7.9 Finance - Equity and Debt Flashcards
(21 cards)
What are the procedural principles for generating equity finance (issuing shares)?
CAPN’ Allot!
- [Cap] Is there a cap on the number of shares that need to be issued? Might need OR / SR of the shareholders
- [Authority] Have the directors got the authority to allot shares? (might need OR)
- [Pre-emption rights] Do pre-emption rights need to be disapplied? (might need SR)
- [New class of shares] Is there a need to create a new class of shares? (might need SR)
- [Allotment] Directors need to allot the new shares by BR and comply with administrative requirements
Why must directors’ authority be checked to allot shares?
Authority must be checked as it will specify both the maximum number of shares to be allotted and the date on which the authority will expire.
Authority can also only last only for a maximum of 5 years from the date of granting authority / date of incorporation.
What is the equity finance procedure for a private company with unamended MAs and one class of shares (before and after issue)?
MA 3 - Board Resolution
Directors can issue further shares of the same class by Board Resolution
N.B: MA14 not applicable due to exception re issue of shares
What is the equity finance procedure for a private company wishing to issue shares with different classes and rights?
Incorporated before 01/10/09
This requires the advance authority of the members - Ordinary Resolution required.
Incorporated before 01/10/09 - Memorandum of association will set out authorised share capital. Following CA, this provision is transferred to the articles and can be amended by Ordinary Resolution.
OR MUST BE FILED AT COMPANIES’ HOUSE within 15 days - proposed issue of shares
What is the equity finance procedure for a private company wishing to issue shares with different classes and rights?
Incorporated after 01/10/09
This requires the advance authority of the members - Ordinary Resolution required or by provision in the company’s articles.
Articles of association need to be checked for restrictions.
Extra SR? Only if there are bespoke articles
Unamended MAs do not have restrictions (important!) However, bespoke articles can be amended if necessary by Special Resolution.
SR at General Meeting to amend articles if needed, otherwise OR at General Meeting if not provided in articles (e.g in unamended MAs)
What are statutory pre-emption rights?
Requires new shares to be offered (for a period of 14 days) to existing shareholders first in proportion to their existing holdings, before the shares may be offered elsewhere. The offer to shareholders must not be on less favourable terms.
What should be taken into account when shares are issued solely for cash?
Statutory pre-emption rights apply
Also check for special articles - MAs do not vary the statutory rights but they could be varied or removed by private companies by contrary provision in the articles either on incorporation or subsequently by SR
What should be taken into account when shares are bought for non-cash consideration?
Statutory pre-emption rights do not apply
Check for special articles
Could also be an SPT - OR required
When do pre-emption rights not apply?
1) Shares are being bought for non-cash consideration;
2) Pre-emption rights have been excluded;
3) All shareholders entitled to be offered shares have signed a waiver renouncing their claim to them.
How can pre-emption rights be disapplied for private companies with one class of shares?
Directors may be given power under the articles or by Special Resolution to allot shares:
- Without applying the pre-emption rights;
- By applying pre-emption rights but with modifications determined by the directors.
Shareholders give permission by passing a special resolution.
How can pre-emption rights be disapplied for all other companies?
Can be granted to directors who have been given authority to allot shares. Where the directors’ authorisation to allot shares is general, then the power to disapply may be given under the articles or by special resolution.
Otherwise, disapplication can be by way of a special resolution.
What is meant by effecting a share transfer?
Can be transferred by the shareholder selling or gifting them to someone else. Governed by the company’s articles and in the absence of such provision, (MA 26), there is no minimum price or pre-emption requirements.
Note MA 26 - Directors are given absolute discretion to refuse to register a transfer of shares.
What is the procedure for a share transfer?
1) A stock transfer form (STF) is signed by the shareholder transferring the shares and given to the transferee along with the share certification.
2) Stamp duty is paid (if applicable) and the transferee submits the stamped STF and share certificate to the company.
3) Directors pass BR to approve / reject the transfer
4) Within 2 months of the directors approving the transfer, the new shareholder’s name must be entered onto the members’ register and a new share certificate issued by the company.
5) New share certificate is sent to the new member within 2 months of the application.
6) Company will update details of shareholders in the annual Confirmation Statement
How is a declaration of dividend made in a private limited company?
Ordinary Resolution required
Check profits are available - s830 CA
MAs 30 - 35 - Check special articles
Directors decide whether a dividend ought to be declared and make a recommendation to the members in general meeting (GM)
Members vote (by OR) to pay themselves the amount as recommended by the directors or less - same or less (N.B: they cannot vote to pay themselves more than the recommended sum)
What is the procedure for buyback of shares from profits?
Ordinary Resolution required - Buyback of shares that is only permitted where distributable profits (s830 CA) are available.
Due diligence:
Check shares are fully paid
Check articles do not prohibit buyback
Directors should consider their duties under ss172 and 174
Check profits are available by producing accounts - distributable profits must be available or payment made from a fresh issue
Requirements:
OR required to approve contract. Holders of shares being bought CANNOT vote and their votes do not count.
Process:
Copy buyback contract / summary sent with written resolution or made available for inspection 15 days before the GM and at the GM. Payment must be made at the time of buyback
Filing: SH03 and SH06 within 28 days. Cancel shares, update register of members, file relevant PSC forms and update PSC register. Make contract / summary available for inspection for 10 years at registered office once completed
What resolutions need to be passed for buyback of shares from capital?
Special Resolution required - Only permitted to the extent that distributable profits are unavailable. A company cannot buyback out of capital if profits are available; they must use these first.
OR at General Meeting to approve contract
SR at General Meeting to approve buyback from capital
Principle of capital maintenance: The capital provided by shareholders must be maintained and must not be returned to them as creditors rely on it
What is the procedure for buyback of shares from capital?
Due Diligence:
Check shares are fully paid
Check articles do not prohibit buyback
Directors should consider their duties under ss172 and 174
Check whether profits are available by producing accounts (prepared no more than 3 months before statement of solvency SOS)
Preliminary process:
No earlier than 1 week before the meeting, directors must make an SOS (auditors’ report annexed) that the company will remain solvent for a year after the transaction. They may face personal liability and criminal sanctions if they do this negligently. Auditors’ report must confirm that the SOS is not unreasonable
Requirements:
OR required to approve contract. SR required to approve buyback from capital. Holders of shares being bought cannot vote and their votes do not count.
Main process:
Copy buyback contract / summary sent with written resolution or made available for inspection 15 days before the GM and at the GM.
Copy SOS and auditors’ report must be available for inspection before and at the meeting, otherwise resolution will be ineffective
Notice published in London Gazette and national newspaper or actual notice to each creditor within 7 days of SR. This should state where SOS and auditors’ report will be available and that creditors have 5 weeks to apply for order preventing buyback. SOS and report must be filed at Companies House.
Copy SOS and auditor’s report must be available for inspection until 5 weeks after SR.
Payment made in the 2 weeks following 5 weeks of SR.
Filing:
Forms SH03 and SH06 within 28 days, SR at Companies’ House within 15 days. Cancel shares, update register of members, file relevant PSC forms and update PSC register.
Contract/summary available for inspection for 10 years at registered office once completed
What is required to approve the power to borrow / give security when the company has unamended MAs?
MA 3 - Directors may approve by Board Resolution
What is required to approve the power to borrow / give security when the company has special articles?
If company is formed before 01/10/09: check memorandum and amend by SR
If company is formed after 01/10/09: check articles and amend by SR
What is the impact of a Negative Pledge on charge holders?
A negative pledge provides security for floating charge holders.
Prohibits a company from creating later charges with priority over a floating charge, without the floating-charge holder’s permission.
No fixed charge created later than a floating charge will take priority, where the future lender has notice of negative pledge (without consent of charge holder).
Actual notice is achieved by detailing negative pledge on Form MR01 and within charging document. Both sent to Companies House for filing. Whoever takes the charge with notice may be liable for tort of inducing breach of contract.
How is a charge registered at Companies House?
A certified copy of the charge documentation, Form MR01 and a fee needs to be sent to Companies House by 21 days from the creation of the charge.
The Registrar at Companies House will register the charge as it has been submitted within the requisite 21-day period, which begins the day after the day on which the charge was created.
Failure to register a charge will make the charge void against the liquidator/administrator and any other creditors.
