Question 1

What is the five step process which a company needs to go through to issue shares?

Accepted Answer

1. Any cap on the number of shares that may be issued? (ASC) 2. Do the company director's need authority to allot? 3. Must pre-emption rights be disapplied on allotment? 4. Must new class rights be created for the shares? I.e. added to the Articles. 5. Directors must pass a BR to allot the shares (regardless of whether other steps apply)

Question 2

How does the position under Step 1 vary for companies incorporated under 1985 and 2006 legislation?

Accepted Answer

A company incorporated under CA 1985 will have an ASC unless such cap is removed in their Articles. A companies incorporated under CA 2006 will not have an ASC unless it is provided for in the Articles.

Question 3

How can a company incorporated under CA 1985 remove its ASC?

Accepted Answer

Must do so by shareholders ordinary resolution. Additionally, any deemed restriction will fall away as a consequence of the company adopting new Articles.

Question 4

How can a company incorporated under CA 2006 move a restriction on ASC from its Articles?

Accepted Answer

By special resolution.

Question 5

What is the position under section 550 CA 2006 in relation to Step 2?

Accepted Answer

Directors of private companies with only one class of share have automatic authority to allot new shares of the same class.

Question 6

What is the position under section 551 CA 2006 in relation to Step 2?

Accepted Answer

For all other companies apart from those that fall under s 550, the directors will need to be granted authority to allot new shares by way of ordinary resolution. Authority to allot under section 551 can only be given subject to limits in terms of both time and number of shares. This means that if a company has already granted its directors a section 551 authority, it must be checked to ensure it is still valid.

Question 7

If a company is incorporated under the 1985 regime can section 550 CA 2006 apply?

Accepted Answer

No, an ordinary resolution is required to authorise the directors to rely on CA 2006.

Question 8

What does a pre-emption right mean?

Accepted Answer

New shares should be offered pro rata to existing shareholders before any new investor.

Question 9

What is the purpose of pre-emption rights?

Accepted Answer

When a company allots shares to new shareholders, there is an effect on the proportionate ownership of the company held by the existing shareholders. Their ownership is diluted, and therefore their entitlement to dividends and voting power is also diluted.

Question 10

What type of shares do pre-emption rights apply to?

Accepted Answer

Equity securities

Question 11

What are equity securities?

Accepted Answer

If the dividend AND capital pay-out on shares are capped they are not an equity security and therefore pre-emption rights will not be relevant. However, any other share is an equity security.

Question 12

What are the two ways in which pre-emption rights are typically disapplied?

Accepted Answer

1. General disapplication of pre-emption rights by passing a SR or by including the disapplication in Articles. This is where directors are generally authorised for the purposes of s 551 CA 2006. This is not a permanent disapplication, but attaches to a particular pre-existing s 551 authority. 2. Private companies with one class of share can disapply by passing a SR. This is where the directors power to allot derives from section 550 CA 2006. Therefore, this can apply forever until the company has more than one class of share in issue.

Question 13

If a company is creating a new class of share what must it do under Step 4?

Accepted Answer

The company will need a SR to amend the Articles.

Question 14

What is required under Step 5?

Accepted Answer

The directors will resolve by board resolution to allot new shares on behalf of the company. Any requirements for shareholder resolutions must be dealt with in a GM before the BM is held.

Question 15

When would a GM not be necessary ahead of a BM in relation to the allotment of shares?

Accepted Answer

Where the company has no limit in its constitution on the number of shares which can be issued; AND Directors do not require authorisation because the company is a private company with only one class of shares OR has already been given the power to allot shares; AND is issuing shares to existing shareholders in proportion to their existing shareholdings OR has already disapplied pre-emption rights; AND Has the relevant class in its Articles.

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The procedure for allotment of shares Flashcards

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