19: Company law share and loan capital

Question 1

there are two types of ways a company can raise long term finance. this is by:

Answer 1

share capital

debt capital

Question 2

both shareholders and debenture holders are investors who receive a return on their capital investment. shareholders receive a return by way of a _____ and debenture holders by a ____

Answer 2

dividend, interest

Question 3

can a company issue share capital at a discount to its nominal value?

Answer 3

no.

Question 4

can a company issue share capital at a discount to its market value?

Answer 4

yes, provided it is not lower than the nominal value

Question 5

if the nominal value of a share is £1 and the company issue them for £1.25, what is the term for this £0.25?

Answer 5

share premium

Question 6

Jacques set up Cloone Ltd two years ago, subscribing for a £1 share at its nominal value.

The company asked for 50p to be paid. This is called _ share capital.

Jacques actually paid 30p. This is _ share capital. Jacques still currently owes the company 20p per share. He is also under a duty to pay 50p per share in the future when the company calls for the _ share capital

fill in blanks

Answer 6

called up share capital

paid up share capital

uncalled share capital

Question 7

what is the difference between unissued share capital and uncalled share capital?

Answer 7

unissued share capital is not issued to anyone and no liability has been created

uncalled share capital is a shareholder has not yet paid up for the share capital that they are obligated to pay and therefore creates a liability: it is a debt and if called upon, shareholder is obliged to pay,

Question 8

is there only one class of share?

Answer 8

no

Question 9

what are ordinary shares entitled to?

Answer 9

entitled to a dividend from the distributable profits

Question 10

ordinary shares are entitled to a dividend from the distributable profits, but only once what…?

Answer 10

once the preferential share holders have been paid their dividends first

Question 11

there may be class A ordinary shares and class B ordinary shares. what might the difference in these be?

Answer 11

perhaps a difference in voting rights

Question 12

are preference shareholders entitled to dividends at a fixed or flexible rate?

Answer 12

fixed

Question 13

what does it mean by cumulative and non cumulative preference shares?

Answer 13

if for any reason, a company cannot distribute dividend shares for that year, they will double your dividend rate in the next year. this is cumulative preference shares

if for any reason, a company cannot distribute dividend shares for that year, the right to the dividend lapses and you will not receive a dividend that year. this is non-cumulative preference shares

Question 14

will a preference shareholder ever receive a dividend that is less than their fixed rate?

Answer 14

no, they will always receive their fixed rate or above. but never below.

Question 15

what is a participating preference shareholder?

Answer 15

one that has receives dividends from their preference shares, but additionally receives dividends received from other classes of shares

Question 16

what are deferred shares

Answer 16

shares that have a right attached to them that only begins conditional to a future date or event to occur.

example: shares that have no right to a dividend that will acquire voting rights when the company’s profits reach a defined amount

Question 17

what are convertible shares?

Answer 17

shares that are, when issued, convertible into another share class.

example: convertible into ordinary shares

Question 18

what are redeemable shares

Answer 18

shares that will be bought back by the company at a later date

Question 19

do non-voting share have voting right?

Answer 19

no

Question 20

do all companies need ordinary and preference shares?

Answer 20

no, not all companies have preference shares

Question 21

what does the term “pari passu” mean?

Answer 21

it means that all share classes rank equally

Question 22

does ordinary share capital include only all ordinary shares issued? for tax purposes

Answer 22

no.

it includes all shares issued, except preference shares (and it does include participating preference shares)

Question 23

at what point leads to the allotment of shares?

Answer 23

after the person who wishes to subscribe to the shares in the company has offered and the company has accepted the offer. then, the shares are ‘alloted’ to the person

Question 24

can directors buy shares in the same company they work at?

Answer 24

yes, provided they receive authority under the companies articles

or

from ordinary resolution of the shareholders

Question 25

can a private company with one share class give authority to the director to allot shares for 10 years?

Answer 25

yes, because there is only one share class

Question 26

can a public company with 3 share classes give authority to the director to allot shares for 6 years?

Answer 26

no

Question 27

what is a pre-emption right?

Answer 27

existing shareholders have the opportunity to subscribe to further shares in the company before the shares are issued to new shareholders

Question 28

what is consoldiation and sub-division of share capital?

Answer 28

consolidation is where the nominal value of shares are low, and the company converts the nominal value of shares to a higher amount. (consolidates ten 10p shares into one £1 share) sub-division is where the nominal value of shares are high and the company converts the nominal value of shares to a lower amount (sub-divides one £1 share intp ten 10p shares)

Question 29

what is the term creditors buffer

Answer 29

a creditor will look at the share capital of the company to decide whether the level is high enough to consider them a 'safe' company. a company is required to maintain its share capital and for example, if a dividend was to be paid, this cannot be taken from the share capital, so the creditors know that this is a safe figure to look at

Question 30

what are distributable profits (calculation)

Answer 30

accumulated realised profits less accumulated realised losses aka realised profits less realised losses over time

Question 31

a public company can only make a distribution if its...?

Answer 31

if its net assets are not less than called up share capital + undistributable reserves

Question 32

what is a dividend called if they do not follow the proper procedure to distribute dividends?

Answer 32

unlawful dividends

Question 33

the shareholders may have to repay (i.e. make good) the amount paid out as an unlawful dividend true or false?

Answer 33

false the shareholders and directors may have to repay (i.e. make good) the amount paid out as an unlawful dividend

Question 34

which type of dividend is declared by ordinary resolution?

Answer 34

final dividend

Question 35

which of the type of dividend can the shareholders rescind if they decide they no longer want to distribute?

Answer 35

interim dividends

Question 36

the existance of two possible levels of taxation for dividends leads to __ __ __

Answer 36

economic double taxation (one in the hands of the shareholder and one in the hands of the taxpayer of the same income)

Question 37

does fiscal transparency mitigate the problem of economic double taxation?

Answer 37

yes, because it regards the commpany as an intermediary recipiant of income on behalf of its shareholders

Question 38

a private company can reduce its share capital but on what conditions? (3)

Answer 38

- the Articles allow it (or changed to allow it) - agreement by special resolution - courts allow it; or solvency statement (showing they have no reason to not be able to pay its debts for the next 12 months)

Question 39

what are the four ways a private company can execute a share buy-back?

Answer 39

1. out of distributable profits 2. from the proceeds of a fresh issue of shares 3. with a de-minimus amount of cash 2. out of capital

Question 40

bob is a shareholder of xyz limited. xyz limited are executing a share buy back and have set a meeting in two weeks for an ordinary resolution. xyz have planned to buy back some of bob's shares. can bob attend the meeting?

Answer 40

no. bcos he owns the shares they are buying back

Question 41

once the shares are cancelled, an amount equal to the nominal value of the shares bought back must be transferred to the ...?

Answer 41

capital redemption reserve

Question 42

why might a loan be more advantageous than issuing shares to raise finance?

Answer 42

- interest payable rather than dividends based on distributable profits - can pay loan off over time - loan can be more tax efficient - loans do not require voting rights (generally)

Question 43

does a debenture holder have a contractual relationship with the company?

Answer 43

yes

Question 44

what is the difference between secured and unsecured loan stock?

Answer 44

an unsecured loan stock is where the creditor has a contract with the company according to normal contract law a secured loan stock is where the lender has rights against the company's property against which the loan has been secured

Question 45

what is a fixed charge?

Answer 45

a debt secured against an asset in the company. a fixed charge relates to a specific asset in the company that the debt is secured against. therefore if the company fails to pay back to loan, the creditor can realise the asset to meet the debt owed

Question 46

what happens if there is a fixed charge over an asset that the company has sold? how will the debt be repaid?(2)

Answer 46

the debt can be repaid by: 1. by using the proceeds from the sale of the asset 2. the purchaser of the asset will buy this asset with the fixed charged attached to the asset (encumbered by the charge)

Question 47

is it more preferred for a fixed charge to be attached to an asset that will be held for a long term time period or short term?

Answer 47

long term, because the debt is secured against that particular asset

Question 48

what is a floating charge attached to?

Answer 48

a class of assets of a company's present and future.

Question 49

why is a floating charge called floating?

Answer 49

because it is 'floating' above all the company's assets. there is no one asset in particular that the debt is secured against

Question 50

at what point does a floating charge crystallise?

Answer 50

at the time of a trigger event for example, this can be upon insolvency of the company

Question 51

what happens when a floating charge crystallises?

Answer 51

this is when a floating charge is converted into a fixed charge on assets owned by the company at the time of crystallisation

Question 52

when does a floating charge attach to the assets of a company

Answer 52

upon crystallisation

Question 53

proceeds from share issues must be set aside and used to pay creditors in the event of the company becoming insolvent true of false?

Answer 53

false. proceeds from share issues can be used in trade but not for to pay shareholders in the event of insolvency

Question 54

the directors of sandringham ltd want to propose a buy back of company shares out of capital what kind of resolution is required? ordinary/special with special/usual notice?

Answer 54

special resolution with usual notice

Question 55

interest payments to debenture holders in a period must be paid out of

Answer 55

pre-tax profit or loss for the period