Equity Finance: shares, dividends, and allotment procedure Flashcards
what is the advantage from the investor’s point of view to investing in a company by acquiring equity?
- the return on investment is through dividend payments of income or through capital gain by reselling their shares if the company grows and becomes more profitable (however, neither are guaranteed)
- they may have input in decision making if they have ordinary shares with voting rights
what is the value of the share made up of?
nominal value + premium
- nominal value = the minimum subscription price for a share; a share cannot be issued at a discount to its nominal value
- premium = a share CAN be issued at a premium to its nominal value
what rights attach to ordinary shares?
advantages/disadvantages
advantages:
- voting rights usually
- right to participate in surplus dividends is unrestricted (after preference shareholders are paid) - so SH receive more dividends if company performs well
- right to a portion of surplus capital on winding up
disadvantages:
- have no fixed entitlement to a dividend each year - only when one is declared
- even if dividends are declared, they receive dividends after the preference shareholders receive their dividends which means they may receive less or no dividends in a particular year
- if the company is new and there are preference shareholders this may mean that ordinary shareholders may have to wait for a long time before receiving a return on their investment
what is a preference share? what are the usual features? advantages/disadvantages?
advantages
- receive dividends before ordinary shareholders and rank in priority to ordinary shareholders on winding up
features
- receive a fixed rate of dividends based on the amount paid on the share
- can be participating or non-participating in the surplus dividends declared or surplus assets on winding up (in addition to the fixed entitlement)
- can be cumulative or non-cumulative: cumulative means if dividends are not declared in one year, the right to receive dividends for that year is carried forward and will be paid when there are available profits together with other dividends due
disadvantages
- no voting rights usually (cannot control investment)
- if non-participating = if value of company increases, SH will not have the benefit of receiving dividends reflecting the profitability because the dividend is fixed
what is the disadvantage of having non-participating preference shares?
if value of company increases, SH will not have the benefit of receiving dividends reflecting the profitability because the dividend is fixed
what resolution is needed to vary class rights?
special resolution (75%) passed by holders of that class of shares
when is a company allowed to pay dividends?
- there is no obligation to pay dividends
- dividends can be declared only if a company has sufficient distributable profits
- distributable profits = accumulated realised profits - accumulated realised losses
- a company can make a final and interim dividend
what is required procedurally before a company can pass a final dividend?
- directors recommend the dividend to the SH
- SH can reject
- If SH approve = an ordinary resolution is needed to declare it
- SH cannot declare a dividend higher than what board recommended
(final dividends can be paid only once at the end of the company’s financial year)
what is required procedurally before a company can pass an interim dividend?
- Interim dividends can be paid several times throughout the financial year
- Interim dividends can be paid without the need for an ordinary resolution of the shareholders (under the MA) if the company has sufficient distributable profits (e.g., company has realised an investment)
what is allotment of shares vs issue of new shares?
- a share is said to be allotted to a person when they have the unconditional right to be included in the company’s register of members
- a share is said to be issued to a person when they are actually registered in the register if members (this is when legal title passes)
what are regulatory considerations when allotting shares (3)?
- private companies cannot offer shares to the public, only to targeted investors
- a prospectus may be required
- prohibition on financial promotions unless if falls within a FSMA exception
what are some restrictions on transfer of shares? (2)
- directors have the power to refuse to register the transfer of shares in the company’s register of members
- articles may contain pre-emption rights for shareholders with regards to transfer (but model articles do not)
what is the document used to transfer ownership in shares?
stock transfer form - must be executed by the transferor
what is the procedure to transfer shares? (5)
- transferor executes stock transfer form and sends it with the share certificate to the purchaser (beneficial title passes here)
- purchaser pays SDLT and obtains the stamp on the stock transfer form
- purchaser sends the stock transfer form to the company
- the company registers the purchaser as the shareholder in the register of members (legal title passes here)
- the company must send the new shareholder a new share certificate within 2 months of registration
what is the 5 step procedure to allot new shares?
- remove any cap on the number of shares issued –> special resolution
- directors must have/obtain authority to allot –> ordinary resolution
- any pre-emption rights must be disapplied –> special resolution
- amend articles if new shares are of a new class –> special resolution
- board meeting to allot shares by board resolution (always required)
