Equity Finance Flashcards
(33 cards)
There are three ways shares can change hands:
- Allotment
- Transfer
- Buyback
Allotment
What is allotment?
What would the company do after allotting the shares?
Allotment: the company creates new shares and gives them to an existing shareholder or new shareholder in return for payment.
The company will issue the share certificate and enter the person on the register of members (or amend their existing entry to show their increased shareholding)
Allotment: Difference between allotment and issue
At what point does allotment occur?
What are the conditions for this?
When are the shares issued?
Allotment: When a person acquires the unconditional right to be on the register of members (s.558, CA 2006)
- The shares have been transferred and paid
- A board resolution has been passed to register the transfer.
Issue of shares: shareholder is entered on the register.
More important is allotment.
Allotment: Investor’s interests
How would an investor make a return on their investment?
- selling his shares to another investor, or back to the founder
- acquisition – the company is sold to another company and the investor’s shares are sold to the acquirer
- IPO – the company is listed on a stock exchange, where shares can be sold to the public
Note: usually private companies will restrict ability to sell shares.
Allotment
The three questions a solicitor must consider when working out the procedure to allot shares are:
- Are there any constitutional restrictions on allotment?
- Do the directors have authority to allot?
- Are there any pre-emption rights?
Allotment: Constitutional restrictions
What is the authorised share capital (ASC) and in what situation does it apply?
When the ASC applies, where is it found in the company’s constitution?
An upper limit on the number of shares a company can have. It applies to companies incorporated before 1 October 2009 that didn’t update their articles.
Memorandum of association for pre-CA and the articles post-CA.
Allotment: Constitutional restrictions
Companies incorporated before 1 October 2009 will have the ASC clause in their articles unless they were updated. How can you remove the ASC clause?
Even companies incorporated after 1 October 2009 may have an equivalent clause that limits the number of shares the company can have. How can you remove such a clause?
Ordinary resolution.
Special resolution.
Note: this is an exception to the rule that the company’s articles can only be amended by special resolution.
Directors’ authority to allot: private company with one class of share
Section 550 of CA 2006
How can a director of a private company with one class of shares obtain the authority to allot shares?
Suppose the company’s articles restrict the director’s s.550 power to allot shares. How can this restriction be removed?
The company must have one class of shares both before and after allotment
By board resolution only, unless incorporated pre-CA 2006, an ordinary resolution is also required (to ‘activate’ s.550).
A special resolution.
Director’s authority to allot: s.551
Section 551 of CA 2006 applies to public companies and private companies with more than one class of shares.
How can the directors obtain the authority to allot shares in these circumstances?
In either case, what must be stated?
Authority to allot
- Articles (generally or for a specific allotment)
- Ordinary resolution (generally or for a specific allotment).
Required information
- Maximum number of shares the directors may allot;
- Date on which the authority expires, which cannot be more than five years from the incorporation date (for authority by articles) or from the resolution (for the OR).
If the authority expires, it can be renewed by ordinary resolution with the same requirements (max. number of shares and date of expiry).
Note: this is an exception to the rule that the company’s articles can only be amended by special resolution.
Allotment: Pre-emption rights
What must the company do before allotting equity securities to a person (s.561 CA 2006)?
How can private companies exclude pre-emption rights?
It must offer them to existing holders of ordinary shares on the same or more favourable terms
Provisions in the articles (either generally or for specific allotments)
Enables existing shareholders to retain their percentage shareholding in the company, as they must be offered shares proportionately the number of shares they already hold.
Equity securities = Ordinary shares and rights to subscribe for or convert securities into ordinary shares.
Allotment: Pre-emption rights - exercise
UOL has the following shareholders: Emma - 600 shares. Farha - 300 shares. Geeta - 100 shares.
The board proposes to allot 500 more shares to a third party in return for $1000 cash. How many shares must the board offer to each shareholder?
Pre-emption rights are also called rights of first refusal over shares which are being allotted.
Emma - 300 shares (60% of 500).
Farha - 150 shares (30% of 500)
Geeta - 50 shares (10% of 500)
Allotment: Pre-emption
When a shareholder is offered new shares in accordance with pre-emption, what are the requirements of the offer?
- The offer must state the period of acceptance, which cannot be less than 14 days.
- The offer cannot be withdrawn within that period.
If any or all shareholders do not accept the offer, the directors can offer shares to new buyers.
Allotment: Pre-emption
Pre-emption rights do not apply in three situations:
- In relation to allotment of bonus shares;
- Consideration is partly or wholly non-cash.
- The shares are to be held under, allotted or transferred pursuant to an employee share scheme.
Allotment: Disapplying pre-emption
How can companies disapply pre-emption rights?
By special resolution (either generally or for specific allotments)
A company can disapply pre-emption either generally or for a specific allotment.
Allotment: Disapplying pre-emption - s.551 interaction
What further step may be required of a public company or private company with more than one class of shares?
N.B. disapplication of pre-emption rights lasts as long as the director’s authority to allot under the ordinary resolution.
If the company authorised a specific allotment under s.551, the director must make a recommendation for the special resolution to disapply pre-emption.
Instead, if it passes an ordinary resolution for a general authority to allot, a recommendation is not required.
As such, it makes more sense to pass an ordinary resolution for the general authority to allot shares, so that pre-emption can be disapplied without a director’s recommendation.
Allotment: Disapplying pre-emption - s.551 interaction
Where a director’s recommendation is required, what must it state?
- The reason for recommendation.
- Amount the buyer will pay;
- Justification for that amount.
The statement must be circulated to shareholders with the notice of general meeting (or written resolution.
Allotment: Payment for shares
Under MA 21, all shares in a company must be fully paid up. What does this mean?
If the company’s articles do not include MA 21, the shares can be issued partly paid, but when would the shareholder pay the remainder?
The buyer must pay for the shares when they receive them.
When contractually obliged or company is wound up.
Allotment: admin
Which three ordinary resolutions need to be sent to Companies House and within how many days?
Beyond the general requirement to prepare minutes of board meetings (s.248) and general meetings (s.355) there are various administrative and filing requirements in relation to allotment.
- Resolution removing the ASC;
- Resolution activating s.550 in a pre-CA 2006 company.
- s.551 resolution granting directors authority to allot.
Allotment: admin
When a company allots shares, what forms need to be sent to CH, and when?
Which of the company’s registers must be amended after allotment and when?
Finally, what must be prepared and allocated?
- SHO1 (return of allotment and statement of capital) within one month of allotment.
- Register of members within 2 months of allotment.
- The share certificate, within 2 months of allotment.
PSC register may also require amending.
Transfer of shares
The articles cannot restrict the existing shareholders’ ability to…
The articles cannot restrict particular persons from…
However, what discretion is given to the board by virtue of MA 26?
Selling shares.
Buying shares.
The right to refuse the transfer of shares (i.e. they must approve every transfer).
Transfer of shares: How are shares transferred?
What steps do each of the parties take in a transfer of shares?
Transferor
- Completes and signs a stock transfer form
- Gives the stock transfer form and share certificate to the transferee
Transferee
- sends stock transfer form and share certificate to company.
Company
- sends new shareholder a new share certificate in their name within two months.
- notifies the Registrar of the ownership change when filing its annual confirmation statement. (CS01).
Transmission
In what circumstances does transmission occur and what are its effects?
Transmission: a shareholder dies or becomes bankrupt.
Effects: the shares automatically pass to the PRs or trustee in bankruptcy.
Maintenance of share capital
What is the share capital and what is the general rule in relation to it?
What are the two consequences of this rule?
Share capital: the money provided by shareholders in return for shares.
The general rule is that this fund cannot be reduced as it is used for creditors and cannot be returned to shareholders.
- dividends cannot be paid out of capital (must be out of distributable profits);
- the company must not generally purchase its own shares.
Share buyback
Provide two reasons a company might buyback its own shares.
- A shareholder wants to cut ties but cannot find a purchaser;
- If the articles require a special resolution for transfer, an ordinary resolution authorising a buyback may be easier.
Often justified by the company on the basis that it is best for the company long-run to buy out a disgruntled shareholder.
