SQE2 Flashcards
Advantages of loans (debt finance) compared to equity finance (shares)
- Control
- Payment of interest on the loan are tax deductible (unlike dividends), which would reduce tax payable by the company
- Loan is for fixed amount of money repayable so if company increases in value, won’t benefit the loan holder but will benefit shareholders
Disadvantages of term loan
- Have to pay with interest acc to terms regardless of how the company is performing
- Loaner can assign their debt to a third party without consent of debtor (depending on terms)
- Can be expensive to negotiate
Proposed wording for resolution re changing articles of association
(quoted exactly)
That the articles of association in the form attached to this written resolution be adopted in their entirety in substitution for the current articles of association of the Company.
(be careful to say articles of assoc and not articles)
Difference in involvement in company between shareholders and creditors?
(equity vs debt finance)
Shareholders have certain rights to attend and vote in GMs
Lender has no ownership rights and therefore no say in how run - provided company sticks to terms of facility agreement
Difference in repayment of capital for shareholders vs creditors
Companies generally don’t repay capital unless wound up, although shareholder may sell shares to TP
Loan capital must be repaid, possibly on demand. Must ensure funds available to repay loan when due, otherwise will be in default.
What constitutes the financial cost of equity financing to a company?
- any dividends, capital appreciation and share buybacks
- cost to existing shareholders, since their share of future dividends or capital growth is decreased
What factors influence interest rate debt finance?
- Security offered by company
- How much is borrowed
- How long for
- Company’s creditworthiness
- General economic conditions
What may restrict a company’s ability to issue shares (equity finance) vs debt finance?
Equity finance - company’s articles
Debt finance - terms of agreement may restrict taking new loans/debts, at least w/o existing lender’s consent
What should u tell client who wants licence to sell alcohol
must attend a training course and sit an exam
Legal and financial considerations of expanding business
Financial
- additional premises rent
- marketing costs
- tech and IT support if starting up online
- additional expenses mean profits initially decrease before benefit takes effect
Legal
- consider best way to expand - merger vs acqusition
(merger = go into business w another, acquisition = acquire another’s business
And also consider timing
Insolvency concerns for new businesses
start-up companies esp at risk to issues in economy
signif start up costs before make money is a concern
over-expansion common cause of insolvency
Owner funding as form of equity finance in
- sole traders
- partnerships
- companies
sole trader
- provide capital themselves so own entire business / profits
partnerships
- each gets partnership share so receive share of profits
- agreement may entitle to interest
- could be sleeping partners if want to invest but no management
companies
- shares in return for VRs and usually dividends
Impact of failing to declare/pay dividends?
○ IF FAIL TO PAY DIVIDENDS IT IS UNLIKELY TO ATTRACT FURTHER INVESTMENT AND EXISTING INVESTORS MAY PULL OUT
Typical shares for small limited company.
what do they give
Ordinary
Give VRs but don’t guarantee dividends
What are business angels?
What type of financing is it?
Wealthy individuals who invest in high-growth companies in return for a share in ownership of business i.e. equity in the business
E.g. Dragons Den
Equity financing
What is private equity as form of equity financing?
- Private equity firms manage private pools of funds for investors
- Raise funds from private sources, usually pension funds and wealthy individuals as well as borrowing
- Then buy controlling shares in undervalued/underperforming companies who identify as having potential to improve
- use controlling interest to turn company around and sell it at a profit in future date, usually five to ten years
Crowdfunding as way of financing company
How does it work?
What type of financing is it?
Equity financing. Form of fintech.
○ Invite investment from public via internet
○ They invest small amounts usually between 100 and 10k
○ They are pooled together to help business reach funding target
○ Often good for small high-risk innovative businesses which struggle to raise finance from conventional sources
○ Investors don’t necessarily get a share in the business
○ They provide funds solely to enable the business to start up or finance a particular project
○ E.g. in past return was a copy of the finished version of a computer game
eCommerce as way of financing company
How does it work?
What type of financing is it?
Equity
Third party companies which help market/distribute products or manage payments are also starting to fund the businesses which use them since have so much info on those companies and are in a position to assess their creditworthiness
E.g. Etsy
PayPal
limited vs unlimited liability
Limited liability means shareholders aren’t personally liable
Unlimited liability means if company defaults, directors must repay from personal assets
Short-term vs long-term debt finance
Diference and disadvantages
Short-term
- usually overdrafts
- interest charged at daily rate so spenny
Long-term
- usually require security in return so easier if own premises
- bank may require personal guarantee
- sole traders/partnerships may need to grant over own individual premises
Explain bonds as ways for company to raise capital
Can issue to raise capital
Shares are based on EQUITY value of a company.
Bonds based on DEBT value.
Means bonds not backed by security
Instead company agrees to pay back on certain day and pay interest until then.
advantages of taking bonds from company for investor?
:) good for investors as like other investments can be sold so can get money back. Interest then paid to current holder who claims the sum on maturity.
What could company do if can’t get borrowing from bank eg cos poor credit rating or high levels of borrowing?
§ Borrow from family and friends - may charge lower interest rate or keep available for longer period
§ Commercial loan providers - provide loans and credit facilities. But can’t take deposits like banks
Government - grants and loan schemes for small businesses
How could investor check whether company worth investing in or dealing with in general?
Credit rating
Often lower score if pay bills late
PESTLE meaning
- Political
Stability of government / tax policy - Economic
○ Interest rates, inflation, unemployment, projected economic growth/decline - Social
○ Population growth rate and demographics e.g. public opinion - Technological
○ New ways of working and communication - Legal
○ Trends in regulation and deregulation / employment legislation - Environmental - climate change/weather
(e.g. Italy the wine)
Shareholder activism - different methods
- Pose questions at a GM
- Requisition a GM and table a resolution
- Sell shares and re-invest into diff company
Explain how activist shareholder may pose Qs at GENERAL meeting and cost/benefits
Shareholder may speak at GM
- so can use to pose difficult Qs to board
Costs/benefits
- cheap
- 1-2 hours work
- low impact: Board may choose to re-think based on bad publicity
Limitations for activist shareholder posing Qs at GM
board may refuse to answer your question if it would involve the disclosure of confidential information, or it would not be in the interests of the company
consider when GM would be held - would it be after contract etc signed?
activist shareholder: sell shares and re-invest funds
Adv and disadv
Disadv
- Does not maintain relationship as would terminate relationship
- Also does not stop the company doing what don’t want it to
But is cost-effective and may even be profitable as share prices unlikely to reduce as a result of investment if don’t raise in public forum
Requisition a general meeting and table a resolution as form of shareholder activism:
% shares required
Advantages
5% (public and private)
Place Ds under pressure
Forum to air views and pass resolutions effecting the change
Requisitioning a GM and tabling a resolution - what must it include?
Business to be dealt with at meeting
Text of resolution
(e.g. to prevent investment in XYZ on grounds of env sustainability and poor chance of long-term profit)
forcing Ds to act in certain way requires special resolution
upon receipt valid requisition request, how long board all GM?
what must notice contain?
21 days
notice of proposed resolution
provide for GM and date , which must not be than 28 days after notice been sentT
To be tabled, a shareholder requisitioned resolution must not be ____
Ineffective (eg bcos illegal)
Frivolous
Defamatory
Vexatious
Cost and risks of requisitioning a GM and proposing resolution to effect change as shareholder
More expensive - around 2-3 hours to ensure procedure managed properly and 4-5 hours to draft docs
Might be perceived as deliberately obstructive and other shareholders may oppose you
Board entitled to speak and may make good business case for why resolution not in interests
Board may try to establish res falls into frivolous or even vexatious category
Advantages of requisitioning a meeting as form of shareholder activism
- threat alone may cause directors to act
- depending on circumstances, may be more likely to achieve goal than other options
How could shareholders reach other shareholders before a meeting to influence them?
Requirements for shareholder to do this and formalities?
Require the company to circulate statement to members
5% VRs
Up to 1000 words
Must relate to matter in proposed resolution to be considered at a GM
(just check if this applies to private companies too)
What must company do if received valid request to circulate written statement before GM?
Company must circulate statement once received request
Must send to every member entitled to receive notice of the meeting:
- in same manner as notice of meeting
(eg writing)
- and same time or soon as reas practicable after giving notice of the meeting
(just check if this applies to private companies too)
Penalty if company fails to send written statement to members following request
fine
Company does not need to send a written statement, despite request from shareholder, if
Can satisfy court that member making request is abusing their rights
(unlikely if a lot of gravity to situation/I suspect as long as not trivial)
Difference between present and in attendance
Present = those needed for quorate e.g. directors
In attendance = any others e.g. company secretary
How can partners prevent provisions of partnership act applying?
Oral/written agreement, conduct i.e. acts/omissions etc
Property used by partnership - how is it owned?
Even though partnership property might be used or legally owned by one partner, must hold use or ownership on trust for benefit of all partners
What is MA 14?
Can u disapply?
D can’t count in the QUORUM or VOTE if proposed decision of Board is:
concerned with actual or proposed transaction or arrangement with the company
which the D is interested in
Can disapply it (permanently or temporarily) - eg small business
But can’t disapply ob to declare nature and extent
Who decides whether to proceed with court proceedings/litigation in company?
Board of directors
(nb not capitalised)
explain board meeting sandwich
explain then in context of SPT
where need approval of shareholders, it goes:
- Board
- Shareholders
- Board
e.g. SPT
(1. notify other Ds of interest)
2. Board draft and approve draft contract
3. consent via ordinary resolution of shareholders
4. board execute contract
Effect of quorum not being met, including if not met in breach of MA 14
Meeting and decision invalid
(remember MA 14 is where interested director can’t vote or count in quorum)
Relevant MA for director’s personal interests
Explain it and the number
MA 14
Can’t count in QUORUM OR VOTE on board decision regarding
actual or proposed transaction with company in which director is INTERESTED
can count and vote for part of meeting where other resolutions passed
How can director declare interest in transaction to board?
Explain how differs for proposed and existing.
(make sure declare NATURE and EXTENT)
- Proposed
great deal of flexibility
make before enter
section refers to:
- at board meeting
- general notice in writing
^ also says does not HAVE to be done in this way
(says in WKS “great deal flexibility. could be by general notice in writing to Ds or somet less formal - I would have said writing best in case future disputes)
- Existing:
- soon as reas practicable
MUST:
board meeting; or
notice in writing sent to all Ds; or
general notice at BM
SPT - what should interested director do if selling/connected with the person selling the land?
Obtain an independent valuation of the property
Docs needed at board meeting to transfer shares
- stock transfer form
- share certificate
maybe:
- deed of adherence to shareholders agreement (would be told in instructions)
Can get variety of charges as a company - an advantage for companies.
But how can this negate other advantages of being a company?
Lenders may require personal guarantees before making a loan.
If company default, liable to pay back.
Impact negatively on key adv of shareholders not being liable for company’s debt.
Resolutions required where buyback of shares (where not out of capital)
SANDWICH
Board
1. approve draft terms of buyback
2. propose OR
3. circulate written res or call GM
SH
- pass OR
Board
1. enter buyback agreement
2. authorise director to execute on behalf of company
Have a go at Business Consolidate task 2 unit 5
When are shareholder agreements common
- shareholders are outside investors
(i guess not connected to company like S GBS) - entering into a joint venture
i.e. two sep businesses contribute own resources to a collaborate in carrying out a business
Shareholder agreements different to articles in terms of what they must relate to.
Explain
Terms in shareholder agreements must directly relate to shareholders RIGHTS
IMPORTANT.
Shareholder can only take action under articles if ___
Directly relates to their rights AS A MEMBER
(not as an outside person)
Cos doesn’t bind TPs
Examples of how articles may be used to sue?
shareholder to company:
sue for dividend if dividend declared but individual shareholder entitled to receive if left out
company to shareholder:
sue shareholder who failed to pay up on allotment of shares to them
Shareholder agreement terms which may be used to protect minority shareholders
- articles only changed if all vote in favour
(increases from 75% to 100%) - restrictions on who members can transfer their shares to
(i personally don’t think last one is that good for minority specifically but guess if pre-emption rights disapplying)
Articles protecting minority shareholders
- Class rights
- lists matters which can only be done with consent of EACH CLASS OF SHAREHOLDER
^ since such matters would be a variation of class rights. - Weighted voting rights
- given to any shareholder who votes against a resolution
^ so they can cast such number of votes as is needed to defeat the resolution
Procedure for allotting shares SOLELY BETWEEN shareholder and company? (i.e. not CAP)
- Apply for shares
- Company approves application
- Shareholder registered as member
- Company issues Share Certificate and sends docs to CH
Qs will likely need answering re allotting shares
- How will shares be paid?
- Copy of articles? Table A or Model Articles?
- How quickly does transaction need to be completed?
- Does the company have sufficient shares to make allotment?
- Do directors have power/given authority to allot shares?
- Any interested directors?
- Pre-emption rights apply?
Necessary documents for allotment of shares
(may not all be required:)
- Letters of application for shares
- Board minutes
- Notices of GM
- Shareholder reoslutions
- GM minutes
- Company forms and returns
Requisite percentages for:
- Short notice
- Poll vote
- Circulate written resolution
- Circulate statement re matters dealt with in GM
- Requisition GM
90% consent; OR
95% in public / table A;
AND majority in number
(section 307 CA)
10%
All others 5%
(SHORT NOTICE appears to be ONLY ONE WHERE DIFF PUBLIC COMPANIES)
Sections of CA for:
declaring in proposed
dec in existing
s 177
s 182
how to get rid of chairperson right to casting vote
articles
(so special res)
