Share/raising capital

Question 1

what are the issues to consider when raising finance

Answer 1

Companies need assets (factory, chairs,
computer, people)
 Directors role – to maximise shareholder
wealth – i.e. the flow of dividends to the
shareholder over a continued period
 Investment decisions will have to be made

Question 2

what is a business angel

Answer 2

Business Angels: When a medium-sized company needs more money but isn’t ready to become a public company, they might turn to business angels. These are wealthy individuals who invest their own money into promising businesses in exchange for a stake in the company.

Question 3

Venture capital firms

Answer 3

Venture Capital Firms: Another option is to seek funding from venture capital firms like 3I Group plc. These firms pool money from investors like pension funds and banks, and then invest it into high-potential businesses in exchange for ownership stakes

Question 4

what are redeemable shares

Answer 4

Redeemable Shares: When companies issue shares to raise money, there’s a risk of losing control if too many shares are sold. To avoid this, companies can issue redeemable shares. These shares can be bought back by the company at a later date, allowing them to regain control over their ownership structure if needed. It’s like borrowing money from investors, but with the promise to buy back their shares later on.

Question 5

Initial start ups - entrpreneur /banks

Answer 5

(A) Initial start ups - entrepreneur /banks
 cash from entrepreneur or promoter (mortgage, savings,
redundancy, relatives (dilute control)
 bank loans (secured on house, floating charge over the
companies assets)
 promoters will obviously get shares in the company

Question 6

(B) Medium sized - venture capitalists

Answer 6

Company needs more capital but it is not ready to list:
 Business angels
 Venture Capital Firms (i.e. 3I Group plc) – get money from
pension funds, banks)
 Potential loss of control – so – issue REDEEMABLE SHARES.

Question 7

C. Large - public offering

Answer 7

Company needs large amount of cash –
 shares publicly quoted on a stock exchange (LSE, Tokyo,
New York, etc)
 Good because: -
 possible unlimited amounts of equity available
 liquid market – i.e. shareholders can get out quickly
 Bad because: -
 UK Corporate Governance Code
 Disclosure Transparency Rules, etc
 Financial press
 Costs
 Wide ownership – hostile takeover bids

Question 8

Raising money from the public

Answer 8

The company must choose the way to sell its
shares to the general public:
1. the company offers shares for
subscription/ an offer for sale
2. a placing
3. rights issue

Question 9

Obligations when listing

Answer 9

the Listing Rules focus specifically on the information
that must be made available to the public by a
company when its shares are being listed
 ‘Contain all such information as investor sand their
professional advisers would reasonably require, and
reasonably expect to find there for the purpose of
making an informed assessment of: (a) the assets and
liabilities, financial position profits and losses, and
prospects of the issuer of the securities; and (b) the
rights attaching to those securities.’ S.80(1) FSMA 2000

Question 10

Continuing obligations

Answer 10

publication of half-yearly reports on companies’
activities
 information on profits and losses made during
the first six months of each financial year
 duty to issue full annual accounts and reports
 ‘fair business review’

Question 11

Paradigm for English registered
company

Answer 11

aradigm for English registered
company
 (A) London Stock Exchange (LSE)
 UK Corporate Governance Code
 FSMA 2000; FCA and PRA
 Prospectus Rules
 Disclosure Rules
 Transparency Rules
 Listing Rules

Question 12

first stage

Answer 12

(that
there is a wide safe market

Question 13

Two markets at the LSE

Answer 13

1) main market (FTSE 100 companies) –
 (2) alternative investment market – smaller
companies – less well regulated so higher risk

Question 14

The legal concept of a share

Answer 14

An interest in the company, made up of rights
 shares or other interests in a company are personal
property and are not in the nature of real estate [s
541]

Question 15

Borland’s Trustee v Steel Bros & Co Ltd [1901]:

Answer 15

the
interest of a shareholder in the company measured
by a sum of money, for the purpose of liability in
the first place, and of interest in the second

Question 16

Cumbrian Newspapers Group v Cumberland &
Westmorland Herald

Answer 16

Facts: The claimant and the defendant were both publishers of
newspapers. They negotiated a transaction whereby D would
acquire one of C’s papers and C would acquire 10 per cent of D’s
share capital. D issued the 10 per cent share holding and as part of
the agreement under which the shares were issued amended its
articles to give C certain rights including preemption rights over
other ordinary shares. The purpose of such rights was to enable C
as a shareholder to prevent a takeover. Subsequently, a few years
later D called a meeting to pass a special resolution to cancel the
articles which gave special rights to C. C sought a declaration that
the rights were class rights which could not be cancelled without
his consent.
 Decision: The declaration was granted. The special rights granted
were rights which could not be varied or cancelled without C’s
consent

Question 17

Maintenance of Share Capital for
Creditor protection

Answer 17

The principle of capital maintenance is at least as old as the
limited liability company. The law gave the shareholder the
privilege of limiting his liability, so that once he had paid , or
promised to pay on call [in the case of partly paid shares], an
amount equal to the nominal value of the shares he too k up he
had no further responsibility for the debts of the company. In
order to protect members and creditors, however, a body of
rules was erected; such rules were designed to prevent the
capital so provided from being extracted or otherwise eroded,
save as a result of trading or other business events.

Question 18

Maintenance of Share Capital Rules

Answer 18

no shares at a discount
 dividends only out of profits
 company must not purchase its own shares
 a public company must not give financial
assistance for the purchase of its own shares
 a company may not own shares in its holding
company
 share capital cannot be reduced

Question 19

Reduction of capital

Answer 19

The company must be authorised by the articles to reduce
capital
 s.641CA 2006 Circumstances in which a company may reduce
its share capital
 Two ways of reducing the capital
 Court order
 Solvency statement, new under CA 2006
 Why would you need to reduce the ‘legal capital’?
1. return capital to shareholders if no longer needed
2. issued share capital may not be paid, but the company
already has the money it needs
3. the company has to restore reality to balance sheet
position

Question 20

Purchase of own shares

Answer 20

Maintaining share capital
 Company purchasing its own shares
 Section 658 CA 2006 General rule against company acquiring
own shares
 (1) A limited company must not acquire its own shares,
whether by purchase, subscription or otherwise, except in
accordance with the provisions of this part.
 S. 658 confirms but does not replace the common law rule
 Companies cannot purchase their own shares
 Trevor v. Whitworth (1887) 12 App Cas 409

Question 21

When can a company purchase its own
shares

Answer 21

Section 690 ff CA 2006 - provides that a company may
purchase its own shares, subject to any restrictions or
prohibitions in the company’s articles
 The CA 2006 provides that cam buy back shares unless their
articles provide otherwise = reversal of the position in the CA
1985, were a special authorization via the articles was required
 Must have shares also that are NOT redeemable
 Terms of redemption must be set out in the company’s articles
 Redeemable shares can be redeemed only out of distributable
profits or out of the proceeds of a fresh issue of shares made
for the purpose
 ‘the capital redemption reserve’

Question 22

Dividends

Answer 22

Only paid out of distributable profits

Question 23

why might a public company not able to pay out dividends

Answer 23

It may not have money left over due to paying debts and expenses or when it wants prioritize future growth and financial stability