Shareholders

Question 1

What is a share?

Answer 1

A share is a unit of ownership, representing a proportion of a company’s total capital.

Question 2

What is the share vapital?

Answer 2

The share capital is the aggregate value of all the the shares in a company.

Question 3

What is a fixed nominal value?

Answer 3

This is the value that each share must have e.g. £1

Question 4

Name the 3 main ways of becoming a shareholder?

Answer 4

1. Allotment and issue of new shares.
2. Transfer of existing shares.
3. Transmission of existing shares.

Question 5

How does someone become a shareholder through allotment?

Answer 5

• Shares will be alloted when new shareholder “acquires unconditional right to be included in company’s register of members in respect of shares.
• Alloted shares then issued by director to new shareholder and legal title passes when their name is actually entered onto register.

Question 6

What authorisation is needed for directors of priv limited companies to allot shares of same class?

Answer 6

The director can allot shares of same class UNLESS they are prohibited by AAs.

Question 7

What authorisation is needed for plc’s and priv limited companies to allot shares of more than one class?

Answer 7

The directors may only allot shares if they are authorised by AAs or if members pass a resolution to authorise the allotment.

Question 8

What do we mean by shares of different classes?

Answer 8

Different rights attach to different types of shares i.e. for some classes of shares, you may get voting rights but for some, you may not.

Question 9

What are pre-emption rights?

Answer 9

These are rights that some shareholder have that protect a shareholding against dilution.
- If there are new shares, they must first be offered to the existing shareholders so that their voting power is not diluted.

NOTE: Shareholders can also choose not to subscribe to a new share issue, so that it can be offered to others.

Question 10

What do pre-emptions rights NOT apply to?

Answer 10

They do not apply to:
- capped preference shares
- bonus shares
- shares issued under an employee share scheme
- shares issued for non-cash consideration.

Question 11

Can pre-emption rights be disapplied?

Answer 11

Yes, there are provisions to allow for the disapplication of pre-emption rights

Question 12

How does someone become a shareholder for transfer?

Answer 12

A member can use a stock transfer form to transfer ownership of existing shares to a new shareholder
- S.1 Stock Transfer Act 1963.

Question 13

How does someone become a shareholder through transmission?

Answer 13

Ownership of shares can change by operation of law (e.g. upon death or bankruptcy).

Question 14

Do companies have to keep a register of members?

Answer 14

Yes, under the EECTA, they will have to keep local up-to-date registers of members.

Question 15

Name the 3 most common types of share classes.

Answer 15

1. Ordinary shares
2. Preference shares
3. Deferred Shares.

Question 16

What are ordinary shares?

Answer 16

• Most common type of shares.
• Generally comes with voting rights, and any dividend awarded to owner is at discretion of directors.

Question 17

What are preference shares?

Answer 17

• These do not normally come with voting rights.
• Owners often entitled to fixed dividend, which must generally be paid ahead of ordinary shareholders, making them less risky investments.

Question 18

What are deferred shares?

Answer 18

• Shareholders have no right to dividend until certain conditions met (e.g. particular level of profitability is reached, or a fixed period of time has passed).

Question 19

What are class rights?

Answer 19

The rights enjoyed by particular members of a company by virtue of a particular class of shares.

Question 20

How can class rights be varied?

Answer 20

1. By AAs
2. If all members of that class consent or otherwise by SR.

NB: Any vote would be invalid if its dominant purpose was not to benefit the class as a whole.
- i.e. If at least 15% of members of that class oppose, they may apply to court to cancel variation. The Court may cancel if variation would “unfairly prejudice” applying shareholders.

Question 21

What is a dividend?

Answer 21

A dividend is a payment out of distributable company profit/distributable reserves to shareholders

Question 22

What is ‘distributable profits?’

Answer 22

A company’s accumulated realised profits less accumulated realises losses.
- Essentially, this is any available profit less any losses which have not yet been accounted for

Question 23

Can a loss-making company pay out a dividend? Why?

Answer 23

No, this is because a company cannot pay out of share capital if it doesn’t have any distributable profits (doctrine of maintenance of share capital)

Question 24

Do ordinary shareholders have an automatic right to a dividend?

Answer 24

No, only to a dividend which has been properly declares and authorised but no right to be paid out.

Question 25

How can directors declare a dividend?

Answer 25

1. Can declare by recommending at BM - they then need OR from members (though may depend on AAs). 2. Can declare and pay interim dividends during the year by a board resolution only (no need for OR too), and then declare and pay final dividend (authorised by OR) at end of year.

Question 26

What happens if a dividend is paid unlawfully?

Answer 26

Any member or director who knew at the time (or ought to have known, that it was unlawful is required to repay it.

Question 27

What is a scrap dividend?

Answer 27

Where a dividend is given by way of shares rather than cash

Question 28

What is dividend in Specie?

Answer 28

Where a dividend is given by way of assets rather than cash.

Question 29

When can dividends be paid out?

Answer 29

1. Interim (at any point) 2. Final (year-end)

Question 30

What counts as 'undistributable reserves' that members cannot be paid out from?

Answer 30

1. Share premium account 2. Capital redemption reserve 3. Any prohibited reserve as stated in AAs. 4. Revaluation reserve.