W5

Question 1

What is the purpose of share capital?

Answer 1

Share capital refers to the money raised by a company through the issuance of shares. It provides funds for running the business, starting the business, keeping the business going (working capital), and for expansion and growth.

Question 2

What are the different types of shares?

Answer 2

Shares can be broadly categorized into six groups: ordinary shares, preference shares, participating preference shares, deferred shares, redeemable shares, and convertible shares. However, there are no statutory definitions for these types of shares.

Question 3

What determines the rights attached to shares?

Answer 3

The rights attached to shares are set out in the company’s Articles. Different classes of shares may carry different rights and entitlements.

Question 4

When does a shareholder acquire full legal title to new shares issued by the company?

Answer 4

A shareholder acquires full legal title to new shares that the company has issued when their name is entered into the company’s register of members.

Question 5

What is the difference between issued shares and allotted shares?

Answer 5

Issued shares refer to the amount of shares in issue at any time, which is known as the issued share capital. Allotted shares, on the other hand, are shares that a person acquires the unconditional right to be included in the company’s register of members.

Question 6

What is the nominal or par value of a share?

Answer 6

The nominal or par value of a share is the minimum subscription price for that share. It represents a unit of ownership rather than the actual value of the share. Common nominal values for ordinary shares are 1p, 5p, or £1.

Question 7

What is the premium of a share?

Answer 7

A share may be allotted or issued for more than its nominal value, and the excess over the nominal value is known as the premium. The market value of a share is often much higher than its nominal value.

Question 8

What is called-up share capital?

Answer 8

Called-up share capital refers to the amount of nominal capital paid by shareholders. It is the aggregate amount of the calls made on a company’s shares and the existing paid-up share capital.

Question 9

What are treasury shares?

Answer 9

Treasury shares are shares that have been bought back by the company itself and are held by the company in its own name. The company can choose to sell these shares, cancel them, or transfer them to an employee share scheme.

Question 10

What are the different classes of shares?

Answer 10

A company may have different classes of shares, each with differing rights and entitlements. Some common types of shares include ordinary shares, preference shares, non-voting shares, employees’ shares, cumulative shares, convertible shares, and deferred shares.

Question 11

What are the characteristics of ordinary shares?

Answer 11

Ordinary shares are the most common form of share and carry voting rights in general meetings, entitlement to dividends if declared, and a portion of any surplus assets on winding up. They have an unlimited right to participate in dividends and surplus capital.

Question 12

What are preference shares?

Answer 12

Preference shares give the holder a preference as to payment of dividend or return of capital on a winding up of the company. They often have a fixed preferential dividend expressed as a percentage of the par value of the share.

Question 13

What are participating preference shares?

Answer 13

Participating preference shares allow the holders to participate, along with ordinary shareholders, in surplus profits and surplus assets on winding up. They are often issued with a fixed dividend and can be cumulative.

Question 14

What is the significance of the Articles in relation to shares?

Answer 14

The rights and entitlements in relation to shares, including different classes of shares, are set out in the company’s Articles. It is important to check the Articles to understand the specific rights attached to shares.

Question 15

What are deferred shares and what rights do they carry?

Answer 15

Deferred shares carry no voting rights and no ordinary dividend. In some cases, they may be entitled to a share of surplus profits after other dividends have been paid. However, more commonly, deferred shares carry no rights at all and are used in specific circumstances where worthless shares are required.

Question 16

What are redeemable shares and how are they treated by a company?

Answer 16

Redeemable shares are shares that are issued with the intention that the company will, or may wish to, buy them back and cancel them in the future.

Question 17

What are convertible shares and what option do they usually carry?

Answer 17

Convertible shares usually carry an option to convert into a different class of share according to stipulated criteria.

Question 18

What is the process for varying class rights in a company?

Answer 18

If an attempt is made to alter the Articles of a company such that existing class rights are varied, the resolution in question will not be effective unless varied in accordance with provisions in the company’s Articles for the variation of those rights or, where Articles don’t contain such provisions, by consent in writing of holders of at least 75% of the issued shares of that class or by means of a special resolution passed at a separate general meeting of holders of that class.

Question 19

What are the two types of dividends and how are they declared?

Answer 19

The two types of dividends are final dividends and interim dividends. Final dividends are recommended by the directors and declared by the company through an ordinary resolution of the shareholders following the financial year end. Interim dividends can be paid without the need for an ordinary resolution of the shareholders and are often paid where the company has realized an investment.

Question 20

What is the procedure for allotment, transfer, and transmission of shares?

Answer 20

Allotment of shares involves a 5-step procedure: checking for a cap on the number of shares, verifying if directors need authority to allot shares, determining if the shares are equity securities, considering the creation of a new class of share, and resolving to allot the shares. Transfer of shares is done through a stock transfer form, while transmission of shares occurs automatically in the event of death or bankruptcy of a shareholder.

Question 21

What restrictions may apply to the transfer of shares?

Answer 21

Restrictions on the transfer of shares may include the power of directors to refuse registration and pre-emption clauses (rights of first refusal). Directors may refuse to register a transfer of shares, except when there is suspicion of fraudulent activity. Pre-emption rights on transfer are usually set out in the Articles and require offering shares to existing shareholders before offering them to an outsider.

Question 22

What is the difference between allotting and transferring shares?

Answer 22

Allotment of shares is a contract between the company and a new/existing shareholder, where the company agrees to issue new shares in return for the purchaser paying the subscription price. On the other hand, a transfer is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares, except in the case of a sale out of treasury of treasury shares.

Question 23

What restrictions may apply to the allotment of shares by a private company?

Answer 23

Under section 755 of the Companies Act 2006, a private company limited by shares is prohibited from offering its shares to the public. Private companies are essentially restricted to offering their shares to targeted investors only and not to the public indiscriminately. However, there are exceptions for offers made to existing shareholders, employees of the company, certain family members, and employee share schemes.

Question 24

What is a prospectus and when is it required?

Answer 24

A prospectus is an explanatory circular that provides investors with details about the company and the investment itself. It is required when a company offers shares to potential investors. The prospectus should contain all the necessary information for investors to make an informed assessment of the company’s financial status and the rights attaching to the shares.

Question 25

What is a financial promotion and how does it relate to issuing shares?

Answer 25

A financial promotion is any invitation or inducement to engage in investment activity. Financial promotions are prohibited unless certain requirements set out in the Financial Services and Markets Act (FSMA) are fulfilled. When a company issues shares, communications made by the company must either fall within an exemption from the prohibition or be issued or approved by an authorized person.

Question 26

What is the process for transferring shares and what are the considerations?

Answer 26

Shares may be transferred from an existing shareholder to a new shareholder by way of sale or gift. Shareholders are generally free to transfer their shares, subject to any restrictions in the Articles. Common restrictions include the power of directors to refuse registration and pre-emption clauses. The transfer is effected by the transferor signing a stock transfer form and giving it to the transferee along with the share certificate.

Question 27

What are the considerations when issuing shares by a private company?

Answer 27

Private companies are prohibited from offering shares to the public. Offers made to existing shareholders, employees of the company, certain family members, and employee share schemes are excluded from this restriction. Additionally, the requirement for a prospectus should be considered when offering shares to potential investors. Financial promotions related to issuing shares must comply with the requirements set out in the Financial Services and Markets Act (FSMA).

Question 28

What is the purpose of an authorised share capital (ASC) in a company incorporated under CA 1985?

Answer 28

An authorised share capital (ASC) in a company incorporated under CA 1985 acts as a ceiling on the number of shares it can issue.

Question 29

Do companies incorporated under CA 2006 have an authorised share capital?

Answer 29

No, companies incorporated under CA 2006 do not have an authorised share capital. Shareholders wishing to impose a cap on the number of shares that can be issued by such a company will need to amend the Articles to include suitable provisions.

Question 30

How can the cap on the number of shares be removed in a company incorporated under CA 1985?

Answer 30

Shareholders wishing to remove or amend the deemed restriction in a company’s Articles may do so by ordinary resolution, despite the fact that removing such a deemed restriction involves changing the Articles, which would normally require a special resolution under CA 2006.

Question 31

What is the difference in the procedure for removing the cap on the number of shares between companies incorporated under CA 1985 and CA 2006?

Answer 31

For companies incorporated under CA 1985, the cap can be removed by ordinary resolution. However, for companies incorporated under CA 2006, the cap can only be removed by amending the Articles through a special resolution.

Question 32

What is the significance of checking the company’s Articles and resolutions in relation to share capital?

Answer 32

Checking the company’s Articles and resolutions is important to determine whether any resolutions have been passed to remove, impose, or change any cap on the number of shares, as well as to ensure that the information is up-to-date. This is crucial in establishing whether the company has the authority to issue new shares.

Question 33

What is the role of directors in the allotment of shares?

Answer 33

Directors are responsible for the actual allotment of shares to a shareholder, and they must resolve by board resolution to make an allotment. However, they may need to have the prior authority of the shareholders to be able to do this.

Question 34

Under what circumstances do directors have automatic authority to allot new shares?

Answer 34

For private companies with only one class of shares in existence, directors have automatic authority to allot new shares of the same class. However, this authority can be prohibited by the company’s Articles.

Question 35

What is the difference in the authority required for directors to allot shares in private companies with one class of share versus other companies?

Answer 35

For private companies with only one class of share, directors have automatic authority to allot new shares of the same class. For all other companies, directors need to be granted authority to allot new shares by the shareholders through an ordinary resolution.

Question 36

What are pre-emption rights in relation to the allotment of shares?

Answer 36

Pre-emption rights refer to the right of existing shareholders to be offered new shares before they are offered to new investors. This is to protect the existing shareholders’ proportionate ownership and entitlement to dividends and voting power.

• You will be able to work this out by looking at the dividend and capital payout on the shares. If both are capped, the share is not an equity security and therefore pre-emption rights are not relevant. If the shares are equity securities, consider whether the company needs to disapply pre-emption rights.

Question 37

How can pre-emption rights be disapplied on allotment?

Answer 37

Pre-emption rights can be disapplied by passing a special resolution or by including the disapplication in the company’s Articles. This can be done when the directors are generally authorised under s 551 CA 2006 or for private companies with only one class of share by special resolution under s 569 CA 2006.

Question 38

What is the procedure for disapplying pre-emption rights in relation to a specific allotment of shares?

Answer 38

To disapply pre-emption rights in relation to a specific allotment of shares, a special resolution under s 571 CA 2006 is required. The directors must provide a written statement explaining the reasons for the disapplication and the amount to be paid to the company pursuant to the allotment.

Question 39

What is the difference between a general disapplication of pre-emption rights and a specific disapplication?

Answer 39

A general disapplication of pre-emption rights applies to a particular, pre-existing s 551 authority and can be done by passing a special resolution or including the disapplication in the Articles. A specific disapplication applies to a specific allotment of shares and requires a special resolution under s 571 CA 2006, along with a written statement explaining the reasons for the disapplication.

Question 40

Under what circumstances do private companies with one class of share disapply pre-emption rights?

Answer 40

Private companies with one class of share may disapply pre-emption rights under the Articles. However, this is unusual in practice because it leaves existing shareholdings with no protection from dilution.

Question 41

What steps are involved in creating a new class of shares?

Answer 41

To create a new class of shares, a company must take several steps: amend the Articles to cater for the new rights through a special resolution, insert new provisions in the Articles dealing with the rights attached to the new shares, and pass a board resolution to allot the shares.

Question 42

What administrative requirements must be fulfilled after allotting new shares?

Answer 42

After allotting new shares, copies of resolutions must be sent to Companies House within 15 days. Additionally, the register of members must be updated within two months of the allotment, and share certificates must be prepared and sent to new shareholders within two months.

Question 43

What is the purpose of the rules on financial assistance in share acquisitions?

Answer 43

The rules on financial assistance in share acquisitions are designed to protect public companies’ assets representing share capital. They prohibit certain companies involved in the acquisition from giving assistance for the purpose of the acquisition.

Question 44

Which companies are prohibited from giving financial assistance in share acquisitions?

Answer 44

The prohibition on giving financial assistance applies to public companies themselves and their subsidiaries, whether private or public. For private companies, the prohibition applies to their public company subsidiaries.

Question 45

What types of transactions may amount to financial assistance?

Answer 45

Financial assistance includes transactions such as gifts, guarantees, loans, or any other type of assistance that materially reduces a company’s net assets or leaves it with no net assets. The transaction must actually constitute financial assistance and have the purpose of facilitating the acquisition.

Question 46

Are there any exceptions to the prohibition on financial assistance?

Answer 46

There are purpose exceptions to the prohibition on financial assistance. If the principal purpose of giving financial assistance is not for the purpose of the acquisition or if the acquisition is only an incidental part of a larger purpose, the giving of financial assistance may not be unlawful.

Question 47

What are the consequences of giving unlawful financial assistance?

Answer 47

Giving unlawful financial assistance is a criminal offense. The company and defaulting officers are liable to a fine and/or up to 2 years’ imprisonment.

Question 48

What are the statutory rules on financial assistance applicable to?

Answer 48

The statutory rules on financial assistance are applicable to the acquisition or sale of shares and the issue of shares by a company to an investor. They aim to protect public companies’ assets representing share capital.

Question 49

What are the unconditional exceptions to the prohibitions on certain transactions under Section 678 and 679 of the Companies Act 2006?

Answer 49

The unconditional exceptions to the prohibitions on certain transactions under Section 678 and 679 of the Companies Act 2006 include dividend payments.

Question 50

What are the conditional exceptions to the prohibitions on certain transactions under Section 678 and 679 of the Companies Act 2006?

Answer 50

The conditional exceptions to the prohibitions on certain transactions under Section 678 and 679 of the Companies Act 2006 include money lending in the ordinary course of business and assistance in respect of employee share schemes. These exceptions are subject to certain conditions being met.

Question 51

In the context of a company acquiring the entire issued share capital of another company, which security options fall within the prohibited financial assistance regime if the target company has two wholly owned subsidiaries (one being a PLC and the other a private limited company)?

Answer 51

In the context of a company acquiring the entire issued share capital of another company, only the security proposed by the PLC subsidiary is caught by the prohibited financial assistance regime.

Question 52

In the context of a company acquiring the entire issued share capital of a public limited company with two wholly owned subsidiaries (one being a PLC and the other a private limited company), which security options fall within the prohibited financial assistance regime?

Answer 52

In the context of a company acquiring the entire issued share capital of a public limited company with two wholly owned subsidiaries (one being a PLC and the other a private limited company), the security offered by the Target and both subsidiaries will be caught by the prohibited financial assistance regime.

Question 53

What is the doctrine of maintenance of share capital in company law?

Answer 53

The doctrine of maintenance of share capital in company law states that the share capital of a company is seen as a permanent fund available to its creditors. Companies are generally not permitted to return capital to shareholders, and all payments to shareholders should be made out of distributable profits.

Question 54

Under what circumstances can a company buy back its own shares?

Answer 54

A company may buy back its own shares (or redeem redeemable shares) provided it meets the conditions set out in the Companies Act 2006. This includes funding the buyback out of distributable profits, proceeds of a fresh issue of shares, or capital (for private companies only).

Question 55

What are the procedural requirements for a buyback of shares funded out of profits or proceeds of a fresh issue?

Answer 55

For a buyback of shares funded out of profits or proceeds of a fresh issue, a contract is required and must be approved by an ordinary resolution of the shareholders. The contract must be available for inspection at the company’s registered office and must continue to have issued shares other than redeemable and treasury shares.

Question 56

What are the funding options for a company to buy back its own shares?

Answer 56

A company may fund a buyback of its own shares using distributable profits, proceeds of a fresh issue of shares, or capital (for private companies only). However, public companies cannot use capital to purchase their own shares.

Question 57

What are the consequences of using capital to fund a buyback of shares?

Answer 57

Using capital to fund a buyback of shares is strictly regulated and subject to restrictions. Only private companies can use capital for this purpose, and any redemption or purchase out of capital must comply with the restrictions set out in the Companies Act 2006. Companies must first use distributable profits or proceeds of a fresh issue of shares before using capital.

Question 58

What are the requirements for a company to buy back its own shares out of distributable profits or proceeds of a fresh issue?

Answer 58

For a company to buy back its own shares out of distributable profits or proceeds of a fresh issue, the purchase must not be restricted or prohibited in the company’s Articles, the shares being purchased must be fully paid up, and the company must continue to have issued shares other than redeemable and treasury shares. A contract is required and must be approved by an ordinary resolution of the shareholders.

Question 59

What are the conditions for the buyback of shares out of profits or the proceeds of a fresh issue?

Answer 59

In addition to the conditions set out above, the following conditions apply: The purchase of own shares out of capital is not restricted or prohibited in the company’s Articles. The accounts must be prepared no more than three months before the directors’ statement. The company must have distributable profits available.

Question 60

What is the purpose of the directors’ statement of solvency in a buyback out of capital

Answer 60

The directors’ statement of solvency confirms that the company is solvent and able to pay its debts as they fall due. It also states that the company will remain solvent for a period of 12 months after the buyback. This statement is important as the directors may be required to contribute to the assets of the company and may face criminal sanctions if the company becomes insolvent within one year and they had no reasonable grounds for making the statement of solvency.

Question 61

What are the notification requirements for a buyback out of capital?

Answer 61

Within seven days of the passing of the special resolution approving the payment out of capital, the company must give notice to its creditors by publishing a notice in the Gazette and an appropriate national newspaper, or by giving notice in writing to each of its creditors. The company must also file copies of the directors’ statement of solvency and auditors’ report at Companies House.

Question 62

What is the role of the auditors’ report in relation to the directors’ statement of solvency?

Answer 62

An auditors’ report must be annexed to the written statement of solvency, confirming that the auditors are not aware of anything to indicate that the directors’ opinion is not reasonable. This report provides additional assurance regarding the solvency of the company.

Question 63

What are the requirements for notifying creditors in a buyback out of capital?

Answer 63

Within seven days of the passing of the special resolution approving the payment out of capital, the company must give notice to its creditors by publishing a notice in the Gazette and an appropriate national newspaper, or by giving notice in writing to each of its creditors. The notice must state that the company has approved a payment out of capital for the purpose of purchasing its own shares, where the directors’ statement and auditors’ report are available for inspection, and that any creditor of the company may apply to the court under s 721 CA 2006 for an order preventing the payment.

Question 64

What is the timing requirement for a share purchase in a buyback out of capital?

Answer 64

The share purchase can take place no earlier than five weeks and no later than seven weeks after the date of the special resolution. This timing requirement allows shareholders and/or creditors of the company to object to the payment out of capital by lodging an application at court for cancellation of the resolution.

Question 65

What are the post-meeting matters in a buyback of shares out of capital?

Answer 65

Within 28 days of the date on which the shares that are bought back are delivered to the company, the company must send a return to Companies House under s 707(1) CA 2006 and a notice of cancellation under s 708(1) CA 2006, together with a statement of capital under s 708(2) CA 2006. The company should also keep a copy of the contract for 10 years and update the register of members (and PSC register if applicable) to reflect the cancellation of shares.

Question 66

What are preference shares and how are they classified?

Answer 66

Preference shares are equity securities that carry a right to participate. They are classified as equity securities and require the disapplication of pre-emption rights by special resolution.

Question 67

What is the purpose of amending the articles of a company?

Answer 67

If a company has only ordinary shares in issue, the articles must be amended by special resolution to create the rights to preference shares.

Question 68

What is the purpose of security in a business acquisition?

Answer 68

In a business acquisition, security is required by the bank to protect its loan. The bank requires security over the assets of the target company, the buyer, and the buyer’s subsidiary PLC.