Business - Financing

Question 1

What is the purpose of the allotment of shares?

Answer 1

To issue new shares to investors or existing shareholders

Question 2

What must companies incorporated before 1 October 2009 do regarding allotment restrictions?

Answer 2

Check if they have updated their articles since that date

Question 3

What is the authority for directors of a private company with one class of shares to allot shares?

Answer 3

• Directors can allot shares without shareholder permission under s 550 CA 2006.
• All that is needed is a board resolution

Question 4

What is the requirement for public companies or private companies with more than one class of shares before allotting shares?

Answer 4

Pass an ordinary resolution to allot shares which must be filed at CH- s551

Question 5

What are pre-emption rights and what is its purpose ?

Answer 5

Rights of first refusal over shares being allotted. It allows existing shareholders to preserve their shareholding.

Question 6

Under s 561 CA 2006, what must a company do before allotting equity securities i.e ordinary shares ?

Answer 6

Offer them to existing shareholders on the same or more favourable terms and specify an acceptance period which cannot be less than 14 days.

Question 7

What are exceptions to pre-emption rights?

Answer 7

• Bonus shares
• Non-cash or partly non-cash considerations
• Employee share schemes

Question 8

How can pre-emption rights be disapplied ?

Answer 8

By passing a special resolution -s565

Question 9

What must be done before a company can buy back its own shares?

Answer 9

Shareholders must pass an ordinary resolution authorizing the buyback contract.

Question 10

Share buyback - considerations for the company before deciding on a buyback

Answer 10

Whether it will be beneficial to the company because the company will be financially worse by buying back existing shares however it could be beneficial in the long run as they will not be dealing with a problematic shareholder.

Question 11

What is required for private companies to buy back shares out of capital?

Answer 11

They must exhaust distributable profits before using capital

Question 12

Procedure for buyback out of profits

Answer 12

1) Check articles to see there are no limits for buyback

2) 1st Board Meeting to approve the terms of purchase and resolve to call a GM or WR

3) WR or GM to pass ordinary resolution

4) 2nd Board Meeting to resolve to enter into contract

5) After completion, update the register

Question 13

Eligibility for voting at a GM or WR in relation to buyback

Answer 13

WR

• A shareholder who holds shares which are being bought back cannot vote

GM

• Resolution will not be effective if that shareholder’s votes made the difference between the resolution passing or not so vote should not be cast.

Question 14

Procedure for buyback out of capital

Answer 14

1) Board to prepare accounts

2) 1st Board meeting and directors make statement of solvency

3) WR/GM : Ordinary resolution to authorise the buyback and special resolution to authorise payment out of capital.

4) Within seven days of the special resolution being passed, the company must put a notice in the London Gazette, stating that the shareholders have approved payment out of capital.

5) 2nd Board Meeting to resolve to enter into contract

6) Make payment out of capital

Question 15

Under s 830 CA 2006, when can a company pay a dividend?

Answer 15

If it has profits available for the purpose

Question 16

What is an overdraft facility?

Answer 16

A contract allowing a business to overdraw on its current account

Question 17

What is the main disadvantage of an overdraft?

Answer 17

Repayment may be demanded at any time by the bank

Question 18

What are the characteristics of term loans?

Answer 18

• Fixed amount of money
• Specified repayment period
• Interest paid at regular intervals

Question 19

What is a revolving credit facility?

Answer 19

A facility allowing a business to borrow and repay money repeatedly within a set limit

Question 20

What is a debenture?

Answer 20

A written loan agreement that is registered at Companies House

Question 21

What is the difference between secured and unsecured debt?

Answer 21

Secured debt has priority over assets; unsecured debt is paid pro rata if funds are insufficient

Question 22

What is a fixed charge?

Answer 22

A charge taken over specific assets that gives the lender control of the asset

Question 23

What is a floating charge?

Answer 23

A charge over a pool of assets that can change over time

Question 24

When must charges be registered ?

Answer 24

All charges must be registered within 21 days of creation

Question 25

Does a fixed charge prevent a company from operating its business?

Answer 25

No, a fixed charge does not prevent the company from operating its business within the asset that has a fixed charge on.

Question 26

What rights does a fixed charge give to the lender?

Answer 26

- It gives the lender control as to sell a property with a fixed charge on, you need the lender's consent. - A fixed charge does not give the lender the right to immediate possession or transfer legal ownership.

Question 27

Why are floating charges necessary for a company?

Answer 27

Floating charges are necessary because some assets cannot be fixed as the company needs to sell them regularly to operate its business and fixed charges need the consent of the lender to be sold.

Question 28

Can more than one floating charge be created over the same group of assets?

Answer 28

Yes, it is possible to create more than one floating charge over the same group of assets.

Question 29

What is subordination in the context of creditors?

Answer 29

Subordination is an agreement between creditors to alter the order of priority of their charges, often executed through a deed of priority.

Question 30

What is a negative pledge?

Answer 30

A negative pledge clause prohibits the company from creating later charges with priority to the floating charge without the floating charge holder’s permission.

Question 31

What happens if a subsequent lender takes a charge over the same asset with knowledge of a negative pledge?

Answer 31

The subsequent lender’s fixed charge will be subordinate to the bank’s floating charge.

Question 32

Methods of equity finance

Answer 32

Allotment, transfer, buyback

Question 33

Procedure for allotment of shares

Answer 33

1) Are there any restrictions on allotment 2) Do the directors have authority to allot 3) Are there pre-emption rights ?

Question 34

Transfer of shares (Equity Finance) - How are shares transferred

Answer 34

Transferor completes and sends the transferee 1) Stock transfer form 2) Share certificate