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SQE - BLP > WS5 - Equity Finance > Flashcards

WS5 - Equity Finance Flashcards

1
Q

Introduction to Shares: What is capital & share capital?

A
  • The general term capital is used to refer to funds available to run the company.
  • Share capital relates to money raised by the issue of shares and this is contributed by investors of the company and represented by shares that are issued to these investors.
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2
Q

Introduction to Shares: Why does a company need funds?

A
  • To get the business started (Stock, machinery, staff, etc)
  • Keep the business going, commonly known as working capital
  • To fund expansion and growth
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3
Q

Introduction to Shares: How does a company fund its business?

A

Various ways company’s can raise funds, including issuing shares (i.e equity finance) borrowing (i.e debt finance) and or retaining its profits for use in business instead of paying to SH’s.

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4
Q

Equity Finance - a) What are shares: How are shares described and what does it give the investor?

A
  • A bundle of rights
  • Investor becomes part owner and will often have voting rights in meetings.
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5
Q

Equity Finance - a) What are shares: What are the incentives to invest?

A
  • Receipt of income by way of dividend
  • Capital gain by way of growth in the value of the company
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6
Q

Share Capital Structure - a) Nominal or Par Value: What is the position for limited company’s?

A
  • S542 provides shares in limited company must have fixed nominal value and any which does not is void.
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7
Q

Share Capital Structure - a) Nominal or Par Value: What is the nominal or par value?

A
  • Minimum subscription price for that share.
  • Represents a unit of ownership rather than the actual value of the share and common nominal values are 1p, 5p or £1.
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8
Q

Share Capital Structure - a) Nominal or Par Value: Can they be discounted?

A

S580 provides that a share may not be alloted/issued by a company at a discount to its nominal value.

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9
Q

Share Capital Structure - b) Premium What does it mean if share issued at premium?

A
  • Share may be allotted/issued for more than its nominal value and the excess over the nominal is known as the premium.
  • Market value wll often be much higher than nominal value of the share.
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10
Q

Share Terminology - a) Issued Shares: What is the issued share capital?

A
  • The amount of shares in issue at any time.
  • So, the amount of share capital shown in company balance sheet in the accounts.
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11
Q

Share Terminology - a) Issued Shares: What is issued share capital made up of?

A
  • Shares purchased by the first memebrs of the company, known as the subscriber shares and
  • Further shares issued after company icnorported tto new and existing shareholder and new shares can be issued at any time provided correct procedure followed
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12
Q

Share Terminology - b) Alloted Shares: How is allotment defined?

A

S558 defines in which shares are said to be allotted when a person aquires the unconditional right to be included in company register of members in respect of those shares.

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13
Q

Share Terminology - b) Alloted Shares: How is the different from issue of shares?

A
  • Often used interchangably, but different means.
  • No statutory definition of issue, but said shares are only issued and form part of ISC once SH has been registered as such in company registered of members and their title become complete.
  • S112 CA confirms that full legal title to shares only achieved when name entered in register.

**So Issued Shares/ISC is about the total amount of shares in issue at any one time, whereas allotment is about when the shares become alloted to that person which is when they have their name entered in comapyn register for members. ** (Potential quesiton)

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14
Q

Share Terminology - c) Called up/Paid Shares: Must the full amount due be paid immediately?

A
  • No, amount of nominal capital paid is known as the paid up share capital and the amount oustanding can be demanded by the company at any time.
  • Increasingly rare for SH’s not to pay full nominal value of their shares on issue.
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15
Q

Share Terminology - c) Called up/Paid Shares: What happens once company demand amount outstanding?

A
  • Amount becomes “called”
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16
Q

Share Terminology - c) Called up/Paid Shares: What is the definition of called ip share capital?

A

The aggregate amount of the calls made on company shares and existing paid up share capital.

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17
Q

Share Terminology - d) Treasury Shares: What are these shares?

A
  • Shares bought back by company out of distrbutable profits and are held by the company “in treasury”
  • These are issued shares being held by company in its own name and company can subsequently sell them.
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18
Q

Share Terminology - d) Treasury Shares: What is it important to distiguish and what will apply?

A
  • Such a sale of shares is a transfer and not an issue of shares by the company. (Potential Question)
  • S561 CA Pre Exemption rights and S573 disapplication of pre-emption rights will apply.
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19
Q

Share Terminology - d) Treasury Shares: What can the company choose to do?

A

Compan can also choose to cancel treasury shares at any time of transfer to employee share scheme.

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20
Q

Classes of Shares - a) Introduction: What may company have and what is the difference?

A
  • Different classes of shares
  • The different relates to the rights which each type of share have relating to entitlements to vote, to dividends and to return of capital when a company is ultimately wound up.
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21
Q

Classes of Shares - a) Introduction: Are the different classes defined?

A

Nothing in CA 2006 which defines classes of shares or class rights and the label attached to a share is not determative.

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22
Q

Classes of Shares - a) Introduction: Where are rights attached to a class of shares determined?

A

In company articles.

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23
Q

Classes of Shares - a) Introduction: What are the different classes of share?

A
  • Ordinary Shares
  • Redeemable Shares
  • Preference Shares
  • Non-Voting shares
  • Employee Shares
  • Cumulative Shares
  • Convertible Shares
  • Deferred Shares
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24
Q

Classes of Shares - b) Ordinary Shares: What is the general definition?

A
  • Ordinary shares carry right to vote in GM’s, a right to a dividend if one is declared and right to a portion of an surplus assets of the company on winding up. (fraction of dividends and capital in accordancing with their shareholding)
  • Companies may have more than one class of ordinary share with differening rights and perharps different nominal values.
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25
Q

Classes of Shares - b) Ordinary Shares: What is position in MA for ordinary shares?

A
  • Default position under the MA, so if company shares issued with differntiation, they will be ordinary shares.
  • These are therfore most common form of share.
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26
Q

Classes of Shares - b) Ordinary Shares: What is a benefit over preference shares?

A

While Ordinary Shareholders receive dividends after preference, one advantage is that entitlement of ordinary to a divdend is unrestricted.

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27
Q

Classes of Shares - c) Preference Shares: What can these give the holder?

A

It may give the holder a preference as to the payment of dividend or to return of capital on winding up of the company or both.

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28
Q

Classes of Shares - c) Preference Shares: What does this preference mean?

A

Their payment will rank as higher priority than any equivalent payment to ordinary shareholders, so any preference to dividend will be paid before other shareholders.

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29
Q

Classes of Shares - c) Preference Shares: How is amount of preferred dividend expressed?

A

Usually expressed as a percentage of the par (nominal) value of the share e.g 5% £1 preference shares.

This would therfore give an entitlement of 5% of £1 per share euqating to 5p per share by way of dividend each year provided one is declared.

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30
Q

Classes of Shares - c) Preference Shares: What if preference shares issued at premium to par value?

A
  • If shares issued at preium to par value and intended fixed dividend will be apid based on amount subscribed for the share (par plus preium) then the share rights must expressly state dividend to be calculated as percentage of total subscription.
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31
Q

Classes of Shares - c) Preference Shares: What is the position on voting?

A

Usually non-voting although important to check rights set out ina rticles as it is possible to issue preference shares with voting rights.

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32
Q

Classes of Shares - c) Preference Shares - (i) Cumulative Preference shares: What is it presumed and what does it mean?

A
  • Presumed preference share is cumulative unless otherwise stated.
  • This means if dividend is not declared for particular year, the right to the preferred amount on share is carried forward and will be paid together with any other dividends due when there are vailable profits.
  • If accumlation not desired, then the share must be expressed to be non-cumulative.
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33
Q

Classes of Shares - c) Preference Shares - (ii)Participating Preference Shares: What does this allow particupation in?

A

These shareholders may partiicpate together with holders of ordianry shares in:
* Surplus profits availaable for distrubtion after receiving their own fixed preferred dividend and/or
* Surplus assets of the company on winding up. As with preference shares, participating preference shares almost always issued with a fixed dividend and can be cumlative if articles allow and if they have these characteristics usually referred to as “fixed rate particupating cumulative preference shares”.

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34
Q

Classes of Shares - c) Preference Shares: Compare example of participating and non-participating preference shares

A
  • Company A has particpating shares in issue which carry right to received fixed preferntial dividend of 5% of Par value of shares and shares par value is £1 each. Therfore, they would be entitled to dividend of 5p per share per annum before ordinary SH’s and also entitled to fraction of remaining general dividend alongside ordinary SH’s.
  • Company B has non-participating shares in issue which carry right for fixed peferential dividend of 5% of total subscription price per share per annum. Shares have par value of £1 each but subscribed a £2 per share. Preference SH’s would be entitled of 10p per share per anum before ordinary SH’s but not entitled to share in any further dividend alongside ordinary.
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35
Q

Classes of Shares - d) Defered Shares: What does these shares allow for?

A
  • No voting rights or ordinary dividend.
  • Soemtimes entitled to share surplus profits afte rother dividends have been paid (presuming surplus).
  • More usually deffered shares carry no rights at all and are used in specific circumstances where worthless shares required.
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36
Q

Classes of Shares - e) Redeemable Shares: What is the purpose of these shares?

A
  • Issued with the intention that company will or may wish to at some time in future, buy them back and cancel them, usually on specified terms.
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37
Q

Classes of Shares - f) Convertible Shares: What option will these shares have?

A

Option to convert into different class of share according to stipulated criteria.

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38
Q

Variation of class Rights: What are rights attaching to class of shares found and what should you also check for type of share?

A
  • Company articles
  • In relation to type of share, always refer to articles and find relevant rights attaching to a share, since there are no formal definitions of the types of share.
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39
Q

Variation of class Rights: What if a company attempts t alter the articles to vary existying class rights

A

Reoslution will not be effective unless varied in accordance with company articles for varation of those rights or where no such provision, 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 seperate GM of holders of that class. (Potential Question)

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40
Q

Variation of class Rights: What can shareholders do who oppose the varation?

A

Those holding 15% of relevant shares (provided did not vote in favour) can apply to court within 21 days of resolution to have varation cancelled - s633.

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41
Q

Variation of class Rights: What if application made to cancel?

A

Varation will not take ffect unless and until confirmed by the court and court will not confirm if it feels the varation unfairly prejudces the SH’s in that class.

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42
Q

Dividends: What is the purpose of investement?

A

Generally to make money and SH’s receives return on investement in two ways:
* By receipt of dividnds (which will be an income receipt on them)
* An crease in capital value of the shares (which may give rise to a capital gain)

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43
Q

Dividends: When are dividends only payable?

A

If the company has sufficient distrubtable profits - s830 CA

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44
Q

Dividends: What is the meaning of distrubtable profits?

A

The company’s accumilated realised profits less its accumulated realised losses.

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45
Q

Allotment - a) What is difference between alotting and transferring: What is an allotment?

A

An allotment of shares is contract between company and new/existing SH under which company agrees to issue new shares in return for purchaser paying subscription price.

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46
Q

Allotment - a) What is difference between alotting and transferring: What is a transfer of shares?

A

A contract to sell existing shares in the company between existing SH and pruchaser in which company is not a party to the contract on a transfer of sales (unless sale of treasury shares.)

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47
Q

Allotment - b) Considerations on allotment - S755 restriction on private company offering shares to public: How are companies limited under s755?

A

Private company limited by shares is prohibited from offering its shares to public and therfore restricted to offering to targeted investors only and not the public indiscrimately.

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48
Q

Allotment - b) Considerations on allotment - S755 restriction on private company offering shares to public:What is the definition of offer to public?

A
  • Defined in s756 covers to offers to any section of the pbulic, but excludes offers which are intended only for eprson receiving them and offers which are a private concern of eprsons making and receiving them.
  • **Note - ** This exclusion will cover offers made to existing SH’s, employees, and certain family members of those person as well as employee share schemes.
    (potential question) - Important to consider when private company involved.
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49
Q

Allotment, of shares - c) The requirement for a prospectus What must a company consider when it offers shares?

A
  • Everytime it should consider if it is required to publish a prospectus to would be investors
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50
Q

Allotment, of shares - c) The requirement for a prospectusThe requirement for a prospectus** What is a prospectus?

A
  • An explanatory circular giving investors details about company and the investement itself.
  • It should contain all info necessary to enable investors to make informed assessment of financial status of company and rights to the shares.
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51
Q

Allotment, of shares - c) The requirement for a prospectus The requirement for a prospectus** What if it is a private company?

A

It will usually be case that prospectus is not requried, however, company will need to consider the rules each time.

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52
Q

Allotment, of shares - d) Financial Promotions: What is a financial promotion?

A

Under FSMA 2000, a financial promotion is any invitation or inducement (in course of business) to engage in investement activity (which includes buying shareS)

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53
Q

Allotment, of shares - d) Financial Promotions: Are financial promotions permitted?

A

They are prohibited for all company unless certain requirements set out in FSMA are fufilled and clearly this is potentially relevant if company considering issuing shares to investors.

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54
Q

Allotment, of shares - d) Financial Promotions: How must commuciations made by a company when issuing be?

A
  • Either be in an excemption from the S21 FSMA prohibtion
  • Or be issued or approved by an authorised person
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55
Q

Transfer and Transmission of Shares: What is a transmission of shares?

A

An automatic process in the event of death or bankruptcy of a SH as follows:
* If SH dies, their shares automatically pass to their PR’s.
* If SH made bankruupt, their shares automatically vest with the trustee in bankruptcy.

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56
Q

Transfer and Transmission of Shares - a) Transfers: How may shares be transferred?

A

Free to transfer subject to any restrictions in articles and can be to existing SH or a new by way of sale or gift.

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57
Q

Transfer and Transmission of Shares - a) Transfers: What must therefore be checked?

A

Articles and any SH’s agreements for any restrictions on transfer.

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58
Q

Transfer and Transmission of Shares - b) Restrictions on Transfers: What are the two common forms of restrictions?

A

(a) Directors powwer to refuse to register: S26 MA states “Directors may refuse to registe transfer of a share, and if they do, the instrument of transfer must be returned to transferee with notice of refusal unless they suspect that proposed transfer may be fraudulent and under s771 a company must give reasons if it refused.
(b) Pre-emption clauses (Right of first refusal): This looks at pre-emption rights ona transfer of shares (which should not be confused with those on allotment) and such rights suually set out in articles but CA and MA do not contain any pre-emption rights so they must be specifically insets into articles.

Pre-emption rights on transfer will foten require SH wishing to sell shares must offer to existing SH’s before being able to offer to outsider.

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59
Q

Transfer and Transmission of Shares - c) Method of transfer: What is involved in the transfer?

A
  • Insturment of transfer
  • Legal and equitable ownership
  • Stamp Duty
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60
Q

Transfer and Transmission of Shares - c) Method of transfer - (i) Instrument of Transfer: what does this involve?

A

Transfer of shares is made by way of stock transfer form which has to be transfer by transferor and submitted with share certificate to new SH.

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61
Q

Transfer and Transmission of Shares - c) Method of transfer - (ii) Legal and Equitable Ownership: How does each title pass?

A
  • Legal title passed onr egisteration of member as the owner of those shares in the register of membersof the company.
  • Beneficial title to shares passed on execution of stock transfer form.
  • Company will also send the shareholder a new share certificate in their name within two months
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62
Q

Transfer and Transmission of Shares - c) Method of transfer - (iii) Stamp Duty: What msut be stamped?

A
  • Stock transfer form must be stamped before new owner can be registered as holder of shares.
  • Stamp duty is currently payable at 0.5% of consideration rounded to nearest £5.
  • No stamp duty payable where consideration is £1,000 or less, but if more than minimum fee of £5 is payable. (As 0.5% of anything above 1k is £5+
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63
Q

Procedure for Allotment - a) Introduction: What is it important to appreciate on issuing shares?

A

Whether the company instructed by has been incorporated under CA 2006 or CA 1985 as there are differences in how these companies will issue shares.

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64
Q

Procedure for Allotment - a) Introduction: What does the processes to issue involve?

A

Five step process a company needs to go through to issue shares, but it could be that no action is needed at one or more of stages, however, working through will aid udnerstanding and ensure identification of alls teps required in each case.

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65
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued: What must you check beofre issuing shares?

A

Compan Articles for any cap or limit on number of shares that may be issued and if this is to be exceeded, the cap must be removed or limit increased.

66
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued: What is the position for a company under CA 1985?

A

Originally would have authorised share capital, which acted as ceiling on number of shares it could issue and this will remain following CA 2006 in their articles unless such a cap is removed.

67
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued: What is the position for company under CA 2006?

A

Requirement for an ASC no longer exists and those incorporated iwth MA will not have an ASC and SH wishing to impose cap will need to amend the MA by special resolution to include such provision.

68
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued - (a) How can the cap be removed: What is the position under CA 1985?

A

SH wishing to remove or amend deemed restrction in CA may do so by ordinary resolution and this is despite fact that remove it requires change to articles which usually requires special resolution.

If the company adopts the new MA’s, then any restriction would also fall away as new MA’s do not include such cap.

69
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued - (a) How can the cap be removed: What is the psoition of companies under CA 2006?

A
  • They will not have an authised share capital and therfore no bar to issue under step 1.
  • Theonly exception would be if company placed a provision in articles limited number of shares that can be issued. If so, this can be removed or icnreassed by special resolution.
    Note - Make sure to remember the CA 1985 only requires ordinary res for removal and CA 2006 requires special
70
Q

Procedure for Allotment - Step 1: Any cap to the number of shares that can be issued: What is the summary of what to check?

A
  • If any resolutions to remove, impose or change any cap or increase share capital has been passed, and ensure you have up to date info from company articles.
  • If any shares have been issued by checking register of members or most recent confirmation statement at CH and any forms filed on allotments.
  • If no limit on share capital, or sufficient unissued shares available within any cap, the company can proceed to step two. (So, if CA 2006 with no restriction, or CA 1985 with removed restriction or enoguh unissued shares)
71
Q

Procedure for Allotment - Step 2: Do the company’s directors need authority to allot: Who is resonsible for allotment and how?

A
  • Directors respoonsible for actual allotment to SH and must do so by board resolution.
    **Note - They may need shareholder authority to do this. **
72
Q

Procedure for Allotment - Step 2: Do the company’s directors need authority to allot: What does the CA say regarding directors ability to allot shares?

A

S549 sets out directors must not exercise any power of company to alott, except in accordance with:
* s550 CA: For private compabnies with ounly one class of shares, the directors will have automatic authority to allot new shares or the same class, (unless prohbited by articles) or
* S551: For all other compabnies or if S549 cannot be relied on (more than one class) directors need to be granted authority to alott new shares by shareholders by way of ordinary resolution (unless articles require higher majority)

**Potential question requiring you to know difference between when authority needed. **

73
Q

Procedure for Allotment - Step 2: Do the company’s directors need authority to allot: What is the position for S550 and compaies under CA 1985?

A

An ordinary resolution is required to authorised directors to rely on S550 CA.

74
Q

Procedure for Allotment - Step 2: Do the company’s directors need authority to allot: What is authority under S551 authority subject to?

A
  • Authority under S551 can only be given subject to limits, both time and the number of shares to be allotted.
  • This means if company already granted directors S551 authority, it must be checked to ensure it is still valid (The expiry date cannot be more than 5 years from date of authorisation.

Note - Potential question to spot if authority has expired or not valid as more than 5 years

74
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment: What is a pre-emption right?

A

This means the “right of first refusal” in which new shares should be offered pro-rata to existing shareholders before any new shateholders.

75
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment: Why do pre-emption rights exist?

A

When company allots shares to new SH’s, there is effect on proportioante ownership held by existing SH’s and their ownership is diluted and therfore there entitlement to dividends and voting power is also.

76
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment:What exists to prevent dilutation?

A

S561 exists contains pre-emption rights which give protection to existing SH’s.

77
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment: What happens if these rights apply?

A

The most usual appropach is for company to request existing SH’s to disapply these pre-emption rights by special resolution.

78
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment: See example of diluation in book

A
79
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - a) What type of shares are theses rights relevant to: What does the CA state these apply to?

A

S561 CA states:
* Company must not allot equity securties toa eprson on any terms unless
* It has made an offer to each person who holds ordinary shares in company to allot him on the same or more favourable terms a proporation of those securities that is nearly rpacticable equal to proportion of nominal value held by him of ordinary share capital of the company

80
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - a) What type of shares are theses rights relevant to: What does this provision mean?

A

Any new “equity securities” must be offered to existing SH’s (holding ordinary shareS) in proportion to their existing SH before they can be offered to anyone outside company.

81
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - a) What type of shares are theses rights relevant to: How is equity securities defined?

A

S560 defines it as:
(i) Ordinary shares or
(ii) Rights to subsrcribe for or convert seucrties into ordianry shares

However, under s560, there is special statutory definition of ordinary shares, which is wider and are “other than shares that as respects dividends and capital carry a right to participate only up to a specified amount”

82
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - a) What type of shares are theses rights relevant to: What does the special statutory definition mean?

A

Note - If an individual was receiving a figure of 22% to share in excess profits or capital on winding up, then this would not count as a cap, as while there is a figure, it could be 22% of nothing or five million so no fixed cap as to how much they coulod receive each year. This could read as “pro rata to basis of shareholding so receives % of whatever shareholding is

83
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - b) Applitcation of rights: Why would a company want to disapply these rights?

A
  • Procedure for giving effect tot hese rights can be lengthy and complicated, especially for companies with numerous SH’s.
  • It may also be inappropiate or indesirable to follow the procedure, e.g where all SH’s agree the company ought to bring in a new SH, so company will want to disapply the rights which is permitted under CA with permission frome existing SH’s.
84
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - b) Applitcation of rights: What are the two common methods in practice to disapply the rights?

A
  • General disapplication: A company may disapply them where directors are generally authorised for purposes of S551 by passing special resolution or including disapplication in its articles. (Note this is not a permant application, but attaches to particular pre-existing S551 authority.
  • Private companies with one class of share - By special resolution: S569 provides for disapplication by special resolution in these companies. Such disapplication prespposes the directors authority to allot shares deriving from S550 and therfore applies so long the company has in issue and allots shares of only one class.
85
Q

Procedure for Allotment - Step 3: Must pre-emption rights be disapplied on allotment - b) Applitcation of rights: What are the others ways to disapply pre-exemption rights?

A
  • Specific disapplication: It is possible, but uncommon for company to disapply in relation to specific allotment of shares (e.g shares to a particular person or purposes) by special resolution under S571.

**Note - The procedure is more cumbersome for specific disapplication rather than general and directors will need to provide written statement explaining the reasons for specific disapplication, and the amount to be paid to the company for allotment alng with justification to amount and specific disapplication under s571 attaches to a particular pre-existing S551 authority. **

  • Private companies - exclusion of rights in articles: They can exclude these rights permanetly by way of provision in their articles, however, this is rarely done as it gives existing shareholders no protection from SH’s and in practice only subsidfiary companies will exclude in their articles.
  • Private companies with one class of shares - exclusion in articles: They can disapply in articles, but again unsual because existing shareholdings have no protection.
86
Q

Procedure for Allotment - Step 4: Must new clas rights be created for the shares: What may a company wish to do when issuing?

A

Create a new class of shares such as preference shares.

87
Q

Procedure for Allotment - Step 4: Must new clas rights be created for the shares: What is necessary to create a new class of shares?

A

In addition to taking so or all steps above, may need to insert new povisions in its articles dealing with the rights attaching to those shares.

88
Q

Procedure for Allotment - Step 4: Must new clas rights be created for the shares: What will be required to make such alteration?

A

Special resolution of SH’s (except with a CA 1985 if removing cap transferred from company’s authorised share capital.

89
Q

Procedure for Allotment - Step 5: Directos must pass board resolution to allot: Is board resolution needed?

A

Directs will need to resolve by board resolution to allot new shares on behalf of the company and any requirrements for SH resolution must be dealt with in GM before BM is held to allot.

90
Q

Procedure for Allotment - Step 5: Directos must pass board resolution to allot: When is GM not required in advance of BM?

A

Company has:
* No limit in its constituion on number of shares which can be issued by the company and
* Does not require directions authorisdation becuase company is private company with only one class of shares and no resrction in company articles or has already given directors authority to allot and
* Is issuing shares toe xisting shareholders in proportion to their existing shareholders and follows procedure in S562 or has already disapplied S561 or is a prviate company taking advantage of S567 and
* Has relevant rights in its articles

91
Q

Procedure for Allotment - Administrative requirements on allotement: What must be done with the copies of resolutions?

A
  • Must be sent to companies house within 15 days.
  • If CA 1985, companies need to file any oridnary resolution removing cap on authorised share capital and any ordinary resolution allowing company to use s500 CA 2006
  • Any S551 ordinary resolution granting directors authority to allot
  • All special resolutions regarding disapplication of pre-exemption rights and/or amending articles if passed
  • Amended asrticles must also be sent to CH if new shares created and artyicxles amende.d
92
Q

Procedure for Allotment - Administrative requirements on allotement: What company forms must be sent to CH?

A
  • Return of allotment (Form SH01) and statement of capital within one month
  • If persons with significant control changed due to allotment the relevant forms - PSC01, PSC02, PSC04, PSC07
93
Q

Procedure for Allotment - Administrative requirements on allotement: How must company registers be updated?

A
  • Update register of members within two months of allotment
  • Update PSC register if necessary
94
Q

Procedure for Allotment - Administrative requirements on allotement: What must be done with share certificates?

A
  • Share certs must be prepared and sent to new SH’s within two months of allotment.
95
Q
A
96
Q

Financial Assistance - a) Introduction: What is the section concerned with?

A

The prohibitions on financial assistance by a company to enable to purchase of shares.

97
Q

Financial Assistance - a) Introduction: What is prohibited under statute?

A

When shares are being aquired in a company, there are statutory rules prohibiting certain companies involved from giving assistance for the purpose of acquisition.

98
Q

Financial Assistance - a) Introduction: Where are the statutory provisions derived from?

A

Doctrine of maintenance of capital and legislation designed to protect public companie assets representing its share capital.

Very broadly speaking, this therfore applies to public companies and private companies in groups which cotain public.

99
Q

Financial Assistance - b) Which transactions are the rules applicable: What are the two transactions?

A
  • Acquisition or sale of shares
  • Issue of shares
100
Q

Financial Assistance - b) Which transactions are the rules applicable - (i) Acquisition/Sale: What must be considered on sale?

A

When share sale contemplated, the funding arrangements should be examined carefully to see if they fall foul of financial assistance prohibitions.

101
Q

Financial Assistance - b) Which transactions are the rules applicable - (ii) Issue of shares: Are the rules still applicable?

A

Yes, even on issue of new shares by company to an investor since that equally amounts to an acquisition of shares by the investor.

102
Q

Financial Assistance - c) Which companies are prohibted: What must be cosnidered?

A

S678, S679 CA set out the basic prohibitions on giving financial assistance and determine which companies are caught by these prohibitions.

You must follow a step by step route to determine if they will apply.

103
Q

Financial Assistance - c) Which companies are prohibted: Step 1: Identify the target company

A

You must first identify the company in which shares are being aquired:
* On a share of sale, this will be the company which is the subject of the acquisition
* On an issue of shares, this will be the company doing the issuing of new shares

The company whose shares are being acquired either by transfer or issue, will be referred to as the target company

104
Q

Financial Assistance - c) Which companies are prohibted: Step 2: What if the company is a public company?

A

Under S678, the prohibition on giving financial assistance applies to:
* The target company itself and
* Any subsidiary of the target company, whether private or public

105
Q

Financial Assistance - c) Which companies are prohibted: Step 3: What if the company is a private company?

A

Under S679, the probition on giving financial assistance applies to any public company subsidiary of the target company.

106
Q

Financial Assistance - d) What does giving financial assistance mean: How is financial assistance defined?

A

Very broadly in S677 which sets out number of different types of transaction which may amount to financial assistance:
* Financial assitance given by way of gift
* Financial assistance given by way of guarantee, secueirty, indemnity, release or waiver
* Financial assistance given by way of loan or similar agreement
* Any other financial assistance given by company where net assets of company are reduced to material extent by giving of financial assistance or company has no net assets. (This is essentially catch all provision for any transaction not expresly listed.)

107
Q

Financial Assistance - d) What does giving financial assistance mean: What is not enough?

A

Not enough that the transaction is listed above, it must also actually consistute financial assistance, so:
* Assistance must be givenl and
* Assistance must be financial in nature.

108
Q

Financial Assistance - d) What does giving financial assistance mean: What meaning should be given to these words?

A

Their ordinary meaning, bearing in mind commercial realities e.g actions which merely smooth the path to the aquisition such as payment by a subsidiary of the tatget, or due dilligence fees incurred by the buyer) have been held to amount to assistance.

109
Q

Financial Assistance - d) What does giving financial assistance mean: What is the position for direct/indirect assistance?

A

Assistance is covered by the rules whether it is direct (e.g loan given to buyer of shares) or indirect (guarantee given to a bank in relation to loan made by the bank to buyer of shares)

110
Q

Financial Assistance - d) What does giving financial assistance mean: What is the position for when the assistance si given?

A

Rules cover if it is given before or at the time of the aquisition or after.

111
Q

Financial Assistance - d) What does giving financial assistance mean: What is the requirement for purpose of the assistance?

A

Assistance must be given for the purpose of the acquisition (or if given after, for the purpose of reducing or discharging liability incurred for the purpose of the aquisition).

112
Q

**Financial Assistance - Example application as to if it would be assistance

A

See P118

113
Q

Financial Assistance - e) Are there any exceptions (i) Purpose execeptions: What is the purpose exception?

A

Giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose (the acquistition) is only an incidental part of some larger prupose.

114
Q

Financial Assistance - e) Are there any exceptions (i) Purpose execeptions: Is this relied on?

A

Not normally due to its narrow application in case law and very serious consequences of giving unlawful financial assistance.

115
Q

Financial Assistance - e) Are there any exceptions (ii) Unconditional Exceptions: What does this involve?

A

S681 lists a number of specific types of transaction which will be exempt from the prohibitions such as dividend payments.

116
Q

Financial Assistance - e) Are there any exceptions (iii) Conditional execeptions: What does this involve?

A

S682 lists a number of specific types of transactions exempt from the prohibitions provided certain conditions are met.

117
Q

Financial Assistance - e) Are there any exceptions (iii) Conditional execeptions: What do these transactions include?

A
  • Money lending in the ordinary course of business
  • Assistance in respect of employee share schemes
118
Q

Financial Assistance - e) Are there any exceptions (iii) Conditional execeptions: What are the conditions which must be met for this exception?

A

(i) Company giving the asistance is a private company or
(ii) The company giving assistance is public company and net assets of that company are not reduced by giving of assistance or to extent they are reduced the asistance is provided frm distrubtable profits.

**Note - So, to fall in this exception, must be a transaction type listed in the provision and fufill these conditions. **

119
Q

Financial Assistance - f) What are the consequences of prohibted financial assistance: What does the act set out?

A

S680 sets out breach is an offence which can lead to penalties for:
* company (a fine) and
* Officers of the company (fine/imprisonment

120
Q

Financial Assistance - f) What are the consequences of prohibted financial assistance: What may be seen in additional to criminal penalties?

A

Under case law, transaction amounting to prohibted financial assistance (e.g loan made to buyer) would be void and wider transaction (share aqusiition itslef) may be void as well.

121
Q

Introduction to the Buyback of Shares - (a) Principle of Maintenance of share capital: What is the position after a SH decided to invest?

A

A company is not usually permitted to return capital to its shareholders, and all payments made to its SH’s should be made from distributable profits.

122
Q

Introduction to the Buyback of shares - (a) Principle of Maintenance of share capital: What is the maintenance of share capital doctrine?

A
  • SH investements are recorded in the accounts and geenerally speaking a company cannot release sums reresented in this equity account.
  • Money in these accounts may be used to carry on business of the company as working capital, bt generally it cannot be returned to SH’s while the company is a going concern.
123
Q

Introduction to the Buyback of Shares - (a) Principle of Maintenance of share capital: What is the purpose of this doctrine?

A

Primarily for the benefit of the company’s creditors and it is long established concept that share capital is seen as a permanent fund avialable to its creditors.

But in practice, many private companies only have a small issued share capital, so this maintenace regime is of little relevant.

124
Q

Introduction to the Buyback of Shares - (a) Consequence of the principle of Maintenance of share capital: What are these?

A

There are a number of important consequences:

  • dividends may only be paid out of distrubtable profits,not capital and
  • Companies generally must not purchase their own shares
125
Q

Introduction to the Buyback of Shares - (a) Principle of Maintenance of share capital: What are the exceptions to these rules?

A
  • A company may buyback its own shares (or redeem redeemable shareS) provided it follows procedure in the CA
  • A company may purchase its own shares where a court order is made for this folloowing a successful SH petition of unfair prejuddice.

We will review in detail the procedure for buyback of shares, but not redemption of redeemable shares.

126
Q

Introduction to the Buyback of Shares - (b) Redemption and buyback of shares: When can a company effectively buy its own shares as per the exception to doctrine above?

A
  • Redemption of redeemable shares and
  • Purchase of own shares (buyback) - We consider this in detail.
127
Q

Introduction to the Buyback of Shares - (b) Redemption and buyback of shares: Why may a company do this?

A
  • In a private company, SH may want to leave but cannot find a buyer for their shares but not permitted to offer them to the public.
  • So, to prevent SH being locked into the company with no way to sell, company can purchase or redeem shares if they were issued as redeemable. (However, due to doctrine, there are very strict controls on thi9s process.)
128
Q

Introduction to the Buyback of Shares - (b) Redemption and buyback of shares: Which companies can buy back or redeem redeemable shares?

A

Both private and public may do so if they comply with the provisions.

129
Q

Overview of the Buyback of Shares: When will a buy back take place?

A

When a company purchases its own shares from an existing shareholder, such as if no other buyer available.

130
Q

Overview of the Buyback of Shares - a) Funding: What are ways in which a company may fund a buyback of its own shares?

A

Company may use:
* Distributable Profits
* Proceeds of a fresh sisue of ahsares made for purpose of financing buyback
* Capital

131
Q

Overview of the Buyback of Shares - a) Funding: What should be noted for use of capital to fund buyback?

A

It is heavily regulated and note:
* Option to use capital is only available to private companies and a public can never use capital.
* Any redemption or purchase of capital must comply with restirctions in s709 to 723.
* Companies must first use any money avialable in the form of distrubtable profits or proceeds of a fresh issue of shares before using capital.

132
Q

Overview of the Buyback of Shares - b) Using distrbutable profits/proceeds of fresh issue: When can a company purchase using these two funding options

A
  • Purchase of own shares is not restricted or prohibted in the company’s articles
  • The shares being purchased re fully paid up
  • Following purchase, the comany must continue to have issued shares other than redeemable and treasury shares.
133
Q

Overview of the Buyback of Shares - b) Using distrbutable profits/proceeds of fresh issue: What is the procedure under the act?

A
  • A contract to purchase the shares is required
  • The terms of the contract need to be approved by ordinary resolution
  • Contract must be available for inspection at company registered office for period of 15 days before GM and also at the GM and if written res use, a copy of contract must be sent with any written res.
134
Q

Overview of the Buyback of Shares - c) Procedure for using distrbutable profits/proceeds of fresh issue: Step 1: What are the initial steps?

A
  • Check there is no limit in articles on S690 power to buyback
  • Preprare accounts and check sufficient ditributable profits
  • Confirm shares are fully paid.
135
Q

Overview of the Buyback of Shares - c) Procedure for using distrbutable profits/proceeds of fresh issue: Step 2: What happens are the board meeting?

A

BR to approve the draft contract
BR to call a GM and approve form of notice/propose WR
Contract to be made available to SH’s:
* If GM: Contract must be made avialable for inspection at company registered office at least 15 days prior to and at GM
* If WR: Circulate contract with WR

136
Q

Overview of the Buyback of Shares - c) Procedure for using distrbutable profits/proceeds of fresh issue: Step 3: What happens at GM/WR?

A
  • SH pass or approve the contract
  • Holders of shares being bought may not be eligble to vote.
137
Q

Overview of the Buyback of Shares - c) Procedure for using distrbutable profits/proceeds of fresh issue: Step 4: What happens at the second BM?

A
  • BR to enter into contract
  • BR to appoint a direct(s) to sign contract
138
Q

Overview of the Buyback of Shares - c) Procedure for using distrbutable profits/proceeds of fresh issue: Step 5: What is involved in PMM?

A
  • File return, notice of cancellation and statement of capital within 28 days.
  • Keep copy of contract for 10 years
  • Cancel shares, update register of memebrs and PSC if applicale.
139
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital: What must be remembered?

A
  • Only private companies permitted to fund out of capital.
140
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital: What additional requireemnts are there to buy from capital?

A
  • Purchase must not be restricted in company’s articles.
  • Must check the accounts were preparared no more than three months before directors statement
  • Check if company has any distrbutable profits available, if so, those profits (or funds from fresh issue of shares for the purpose) must be used before capital can be used.
  • A directors statement of solvency must be prepared together with auditors report
  • A special resolution to approve payment out of capital must be passsed within a week after directors sign written statement of solvency
141
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (i) Directors statement of solvency and auditors report: When must directors statement of solvency be made?

A
  • No earlier than one week before the GM.
142
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (i) Directors statement of solvency and auditors report: What is the purpose of directors statement?

A
  • This confirms company is solvent and able to pay its debts as hey fall due and that it will remain solvent for period of 12 months after buyback.
  • Directors must therfore be careful as if it becomes isnolvent and wound up within a year, they may be required to contirbute to assets of company and could face criminal sanctions if had no reasonable grounds making the statement.
143
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (i) Directors statement of solvency and auditors report: What must be done with auditors report?

A

Must be annexed to written statement of solvency confirming that auditors not aware of anything to indicate the directors opinion is not reasonable.

144
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (ii) Notification Requirements: What must be done within 7 days of passing the special resolution to approve payment from capital?

A

Under S719, company must give notice to creditors by:
(a) Publishing notice in gazette which states:
* Company has approved payment from capital to purchase own shares
* Where directors statement and auditor report are available for inspection and
* That any creditor may at any time within five weeks immediately after date of resolution, apply to court under s721 for an order preventing payment.
* (b) Publish a notice in same for as gazette notice in an appropiate national paper or give notice in writing to each creditor, and
* (c) File copies of directors statement and audtors report at CH to enable any creditor to inspect.

145
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (iii) Timing: When must the share purchase take place?

A

Can take place no earlier than five weeks and no later than seven weeks after the date of the special resolution - S723.

146
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (iii) Timing: Can this period be reduced?

A

No, the period cannot be reduced even if SR approving payment out of capital, passed unamiously as five week delay is to enable shareholders and or creditors to object to payment of out capital by lodging application to court.

147
Q

Overview of the Buyback of Shares - d) Buyback of shares from capital - (iii) Timing: What must be done within 28 days of the date which shares bought back?

A

Company must send return to companies house under s2707 and a notice of cancellation under s708 together with statement of capital.

148
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 1: What are the initial steps?

A
  • Check there is no limit in articles on s690 power to buyback shares of s709 power to use capital to fund.
  • No earlier than three months before directors prepare the statement of solvency, and prepare accounts to ascertain available distrubtion profits.
  • Confirm shares fully paid.
149
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 2: What is done at the first BM?

A
  • BR’s t approve directors statement fo solvency and auditors report.
  • BR to approve draft contract.
  • BR to call GM and approve form of notice/propose WR.
  • Contact to made made available to SH’s.
    If GM: contract must be available for inspection at registered office for at least 15 fays prior to and at GM
    If WR: then circulate contract wth WR.
  • DSS and AR must be signed no earlier than one week before GM or passing of WR.
150
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 2: What are the additional steps if WR used?

A
  • Circulate WR with contract, DSS and AR.
  • SR to approve payment out of capital OR to approve contract
  • Holders of shares being bought back may not be eligebl to vote.
151
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 3: What happens at GM?

A
  • SH pass OR to approve contract
  • SH’s pass SR to approve payment out of capital
  • Holders of shares being bought may not be eligble to vote.
  • Contract, DSS and AR must be available at meeting
152
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 4: What needs to be done following GM/WR?

A
  • Within 7 days: Place notice in gazaette and national paper and file DSS and AR at companies house
  • Within 15 days: File SR at companies house
  • For five weeks after date of SR: Creditors and SH’s have right to object and copies of DSSand ARRmust be avialable for inspection and registered office.
153
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 5: What happens at second BM?

A
  • BR to enter into the contract
  • BR to appoint a director(s) to sign contract
  • Payment out of capital must take place between 5-7 weeks after SR passed.
153
Q

Overview of the Buyback of Shares - e) Procedure for Buyback of shares from capital: Step 6: What are the PMM’s?

A
  • File return, notice of cancellation and statement of capital within 28 days
  • Keep copy of contract for 10 years
  • Cancel shares, update register of members and PSC if needed
154
Q

Redemption of Redeemable Shares: What are these shares?

A

Shares issued which are issued as redeemable shares.

155
Q

Redemption of Redeemable Shares: What do these shares give the holder?

A

Effectively give them temporary membership in the company and issued to be redeemed on the occurence of certain cricumstances (such as on a fixed date and at a fixed price) or may be redeemed at option of issuing company or the SH.

156
Q

Redemption of Redeemable Shares: Where should details be on the redeemability?

A

all details including date of redemption and price to be paid will either be in articles or determined by the directors.

157
Q

Redemption of Redeemable Shares: Is a contract required?

A

No, a contract is not required irrespective of source of funding used as the terms of redemptiona lready set out in articles or determined by directors prior to allotment of shares.

158
Q

Redemption of Redeemable Shares: What if capital used to fund redemption?

A

Must more regulation and procedure which is very simlar for buyback of shares from capital,

SQE - BLP (12 decks)

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