Lecture 15 - Capital, Shares and Shareholding

Question 1

Company capital =

Answer 1

Money/ capital company needs to finance business

Question 2

Loan capital =

Answer 2

Money borrowed to provide working capital for business

Question 3

Share capital =

Answer 3

Issue of shares is a way to raise money in exchange for a stake/ interest in company

Question 4

Why invest in shares? (3)

Answer 4

• Ability to control business
• Capital gains
• Dividends

Question 5

Nominal (par) value =

Answer 5

Each share in company has assigned nominal value, no relation to actual value of shares.

Question 6

Issued/ allotted share capital =

Answer 6

Nominal value of shares actually ISSUED by company

Question 7

Paid up capital =

Answer 7

Amount of issued share capital paid for by members

Question 8

Ordinary shares =

Answer 8

Carry voting rights and can attend general meetings. No legal entitlement to dividends

Question 9

Preference shares =

Answer 9

Usually no voting rights. Right to payment of final dividend in priority to ordinary shareholders, as long as dividend declared at some stage (cumulative).

Question 10

Redeemable shares = (3)

Answer 10

• Shares which must be bought back by company at pre-determined times at option of company/ shareholder, depending on terms of issue.
• Money required must come from distributable profits/ cash proceeds new issue of shares.
• Redeemed shares cancelled and capital reduced by nominal value.

Question 11

Debt advantages (3)

Answer 11

• Fixed rate of return in form of interest repayments, even if value of company decreases
• If loan adequately secured, likely to be safe
• Debt can be sold to third party if required

Question 12

Debt disadvantages (2)

Answer 12

• No right to participate in management of company

- No chance of sharing in any uplift in value of company

Question 13

Equity (public company) advantages (3)

Answer 13

• Dividends more certain
• Ready market for sale
• Prospect of the value of shares increasing

Question 14

Equity (public company) disadvantage

Answer 14

• No control/ involvement in running of company > usually very small stake

Question 15

Equity (private company) advantages (2)

Answer 15

• Interest/ stake in company potentially with some control

- Chance to share in increased value of company

Question 16

Equity (private company) disadvantages (3)

Answer 16

• Dividends not guaranteed
• More restricted market for sale
• Could lose the lot

Question 17

Issue of shares

Answer 17

New shares can only be issued with authority of members, but general practice to authorise directors to issue new shares at their discretion for up to 5 years

Question 18

Pre-emption rights

Answer 18

Any new shares issued by company for cash must first be offered to existing members in proportion to their existing holdings. If refuse, can then offer elsewhere.

Question 19

Pre-emption rights > private companies

Answer 19

Possible to disapply rule, either in Articles, or by special resolution, when want to issue shares to new members.

Question 20

Transfer of shares =

Answer 20

Shares transferred when one person sells/ gives them to another, they are then registered as new member

Question 21

Transfer of shares process - 6 steps

Answer 21

1) Seller signs stock transfer form (STF)
2) Buyer pays price + stamp duty (0.5% rounded up to nearest £5)
3) Buyer sends STF to company with original share certificate
4) Directors approve registration of transfer, new share certificate issued
5) Register of Members updated
6) Details of changes in membership notified each year to Registrar of Companies

Question 22

Stamp duty on gifts of shares?

Answer 22

No

Question 23

Restrictions on transfer

Answer 23

No restrictions under Table A/ Model Articles, but common for firm for place restriction on ability to transfer

Question 24

Dividends (3)

Answer 24

• No automatic entitlement
• Must be authorised by members (can declare lower but not higher)
• Only payable out of available profits

Question 25

Who recommends dividend?

Answer 25

Directors

Question 26

Who declares dividend?

Answer 26

Shareholders

Question 27

Directors who authorise payment of dividend other than out of distributable profits... (+case)

Answer 27

May be liable to repay personally. Bairstow v Queens Moat Houses plc 2000 > new director, authorised then liable

Question 28

Creditor gives credit on faith of the implied representation that.. (+ case)

Answer 28

Capital shall be applied only for purposes of business and not returned to members. Flitcroft's Case 1882 > directors presented untrue accounts, shareholders declared dividend, went into liquidation, directors liable.

Question 29

Capital Maintenance Principle > 2 aspects

Answer 29

- Creditors have right to ensure capital not improperly diluted/ dissipated - Capital must not be given back to members

Question 30

Issue of shares at discount

Answer 30

Companies prohibited from issuing new shares at discount.

Question 31

Can existing shares be sold for less than nominal value?

Answer 31

Yes if that's all they're worth

Question 32

Issue of shares at a premium

Answer 32

Common place. Excess over nominal capital must be shown in Share Premium account

Question 33

Purchase by a company of own shares using own assets (4)

Answer 33

Generally not permitted except under certain circumstances: - Must not be restricted in Articles - Members must pass ordinary resolution approving - Purchase must be from available profits - Shares bought back must be cancelled

Question 34

If insufficient profits for company to buy back shares (7)

Answer 34

Can buy back from capital, but additional stringent requirements: - Must be permitted by Articles - All creditors must be notified - Directors must make statutory declaration company is solvent and will remain so for next 12 months - Supporting audit report - Ordinary resolution authorising buy back, and special resolution authorising payment out of capital must be passed - Dissentient shareholders/ creditors can apply to Court to complain if they wish - Time limits > wait 5 weeks for creditors to respond, then deal must be completed within 14 days

Question 35

Financial assistance for purchase of shares

Answer 35

Until CA 2006, prohibited for company to provide any financial assistance to purchase shares. Now permitted for private companies, NOT public.

Question 36

Distributions =

Answer 36

Giving money back to members.

Question 37

What amounts to capital (cannot be returned to shareholders) and what amounts to profits (can)?

Answer 37

Trading and capital profits less trading and capital losses = profit distributable to members