Shares, share capital, dept capital, and ESS

Question 1

What is equity? Name an example.

What is debt? Name an example.

Can directors borrow money on behalf of the company?

What are 5 factors to determine whether to use debt or equity as a source of funding?

Answer 1

Equity = funding raised through the issue of shares to investors e.g. shares

Debt = loans owed by the company to another party e.g. term loan, debentures, and bonds

MA 3 and 4 Plc and Ltd = yes, have an implied power to borrow money under thier general powers to manage the company business, subject to provisions of CA2006 and Articles

1. Tem: E = long-term, D= short-term
2. Risk: E= high, D = lower
3. Return: E= dividend and capital gain, D = interest
4. Nature of return: E = variable and irregular, D = fixed and regular
5. Collateral: E = not required, D = essential to secure loans

Question 2

What is authorised capital?

What is authorised share capital?

Is it still relevant under CA2006?

What does it mean for companies incorporated prior to CA2006?

Answer 2

= pool of shares both issued and available to be issued to investors

= the maximum nominal value of shares a company can issue

No, CA2006 abolished the concept of authorised share capital

Companies incorporated before CA2006 = the authorised share capital stated in memorandum is a ceiling on the number of shares that can be allotted and will be considered as a restriction in the Articles

Question 3

What is the difference between allotted and issued share capital?

When are shares allotted under S.558 CA2006?

When are shares issued and what is the name of the case that established this?

How can a company increase its issued share capital?

Answer 3

Allotted share capital = total nominal value of shares that have been allotted

Issued share capital = total nominal value of shares that have been issued and taken up by the members of the company

S.558 = Shares are allotted = when a person acquired the unconditional right to be included in the company’s register of members = usually once the contract of allotment is completed and acceptance of the application is notified to the applicant

Shares are issued = when the shares are allotted and entered into the register of members and for which a share certificate or CREST credit has been issued

National Westminster Bank plc v Inland Revenue Commissioners [1995]

Provided there are no restrictions in the Articles, a company can increase its issued share capital by allotting new shares

Question 4

What is paid-up capital?

Answer 4

= total nominal value of the shares that have actually been paid up on the company’s issued capital

Question 5

What is called-up capital?

Answer 5

= the paid-up share capital plus the amount called for/installment amount due

Question 6

What is equity capital?

Answer 6

= the issued capital of the company - any shares that have the right to participate in a dividend or return of capital only up to a specified amount

= the ordinary voting share capital

Question 7

Under which section of the CA2006 may a limited company with a share capital not alter its share capital except as provided in Parts 17 and 18 of the CA2006?

Under Parts 17 and 18 of the CA2006, what are 6 ways a company can change its share capital?

Answer 7

S.617 CA2006

1. increase its share capital by allotting new shares;
2. subdivide or consolidate all or any of its share capital;
3. redeem shares;
4. purchase its own shares;
5. cancel its shares; and
6. reduce its share capital (CA2006 s. 617).

Question 8

What is a debenture?

How does the CA2006 define debenture?

Can registered debentures be transferred?

Answer 8

= a document that creates a debt or acknowledges a debt

S.738 CA2006 = debenture stock, bonds, and any other securities of the company, whether or not constituting a charge on the assets of the company

Yes, may be transferable on stock transfer forms under the Stock Transfer Act 1963

Question 9

What is loan stock?

How is loan stock constituted?

Why is it usual for loan stocks to bear a higher rate of interest than secured debenture stock?

What is convertible loan stock?

How often must a company give the stockholders notice of their right to exercise conversion rights?

Who will deal with the holder’s applications to exercise conversion rights?

Answer 9

Loan stock = an unsecured loan

Under a trust deed (like a debenture)

Because unsecured loan stock carries a higher risk for investors… may also be necessary for a company to offer convertible loan stock

Convertible loan stock = a form of loan stock, usually unsecured, which includes provision for the stock to be converted into equity shares at ratios determined at the time of issue of the stock

Every year in which the right exists

Cosec or company registrar

Question 10

When issuing shares, it is important to ensure what 2 things?

Once a company has issued shares, what are the 4 circumstances under which they can be returned to the company?

Answer 10

1. Directors have the authority to approve the allotment
2. Any pre-emption rights are observed or waived

(1) Purchase by the company
2. Redemption
3. Reduction of capital
4. Forfeiture

Question 11

What is the general rule on directors’ authority to allot shares?

In which circumstance does this not apply?

What does s.550 CA2006 say?

What are the 3 conditions for directors’ authority to issue additional shares under s.551 CA2006?

How may authority be revoked, varied, or renewed under s.551 CA2006?

A copy of a resolution giving authority to directors to allot relevant securities must be filed with the Registrar within how many days after it is passed?

Answer 11

Directors must not allot shares unless authorised by ss. 550 or 551 CA2006

Does not apply to the allotment of shares allotted under an employee share scheme

S.550 CA2006 = directors of a private company with only 1 class of shares can allot shares without any additional member consent, subject to any restrictions in the Articles

The authority to issue additional shares:
1. may be given in general terms or made subject to conditions;
2. must state the maximum amount of securities that may be issued;
3. must specify the date on which the authority will expire, which must be not more than 5 years after the authority was granted

By an ordinary resolution (even if the authority was given by special resolution or contained in the Articles)

Within 15 days after it is passed

Question 12

What are pre-emption rights under CA2006?

What is the acceptance period members must be given in which to accept the offer?

How can pre-emption rights be excluded or waived? (2)

What are the 3 limits on the disapplication of pre-emption rights for listed companies?

Name 3 allotments and issues that are automatically excluded from pre-emption rights.

When will the dis-application of pre-emption rights cease?

Answer 12

S.561 CA2006 = unless disapplied in whole or in part by the Articles, whenever new shares are to be allotted, they must first be offered to existing shareholders in proportion to their existing holdings

Not less than 14 days

Permanently excluded by Articles (private companies) or excluded for specific duration (waived) by a special resolution of the members at AGM or on an ad hoc basis (public and private companies)

1. General authority restricted to 5% of issued share capital
2. Further 5% may be sought provided only used in connection with an acquisition or specified capital investment
3. In any rolling 3-year period = use of general authority should be restricted to 7.5% of issued capital

A. Shares taken by subscribers to the memorandum
B. Shares allotted under bonus issue
C. Shares acquired through employees’ share scheme

Will cease when the general authority of the directors to issue equity securities under s.551 CA2006 lapses

Question 13

When was the Pre-Emption Group established and what did they produce?

It is recommended that an annual dis-application of pre-emption rights under s.570-1 CA2006 is acceptable provided that what?

How do listed companies usually waiver pre-emption rights?

What does this mean in practice?

Answer 13

Pre-Emption Group established in 2005 to produce a statement of principles on acceptable practice for premium listed companies seeking waivers of pre-emption rights (encouraged for standard listed and AIM companies too)

The authority lapses at the earlier of the next AGM or 15 months after the date of the resolution

Request an annual waiver at each AGM for up to 10% of issued share capital, subject to rolling limit of 7.5% over 3 years

Institutional investors will most likely not support any resolution in excess of the limits

Question 14

What are the 7 steps in the checklist for the allotment of shares?

Answer 14

1. Ensure the appropriate authority has been obtained, if required, to allot shares
2. Send application form to those wishing to subscribe for shares (demonstrate consent to become a member and used to collect necessary information for ROM)
3. Application forms completed and returned with a cheque for full or part payment
4. Application forms checked for completeness and remittances banked
5. Convene a Directors’ meeting to approve applications, issue of shares, issue of share certificates, and updating of ROM
6. Issue share certificates not more than 2 months from the date of allotment (For a plc = members can hold their shares in uncertificated form in CREST)
7. S.555 CA2006 = File form SH01 with Registrar within 1 month of the allotment

Question 15

What is the rule on the issue price of new shares under CA2006?

Which type of shares contravenes this rule?

Can shares be issued at a discount?

What is share premium?

Where are partly paid shares most commonly found?

Answer 15

S.580 CA2006 = shares cannot be issued below their nominal value

Bonus shares = no payment is required from the members with shares being issued ‘for free’

can be issued at 10% discount ONLY if Articles allow and company pays commission

Share premium = amount of the issue price of a share in excess of its nominal value

Non-trading Plc where the minimum amount payable on the shares is paid up, e.g. £12,500 rather than the full £50,000

Question 16

What are the 2 ways in which shares may be paid for?

What does payment in money mean under s.583 CA2006? (2)

What payment method in exchange for the allotment of shares is prohibited?

Can a Ltd company issue nil or partly paid shares?

Answer 16

S.582 CA2006:
A. In money or money’s worth, including goodwill and knowhow
B. By way of capitalisation of the company’s existing reserves

S.583 CA2006 = payment in money means:
1. Cash or cheque received by the company
2. Undertaking to pay cash to the company at a future date

Prohibited = the allotment of shares in exchange for an undertaking to perform work or services

No = MA 21 Ltd

Question 17

SHARES ALLOTTED FOR NON-CASH CONSIDERATION

Can a private company allot shares for non-cash consideration?

Can a public company allot shares (fully or partly-paid) for non-cash consideration?

What are 2 exceptions to this rule?

Answer 17

Ltd = Yes, do not need to have non-cash consideration independently valued

Plc = ONLY if the consideration has been independently valued within 6 months before and a copy of the valuer’s report has been sent to the proposed allottee

Exceptions:
1. Allotments made in a takeover if offer is open to all target shareholders
2. Allotments made in a merger in exchange for all assets and liabilities of another company

Question 18

SHARES ALLOTTED FOR NON-CASH CONSIDERATION

For a public company to allot shares fully or partly-paid for a non-cash consideration, who must the valuation report be prepared by?

What 4 things must the valuer’s report state?

What right does the valuer have?

When must a copy of the report be filed with the Registrar?

What must happen if a formal contract is entered into for the transfer of the non-cash consideration in exchange for the allotment of shares?

Answer 18

By an independent person who is qualified to be an auditor of the company

Valuer’s report:
1. nominal value of shares being allotted for NCC
2. Amount of any premium payable
3. NCC which has been valued and the method used to value it
4. Amount of nominal value of shares and any premium treated as paid up by NCC

Entitled to call for any information from officers (offence to give misleading or false information)

Filed when the SH01 form is filed

The agreement must be stamped and sent to the Registrar with Form SH01 (if no written contract, particulars of the agreed terms must be set out on Form SH01)

Question 19

FINANCIAL ASSISTANCE

How is financial assistance loosely defined under CA2006?

What is the restriction on financial assistance for private companies?

What is the restriction on financial assistance for public companies?

Name 2 transactions that are excluded from this plc rule.

Name 4 instances when financial assistance by or for a public company may be permitted.

Answer 19

S.677 CA2006 = financial assistance = gifts, guarantees, security, loans, and any other financial assistance given by a company

Private = Ltd may not provide financial assistance for the acquisition of shares in its holding company if that company is a public company

Public = Plc must not provide financial assistance for the purchase of its own shares or the shares of its holding company (public or private)

S.681 CA2006 = Excluded transactions:
A. Allotment of bonus shares
B. Redeemable shares

S.682 CA2006 = financial assistance permitted if:
1. The assistance is being provided by a plc, that the net assets are not reduced or, if they are, the assistance is provided out of distributable profits
2. Lending money is part of ordinary business and loan is made in ordinary course of business
3. Loan is given in good faith in company’s interests for purposes of an employee share scheme
4. loan given to employee (not director) in good faith for the purpose of acquiring shares in company

Question 20

CALLS ON SHARES

What is a call on shares?

Where must the process be set out?

What are the 9 steps in the checklist to call amounts due on shares?

Which article provisions of the model articles is this process based on?

Answer 20

= the process by which directors call on members to pay any amounts due on nil or partly paid shares

In the Articles

Procedure:
1. Convene a directors’ meeting to approve the making of a call

2. Cosec arranges the preparation of the issue of call notices to members
3. Each call notices’ distinguishing number is noted on the ROM with a note on the amount being called
4. Cosec makes a list of payments as they are received and once the call date has passed, compiles a list of unpaid calls
5. A reminder letter is sent to members that have not paid their calls, requesting immediate payment and warning of penalties for non-payment (= forfeiture if Articles permit)
6. Members should return share certificates and a copy of call notice
7. Company endorses share certificate and returns to member
8. ROM is amended to include details of additional amounts now paid on shares
9. If a call remains unpaid, interest is due at a rate decided by the directors (no more than 5% above the base lending rate)

Plc MA 54-62

Question 21

CALLS ON SHARES

What details should a call notice contain? (4)

When must the payment date of a call be?

If a call on shares is not paid what is the ultimate sanction available to the directors? (Providing the Articles permit)

What happens when shares are forfeited?

When can shares be surrendered?

Answer 21

Call notice should contain details of the (1) registered member(s), (2) the amounts currently outstanding, (3) the amount now being called, and (4) details of where and when the payment is due

Payment date must be at least 14 days after the date of the call notice

Forfeit the shares (must comply with Articles strictly otherwise forfeiture could be invalid)

Forfeited = the person concerned ceases to be a member of the company and the forfeiture should be entered in the register of members

Surrendered = if the member cannot or will not pay the call, they may wish to surrender the shares = shares can only be surrendered if they are already liable to be forfeited

Question 22

PURCHASE OF OWN SHARES

When can a company purchase its own shares? (3)

What are the 2 ways the shares can be purchased?

What is a solvency statement?

What is form SH19?

On which payments are stamp duty payable?

Answer 22

1. Companies may acquire own shares as part of a valid reduction of capital;
   *. Reduction of share capital with solvency statement (Ltd only)
   *. Reduction of share capital with court order (Ltd and Plc)
   *. Reduction of capital under simplified process (Ltd only)
2. Redemption = (buying back/ paying off) of redeemable shares (Ltd and Plc)
3. Transfer to Treasury (Ltd and Plc)

i. Purchase of own shares out of profit (Ltd and Plc)
ii. Purchase of own shares out of capital (Ltd only) (must use all distributable profit first)

Shows each director has the opinion that the company can pay its debts:
*At the date of the statement and
* As they fall due during the year following the statement

Must be signed by all directors to be valid

Shows a statement of capital

On payments for purchases of shares, redemptions, and acquisitions into treasury where consideration payable is greater than £1,000 (NOT PAYABLE ON PAYMENTS UNDER A REDUCTION OF CAPITAL)

Question 23

PURCHASE OF OWN SHARES - REDUCTION WITH SOLVENCY STATEMENT

ss. 642-644 CA2006

Only for private companies:

What are the 6 steps involved in a reduction of capital with solvency statement?

Answer 23

1. Check Articles to ensure no restriction on the reduction of capital
2. Convene and hold directors’ meeting to resolve to (1) recommend the reduction of capital to members and (2) give a solvency statement
3. Issue notice and solvency statement on 14 clear days’ notice (or circulate WR) for members to consider the special resolution
4. Special resolution must be approved within 15 days of the date directors make solvency statement
5. Within 15 days of passing the resolution = file a copy of the special resolution, Form SH19, and £10 filing fee with Registrar (Reduction becomes effective upon registration of the documents)
6. Cancel share certificates, issue balancing share certificates, and update ROM

Question 24

PURCHASE OF OWN SHARES - REDUCTION UNDER SIMPLIFIED PROCESS

s.692(1ZA) CA2006

Only for private companies:

What are the 6 steps involved in a reduction of capital under simplified process?

Answer 24

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to resolve to (1) recommend the reduction of capital to members
3. Issue notice on 14 clear days’ notice (or circulate WR) for members to consider the ordinary resolution
4. A copy of the agreement must be made available for member inspection at RO not less than 15 days prior to GM and at meeting itself
5. Shareholders vote and approve the resolution
6. Within 15 days of passing the resolution = file a copy of resolution, Form SH19, and £10 filing fee with Registrar

Question 25

PURCHASE OF OWN SHARES - REDUCTION WITH COURT ORDER

s.645-651 CA2006

For public and private companies:

What are the 7 steps involved in a reduction of capital with court order?

Answer 25

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to resolve to (1) recommend the reduction of capital to members and (2) give a solvency statement
3. Issue notice and solvency statement on 14 clear days’ notice (or circulate WR) for members to consider the special resolution
4. Special resolution must be approved within 15 days of the date directors make solvency statement
5. Apply to court to approve the special resolution
6. Within 15 days of passing the resolution = file a copy of special resolution, court order, Form SH19, and £10 filing fee with Registrar
   (Reduction becomes effective upon registration of the documents)
7. Cancel share certificates, issue balancing share certificates, and update ROM

Question 26

PURCHASE OF OWN SHARES OUT OF PROFITS

ss.690-708 CA2006

For public and private companies:

What are the 7 steps for purchasing own shares out of profits?

Answer 26

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to resolve to recommend the purchase of own shares to members
3. Issue notice on 14 clear days’ notice (or circulate WR) for members to consider the special resolution
4. A copy of the agreement must be made available for member inspection at RO not less than 15 days prior to GM and at meeting itself
5. Shareholders vote and approve the resolution
6. Within 15 days of passing the resolution = file a copy of resolution and Form SH03 with Registrar and send copy of SH03 to HMRC for stamping if consideration paid is over £1,000
7. Cancel share certificates, issue balancing share certificates, and update ROM

Question 27

PURCHASE OF OWN SHARES OUT OF CAPITAL

ss.709-723 CA2006

Only for private companies:

What are the 9 steps for purchasing own shares out of capital?

Answer 27

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to (1) resolve to recommend the purchase of own shares to members and (2) give a solvency statement
3. Issue notice, solvency statement, and audit report on 14 clear days’ notice (or circulate WR) for members to consider the special resolution (Will need to appoint an auditor if don’t already have one)
4. Directors make a statutory declaration specifying the permissible capital payment within 1 week before the date of the meeting
5. Special resolution must be approved within 15 days of the date directors make solvency statement
6. Within 1 week of passing the special resolution:
   A. company must publish a notice in the London Gazette giving details of the proposed payment and
   B. notify creditors (newspaper advertisement)
7. If no objections are received = payment may be made at the end of the 5-week period but within 7 weeks of the date of approval of the special resolution
8. Within 15 days of passing the resolution = file a copy of resolution and Form SH03 with Registrar and send copy of SH03 to HMRC for stamping if consideration paid over £1,000
9. Cancel share certificates, issue balancing share certificates, and update ROM

Question 28

PURCHASE OF OWN SHARES - REDEMPTION

ss.684-689 CA2006

For public and private companies:

Which shares can be redeemed?

What are the 8 steps for redemption of shares?

Answer 28

Shares can only be redeemed if they were issued as redeemable and are fully-paid

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to resolve to recommend the purchase of redeemable shares to members
3. Where only part of the redeemable shares are to be redeemed, the Articles will set out the process to determine which shares are to be redeemed = may be decided as a % of each members’ holding
4. Issue notice on 14 clear days’ notice (or circulate WR) for members to consider the special resolution
5. A copy of the agreement must be made available for member inspection at RO not less than 15 days prior to GM and at meeting itself
6. Shareholders vote and approve the resolution
7. Within 15 days of passing the resolution = file a copy of resolution and Form SH03 with Registrar and send copy of SH03 to HMRC for stamping if consideration paid over £1,000
8. Cancel share certificates, issue balancing share certificates, and update ROM

Question 29

PURCHASE OF OWN SHARES - TRANSFER TO TREASURY

ss.724-732 CA2006

For public and private companies:

When may shares be held in treasury?

What are the 7 steps for transferring treasury shares?

Answer 29

Only if the consideration paid to acquire the shares was made out of distributable reserves

1. Check Articles to ensure no restriction on reduction of capital
2. Convene and hold directors’ meeting to resolve to recommend the reduction of capital to members
3. Issue notice on 14 clear days’ notice (or circulate WR) for members to consider the special resolution
4. A copy of the agreement must be made available for member inspection at RO not less than 15 days prior to GM and at meeting itself
5. Shareholders vote and approve the resolution
6. Within 15 days of passing the resolution = file a copy of resolution and Form SH03 with Registrar and send copy of SH03 to HMRC for stamping if consideration paid over £1,000
7. Cancel share certificates, issue balancing share certificates, and update ROM

Question 30

What is the role of the share registrar? (6)

Answer 30

Provide following services:

1. Insurance and transfer = processing share transfers, cancelling old share certificates, and issuing new share certificates
2. Record keeping = keeping and recording ownership of shares
3. Registration = registering changes of ownership
4. Paying agent = distributing interest, cash, and dividends to members
5. Shareholder liaison = facilitating communications between companies and their members
6. Meeting management = help organising and running GM, registering and verification of attendees, vote scrutineers, and managing poll votes

Question 31

Are all shares automatically transferable?

What are the 8 steps in the checklist to transfer shares?

What comfort does certification of a stock transfer form give to the purchaser of the shares? (When only part of shareholding is being transferred)

When is stamp duty exempt?

Answer 31

No, authority will be in Articles

1. Transferor completes STF (J30) = details of shares to be transferred, own name and address, name and address of transferee, signed by transferor and (if partly paid shares) transferee
2. If consideration payable is more than £1,000 (and/or not exempt) transferee pays stamp duty of 0.5%, rounded to nearest £5 –> Send STF to HMRC for stamping within 30 days of transaction (unstampted STF = not a valid transfer)
3. Stamped STF and original share certificate (or indemnity for lost/destroyed certificate) sent to company or its regristrar
4. Company check details of transferor are correct and certificate/indemnity is valid (S.775 CA2006 = company may certify these documents before transferee is known)
5. Many private companies have pre-emption rights on transfer of shares so Articles should be checked and followed (pre-emption rights may be waived by remaining members)
6. Board approve transfer (companies with publically traded shares will authorise registrar to register transfers)
7. Transfers must be processed or rejected within 2 months
8. Details of transfer entered in ROM, original share certificate cancelled and new share certificate issued within 2 months

Confirms that the holder does hold sufficient shares to complete the transfer and that the company, or share registrar, is holding the share certificate

If shares are being transferred under a group reorganisation = from a sub to another sub

Question 32

What is the difference between a transfer of shares and a transmission of shares?

When are transmissions most common? (4)

In what 3 ways is a transmission of shares different from a transfer?

Answer 32

Transfer = when a person acquires shares by voluntary act and where consideration is paid to the transferor

Transmission = when a person acquires shares by operation of law without any consideration

Upon death, bankrupcy, a member becoming of unsound mind, when corporate member being wound up/dissolved

1. No STF to complete
2. Transmision is recorded by comapny when person(s) entitled to the shares provides proof of entitilement
3. Not subject to stamp duty

Question 33

What happens to a shareholder’s shares when they die?

Who is a personal representative (AKA Executor) and where do they get their authority?

Who is an administrator and where do they get their authority?

What are the 3 steps that should be followed following the death of a shareholder?

In cases of joint shareholdings, where one of the shareholders dies, what should happen? (2)

Does the death of a shareholder release them from any liability in respect of any share which had been jointly held?

Answer 33

Shares form part of their estate

Personal representative (AKA Executor) = the administrator appointed to deal with the estate when there is a valid will
Authority comes from Grant of Probate (must apply) to deal with estate in accordance with will immediately

Administrator = when there is not a valid will or named executor is unable/unwilling to act (these circumstances know as dying intestate)
Authority comes from a Grant of Letters of Administration to decide how assets are to be distributed (only once Letter of Administration granted)

1. Send death certificate to company for noting on the ROM and return
2. Send the Grant of Representation (either a Grant of Probate or Letters of Administration) to the company for noting and return
3. Executor/Administrator requests shares be registered in name(s) of beneficiary(ies) often themselves using a Letter of Request (no STF for transmission)

A. Principle of surviorship = surviing holder(s) have full powers to deal with sharheolding
B. Death certificate sent to company = ROM amended by crossing out name

MA. 65 (Plc) = no

Question 34

Companies and their share registrar will often receive documents for registration that affect title.

In addition to notification of share transfers and changes of address, companies and their registrars will often receive documents from members to be noted and registered in the register of members.

The important factors when registering these documents is to ensure what? (3)

Name 5 types of documents that may be received.

Answer 34

They are correctly authenticated, are original or certified copies, and correctly identify the member to which they relate.

1. Death certificate
2. Appointment of administrator, liquidator, or receiver
3. Lasting power of attorney
4. Bankruptcy order
5. Court protection order

Question 35

Proof that a person is or is not a member of the company is obtained by examination of the register of members, but what does a share certificate show?

What 5 pieces of information should a share certificate contain?

When must a share certificate be issued following a share issue or share transfer?

Answer 35

s.768 CA2006 = prima facie evidence of title to those shares

1. unique certificate serial number
2. name and registered number of company
3. name of registered holder(s) (not necessary to show address)
4. number (in words and figures) and description of shares, including extent to which paid-up
5. date of certificate

S.769 CA2006 = within 2 months

Question 36

DISTRIBUTIONS

What is a distribution?

Where must distributions come from?

If the last annual accounts do not show that there is sufficient distributable profit, what can the directors do?

What are the 3 consequences of a dividend paid in contravention of CA2006?

Can members be liable to repay an unlawful dividend payment?

What is the most common form of distribution?

What approval does it require to be paid

Answer 36

S.829 CA2006 = every description of distribution of a company’s assets to its members, whether in cash or otherwise (except the redemption or purchase of any of the company’s own shares out of capital or an issue of bonus shares)

S.830 = out of profits available for that purpose = distributable profits/reserves = accumulated realised profits - accumulated realised losses

Prepare interim accounts to justify the amount of the distribution (plc = prepare in accordance with CA2006, be signed, and filed at CH otherwise unlawful distribution)

(1) directors in breach of s.171 (2) dividend payment not lawful (3) directors liable to repay the amount of the dividend

CA2006 = yes, if shareholders knowingly received improperly paid dividend

MA. 70 (Plc) and 30 (Ltd) = Cash dividend to members which is at directors’ discretion (subject to availability of profits and restrictions in Articles)

Interim dividend = no member approval
Final dividend = directors recommend amount for member ordinary resolution

Question 37

DISTRIBUTIONS

What is a dividend mandate?

What are the 3 benefits of a dividend mandate?

What is a dividend warrant?

Do warrants have an active life?

What should happen if attempted delivery of a dividend warrant keeps being returned as undeliverable?

If company cannot trace shareholder and warrant remains unpaid, what can the board do?

Once a warrant has been paid, how long must it be kept for?

In a joint shareholding, who are dividend warrants payable to?

Answer 37

Dividend Mandate = authority from member to company to pay dividends becoming due to an account at a specified branch of a specified bank (must be signed by member(s))

A more secure and faster method of payment, can also issue an ‘evergreen’ instruction for all future dividends to go there unless otherwise instructed

Dividend warrant= a document that shows that a shareholder is entitled to a dividend (can issue a duplicate if lost and received an indemnity)

Displayed on the warrant and usually 6-12 months, if expires must be returned to the company/bank/registrar for revalidation

FCA (listed companies) = dividend warrants should not be withheld unless 2 consecutive dividend payments have been returned as undeliverable or left uncashed

Board has right to resolve that the company ceases to be liable to pay the dividend after 12 years even if dividend warrant is later presented

6 years

The first named holder

Question 38

DISTRIBUTIONS
What is a scrip dividend?

What is an enhanced scrip dividend used to by companies to encourage members to take up scrip dividends?

What is the 1 benefit and 1 downfall of a scrip dividend for the company?

Is member approval required?

What is a dividend reinvestment scheme (DRIP)?

What authority is required for a DRIP?

What are the 2 benefits and 1 downfall of DRIP?

Answer 38

Scrip = Members may receive new, fully paid shares in lieu of cash dividends, but Articles must give authority

Enhanced scrip dividend = the value of the shares being offered exceeds the value of the cash payment

Scrip dividends help preserve cash within the company but the costs of administering a scrip dividend all fall on the company

Yes (Ord.R), because results in a share allotment otherwise than in proportion to existing shareholdings (= dilution of capital) (SH01 to CH also required)

DRIP = shareholder signs a mandate that all dividends in future be paid to the company to be used to purchase company’s own shares and then added to their existing holding (get existing fully paid shares instead of cash dividend)

No authority by members is required for a DRIP

1. Share purchased as signle transaction on day dividend is paid at current market price = takes advantage of the lower dealing costs involved in a bulk purchase
2. Member borne the costs (will have to pay stamp duty when shares purchased)

No cash preservation advantage for company

Question 39

DISTRIBUTIONS

For listed companies, the company should make an announcement of the decision to declare a dividend and confirming the dividend timetable.

What are the 4 dates in the dividend timetable?

Answer 39

1. The announcement date = the date the directors announce the declaration of a dividend = the same day the board makes the decision (latest date = Thursday before ex-dividend date) (11 May 2023)
2. The ex-dividend date = the trading date on and after which any transfer of shares does not include a right to the dividend (On a Thursday) (18/05/2023)
3. The record date = the date on which holdings on the register of members are used to calculate the individual dividend entitlements (Day after on Friday) (19/05/2023)
4. The payment date = the date the shareholders will receive the dividend payment (should be within 30 business days of the record date) (30 July 2023)

Question 40

What is a warrant?

Where does the authority to issue warrants come from?
What are the 4 differences between a holder of a warrant and an ordinary shareholder?

When are warrants often issued and why?

What must the terms of issue of warrants include? (4)

Answer 40

= documents which entitle the holder to subscribe for equity capital in company at some future date at a price determined at time of issue of warrant

The Articles

1. warrants do not form part of company’s capital
2. terms of warrant including rights of the holder are in the warrant itself not statute
3. warrant holder do not have right to dividends
4. warrant holders cannot attend or vote at general meetings

Issued in connection with takeover offers to make terms more attractive without immediate cost to bidding company

Procedures regarding (1) transfer, (2) inspection of register, (3) requests for copies of registers, (4)and dispatch of ARA to warrant holders

Question 41

CAPITAL EVENTS AND THE ROLE OF SHARE REGISTRAR - CONSOLIDATION / SUBDIVISION

Following member approval of the necessary resolution, what are the 3 steps that will be required?

Answer 41

1. Members’ entitlements under the new share class are calculated as at the record date and a schedule of entitlements forwarded to the company secretary, directors, and any professional advisers
2. Directors hold meeting to formally approve the issue of shares
3. ROM updated, new share certificates issue and original share certificates cancelled

Question 42

EMPLOYEE SHARE SCHEMES

What are the 4 advantages of employee share schemes for an employer?

What are the 5 disadvantages of employee share schemes for an employer?

What is the advantage of a HMRC approved scheme?

What is the disadvantage of a HMRC approved scheme?

Answer 42

A. Aligns employee and shareholder interests
B. Aids employee retention and recruitment
C. Remunerates employees in a tax-efficient way (tax benefits for HMRC approved schemes)
D. Raises working capital

1. Adverse effect on morale if the share price falls
2. Administration costs = initial set-up costs and long-term costs of administering the scheme
3. Dilution of share ownership
4. Risks of unrealistic financial expectations among employees
5. Difficulty in selling shares post-exercise for employees in an unlisted company and potential need and costs to establish employee benefit trust

Adv = shares granted benefit from tax incentives for both company and employees

Dis = must meet certain criteria set by HMRC = loss of flexibility of operation of a scheme

Question 43

EMPLOYEE SHARE SCHEMES - ENTERPRISE MANAGEMENT INCENTIVE (EMI)

What is an EMI scheme?

To qualify to issue EMI options, what 3 things must the employer have?

EMI options can be granted up to the value of what?

What is the option period capped at and what is the initial holding period?

What are the 3 tax benefits of these schemes?

Does HMRC have to be notified of EMI?

Answer 43

= a discretionary scheme allowing an award of share options with more favorable tax treatment (certain staff can be selected to participate, or it can be used as an all-employee scheme)

1. Assets not more than £30 million
2. Not more than 250 employees
3. Must be carrying out qualifying trade

£250,000 per employee in a 3-year period and employer limited to aggregate of £3 million

Capped at 10 years with no minimum initial holding period

A. No income tax or NI contributions charged on grant of EMI options
B. No income tax or NI contributions charged at point of exercise of options if options continue to qualify until date of exercise and exercise price is at least equal to market value at date of grant
C. Entrepreneurs Relief can be claimed on capital gains tax due on sale lowering tax rate to 10%

Yes, notify HMRC within 92 days of the date of grant of qualifying options

Question 44

EMPLOYEE SHARE SCHEMES - COMPANY SHARE OPTION PLAN (CSOP)

What is a CSOP scheme?

Which companies can offer CSOPs?

CSOP options can be granted up to the value of what?

What must the option period be between?

What are the 2 tax benefits of this scheme?

When will the tax benefits not apply?

Answer 44

= a discretionary scheme allowing an award of share options with more favorable tax treatment (certain staff can be selected to participate, or it can be used as an all-employee scheme)

Any company regardless of size

£30,000 per employee

3 and 10 years

1. No income tax or NI due when the option is granted
2. No income tax or NI due when the option is exercised
   (But capital gains tax will be due on sale on any gain over exercise price)

Any options granted to an employee in excess of £30,000 will be treated as an unapproved share option = do not benefit from tax incentives i.e. employee must pay income tax and NI on exercise of option (company may also need to make NI contribution)

Question 45

EMPLOYEE SHARE SCHEMES - SAVE AS YOU EARN (SAYE)

Who must a SAYE scheme be made available to?

Under a SAYE scheme, employees are granted what?

How much can employees contribute in this time?

What are the 3 tax benefits of this scheme?

Answer 45

All employees although this can be subject to an initial period of employment of up to 5 years

Options to buy ordinary, fully paid, and unrestricted shares after 3 or 5 years of service with the company at a discount of up to 20% of the market value at the date of grant

Employees can contribute between £5 and £500 per month for 3 or 5 years in order to purchase shares at the end of the option period or withdraw the cash as a lump sum

1. No income tax charge on grant of option
2. No income tax charge on exercise of option
3. Companies will receive corporation tax relief on cost of establishing and administering SAYE scheme
   (But capital gains tax will be due on sale on any gain over exercise price)

Question 46

EMPLOYEE SHARE SCHEMES - SHARE INCENTIVE PLAN (SIP)

SIP schemes issue shares and not options over shares.

What are the 4 types of SIP shares that a company can offer to its employees either alone or in combination?

Explain each of the 4.

How long must SIP shares be held by an employee (the holding period)?

What other tax benefit is there of this scheme?

Answer 46

1. free shares = company can award each employee free shares up to value of £3,600 per year with no income tax or NI consequences = awarded by reference to employee’s performance, length of service, or hours worked
2. partnership shares = Employees may purchase the lower of £1,800 or 10% of their salary in partnership shares per year out of their pre-tax and pre-NI salaries
3. matching shares = company may match partnership shares at a ratio of up to 2 matching shares for each partnership share purchased by employee = allows a further £3,600 worth of ‘free shares’ to be given by company each year
4. dividend shares = Employees may reinvest dividends paid on the shares by purchasing dividend shares with no income tax charged on dividends that are paid out

Must be held for minimum 5 years in an employee trust

Companies will receive corporation tax relief on cost of establishing and administering SIP scheme

Question 47

EMPLOYEE SHARE SCHEME ADMINISTRATION

Employee share schemes will be governed by plan rules which set out the key features of the options and typically includes what 4 things?

Is shareholder approval required to establish/amend employee share scheme?

Do pre-emption rights apply to shares issued under employees’ share scheme?

Answer 47

1. when company can issue options
2. Which employees can be granted options (e.g. length of service) and what happens when option holder leaves company (good or bad leaver (bad = lose options))
3. how many options will be granted
4. how and when options can be exercised

Articles may require (and listed company = yes under LR), but s.549 CA2006 = directors have authority to issue shares or options under employees’ share scheme without shareholder approval

S.566 CA2006 = no

Question 48

EMPLOYEE SHARE SCHEME ADMINISTRATION

Once a share scheme has been established it is important that ongoing administration is undertaken.

This includes the following steps which should be followed to grant options, maintain the option holders’ details, and file annual returns with HMRC etc.

What are the 11 steps?

Answer 48

1. Confirm the details of employees that meet the eligibility criteria
2. Obtain authority from directors to offer new options
3. send scheme documentation to eligible employees for them to join the scheme
4. Confirm details of accepting employees and issue confirmations and details of the options
5. For EMI scheme notify HMRC within 92 days of the date of grant of qualifying options
6. In lead up to vesting, ensure participants are aware of the ability to exercise options
7. Process any exercises of options and obtain director to issue new shares or transfer shares from treasure to satisfy the exercises
8. Update registers following allotment or transfer of shares (allotment = notify CH)
9. Details of participants should be maintained such as changes of address or name, good and bad leavers, additional awards etc
10. Each scheme will require an annual return to be made to HMRC with details of any awards, vestings, or lapses of options since the previous return
11. Plan rules should be reviewed periodically to ensure they remain fit for purpose and amendments duly authorise by board / shareholders

Question 49

LOST SHARE CERTIFICATE

A share certificate provides prima facie evidence of a member’s title to those shares.

What is the risk if the certificate is lost?

To protect against this, what should happen if a share certificate is lost?

Who should this be joined in by? (3)

What should be issued following this?

How should the Register of Members be updated?

What should be asked of the shareholder if the old certificate is ever found?

Answer 49

1. The lost certificate subsequently found and used fraudulently to support a transfer of shares
2. The company should ask the shareholder to provide an indemnity against the liability which may arise on a fraudulent transfer
3. The indemnity should be joined in by a bank, insurance or trust company (who may charge a fee to the shareholder)
4. A replacement certificate, clearly marked as ‘duplicate’
5. ROM annotated to note that the original certificate was lost and a duplicate issued

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