Equity Finance

Question 1

What rare the 2 finance options for companies?

Answer 1

Equity finance

Debt finance

Question 2

What is allotment of shares

Answer 2

When a company decides to create shares and give them to existing shareholder, or a new shareholder, in return for payment.

Question 3

What is share transfer?

Answer 3

Where the shareholder sells or give shares to another shareholder or a new shareholder

Question 4

What is buyback?

Answer 4

Where the company buys back some of its own shares from one or more shareholders.

Reverse of allotment

Question 5

What is common about all methods of equity finance?

Answer 5

They are al involve the percentage shareholding of at leases one shareholder to change.

Question 6

What is s 558 CA

Answer 6

A company altos shares when a person acquires the unconditional right to be included in the companys register of members in respect of the shares

Question 7

What are the 3 questions that you must consider when working out if you can allot shares?

Answer 7

Are there any constitutional restrictions on allotment?

Do the directors have authority to a lot shares

Are there any pre-emption rights?

Question 8

When do you need to check if there are constitutional restrictions on allotment?

Answer 8

I companies were incorporated BEFORE OCtober 2009.

The company’s memorandum of association always contained an UPPEr LIMIT on the number of shares a company could have - ASC>

When CA 2006 cam einto force, the ASC clause was transferred to companies articles, and can be removed by ordinary resolution.

Question 9

What is an ASC clause?

Answer 9

Authorised share capital clause

Pre CA 2006, was transferred into articles of association.

Question 10

Can the ASC clause be removed?

Answer 10

YES< it can be removed from the articles by ORDINARY RESOLUTION, which is different to usual. A copy of this must be filed.

Question 11

How do you check if directors have the authority to allot shares?

Answer 11

Either board decision or shareholder decision.

Private company with 1 class of shares: have authority to allot shares without the permission of shareholders, under s 550 IF incorporated under CA 2006.

If incorporated BEFORe 2006, shareholders must pass ordinary resolution to activate this s 550 section.

Question 12

What is s 550 CA

Answer 12

Authority to allot shares without permission from shareholders

Question 13

What is s 551 authority to allot shares?

Answer 13

Directors of public companies, or private companies with MORE THAN 1 CLASS OF SHARES before or after allotment, MUST obtain the permission of the company’s shareholders before they can allot shares.

This authority will expire 5 years from date of ordinary resolution

Question 14

Under s 551, when will authority to alot shares expire?

Answer 14

5 years after date of ordinary resolution

Question 15

What is an alternative to s 551 which means you dont have to keep renewing it?

Answer 15

Can include it in the articles of association from incorporation. Ordinary resolution (EXCEPTION)

Question 16

What are pre-emptive rights?

Answer 16

Rights of first refusal over shares which are being allotted.

Question 17

What is s 561 CA?

Answer 17

Company must not a lot “equity securities” to a person, UNLESS it has fist offered them to existing holders of ordinary shares in teh company, on the SAME or MORE FAVOURABLE terms.

Question 18

What does equity securities mean

Answer 18

It includes ordinary shares and the right to subscribe for, or to covert, securities into ordinary shares int eh company

Basically a way to maintain your shareholding int eh compan

Question 19

Hwo long is the period of acceptable of the offer to pre-emptive rights to shares?

Answer 19

Cannot be less than 14 days.

Question 20

what are the exemptions to pre-emotive rights?

Answer 20

They do not apply in relation to allotment of bonus shares, if wholly or partly non-cash, r if shares are to be held under, allotted or transferred, pursuant to an employee share scheme.

Question 21

Can private companies EXCLUDE pre-emotive rights for article?

Answer 21

Yes, CA allows private companies to exclude them.

This will OVERRIDE the statutory provisions.

Therefore, alwasy check if they have been excluded from articles.

Question 22

How can companies disapply pre-emptive rights?

Answer 22

By SPECIAL RESOLUTION.

Question 23

How can private companies with more than 1 class of shares, disapply pre-emptive rights?

Answer 23

Special resolution, BUT must be recommended by the directors of the compay and before proposing a special reoslution.

Question 24

What must be included in a written statement to propose disapply pre-emptive rights in a private company with multiple shares?

Answer 24

Reasons for making recommendation
Amount the purchaser will pay
Directors justification of that amount

Question 25

What are the administration requirements for allotment of shares?

Answer 25

Copies of resolution sent to companies house, 15 days (all special resolutions, any ordinary reoslutions that remove authorised share capita, any ordinary reoslutions that activate s 550,) Company forms to be sent to companies house (return of allotment and statement of capital) Entries into company sown register within 2 months

Question 26

What forms must be filed to companies house after the allotment of shares?

Answer 26

SH01, return of allotment and statement of capita, within 1 month of allotment Possible PSC for new PSC.

Question 27

Does transfer of share change amount of shares?

Answer 27

No, the total number of shares does not change, but one or ore of the sahreholders percentage shareholding’s changes.

Question 28

How are shares transferred?

Answer 28

Must complete and sign a stock transfer form, and give it too the transfere, along with share certificate relating to the shares. If the sale price of the shares is over ,000, buyer must pay stamp duty on stock transfer form. None is payable if shares are a gift.

Question 29

What must the company do to transfer shares, once the shareholders has filled out all forms?

Answer 29

Send the new shareholder a new share certificate in their name within 2 months Enter name on register of member within 2 months Notify the registrar of companies of change in ownership of shares - CS01

Question 30

What is CS01?

Answer 30

Notify registrar of companies of change in ownership of shares, when company files its annual confirmation statement Transfer of shares

Question 31

When is the transmission of shares an automatic process?

Answer 31

If a shareholder dies, their shares automatically pass to their personal representatives, or If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy

Question 32

What is the companys share captial?

Answer 32

This is the money provided by shareholders, in returns for shares.

Question 33

Can the share capital be used/reduced?

Answer 33

No, because it is the fund which editors look to for payment of debts owed to them. So paid up share capital cannot be returned to shareholders, and their liability with regards to any capital they have not paid on their shares must not be reduced.

Question 34

Where can dividends be paid from?

Answer 34

Dividends cannot be paid out of capital, just out of distributable profits, The company must not generally purchase its own shares.

Question 35

What are exceptions to the principle of share capital?

Answer 35

A company can buy back its own shares, following a specific procedure A company can purchase its own shares under a court order, to buy out an unfairly prejudiced minority shareholder A compay can return capital to shareholders, after payment of companys debts, in winding up.

Question 36

Why might a company want to buy ack its own shares?

Answer 36

If shareholders want to cut all ties, but cannot find a purchaser fr the shares.

Question 37

What must directors consider when buying back shares?

Answer 37

If it will be good for the company in the long run - s 172 CA. Skill, care, s 174

Question 38

How do you buy back shares?

Answer 38

Off market purchases: Companys articles must not forbid buyback Shares must be fully paid Company must pay for the sahres at the time of purchase Shares must be paid for out of DISTRIBUTABLE profit, or proceeds of fresh issue of shares. Shareholders must pass ordinary resolution authorising buyback contract Copy of contract must be available for inspection for 15 days before general meeting

Question 39

After completion of buyback, what must be done?

Answer 39

File return of purchase of own shares and notice of cancellation of shares within 2 days of completion Keep copy of contract at registered office for 10 years.

Question 40

What happens if the company does not have enough money to buy back shares?

Answer 40

It may be as an asset and not as cash. Can buy back out of capital, but certain requirements must be met

Question 41

How can companies buyback out of capitaL?

Answer 41

Permitted to , uNLESSS companys articles for it them to. Must exhaust distributable profits before. PUBLIC companies are not alowed to.

Question 42

What are the requirements specific to buyback out of capital?

Answer 42

Companys directors must make a statement of solvency, no sooner than 1 week before general meeting, stating that the company is solvent and it will remain solvent during year following buyback Statement of solvency must have annexed to it an auditors report Payment out of capital must be approved by SPECIAL RESOLUTION. Withi I 7 days of special resolution, company must put notice in London Gazette. Company must file a copy of the directors statement and auditors report Must be kept until 5 weeks after passing of special resolution, at registered office

Question 43

What are the time limits after buyback for administrative purposes?

Answer 43

Keep minutes/written reoslution for 10 years Creditors rights to object - 5 weeks after SR Keep SS and AR at companys registered office, 5 weeks from date of SR Place notices in London Gazette - within 1 week of SR File SS and AR at companies house befoer fist publication File SR within 15 days of GM

Question 44

What are dividend?

Answer 44

Shareholders recieve dividend. A company can pay a dividend if it has profits available for that purpose.