)
- If goods are sold on by the company, the supplier will have to trace the proceeds of sale (rather than goods themselves)
What is the offence of insider dealing?
Under Criminal Justice Act 1993
Offence for individual who has information (specific, non public on a particular security) as an insider (director, employee, shareholder) to:
- deal in price-affected securities; or
- encourage another to deal; or
- disclose inside info other than in proper performance of duties
What is market abuse?
- Market Abuse Regulation (MAR)
- Market manipulation includes:
- giving misleading signals as to price of, or demand for shares
- effecting transactions which employ fictitious devices or other forms of deception
