Lecture 15 - Capital, Shares and Shareholding Flashcards Preview

Law for Accountancy + Business > Lecture 15 - Capital, Shares and Shareholding > Flashcards

Flashcards in Lecture 15 - Capital, Shares and Shareholding Deck (37):

Company capital =

Money/ capital company needs to finance business


Loan capital =

Money borrowed to provide working capital for business


Share capital =

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


Why invest in shares? (3)

- Ability to control business
- Capital gains
- Dividends


Nominal (par) value =

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


Issued/ allotted share capital =

Nominal value of shares actually ISSUED by company


Paid up capital =

Amount of issued share capital paid for by members


Ordinary shares =

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


Preference shares =

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


Redeemable shares = (3)

- 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.


Debt advantages (3)

- 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


Debt disadvantages (2)

- No right to participate in management of company
- No chance of sharing in any uplift in value of company


Equity (public company) advantages (3)

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


Equity (public company) disadvantage

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


Equity (private company) advantages (2)

- Interest/ stake in company potentially with some control
- Chance to share in increased value of company


Equity (private company) disadvantages (3)

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


Issue of shares

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


Pre-emption rights

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.


Pre-emption rights > private companies

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


Transfer of shares =

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


Transfer of shares process - 6 steps

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


Stamp duty on gifts of shares?



Restrictions on transfer

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


Dividends (3)

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


Who recommends dividend?



Who declares dividend?



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

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


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

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.


Capital Maintenance Principle > 2 aspects

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


Issue of shares at discount

Companies prohibited from issuing new shares at discount.


Can existing shares be sold for less than nominal value?

Yes if that's all they're worth


Issue of shares at a premium

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


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

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


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

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


Financial assistance for purchase of shares

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


Distributions =

Giving money back to members.


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

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