Mailing #4 Flashcards
1
Q
What is meant by “securities”?
A
Stocks and shares
2
Q
What is “stock”?
A
Fixed interest tradeable debt instruments
3
Q
What are “shares”?
A
Ordinary or preference shares - risk bearing part of the company’s capital.
4
Q
What is a preference share?
A
A share with a preferred fixed dividend. The dividend on these shares must be paid before the ordinary shareholder receives any payment.
5
Q
What are the two sub-types of preference shares?
A
Cumulative - failure to pay one year means the amount is carried over.
Non-cumulative - the amount is not carried over.
6
Q
When do preference share holders usually gain the right to vote?
A
If the company fails to pay a dividend.
7
Q
What is a participating preference share?
A
A share entitled to a fixed dividend before the ordinary shareholders, and then a second dividend after the ordinary shareholders.
8
Q
What are ordinary shares?
A
Shares entitled to the residue of distributable profits after the preference shares. Also known as equity shares
9
Q
What are deferred shares?
A
Shares giving special rights to surplus profits after dividends are paid, or to a degree of surplus assets on winding up.
10
Q
Why are preference shares needed?
A
Because during times of difficulty for the company, it is very difficult to raise ordinary share capital because the risks are high. Preference shares are more desirable.
11
Q
Why are shares with weighted voting right needed?
A
In small private companies investors wish to maintain a veto over management.
12
Q
Why are non-voting shares needed?
A
In private companies with trustees holding shares for children, they will not wish to control the board, but still receive dividends.
13
Q
Where can details of the liabilities of interests of shares be found?
A
Within the company’s constitution.
14
Q
What are three differences between shares and debentures?
A
1 Shareholders are members with rights such as attending general meetings. Debenture holders (creditors) have no such rights.
2 Shareholders are paid a dividend when it is declared, debenture holders receive interest.
3 A debenture is redeemed (repaid), whereas shares are not (unless they are redeemable shares).
15
Q
What is a “warrant” (note: not a SHARE warrant)?
A
A tradeable security giving the holder the right to buy shares.
16
Q
What is meant by “primary” and “secondary” markets?
A
Primary - buying shares direct from the company
Secondary - investors trading shares already issued.
17
Q
What is a scrip issue? What is its purpose?
A
When share price becomes too high to trade efficiently, a member is issued bonus shares for every share they hold. The purpose is to reduce the value of each share to make the price more easily traded.
18
Q
What is a member’s pre-emption right?
A
When a company issues new shares, it must offer them to existing members in the same proportion that they already hold, to ensure they maintain that proportion.
19
Q
In what two ways do shares generate income?
A
1 Through payment of dividends
2 Through capital growth (realised when shares are sold)
20
Q
According to s 558 CA, what is an allotment of shares?
A
When a person acquires the unconditional right to be included in the company’s register of members.
21
Q
What three information sheets are given to the directors before making a decision on an allotment?
A
Application sheet
Allotment sheet
Summary sheet
22
Q
What is the process for an allotment?
A
1 Letters of allotment and regret posted simultaneously
2 Listed companies must ensure letters are numbered and initialled by a responsible official
3 Within one month, “return of allotments” is delivered to the Registrar.
23
Q
What is the case authority for posting letters being a valid means of allotment?
A
Household Fire Insurance v Grant
24
Q
What limits does s 578 CA place on allotment by a public company?
A
- shares must be subscribed in full
- the offer must stat the allotment will be carried out in any event.
25
What are the consequences if allotments are made contrary to S 578?
They are voidable within one month of the allotment.
| Directors are personally liable to compensate the company and applicant for losses suffered.
26
When can a public company accept a non-cash consideration upon allotment?
If the consideration has been independently valued, a copy forwarded to the registrar, and the acceptance approved by ordinary resolution of the company.
27
What is the purpose of a letter of renunciation?
Allottees can renounce shares allotted to them in favour of another person.
28
After an allotment, what are the three types of proof of ownership for the new shareholders?
1 When offering shares to the public, they receive an allotment letter confirming their success.
2 When making a rights issue, shareholders receive a provisional allotment letter.
3 In a bonus issue, a renouncable certificate is sent.
29
According to the LSE, what three forms must appear on the back of the allotment letter?
Form X - where the allottee renounces their rights in favour of another.
Form Y - allowing the allottee to split shares between themselves and another
Form Z - allowing the purchases to consolidate transfers into a single name
30
Which section CA gives pre-emption rights?
S 561
31
In what two ways may a member's pre-emption rights be acknowledged during an allotment?
- a provisional allotment, informing the shareholder that shares have been provisionally allotted to him
- a letter of rights, inviting the shareholder to apply for a specified number of shares
32
How may a private company disallow pre-emption rights?
By including a term in its articles.
33
How may a public or private company disallow pre-emption rights for a specified allotment?
- passing a special resolution
- notice must include a statement giving the reasons for the recommendation, the amount to paid for the allotment, and the justification of that amount.
34
What is the process for a rights issue?
1 Board meeting to establish authority to issue
2 Inform Stock Exchange (if listed)
3 Prepare offer documents (letters of allocation and listing particulars)
4 Stock Exchange approves documents
5 Issue and post letters of allocation
6 Balance acceptances and non-acceptances
7 Formal allotment by board
8 Prepare certificates for allottees
9 Issue certificates
10 Inform registrar
35
What is meant by share transfer?
The acquisition of shares from an existing holder.
36
To whom may a shareholder transfer shares?
To whomsoever he pleases.
37
Under what circumstances can a public company refuse transfer of shares (model article 63)?
When shares are partly-paid
38
When may a private company refuse transfer of shares under model article 26?
If it is in the interest of the company to do so.
39
What are the two standard forms for transfer of shares?
1 Stock transfer form
| 2 CREST or SETS
40
What is a blank transfer?
A shareholder completes a stock transfer form but leaves the name and transferee blank, usually for the purpose of using the shares as a form of security for a loan. If the shareholder defaults on the loan, the creditor will fill in their name and have the shares transferred.
41
Is a forged transfer legitimate?
No, forged transfers are void.
42
What must be done after a forged transfer is discovered?
- the true owner must be restored to the register
| - the forged transferee must be removed
43
What happens if a forged transfer is then transferred again to another?
The second transferee can sue for damages, but must be removed from the register
44
What compensation is available to the company after a forged transfer?
The company can claim compensation from the person who lodged the transfer.
45
When does transmission of shares occur?
When ownership changes otherwise than by ordinary transfer, i.e. death or by law (insolvency)
46
What does s 773 CA state regarding a member's death?
A personal representative may make a valid transfer of a deceased member's shares
47
What is a probate of a will?
An official copy of the will sealed by the court of probate which is required to allow a company to administer a member's estate.
48
When will the court appoint an administrator after a person's death?
If they died intestate (did not write a will).
49
When does the "small estates procedure" apply under the Administration of Estates (Small Payments) Act 1965?
When the value of the estate is less than £5000
50
What documents must the personal representative of the deceased produce to use the "small estates procedure" under the Administration of Estates (Small Payments) Act 1965?
- death certificate
- letter from tax office stating no duty payable
- share certificate
- statutory declaration
- letter of indemnity.
51
Where will a member's property vest in the event of bankruptcy?
With his trustee
52
What powers does a trustee in bankruptcy have to deal shares?
He may transfer the shares or have them registered in his own name.
53
What is a share certificate?
A document bearing the common seal of the company, which indicates the extent of a member's interest in the company.
54
S50 CA allows a company to have a second seal for sealing share certificates. What properties must this second seal have?
It must be a facsimile of the original seal, but contain the word "securities".
55
What 6 items must a share certificate contain?
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1 Certificate serial number
2 Name of the company
3 Name of registered holder
4 Number and description of shares
5 Extent to which shares are paid up
6 Date of issue of the certificate
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56
What additional requirements does the Stock Exchange place on the content of share certificates?
Must state:
1 Authority under which the company is constituted
2 Authorised capital and nominal amount and denomination of each share class
3 Conditions as to capital, dividends and redemption if applicable
4 Number of shares the certificate represents
5 Notice that no transfer of the security can be registered without production of the certificate
57
What information must a member provide to the company to request a name change be entered in the register of members?
Their share certificate and evidence of the name change, e.g. marriage certificate.
58
Who has the authority to amend the register of members following an incorrect entry?
Only the courts (although in practice MINOR slips are typically corrected by a company officer).
59
What does ICSA recommend if a request for rectification of the register comes in more than 3 months after share allotment or transfer?
Refuse to amend the register without recourse to the court.
60
In the case of joint stock owners, who must sign the stock transfer form when transferring shares?
All holders
61
What proof is required to evidence power of attorney?
Certified copy of the power of attorney.
62
Can a minor be a member of a company?
They are not prohibited, but a minor's liability is voidable, and so best practice is to use a trustee.
63
What steps can the company take if a member does not comply with a call for payment?
Forfeiture of shares.
64
Is stamp duty payable on a gift of shares?
No, as there is no consideration paid. The transfer form must state "inter vivos for no consideration".
65
What is a s 793 notice?
A public company may serve a notice to persons its believes to be interested in its shares to confirm or deny their interest.
66
What is power of attorney?
The appointment of an agent by deed as prescribed in the Power Of Attorney Act 1971.
67
What is a lasting power of attorney?
Appointment of attorney to make decisions on behalf of a person.
68
What is CREST?
The settlement system for the equities industry, and a recognised clearing house.
69
What functions does CREST facilitate?
- authenticating and matching instructions from parties wishing to settle a transaction
- amending records of account holdings and recording associated payment obligations
- providing information for settlement banks and registers to allow legal title and payment to be moved
- calculate and collect stamp duty and SDRT
- monitor member behaviour and maintain industry standards
70
Which groups are the "participants" of CREST?
- members
- registrars
- receiving agents
- payment banks
- regulators
- inland revenue
- information providers
71
Who is a CREST "user"?
A "participant" who has the technical capacity to input into CREST
72
Who is a "member" in CREST?
A "participant" who holds stock in accounts within CREST and who appears on the company register as the legal owner.
73
Who is a "sponsored member" in CREST?
An institution who has the same rights and responsibilities as a member, but relies upon a sponsoring user to interface with CREST.
74
What is a "payment bank" in CREST?
A "participant" who guarantees payment for transactions delivered to their customer through crest.
75
What are the 4 steps involved in a CREST transaction?
1 INPUT - two members agree a transactions. Their users input the instructions
2 MATCHING - CREST authenticates and matches the settlement instructions.
3 SETTLEMENT - CREST moves the stock, amends the payment obligations of the members' banks, sends a register update request to the registrar.
4 REGISTRATION - registrar responds amending the register to reflect the members accounts.
76
What is SETS?
Stock Exchange Electronic Trading Service
77
How does SETS work?
An investor instructs a broker to buy or sell. The broker places the order which is traded automatically once its terms are matched.
78
What is a dividend?
A proportion of the distributed profits of the company.
79
According to CA s 829 which profits are available for distribution?
The accumulated realised profits minus the accumulated realised losses
80
Under what circumstances may a public company make a distribution according to s 831 2006?
- the amount of its net assets is not less than the aggregate of its called-up share capital and its undistributable reserves.
- the distribution does not reduce the amount of net assets below that amount
81
What is meant by "undistributable reserves"?
- the share premium account
- the capital redemption reserve
- the amount by which the company's accumulated unrealised profits exceed its accumulated unrealised losses.
82
What is the procedure for awarding dividends?
1 Follow articles
2 Board decides on dividend and passes resolution
3 GM is convened, and the company has the power to declare the dividend "recommended"
4 Dividend warrants prepared, signed and posted.
83
What is the process upon a member losing a dividend warrant?
1 Notify the bank
2 Acknowledge letter from shareholder and end an indemnity form for completion
3 Send a duplicate and advise the bank to pay only the duplicate.
84
For how long is an dividend warrant active before it becomes stale?
6 months
85
If a dividend is not cashed, what document must the company prepare and maintain?
An outstanding dividend register
86
Under what circumstances may a dividend be forfeited?
If at least 3 dividends are not claimed during a period of 12 years, and the shareholder is untraceable.
87
What is a scrip dividend?
Where a shareholder elects to receive their dividend as an allotment of shares instead of cash.
88
What is a drip dividend?
Where the shareholder receives the dividend as a cash payment which is then automatically used to purchase shares in the market.
89
What is meant by "normal" (or authorised) capital?
The share capital stated in the memorandum of association.
90
What is meant by "allotted" capital?
The share capital that has been issued.
91
What is meant by "called-up" capital?
The allotted capital that has not been called up.
92
What is meant by "paid-up" capital?
The part of the called-up capital that has been paid.
93
What is meant by "uncalled" capital?
The part of allotted capital that has not been called up.
94
What is meant by "reserve" capital?
The part of uncalled capital that the company has decided by special resolution shall not be called up until the company is wound up.
95
What must happen when a company suffers a serious loss of its capital?
A general meeting must be called.
96
What is considered to be a serious loss of capital?
When net assets are half or less of the called-up share capital.
97
How may a company increase its share capital?
By ordinary resolution, if authorised by the articles. A copy of the resolution must be sent to the registrar
98
How may a company restructure its capital? (4 ways)
1 Existing shares consolidated into larger units
2 Existing shares subdivided into smaller units
3 Fully paid shares converted to stock
4 Unissued nominal capital cancelled.
99
Why is the reduction of share capital strictly regulated?
Since this may reduce the funds available to creditors.
100
In what 3 ways may share capital be lawfully reduced?
1 Reduction of capital under Chapter 10 CA
2 Reduction of capital by issue of redeemable shares
3 Reduction of capital by purchase of its own shares other than redeemable shares (if a private company)
101
How may a company reduce its capital under Chapter 10 CA?
- special resolution and confirmed by the court
| - private company can use a solvency statement instead of court confirmation
102
How may a company reduce its capital using redeemable shares?
- issue redeemable shares under s 684 CA
- - on redemption of shares, the shares are to be treated as cancelled and the company's capital is reduced by that amount
103
What is the rule in Trevor v Whitworth?
The company's constitution allowed purchase of shares. This was held to be illegal on grounds of capital reduction.
A COMPANY CANNOT BE A MEMBER OF ITSELF.
104
What are the exceptions to the rule that a company cannot buy its own shares (CA 659)?
1 the acquisition of shares in a reduction of capital duly made;
2 the purchase of shares in pursuance of an order of the court
3 the forfeiture of shares in pursuance of the company's articles
105
Why might a company wish to buy back its own shares?
```
1 To remove a particular shareholder
2 Because it can (and the members cannot)
3 To prevent a takeover bid
4 To increase value asset per share
5 To increase earnings
6 Because the company has too much cash
7 To buy back employee shares
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106
Under what section CA may a company issue redeemable shares?
S 684 CA
107
What is the difference between "market" and "off-market" shares?
Off market are purchased somewhere other than a recognised stock exchange.
108
What is the process for a company to buy its own shares off-market?
1 Ordinary resolution giving authority
2 Copy of the proposed purchase contract made available for inspection, 15 days before the meting including the names of those selling to the company.
3 Issue copy of resolution to registrar within 15 days
4 Details of transfer to be issued to registrar within 28 days of purchase.
109
What is the process for a company to buy its own shares on-market?
1 Ordinary resolution
2 Issue copy of resolution to registrar within 15 days
3 Details of transfer to be issued to registrar within 28 days of purchase.
110
A public company can only buy its own shares using which funds?
Funds from a new issue of shares.
111
What is the method for a private company to purchase shares out of capital?
1 Authority in the articles
2 Statutory declaration from directors stating amount to be acquired, declaration that it will not make company insolvent, declaration that company will be able to keep trading for at least a year, auditors report.
3 Within one week, company passes a special resolution
4 Company publishes details in the London Gazette and appropriate national newspaper
5 Company delivers copies of statutory declaration and auditors report to Registrar
6 Period of 5 weeks for objections
7 Purchase and payment made no longer than 7 weeks after resolution.
112
All companies may buy their own shares to hold in treasury. For what may treasury shares be used?
1 Resale
2 Cancellation
3 Employee share schemes
113
How is an employee share scheme defined under s1166 CA?
A scheme of encouraging or facilitating the holding of shares or debentures in the company by or for the benefit of:
- bona fide employees or former employees
- wives, husbands, widowers or children or step children of such employees
114
Name some employee share schemes
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1 Savings-related share option scheme (SAYE OR SHARESAVE)
2 Share-option scheme
3 Share Incentive Plan (SIP)
4 Enterprise Management Incentives (EMI)
5 Employee shareholder schemes
6 Long term incentive plans (LTIPs)
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115
How does a Savings-related share option scheme (SAYE OR SHARESAVE) work?
Employees can contract with the Department for National Savings or a building society to save any amount from £5 to £500 a month for three or five years. At the end of the period, the employee receives an option to convert the savings into shares at the price when the contract was taken out
116
How does a SHARE-OPTION SCHEME work (sometimes known as a Company Share Option Plan (CSOP)?
Applicable to full-time directors and qualifying employees, who have less than a 30% interest in a close company. Options are granted to the person within 6 weeks following the announcement of company results, and they can exercise the option between three and 10 years from the day of grant.
117
How does a SHARE INCENTIVE PLAN (SIP) work? (formally called an Employee Share Ownership Plan (ESOP)
An all-employee plan. Employees can enter into an agreement to buy "partnership" shares out of their pre-income tax and pre-national insurance contribution, and can also receive awards of shares. The plan operates with a trust funded by the company. There are various restrictions, including maximum numbers of shares bought.
118
How do ENTERPRISE MANAGEMENT INCENTIVES (EMI) work?
Can be offered by independent trading companies with assets not exceeding £30M. Company can grant EMI options to employees (provided the employee controls less than 30% of the ordinary share capital)
119
What are the duties of the CoSec in managing employee share schemes?
- maintain a register of participants in profit-saving schemes
- maintain individual records of participants in savings-related share option schemes
- maintain a register of participants in share option schemes
- issue option certificates
120
How does a LONG TERM INCENTIVE PLAN (LTIP) work?
Shares are allocated to a trust (usually offshore). Shares are awarded on meeting performance conditions.
