Week 4 (w/c 23rd Oct) - Shares, debentures and charges

Question 1

Why purchase shares in a company?

Answer 1

Purchasing shares gives the investor the possibility of:

Receiving dividends

Making a profitable return on the selling of shares

Influencing the company through control

Question 2

does a company need to register the names and adresses of a shareholder? what else do they need to include? does this info have to be public?

Answer 2

The company needs to maintain the register with the name and address of every shareholder, plus the extent of their shareholding (CA 2006, s113)

The company does not have to make the register public, but needs to confirm to CH where it is kept

Question 2

What are the two ways to become a shreholder by purchasing shares?

Answer 2

There are 2 ways in which shares can be purchased:

I – Purchasing direct from the company when shares are issued

II – Purchasing shares from an existing shareholder

The purchaser only becomes a member when their name is stated on the company register of members

Question 2

How are shares bought from the company?

Answer 2

Potential purchasers can apply to purchase shares from the company (known as making an offer)

The company signifies acceptance of the offer by sending a letter of allotment

Within two months of allotment, a share certificate must be issued (which provides evidence of the member’s ownership)

Question 2

how are shares bought from an exisitng member?

Answer 2

Largely occurs with public companies (plc)

Where a transfer exists, the company needs to be notified of the change in shareholder so that the register of members can be updated

Within two months, company will issue a new share certificate and the new shareholder acquires the relevant rights (voting etc.)

Question 3

What are the two types of shares?

Answer 3

Generally, there are two types of shares that can be purchased (and carry different rights):

1) Ordinary shares

2) Preference shares

Question 3

What rights do you have with a 5% shareholding of ordinary shares in a company?

Answer 3

With 5% Shareholding…

You have the right to call a general meeting (s303 CA)

And the right to circulate a written statement (s314)

Question 4

What are the rights of an rdinary share holder?

Answer 4

All company shareholders have the right to:

Transfer their shares to other parties (subject to any restrictions in the articles)

Receive any dividends declared by the company – in theory there is no limit to the size of the dividend (provided the company has the equity!)

Attend and vote at general meetings

Receive the company accounts

Question 4

What rights do you have with a 25% shareholding of ordinary shares in a company?

Answer 4

With 25% Shareholding…

You can block any special resolution (s283 CA 2006)

This means you have the power to prevent a company’s articles from being amended (s21 CA 2006)

Question 4

What rights do you have with a 10% shareholding of ordinary shares in a company?

Answer 4

You have the right to demand that the company accounts be audited (s476, CA2006)

Question 5

What rights do you have with a 50% shareholding of ordinary shares in a company?

Answer 5

With 50% Shareholding: You can pass & block any ordinary resolution

Question 6

What rights do you have with a 75% shareholding of ordinary shares in a company?

Answer 6

With 75% Shareholding You can pass any special resolution

Question 7

What rights do you have with a 100% shareholding of ordinary shares in a company?

Answer 7

With 100% Shareholding…

You can pass an elective resolution

You can entrench provision

You can do anything! (Within the company)

Question 8

what are preference shares?

Answer 8

Named because they contain the right to receive a dividend before an ordinary shareholder i.e. they take preference

The dividend will be of a fixed percentage each year, providing the company chooses to offer the dividend

example:
You purchase 500 x 10% preference shares, nominal value £1 each
IF the company pays an annual dividend to preference shareholders this year, you will receive 10p per share
Total dividend = £50
The company then may choose to pay a dividend on the ordinary shares

Question 9

what are cumaltive preference shares?

Answer 9

Cumulative means that if a dividend is not paid one year, it carries forward to the next year
Usually do not carry any voting rights, so shareholders do not have control of the company in that respect

If company winds up, preference shareholders have priority in their return of capital

Question 10

What are debenturres?

Answer 10

Debentures are the written documents setting out the terms of a loan (rate of interest, schedule of repayments etc.)

Can be secured or unsecured

As with shares, can be transferable (debentures for plcs can be dealt on the Stock Exchange)

Some debentures offer the right to convert to shares on maturity

As an investment, offers a consistent rate of return, therefore less risky than purchasing shares

Question 11

What are charges?

Answer 11

A charge is a contractual agreement in the form of security (on certain assets) for a loan

The borrower agrees to allow the rights over assets to be transferred to the lender, on the basis that, if the loan is unpaid, the lender can dispose of the assets and secure the return of the loan

Charges are a valuable way of ensuring that loans are secured on tangible assets

Question 12

What is a fixed charge?

Answer 12

The charge is ‘fixed’ to a particular asset

Asset may be “real property” or “personal property”

Real property consists of items such as property or land

While a charge rests over real property, the borrower cannot dispose or significantly alter the asset

Personal property includes equipment, chattels etc.

Requires the borrower to assign ownership of the property with the lender

This means, in the event of non-repayment, the lender has the power to dispose of the property

Question 13

Why are fixed charges more attarictve to lenders?

Answer 13

Fixed charges are more attractive to the lender, as the control they have over the property represents the best form of security

Charge remains until the loan is fully repaid

Lenders with fixed charges rank higher preferential creditors and floating charge lenders

Question 14

What are floating charges?

Answer 14

With floating charges, the charge may apply to a group of assets

The borrower is free to trade in the goods /assets subject to the floating charge

In the event of non-payment, the charge “crystallises” over certain assets

The lender then has the ability to dispose of them