Chapter 7: Equity finance and further considerations relating to shares

Question 1

1.1 Raising capital

Answer 1

Capital: All of the assets of the company (including debt finance, shares, assets).

Legal capital: This is the value received from investors who subscribe for the company’s
shares. It is also referred to as the share capital.

Note that there is no maximum legal capital provision under CA 2006. Companies may have as
much share capital as they wish.
Private companies also have no minimum legal capital requirements – one share is sufficient. However, s 763 CA 2006 states that public companies have a minimum legal requirement of £50,000. This is in order to protect creditors.

Question 2

1.2 Issuing shares at a discount/premium

Answer 2

Issue at a discount: Shares may not be issued at a discount (eg issuing £1 shares for 75p each). The House of Lords held that issuing shares at a discount was beyond the power of the company in Ooregum Gold Mining Co of India v Roper [1892] AC 125, HL. This is now prohibited by s 552 CA 2006.

Issue at a premium: Shares can be issued at a premium (eg issuing £1 shares for £2) This is allowed but is not required, as confirmed in the case of Hilder v Dexter [1902] AC 474. It is common for shares to be issued at a premium.

Question 3

1.3 Benefits and risks for shareholders

Benefits

Answer 3

1) Shareholders share in the profits of the company by way of dividends.

2) If the company does well, the shareholders may also receive a capital return where the value of their shares increases

3) Shareholders often have voting rights therefore they have some input into the management of the company.

Question 4

Risks

Answer 4

1) Company has a separate legal personality, so creditors are paid from the company’s assets.
Shareholders are only liable up to the amount invested – they will not be personally liable for outstanding debts of a company.

2) However, in the event of insolvency, creditors are paid first. This means that it is unlikely that shareholders will receive the full value of their investment.

Question 5

1.4 Protection for shareholders

Answer 5

The issue of new shares in a company will usually dilute the rights of the existing shareholders,
such as their rights to vote and to receive dividends. It is therefore important that there are
statutory protections to prevent directors from issuing new shares without the knowledge and
consent of the existing shareholders.

Question 6

Four key issues when seeking new shares

Answer 6

There are four key issues that directors must consider when the company is seeking to issue new
shares:

• Limit on the company’s authorised share capital
• Limitations on the power of directors to issue new shares
• Pre-emption rights
• Class rights

Question 7

1.4.1 Limit on the company’s authorised share capital

Answer 7

Although relatively rare, it is possible for the company’s Articles to limit the amount of share
capital that a company may issue.

Prior to 2006: Companies incorporated prior to CA 2006 had a limit on the amount of shares that could be issued in their memorandum of association, known as the ‘authorised share capital’. Any such historical limit is deemed to be transferred into the Articles by virtue of s 28 CA 2006.

After 2006: Companies incorporated under CA 2006 have no such limit on their authorised share capital, but it is possible, although rare, for a company to insert a limit into its Articles. It is therefore necessary to check the Articles for any limit on authorised share capital.

Question 8

1.4.2 Limitations on the power of directors to issue shares

Answer 8

Directors require authorisation of the shareholders in order to issue new shares in most circumstances. This is important as it avoids the directors themselves issuing and subscribing for new shares in order to obtain a controlling majority.

Question 9

Directors have no power to issue shares except…….

Answer 9

(a) In accordance with s 550:
Section 550 gives the directors of a private company which has only a single class of shares,
and where the articles do not state otherwise, automatic authorisation to issue new shares of
the same class.

(b) Where the shareholders authorise the directors to issue new shares under s 551:
The shareholders may grant the directors authorisation to issue new shares by ordinary
resolution. This lasts for up to 5 years and for a certain number of shares only.

Question 10

Pre-emption Rights

Answer 10

Shareholders have rights of first refusal (‘pre-emption rights’) when the company issues new
shares in most circumstances (s 561). This means that the shareholders are able to protect their percentage shareholding in the company if they wish to do so.

Question 11

Equity Securities

Answer 11

Section 560(1) defines ‘equity securities’ as:
(a) ordinary shares in the company, or
(b) rights to subscribe for, or to convert securities into, ordinary shares in the company;

Question 12

Ordinary Shares

Answer 12

“Ordinary shares” means shares other than shares that as respects dividends and capital carry
a right to participate only up to a specified amount in a distribution.
This means that pre-emption rights apply where the new shares to be issued are ‘ordinary shares’.
Note that the definition of “ordinary shares” here is broader than the usual meaning of ordinary
shares. In particular, it covers shares such as participating preference shares.

Question 13

Effect of Section 560

Answer 13

The effect of s 560 is that pre-emption rights only do not apply to preference shares that have
capped participating rights as to both dividends and capital.

Question 14

Exceptions and exclusion of the right of pre-emption

Answer 14

Exceptions
There are exceptions to the right of pre-emption which apply where the new shares to be issued
are:
* Bonus shares;
* Issued under an employee share scheme; or
* Issued for non-cash consideration (s 564).

Exclusion
A company may exclude the right of pre-emption by specific provision in the articles (ss 567–568).

Question 15

Disapplication of pre-emption rights

Answer 15

Often, a company may wish to issue new shares without having to offer these shares first to the existing shareholders who have pre-emption rights. Pre-emption rights may be disapplied in the
company’s articles

Question 16

Sections 569–571 (Disapplied by Special Resolution)

Answer 16

• Directors of a private limited company with only class of shares: shareholders may agree to
  disapply pre-emption rights by special resolution under s 569.
• Pre-emption rights may also be disapplied by special resolution under s 570 where the
  directors of the company are acting under a general authority to issue shares. In this situation,
  pre-emption rights are disapplied for all shares issued in accordance with this general authority. This is the most common method of disapplication of pre-emption rights.
• Under s 571, shareholders may pass a special resolution to disapply pre-emption rights in
  relation to a particular share allotment only.

Question 17

Pre-emption rights on transfer of shares

Answer 17

Where shareholders transfer their shares, in general there are no rights of pre-emption for existing
shareholders.

However, a private company may provide for pre-emption rights on transfer of shares in either the
articles or a shareholder agreement. This is quite common in small private companies, where it is
important to keep control of the company to a small circle of individuals.

However, if a private company has a corporate shareholder, the transfer of shares by this corporate shareholder will not trigger these pre-emption rights provisions (Re Coroin [2011] EWHC
3466).

Question 18

1.5 Summary

Answer 18

• The term ‘capital’ refers to all of the company’s assets, of whatever nature.
• The term ‘legal capital’ refers to the company’s share capital.
• Shareholders may benefit from the receipt of dividends or capital growth, as well as voting rights. However, the disadvantage to shareholders is that if the company goes into insolvency, creditors are paid first so that shareholders are unlikely to recoup the full amount invested.
• In order to protect shareholders, there are limitations on the power of directors to issue new
  shares. Directors need authority to issue shares which may be automatic or may require an
  ordinary resolution.
• Where the shares issued are ‘equity securities’, shareholders benefit from a right of preemption, which generally requires a special resolution of the shareholders to disapply.

Question 19

2. The doctrine of maintenance of share capital and the issue of dividends

Answer 19

2.1 Share capital – a recap:

Allotted share capital s 558 CA 2006
Shares are deemed to be allotted when a person acquires the unconditional right to be included in
the company’s register of members.
Issued share capital.

‘Issued share capital’ refers to all the shares that have been issued by the company ie all the shares included in the company’s register of members.

Public companies are required to have a minimum allotted share capital of £50,000 (ss 761/763).
There is no minimum share capital requirement for private companies.

Question 20

2.2 The origins of the doctrine of capital maintenance

Answer 20

The doctrine of capital maintenance states that the company must maintain and not reduce its share capital except in certain very limited circumstances. The share capital therefore is a permanent fund available to creditors.

Question 21

Trevor v Whitworth (1887) 12 App Cases 409.

Answer 21

The reason for the doctrine is the protection of creditors, since the principle of limited liability prevents
creditors from seeking funds from shareholders (other than any amount outstanding on the
purchase of their shares) if the company itself has insufficient funds to repay its debts.

From a creditor’s perspective, the share capital of a company gives an indication of its creditworthiness. Unsecured creditors will seek to claim payment from the company’s capital as well as its unsecured assets if the company is wound up.

Capital can of course be lost as a result of poor business decisions or market conditions, but this
is a legitimate risk which both shareholders and creditors will face.

Obviously, many small private
limited companies and also some larger very successful companies may have very limited share
capital but may instead have significant assets such as property. In such situations the doctrine
provides only limited protection to creditors.

Question 22

2.3 The doctrine of capital maintenance (or maintenance of share capital)

Answer 22

The doctrine of capital maintenance is now set out in s 658 CA 2006 which states:
(1) A limited company must not acquire its own shares, whether by purchase, subscription or otherwise, except in accordance with the provisions of this Part.
(2) If a company purports to act in contravention of this section—
(a) an offence is committed by (i) the company, and (ii) every officer of the company who is in default, and
(b) the purported acquisition is void.

Section 659 sets out a series of limited exceptions to this rule.

Question 23

2.4 The impact of the doctrine of capital maintenance

Answer 23

Since the doctrine of share capital prevents a company from reducing its share capital or returning value to shareholders except in limited circumstances, it has an impact on a number of different transactions:
* The granting of dividends or distributions
* Reduction of share capital
* Purchase and redemption of own shares

Question 24

Rules relating to reduction of share capital:

2.5 Returning funds to shareholders: Dividends

Answer 24

A profitable company may wish to pay dividends to its shareholders rather than reinvesting profits
back into the business. The doctrine of capital maintenance applies here to limit the funds from which the company may pay dividends to its shareholders, since the payment of a dividend will involve the reduction of the company’s assets.

A dividend is a ‘distribution’ under the definition in s 829(1) CA 2006, which states that ‘distribution’ means every description of distribution of a company’s assets to its members,
whether in cash or otherwise, subject to the exceptions set out in s 829(2).
Section 830(1) states that a company may pay dividends only out of ‘distributable profits’.

Question 25

Distributable profits:

Answer 25

Distributable profits are defined in s 830(2) as the company’s ‘[…]
accumulated, realised profits, so far as not previously utilised by distribution or capitalisation,
less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made’.

Question 26

2.6 Dividends – relevant accounts

Answer 26

Section 836 CA 2006 sets out the ‘relevant accounts’ for the purposes of ascertaining whether a company has sufficient distributable profits for the payment of a dividend. This usually means that the most recent annual accounts must be referred to. It is important that the accounts have
been properly prepared in accordance with the relevant provisions.

Question 27

Interim Accounts

Answer 27

However, in some circumstances, specially prepared interim accounts may be appropriate. This would be the case where the most recent annual accounts would not justify the payment of a dividend, but the company has realised a substantial amount of profit since the accounts were prepared (eg where the company has sold a significant asset after the date of the last annual
accounts).

Question 28

Initial Accounts

Answer 28

Where a company has recently started trading and does not have any annual accounts, initial
accounts may be prepared to justify the payment of a dividend.

Question 29

2.7 Different types of dividends

Answer 29

There are three different types of dividend:
* A dividend usually involves the distribution of profits by way of cash to shareholders.
* A scrip dividend is where a company gives the existing shareholders further shares in the
company rather than cash.
* A dividend in species involves the company giving the shareholders value by way of assets.
Note that when recommending a dividend, the directors must have regard to all of their duties,
and particularly the duty to promote the success of the company under s 172.

Question 30

2.8 Final and interim dividends

Answer 30

Typically, final dividends are recommended by the board of directors and declared by ordinary
resolution by the shareholders at the next general meeting following the annual accounts. The articles however may provide that final dividends may be paid without any shareholder involvement.

Shareholders cannot generally (subject to anything to the contrary in the articles) vote for payment of a higher dividend than that recommended by the board but they are able to require a lower dividend to be paid.

Interim dividends may also be paid. They are usually (subject to anything to the contrary in the articles) of a lesser amount than a final dividend and are recommended by the directors alone. Interim dividends will be paid for example where a company has had a particularly profitable quarter.

Question 31

2.9 Disguised distributions

Answer 31

The courts have found that there has been a ‘disguised’ return of capital to shareholders, breaching the capital maintenance principle, in some less obvious cases. Essentially, any
transaction in which a shareholder receives value will be a distribution, not only the payment of a cash dividend.

Question 32

Key case: Re Halt Garage (1964) Ltd [1982] 3 All ER 1016, ChD

Answer 32

This case illustrates the importance of ensuring that directors’ salaries are correctly paid, particularly for directors who are also shareholders. In this case the director receiving remuneration was the wife of the majority shareholder, who had not in fact worked for the company for several years due to ill health.

The company had gone into insolvent liquidation and the court held that the remuneration paid to the director was a disguised gift out of capital and
ordered it to be repaid.

Question 33

Intra-group transfers

Answer 33

Another problematic area where disguised distributions may be found to have occurred is on intra-group transfers (ie transfers of property between companies in the same group). The leading case on intra group disguised distributions is the case of Aveling Barford v Perion Ltd (below).

Question 34

Key case: Aveling Barford Ltd v Perion Ltd [1989] BCLC 626

Answer 34

In this case there were two companies, AB Ltd and P Ltd, which were both owned and controlled
by the same shareholder, Lee. AB Ltd did not have any distributable reserves, but it owned a sports ground valued at £650,000. In February 1987, AB Ltd sold the sports ground to P Ltd for £350,000.

In August 1987, P Ltd sold the sports ground for £1.52 million. AB Ltd then went into liquidation and the liquidator successfully sued to have P Ltd declared a constructive trustee of
the proceeds of sale on the basis that the transaction was an unauthorised return of capital (or a
‘disguised distribution’) by AB Ltd to Lee, its sole shareholder, via P Ltd.

Question 35

2.10 Unlawful distributions – liability of directors

Answer 35

Where an unlawful distribution is made, both the directors who authorised the distribution and
also the shareholders receiving it may be liable. Breach of the rules in CA 2006 relating to the payment of dividends out of distributable profits
makes the payment unlawful. Directors who knew or ought to have known that the payment amounted to a breach are liable to personally repay the dividends.

Question 36

Key case: Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712

Answer 36

In this case the directors, acting on the basis of the company’s 1991 accounts that incorrectly showed inflated profits, unlawfully paid dividends exceeding the company’s distributable reserves. The Court of Appeal ordered the directors to repay the full amount of the dividends (over £78 million), and not only the amount in excess of the amount of dividend that could have lawfully been paid, since they were held to have deliberately and dishonestly paid the unlawful dividends.

Question 37

2.11 Unlawful distributions – liability of shareholders

Answer 37

Section 847(1) and (2) CA 2006 provide that where a distribution is made in contravention of the
requirements of CA 2006 and, at the time of the distribution, the member knows or has reasonable grounds for believing the distribution to have been unlawful, they are liable to repay it to the company.

Question 38

Key case: It’s a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544

Answer 38

In this case the liquidator sought repayment of dividends paid to the defendants who were the
sole shareholders and directors of the company. Over a two-year period in which there were no profits available for distribution, the company’s accounts showed that dividends had been paid to
the defendants. The defendants argued that the sums received were actually remuneration but
had been shown in the accounts as dividends as they had been advised that this was more tax
efficient.

Question 39

Key case: It’s a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544 Judgement

Answer 39

The Court of Appeal held that ignorance of the law was no defence, and that the defendants were liable to repay the money. Arden LJ stated that the shareholders would be liable
‘if [they] knew or ought reasonably to have known of the facts which mean that the distribution contravened the requirements of the Act’.

Question 40

2.12 Dividends – steps that the board must take before issuing a
dividend/distribution

Answer 40

(a) Directors’ duties: Directors need to consider their duties, particularly ss 171/172. Is making the
distribution in accordance with those duties?
(b) Restrictions on distributions: Consider whether the proposed transaction is either a dividend
or a disguised distribution (Aveling Barford Ltd v Perion Ltd [1989]).
(c) Are there any distributable profits?: Check the relevant accounts. If not, the distribution is
unlawful.
(d) Amount of distribution: Check whether the distributable profits cover the whole amount of
the distribution. If not, the distribution is unlawful.

Question 41

2.13 Summary

Answer 41

• The doctrine of capital maintenance is a key doctrine in company law, meaning that a company may only reduce its share capital in very limited circumstances.
• The rationale behind the doctrine is the protection of creditors, who are entitled to assume that the company will have available its share capital as a minimum fund.
• Dividends may only be made out of distributable profits (s 830).
• There are different types of dividend: dividends, scrip dividends and dividends in specie. However, the principle that payment may only be made out of distributable profits applies in each case.
• Disguised distributions are also subject to the same principle, which applies whenever a shareholder receives value from a company.
• If a dividend or distribution is made unlawfully, both the directors who authorised the distribution and the shareholders who received the distribution may be liable to repay the amount given.

Question 42

3. Reduction of capital and redemption/purchase of own
   shares

Answer 42

This section reviews further exceptions to the doctrine of capital maintenance:
* Reduction of capital; and
* Redemption or purchase of own shares by a company.

Question 43

3.1 Reducing share capital

Answer 43

Share capital greater: * If the share capital is greater than the actual net assets, eg where there have been business losses. In this situation the company may wish to reduce its share capital so that it corresponds to the actual net assets, with the hope that it will then be able to resume dividend payments.

• Company with surplus cash: Where the company has surplus cash that it may wish to return to shareholders eg where an asset has been sold. Here the company may wish to reduce its share capital and at the same time return money to shareholders.

Question 44

Paradox with the doctrine of share capital

Answer 44

3.2 Reduction of capital confirmed by the court

Both public and private companies may reduce their capital by using the court procedure under ss 645-651. This requires:
* A special resolution of the shareholders, followed by
* An order of the court

Question 45

Creditor’s Right to Object

Answer 45

The creditors have a right to object before the court will make the order. The court may make an order confirming the reduction of capital on such terms and conditions as it thinks fit (s 648(1)). Before any such order is made, however, the court must be satisfied that every creditor entitled to object has either consented to the reduction or that his debt has been repaid or secured (s 648(2)).

The reduction of capital will take effect on registration of the court order confirming the reduction
and statement of capital at Companies House (s 649(5)).

Question 46

3.3 Private companies only – reduction of capital by special resolution and
solvency statement

Answer 46

CA 2006 simplified the procedure for reducing share capital for private companies only. Although
private companies may use the court procedure, they may also reduce share capital using the simplified procedure under ss 642–644 using a solvency statement of the directors and a special resolution of the shareholders.

Question 47

Requirements of solvency statements

Answer 47

The solvency statement:
* Must be made not more than 15 days before the date on which the special resolution is passed
(s 642(1));
* Must be signed by all directors;
* Must confirm:
- There is no ground on which the company could be found to be unable to pay its debts (s
643(1)(a)); and
- The company will be able to pay its debts for 12 months from the date of the solvency statement (s 643(1)(b)(ii)).

Question 48

3.4 Redemption and purchase of own shares

Answer 48

Although the common law prohibited a company from acquiring its own shares because of the risk to creditors (Trevor v Whitworth (1887) 12 App Cases 409), CA 2006 sets out exceptions to the doctrine of capital maintenance

Question 49

3.4 Redemption and purchase of own shares where companies are able to:

Answer 49

• Issue shares that are redeemable at the option of either the company or the shareholder (s 684(1)). A public company must have express authorisation in its articles to issue redeemable shares, whereas private companies have statutory authorisation to issue redeemable shares, subject to any specific restriction in their articles.
• Purchase their own shares (subject to any restriction or prohibition in the articles) (s 690(1)).

Question 50

The difference between a redemption and a purchase of shares

Answer 50

For a redemption, the
shares to be redeemed were issued as redeemable shares ie they have always been temporary,
and the terms of the redemption were determined at the time of issue (these will be set out in the
articles).

For a purchase of shares, the parties will need to agree the terms of the purchase at the time that the company seeks to make this purchase.

Question 51

3.5 Redemption of shares – ss 685–689 CA 2006

Answer 51

Redeemable shares are issued as such, and the terms of redemption are set out at the time of issue. There is therefore no need for a contract to be prepared (contrast this with a private company’s purchase of own shares – see below). For redeemable shares to be issued, there must be at least one other class of shares in issue (s 684(4)). Shares may not be redeemed unless they are fully paid.

Question 52

Redemption from distributable profits

Answer 52

Redemption will usually be out of distributable profits, but private limited companies can redeem
out of capital provided that they comply with the detailed procedural requirements in CA 2006 for
redemption out of capital (accounts must be no more than three months old, directors’ statement,
auditors’ report and a special resolution of the shareholders are also required – s 687(1)). Creditors must be notified and have a period in which to object.

Question 53

3.6 Purchase (or buyback) of shares – ss 690-708

Answer 53

The company must draw up a contract with the shareholder(s) selling the shares for the purchase
of the shares, which needs to be approved by an ordinary resolution of the shareholders. The
purchase may be funded by:
* Distributable profits (all companies); or
* Capital (private companies only).

Question 54

Further requirements for when a company seeks to purchase its own shares using capital

Answer 54

There are further requirements,
similar to those required for redemption of shares out of capital (accounts must be no more than
three months old, directors’ statement, auditors’ report and a special resolution of the shareholders are required – s 692(1)(a)). Creditors must be notified and have a period in which to object

Question 55

3.7 Summary

Answer 55

• All companies may effect a reduction of share capital using the court procedure.
• Private companies may also effect a reduction of capital using the out of court procedure, which involves the directors making a solvency statement and the shareholders passing a special resolution.
• All companies may issue redeemable shares, provided there is at least one other class of
  shares in issue and that nothing in the articles prohibits this.
• Redemption may be made out of distributable profits, or (for private companies only) out of capital.
• Purchase of own shares may also be made out of distributable profits, or (for private companies only) out of capital. A contract is required to set out the terms of purchase.
• Where a private limited company seeks to fund a redemption or purchase of shares out of
  capital, there are additional procedural requirements – a directors’ statement, auditors’ report
  and special resolution of the shareholders.

Question 56

4. Financial assistance

Answer 56

4.1 Introduction to financial assistance:

The term ‘financial assistance’ refers to a company providing financial assistance for the purchase of its own shares. There are a variety of different types of financial assistance which are covered by the prohibitions – these include financial assistance given by way of a gift, loan,
guarantee, security or indemnity – see s 677 CA 2006.
-The meaning of ‘financial assistance’ was set out in British and Commonwealth Holding PLC v
Barclays Bank plc [1996] 1 WLR 1 as follows:
The section requires that there should be assistance or help for the purpose of acquiring the
shares and that that assistance should be financial.

Question 57

4.2 Financial assistance – the prohibitions (only applicable for public companies)

Answer 57

CA 2006 simplified the provisions relating to financial assistance and, in particular, removed the
prohibition in relation to private companies. The prohibition therefore now only applies in general
to PUBLIC companies

Both public companies and their private limited subsidiaries are prohibited from providing
financial assistance for the purchase of shares in the public company (s 678). Public companies are also prohibited from providing financial assistance for the purchase of
shares in their private limited holding companies (s 679).

The consequences of unlawful financial assistance is that the transaction will be held void and the
company and any officer in default will be liable to a fine and/or up to two years in prison. There are a number of exceptions to the prohibition on financial assistance, but note that these are very narrowly construed, meaning that they are difficult to rely on. The general rule is that public companies must be extremely careful to avoid providing financial assistance for the
purchase of their shares.

Question 58

4.3 Exceptions – conditional and unconditional

4.3.1 Section 681 – unconditional exceptions

Answer 58

Section 681 contains a wide list of ‘unconditional’ exceptions, which relate mainly to financial
assistance being offered for procedures which are authorised in other sections of CA 2006 eg
redemption of shares or reduction of capital.

Question 59

4.3.2 Section 682 – conditional exceptions

Answer 59

Section 682 lists a number of ‘conditional’ exceptions, which apply only if the company has net
assets and either:
(a) Those assets are not reduced by the giving of financial assistance; or
(b) To the extent that those assets are reduced, the assistance is provided out of distributable
profits

One example of a conditional exception is financial assistance by a company for the purposes of
an employee share scheme provided this is made in good faith in the interests of the company or
its holding company (s 682(2)(b)).

Question 60

4.4 The principal purpose and incidental part of a larger purpose defences –
s 678(2) and (3) and s 679(2) and (3)

These exceptions provide that financial assistance is not prohibited:

Answer 60

• If the principal purpose of the assistance is not to give it for the purpose of an acquisition of
  shares, or where this assistance is incidental to some other larger purpose of the company;
  and
• In either case, where the financial assistance is given in good faith in the interests of the company.

Question 61

Larger purposes

Answer 61

The difficulty in relying on these exceptions is that the court needs to determine whether the giving of assistance for the purpose of an acquisition of shares is an incidental part of some larger purpose. This was considered in the case of Brady v Brady [1989] AC 755, set out below.

Question 62

Key case: Brady v Brady [1989] AC 755

Answer 62

This case involved the division of a company’s business between its two shareholders, Jack (J) and
Bob (B), who were brothers who had fallen out. It was decided that J would take the haulage business and B the soft drinks business, but because the haulage business was worth more than the soft drinks business, assets had to be transferred between the businesses.

This was done by
the company transferring assets to a new company controlled by B. This was held to be financial assistance, but the court had to consider whether the financial assistance was an incidental part of a larger purpose of the company which was to remove the deadlock between J and B which
had threatened to result in the liquidation of the business.

Question 63

Key case: Brady v Brady [1989] AC 755 Judgement

Answer 63

The House of Lords held that the exception did not apply since the essence of the reorganisation
was for J to acquire B Ltd’s shares, therefore the acquisition of these shares could not be said to be ‘incidental’ to the reorganisation.
Following this case it is clear that the principal purpose and incidental exceptions will be very narrowly construed.