Funding options: equity

Question 1

what is meant by the allotment of shares? what are the stages?

Answer 1

allotment is when the company creates new shares and receives consideration for them

1. Are there any constitutional restrictions on allotment?
2. Do Ds have authority to allot shares?
3. Are there any pre-emption rights?

Question 2

what must the company do if they are issuing a new class of share?

Answer 2

they would need to amend the AAs by SR (because the AAs detail the rights attached to shares)

Question 3

what effect does allotment have on the existing shares, capital and balance sheet?

Answer 3

This dilutes the shareholding of existing SHs but will increase the share capital on the balance sheet.

Question 4

explain the constitutional restrictions stage

Answer 4

• Incorporated pre-2009 = if the AAs have not been updated, they will inc. an authorised share capital clause. An OR will need to passed to remove this.
• Incorporated post-2009 = check the AAs for limits on the no. of shares (no limits under the MAs). If there are, an SR will need to be passed to amend the AAs.

Question 5

explain the duration, type and required information for s551 authorisation

Answer 5

o Authorisation can only be granted for a specified period (not exceeding 5 years)
o Authorisation can be general or specific
o Authorisation can be revoked, varied or renewed (max. 5 years) by OR
o The authorisation must state the amount of shares + authority expiration date

Question 6

explain D’s authority to allot

Answer 6

always check the AAs (i.e. s550 might be disapplied)
* LTDs incorporated post-2009 with only 1 class of share = D’s have automatic authority to allot (s550)
* All other cases (s551) = authority to allot must be granted by either the AAs or OR

Question 7

what is the s561 pre-emption right? Explain the acceptance period

Answer 7

existing OS SHs must be offered a proportion of the new OS shares equal to the amount they already hold on the same or more favourable terms

Offer must state a period for acceptance (at least 14 days) + cannot be revoked within the acceptance period

Question 8

when does s561 not apply? (5)

Answer 8

o The allotment is not of OS
o The SHs have agreed to waive their s561 right for this transaction
o S561 right has been amended/excluded in the AAs (done by SR)
o S561 has been disapplied by SR
o Exception applies i.e.: allotment of bonus shares, consideration is non-cash, shares are allotted under an employee share scheme)

Question 9

how can s561 be disqualified/modified?

Answer 9

o Authority to allot under s550 = AA or SR
o Authority to general allotment under s551 = AA or SR
o Authority to specific allotment under s551 = SR only + s571 procedure must be followed (i.e. the SR must be recommended by the BOD + they must give a statement of reasons which is circulated with the GM notice or WR)

Question 10

what are the advantages of equity funding? (5)

Answer 10

• No repayment obligation: capital does not need to be repaid to SHs
• No interest payments: this is good for cash flow
• This isn’t a debt so doesn’t restrict the company from taking out a loan in the future
• The value of shares can increase (but they could also decrease)
• Good option if the company is restricted from taking out loans (i.e. by the articles or an existing loan agreement)

Question 11

what are the disadvantages of equity funding? (3)

Answer 11

• Existing SHs shares/future dividends are diluted
• Politics - existing SHs may not approve and/or new SHs could make things difficult
• Longer and more complex process compared to a loan