Unit 10 - Corporate capital

Question 1

Discuss the solvency versus the liquidity test.

Answer 1

• Solvency (objective); assets >= liabilities.
• Liquidity (subjective); company can pay debts as they become due in the course of business for a period of 12 months after the date on which the test is considered.

Question 2

Discuss financial assistance.

Answer 2

The board can provide financial assistance to anyone for purchasing or subscribing to the company’s securities, but only if allowed by the Memorandum of Incorporation (MOI).

Question 3

What are the conditions for financial assistance ?

Answer 3

• The assistance can be given under an employee share scheme.
• With shareholder approval (via special resolution) within the last 2 years, either for a specific recipient or a category of potential recipients, and the recipient must fall within that category.

Question 4

What are the requirements for financial assistance for the subscription of the shares in the company.

Answer 4

• Unless MOI says otherwise you can provide financial assistance to help someone acquire shares in your company.
• Board resolution that authorises this financial assistance.
• Board can only authorise if it is in terms of the employee share scheme.
• If sanctioned in terms of special resolution for the last two years for a specific person or group of persons.

Question 5

What is the test for financial assistance.

Answer 5

• Test for financial assistance is the “impoverishment test”.
• If the company is poorer after than it was before the transaction then it constitutes financial assistance.

Gradwell case.

Question 6

Discuss distributions.

Answer 6

• Dividends (in cash or in kind).
• Payment in cash instead of capitalisation shares.
• The repurchase of shares by the company.
• A debt incurred to or for the benefit of a holder of any of the shares.

Question 7

What are the requirments for distribution ?

Answer 7

• Board must authorise by resolution.
• Comply with solvency and liquidity test.
• Board acknowledges that it applied the test.

Question 8

Discuss the acquisition of shares.

Answer 8

• Acquisition by a company of its own shares is considered a distribution and must follow certain rules.
• Acquisition from directors, officers, or related persons; if shares are bought from these individuals, the board’s decision must be approved by a special resolution of shareholders.
• If more than 5% of a class of shares is being acquired, it may trigger additional requirements.
• Subsidiaries cannot own more than 10% of the holding company’s shares.
• When new shares are issued, current shareholders have the right to purchase them first.