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Business Law and Practice > Workshop 5: Equity Finance > Flashcards

Workshop 5: Equity Finance Flashcards

1
Q

What is capital?

A

Funds available to run business of a company

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2
Q

What is the definition of ‘share capital’?

A

Money raised by the issue of shares, which is contributed towards by investors in company and represented as ‘shares’, which are issues to these investors

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3
Q

What is ‘working capital’?

A

Funds needed to keep the business going

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4
Q

What can ‘share capital’ also be known as?

A

Equity finance

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5
Q

What does a shareholder have by way of investing into the company and becoming a part owner?

A

Voting rights

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6
Q

What does s 542(1) and (2) postage regarding the validity of shares?

A

(1) shares in a limited company having a share capital must have a fixed nominal value
(2) allotment of share that does not have a fixed nominal value is void

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7
Q

What is meant by the term ‘premium’?

A

The excess over nominal value of a share

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8
Q

TRUE OR FALSE

Nominal value represents a unit ownership rather than the value of the share

A

True

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9
Q

What are the common nominal values for ordinary shares?

A

1p, 5p or £1

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10
Q

What is the ‘issues share capital’?

Where can this be found?

A

The amounts of shares in issue at any time, shown in the vompany’s balance sheet in its accounts

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11
Q

What two components make up a company’s ISC?

A
  1. Subscriber shares
  2. Shares issues after the company has been incorporated to new or existing shareholders
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12
Q

What are ‘subscriber shares’?

A

Shares purchased by the first members of the company

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13
Q

What are ‘allotted shares’?

A

S 558 CA 2006 defined shares to be allotted when one acquires the unconditional right to be included in the company’s register of members regarding those shares

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14
Q

What is the ‘paid up share capital’?

A

The amount of nominal capital paid

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15
Q

TRUE OR FALSE

The amounts of share capital outstanding can be demanded only 5 years after having the shares

A

False, it can be demanded by the company at any time

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16
Q

What does a payment being ‘called’ mean?

A

When a company demands the payment of share capital

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17
Q

What is the definition of ‘called up share’?

A

Combined numbers of calls made on a company’s shares and existing paid-up share capital - rarely used as shares are rarely not fully paid up [on issue]

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18
Q

What are ‘treasury shares’?

A

Shares that have been brought back by the company and held ‘in treasury’

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19
Q

What is special about treasury shares in the sale of them?

A

They are ‘transferred’, not issued shares

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20
Q

Can shares in treasury be sold?

A

Yes

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21
Q

What are the names of the eight classes of shares?

A
  1. Ordinary shares
  2. Redeemable shares
  3. Preference shares
  4. Non-voting shares
  5. Employees shares
  6. Cumulative shares
  7. Convertible shares
  8. Deferred share
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22
Q

What is the main underlying reason as to why there are different classes of shares?

A

Each class of shares have different entitlements of

  1. Voting
  2. Dividends
  3. Return of capital when wound up
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23
Q

Where can you find the rights of the share class you’ve invested in?

A

In the company’s Model Articles

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24
Q

What is the most commonly allotted shares?

A

Ordinary shares

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25
Q

What type of shares are issues if a company’s shares are issued without differentiation?

A

Ordinary shares

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26
Q

What three rights do ordinary shares carry?

A
  1. Right to vote in general meeting
  2. Right to a dividend if one is declared
  3. Right to a portion of any surplus assets of the company on a winding up
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27
Q

What three things could a preference share give the holiday a preference of payment to?

A
  1. Payment of dividend
  2. Payment of return of capital on wind of company
  3. Both
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28
Q

TRUE OR FALSE

Equivalent payment of dividends, return of capital or both will be award to a preference shareholder after awarded to ordinary shareholder

A

False

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29
Q

Do preference shares have voting or non-voting rights attached?

A

Non-voting, but important to check rights set out in MA, as these shares can be issued with voting rights

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30
Q

How is the preference to a dividend usually expressed?

A

As a percentage of the par nominal value of the share

E.g., 5% of £1 preference share

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31
Q

How is the preference to a dividend usually expressed where the preference share has been issued at a premium where it is intended the fixed dividend will be paid based on amount the share was subscribed to?

A

The share rights in the MA must expressly state that the dividend is to be calculated as a percentage of the total subscription price per preference share

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32
Q

What are the ‘cumulative preference shares’ that are generally assumed?

A

Where a dividend is not declared for a particular year, but is able to be paid when carried over into the following year

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33
Q

What are the characteristics of ‘deferred shares’?

What are deferred shareholders sometimes entitled to?

A
  1. Carry no voting rights
  2. Carry no ordinary dividend

Sometimes entitled to a share of surplus profits after other dividends have been paid

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34
Q

When are deferred shares issued?

A

When worthless shares are required

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35
Q

What are ‘redeemable shares’?

A

Shares that are issued with the intention that the company will buy them back and cancel them if the future

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36
Q

What are ‘convertible shares’?

A

Shares that have the option to convert shares into a different class according to stipulated criteria

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37
Q

What is the difference between alloying and transferring shares?

A

Allotting - contract between company and new/existing shareholder where company agreed to issues shares in return for purchaser paying for subscription price

Transfer - contract between existing shareholder and purchaser where existing shares are sold

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38
Q

TRUE OR FALSE

The company is a part to a transfer of shares

A

False

Only in the exceptional circumstance where there is a sale out of treasure of treasury shares

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39
Q

What does s 775 CA 2006 mean regarding private companies limited by shares offering of shares?

A

They are limited to offering their shares to target investors only instead of the public, like PLCs

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40
Q

What is a ‘prospectus’ in the offering of shares to would-be investors?

A

Circular that explains details about the company as well as their investment, and how they should base their investment decision

It contains the necessary information to make an informed assessment of the company’s financial status and the rights attached to the shares

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41
Q

Will a prospectus be needed in the offering of shares by a private company?

A

Usually not, but the rules will need to still be considered each time

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42
Q

What two options of communications must be made by a company when issuing shares regarding financial promotions?

A
  1. Communications must be within an exemption from s 21 FSMA prohibition or
  2. Communications must show approval of financial promotions by authorised person appointed by FCA to approve financial promotions
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43
Q

What is the FSMA’s stance on financial promotion?

A

Financial promotion is the course of business to engage in investment activity is prohibited (s 21 FSMA)

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44
Q

What is the ‘transmission of shares’?

Which two scenarios may the transmission of shares occur?

A

Automatic process of the transmission of shares in either

  1. Death of a shareholder, their shares will pass to their PR
  2. In the bankruptcy of a shareholder, their shares automatically vest in their trustee in bankruptcy
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45
Q

Which two ways can shares be transferred from an existing shareholder to a new shareholder?

A
  1. By way of sale
  2. By gift
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46
Q

Are there restrictions on the extent shareholders can transfer their shares?

A

Yes - these restrictions are subject to MA

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47
Q

What are the two most common forms of restriction on shares?

A
  1. Directors’ power to refuse to register
  2. Pre-emption clauses (rights of first refusal)
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48
Q

What does Article 26(5) MA say about the directors power to refuse to register state?

A

Directors may be able to refuse to register the transfer of a share

If they refuse, the instrument of transfer must be returned to transferee shareholder with notice of refusal, unless director suspect proposed transfer to be fraudulent

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49
Q

TRUE OR FALSE

Under s 771CA 2006, a company must give reasons it refuses to register a transfer

A

True

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50
Q

What do pre-emption rights on transfer of shares instruct?

A

That shareholders must offer their shares to existing shareholders before offering to an outsider

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51
Q

What is the three step process for the method of transfer of shares?

A
  1. Fill, transferor sign and submit stock transfer form with share certificate to new shareholder
  2. Beneficial title and legal title passes on
  3. Have stock transfer form stamped before new owner can be registered as new shareholder
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52
Q

Who does the beneficial title of the shares pass on to in transferring shares?

A

Passes on to the execution of the stock transfer form

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53
Q

Who does the legal title of the shares pass on to in transferring shares?

A

Onto the registration of member as the owner of those shares in the register of members by the company

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54
Q

How much is the stamp duty?

A

Buyer pays 0.5% of the consideration, rounded to nearest £5

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55
Q

TRUE OR FALSE

No stamp duty payable if consideration is £1k or less

A

True

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56
Q

TRUE OR FALSE

Minimum stamp duty fee of £5 is payable where consideration is more than £1000

A

True

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57
Q

What it’s important regarding different legislation when considering the context of issuing of shares?

Why is this?

A

Whether the company has been incorporated under CA 2006 or CA 1985

Because there will be difference in the way the company issues shares

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58
Q

How many steps are there generally in the issuing of shares!?

A

5

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59
Q

What is step 1 in the procedure of issuing shares?

A
  1. You must check the MA for caps and limits on no. of shares that may be issued
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60
Q

What happens if a shareholder wishes to exceed the limit of shares issued?

A

The cap must either be removed or increased limit

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61
Q

What is the main difference between CA 2006 and CA 1985 regarding the requirement for an authorised share capital (“ASC”) ?

A

The 1985 requires companies to have the ASC in their MA, unless cap is removed

The 2006 does not require companies to have ASC in their MA

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62
Q

How can shareholders enforce their wish of a cap on the shares issued by a company?

A

They will need to amend the Articles by special resolution to include the suitable provisions

63
Q

How can companies incorporated under CA 1985 remove or amend the restriction on issuing of shares?

A

By ordinary resolution (majority rule)

64
Q

How can companies incorporated under CA 2006 remove or amend their incorporated ACS?

A

By special resolution under s 2161) CA 2006

65
Q

What is step 2 in the procedure for allotment of shares?

A
  1. Whether directors in company have the authority to allot
66
Q

Who is responsible for the allotment of shares?

How are the allotment of shares resolved?

A

Directors

By board resolution

67
Q

Do all directors have automatic authority to allot shares by board resolution?

A

No

They may need to have prior authority of shareholders to allot shares by board resolution

68
Q

What are the two exceptional circumstances that s 549 CA 2006 states must be adhered to, if directors are to go obtain authority to allot share by board resolution?

A
  1. S550 CA 2006 - private companies with only one class of shares, directors will have automatic authority to allow new shares of same class (unless prohibited);
  2. S551 CA 2006 - for all other companies, directors will need to be granted authority to allot new shares by existing shareholders
69
Q

Which resolution does s 551 CA 2006 state directors must obtain authority from existing shareholders to allot new shares?

Are there an exceptions?

A

Ordinary resolution, unless higher majority is required by MA

70
Q

What is the purpose of s 500 CA 2006?

A

Simplifies process of director allotment of shares, given no shareholder resolution is required

71
Q

What type of resolution is required if a company incorporated under CA 1985 wishes to rely on s 500 CA 2006

A

Ordinary

72
Q

What is step 3 of the procedure for allotment of shares?

A
  1. Questioning whether pre-emption rights must be disapplied on allotment
73
Q

Why must ‘pre-emption rights (right of first refusal)’ be applied?

A

Because the ‘dilution’ of ownership, dividends and voting power occurs when new shareholders come in, due to a decrease in proportional ownerhsip of company

74
Q

What happens int he circumstance pre-emption rights apply in the procedure of allotting shares to new shareholders?

A

The company must request that the shareholders disapply the pre-emption rights by special resolution

75
Q

Which type of shares are pre-emption rights relevant to?

A

Ordinary shares

76
Q

What are the two methods companies use to disapply pre-emption rights, subject to the directors authority to allot shares?

A
  1. General disapplication by ordinary resolution
  2. Disapplication by special resolution
77
Q

Who does disapplication of pre-emption rights by special resultuon apply to and provide for?

A

For private companies with only one class of share, supposing that the directpr’s authority derives from s 550 CA 2006

78
Q

Who does general disapplication of pre-emption rights by ordinary resolution apply to and provide for?

A

Companies where the directors are generally authorised for purposes of s 551 CA 2006

79
Q

What does specific disapplication of pre-emption rights relate to?

A

Where a company disapplies pre-emption rights in relation to specific allotment of shares

80
Q

How can the specific disapplication of pre-emption rights occur?

A

By passing a special resolution under s 571 CA 2006

81
Q

How can companies exclude statutory pre-emption rights?

A

By including provisions in their MA

82
Q

Why is it rare that companies exclude pre-emption rights on a permanent basis?

A

Because doing so would remove existing shareholder’s protection from dilution

83
Q

What is step 4 in the procedure for the allotment of shares?

A
  1. Questioning whether new class rights must be created for the shares
84
Q

What must a company do if, in adherence to step 4 of allotting shares, they want to create a new class of shares?

A

The company must insert new provisions in its MA to deal with the rights of the new class of shares

85
Q

What is step 5 in the procedure for allotment of shares?

A
  1. Directors must pass board resolution to allot the shares
86
Q

What kind of resolution is required for a company to alter their MA?

A

A special resolution of shareholders under s 31 CA 2006

87
Q

Where are the new shares alloted?

A

At the board meeting where board resolution is passed to allot shares

88
Q

When must shareholder resolutions be dealt with when it comes to the board meeting being held to allot new shares?

A

At a general meeting before the board meeting is had (where the new shares will be allotted)

89
Q

Which 4 conditions need to be met for a company not needing to cal a GM in advance of a board meeting?

A
  1. No limit of no. of shares to be issues
  2. No requirement for directors’ authorisations as company is private with one class of shares and no MA restrictions OR directors’ have given authority to allot shares
  3. Company is issuing shares to existing shareholders proportionately to existing shares
  4. Company has relevant class rights in MA
90
Q

What are the four administrative requirements on the allotment of shares?

A
  1. Send copies of resolutions to CH within 15 days (s 29, s 30(1) and s 26(1))
  2. Send company forms to CH
  3. Update company registers
  4. Share certificates
91
Q

What is the time frame for preparing and sending certificates to new shareholders once allotted?

A

Two months

92
Q

What is the time frame for updating register of members after the allotment of shares?

A

Two months

93
Q

What is the time frame for return of allotment (SH01 form) and statement of capital?

A

One month

94
Q

Should Amended Articles be sent to CH when allotting shares, if applicable?

A

Yes

95
Q

What transaction does s.677 CA 2006 set out as being ways amounting to financial assistance?

A
  • Way of gift
  • Guarantee
  • Security
  • Indemnity
  • Release
  • Waiver
  • A loan/similar agreement
  • Any other financial assistance where company’s net assets are reduced by the financial assistance
96
Q

How long does the authority to allot last for under s 551?

A

Five years

97
Q

What resolution is needed to give authority to directors to allot?

A

Ordinary resolution

98
Q

What types of companies are prohibited from giving financial assistance to companies involved in acquisition of shares broadly speaking?

A

Private and public companies in groups containing public companies

99
Q

Which transactions are the roles of financial assistance applicable?

A
  • Acquisition of shares
  • Sale of shares
  • Issue of shares
100
Q

Who is prohibited from giving financial assistance

A
  • Public company
  • Private company subsidiary of a public company
  • Public company subsidiary of a public company
  • Public company subsidiary of a private company
101
Q

TRUE OR FALSE

Financial assistance must be direct only

A

False

It can be given directly or indirectly

102
Q

What is an example of ‘direct’ financial assistance?

A

Loan given to the buyer of shares

103
Q

What is an example of ‘indirect’ financial assistance?

A

Guarantee given to bank in relation to a loan make by the bank to a buyer of shares

104
Q

What purpose must the financial assistance be given for to fall within financial assistance statutory provisions?

A

Given for the purpose of the acquisition

or for the purpose of reducing/discharging liability incurred for the purpose of the acquisition

105
Q

How can financial assistance be satisfied if the financial assistance is given after the acquisition?

A

For the purpose of reducing/discharging liability for the purpose of the acquisition

106
Q

What are some exceptions to the prohibition of providing financial assistance?

A

Where the principal purpose of giving is:
- not for the purpose of the acquisition
- only an incidental part of some larger purpose

  • Unconditional exceptions e.g., dividend payments
  • Conditional exceptions (require the company giving the assistance to be private or public and the public company’s net assets aren’t reduce by giving the assistance) e.g. money lending in the ordinary course of business and assistance in respect of employee share schemes
107
Q

What are the consequences of a restricted company carrying out prohibited financial assistance?

A
  • A fine
  • Fine/imprisonment of the officers of a company
108
Q

What would happen to a transaction that was found to have amounted to financial assistance transaction?

A

It would be void

The wider transaction of the share acquisition may be made void as well

109
Q

TRUE OR FALSE

Only PLC subsidiaries of private targets are caught in the prohibited financial assistance regime

A

True

110
Q

Who is the ‘target’ company in an acquisition of sales in the context of financial assistance?

A

The company acquiring shares

111
Q

Where is a shareholders investment in a company recorded in the balance sheet?

A

In the accounts in the bottom half

112
Q

What is meant by the doctrine of maintenance of share capital?

A

Where a company represented in the accounts by way of shareholders’ investment are used to carry on business as working capital but cannot be returned to shareholders whilst company is a going concern

113
Q

What is the share capital of a company seen as?

Who is this particularly beneficial for?

A

A permanent fund available to its creditors

114
Q

What are some key effects/consequences of the principle of maintenance of share capital?

A
  • Dividens are only to be paid from distributable profits, not capital
  • Companies generally must not purchase their own shares?
115
Q

What are the exceptions to a company generally not being able to buy back their own shares?

A
  • Provided it follows procedures set out in CA 2006
  • Where court order is made following successful shareholder peititon for unfair prejudice
116
Q

What are the names of the two types circumstances where a company may buy back its own shares?

A
  1. Redemption of redeemable shares
  2. Purchase of own shares (‘buyback’)
117
Q

Why may a company wish to buy back its own shares?

A

Where a shareholder may want to leave and cannot find a buyer for their shares

118
Q

What type of companies may buy back their own shares subject to their compliance to CA 2006 provisions?

A

Public and private companies

119
Q

What type of company is the buyback of shares more useful for and why?

A

Private companies because they are prohibited from offering their shares to the public

120
Q

What are the three ways a company may use to fund the buyback of its own shares?

A
  1. Distributable profits
  2. Proceeds of a fresh issue of shares made for purpose of financing buyback or
  3. Capital
121
Q

Who is the option of funding the buyback of shares using capital strictly available to?

A

Private companies

Public companies can never use capital to purchase its own shares

122
Q

What must be done by a company seeking to buy back its own shares before using capital?

A

Use money available in either distributable profits or proceeds of a fresh issue of shares to fund the purchase

123
Q

What are the conditions that must be met when a company seeks to purchase its own shares out of either of the following for the purpose of the provided purchase?:

  • Distributable profits or
  • Proceeds of a fresh issue of shares
A
  • Purchase of shares is not restricted or prohibited by MA
  • Shares being purchase are fully pad up
  • Company must continue to have issued shares other than redeemable and treasury shares following the purchase
124
Q

What is the two-step procedure for buying back shares using the following?:

  • Distributable profits or
  • Proceeds of a fresh issue of shares
A
  1. Contract to purchase own shares
  2. Terms of contract to be approved by ordinary resolution
125
Q

How long before should the contract to purchase a company’s own shares must the contract to buyback of shares using distributable profits or proceeds of a fresh issue of shares be made available for inspection at the company’s registered office?

A

15 days before the general meeting

At the general meeting also

126
Q

What must be sent with a copy of written resolution when approving the terms of the contract for buyback of shares using distributable profits or proceeds of a fresh issue of shares?

A

Copy of the contract

127
Q

What are the conditions for private companies buying back shares out of capital?

A
  • Purchase of shares is not restricted or prohibited by MA
  • Shares being purchase are fully pad up
  • Company must continue to have issued shares other than redeemable and treasury shares following the purchase
  • The purchase out of capital is not restricted/prohibited
  • Check the accounts were prepare no more than three months before the director’s statement
  • Use distributable profits or proceeds form fresh issue of shares first
  • Auditors report and director’s statement of solvency must be prepared
  • Special resolution to approve payment out of capital
128
Q

What resolution si required for the approval of a private company’s buyback of shares out of capital?

When must is be passed?

A

Special resolution

Must be passed within a week after the directors sign the written statement of solvency

129
Q

When must the director’s statement of solvency be made when a private company is purchasing back shares out of capital?

A

No earlier than one week before general meeting

130
Q

When must both the director’s statement of solvency and auditors report be available?

A

Made available for inspection at the GM

Or sent with written resolution

131
Q

What does a director’s statement of solvency confirm?

A

That the company is

  • Solvent
  • Able to pay its debt as they fall due
  • Remain solvent for a period of 12 months after the buyback
132
Q

What are the consequences of a company becoming insolvent following the director’s statement of solvency if they had no reasonable grounds for making the statement?

A

The directors may need to contribute to the assets of the company

They may also face criminal sanctions

133
Q

What is the private company required to do when giving notice of buying back their own shares out of capital to creditors under s.719 CA 2006?

A
  1. Public notice in Gazette
  2. Publish notice in same form as Gazette in appropriate national newspaper or in writing to each creditors
  3. Filing copies of directors’ statement of solvency and auditors report at CH
134
Q

What must the notice in the Gazette and appropriate national newspaper or to each creditor state when a private company gives notice ?

A
  • Company has approved payment out of capital for purpose of purchasing its own shares
  • Locations of directors’ statement of solvency and auditors report for inspection
  • That any creditor can apply to court for an order preventing the payment within five week after the special resolution date
135
Q

What must the private company send to CH within 28 days of the date on which the shares are bough back and delivered to the company?

A
  • A return to CH
  • Notice of cancellation
  • Statement of capital
136
Q

What resolution is required to approve of the directors’ statement and auditors’ report when a private compay is buying back shares out of capital?

A

BR

137
Q

What is a shareholders special resolution required for when a private company seeks to pay for the buyback of shares out of capital?

A
  • To approve the payment out of capital
138
Q

What is a shareholders ordinary resolution required for when a private company seeks to pay for the buyback of shares out of capital?

A

Approve contract

139
Q

What are the 5 steps in the procedure of a company buying back shares out of distributable profits/proceeds of a fresh issue of shares?

A
  1. Initial steps (preliminary checks)
  2. Board meeting/WR
  3. General meeting/WR
  4. Board meeting
  5. Post Meeting Matters (PMM)
140
Q

Who is ineligible to vote on the Shareholders vote to pass an OR to approve contract in buyback of shares using any funding?

A

The holder of shares

141
Q

What are the 6 steps in the procedure of a company buying back shares out of distributable profits/proceeds of a fresh issue of shares?

A
  1. Initial steps (preliminary checks)
  2. Board meeting/WR
  3. General meeting
  4. After the GM/WR
  5. Board meeting
  6. Post Meeting Matters (PMM)
142
Q

Is a contract required to redeem redeemable shares?

Why/why not?

A

No, irrespective of source of funding because the terms of redemption have already been set out in MA prior share allotment

143
Q

Where are the terms of the redemption of redeemable shares set out?

A

MAs, at the time that they are issued

144
Q

What is meant by financial services?

A
  • Advising on investment products
  • Dealing in investment products
  • Arranging investment products
145
Q

What are examples of some specified investments that are regulated and specified in Part 3 of the RAO?

A
  • Shares
  • Instruments creating or acknowledging indebtedness e.g., bonds
  • Regulated mortgage contracts
146
Q

What are examples of some ‘specified activities’ by way of business in elation to the ‘specified investment’ in Part 3 of the RAO?

A
  • Dealing in investments as principle or agent
  • Arranging deals in investments
  • Managing investments
  • Advising on merits of investments
147
Q

What does the specified activity of dealing in investments as principle or agent include?

A
  • Buying
  • Selling
  • Subscribing for
  • Underwriting securities
  • Underwriting contractually based investments
148
Q

Where can the exemptions, as a part of step 3 on the FSMA decision making tree, of each specified activity be found?

A

In a chapter in the RAO that is devoted to that activity in the relevant chapter

149
Q

What do the general exclusions/exemptions apply to?

A

Where there is more than one activity

150
Q

When will a solicitor be exempt from being categorised as ‘dealing as an agent’, ‘arranging deals’ or ‘advising on merits of investment’?

A
  • Where the activities are carried in the course of their business and
  • The activities can be reasonable regarded as a necessary part of the business services
151
Q

When will a solicitor not be exempt from being categorised as ‘dealing as an agent’, ‘arranging deals’ or ‘advising on merits of investment’?

A

If the specified activity is remunerated separately from the other serices

152
Q

How do you gauge whether a specified activity is ‘incidental’ as a part of the general exclusions from needing FCA authorisation in step 4?

A

Look at the overall work the firm does and ask whether the activity is an overall activity

If it is an overall activity, it will be incidental

153
Q

How do you gauge whether a specified activity ‘arises out of’ or is ‘complementary’ as a part of the general exclusions from needing FCA authorisation in step 4?

A

If the specified activity arises naturally out of the work the solicitor is doing for the client - if it does not, the work is not complementary

154
Q
A

Business Law and Practice (7 decks)

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