Topic 7: Equity Finance Flashcards
(125 cards)
1
Q
What is the general term used to refer to the funds available to run the business of a company?
A
Capital
2
Q
What does ‘share capital’ refer to in company law?
A
The money raised by the issue of shares
3
Q
What are the primary reasons a company needs funds?
A
- To start the business
- To keep the business running (working capital)
- For expansion and growth
4
Q
What are the three main ways a company can raise funds?
A
- Issuing shares (equity finance)
- Borrowing (debt finance)
- Retaining profits
5
Q
How is a share often described?
A
A ‘bundle of rights’
6
Q
What rights does an investor typically have when investing in share capital?
A
- Voting rights in shareholder meetings
- Income through dividends
- Capital gains
7
Q
What is the nominal or par value of a share?
A
The minimum subscription price for that share
8
Q
What does Section 542(2) CA 2006 state about shares without fixed nominal value?
A
Any allotment of a share that does not have a fixed nominal value is void
9
Q
What is the term for the amount of shares in issue at any time?
A
Issued share capital (ISC)
10
Q
What is ‘allotment’ as defined in s 558 CA 2006?
A
Shares are allotted when a person acquires the unconditional right to be included in the company’s register of members
11
Q
What is the difference between ‘allotment’ and ‘issue’ of shares?
A
Allotment grants rights; issue occurs when registered in the company’s register of members
12
Q
What is ‘paid-up share capital’?
A
The amount of nominal capital paid by shareholders on their shares
13
Q
What are treasury shares?
A
Shares that have been bought back by the company and are held in treasury
14
Q
What defines different classes of shares?
A
The rights attached to each class are determined in the company’s Articles
15
Q
What are ordinary shares?
A
The most common form of share, carrying voting rights and entitlement to dividends
16
Q
What is a preference share?
A
A share that gives the holder priority for dividend payments or return of capital on winding up
17
Q
What are cumulative preference shares?
A
Preference shares that carry forward unpaid dividends to future years
18
Q
What do participating preference shares allow shareholders to do?
A
Participate in surplus profits and/or assets after receiving their fixed preferred dividend
19
Q
What are deferred shares?
A
Shares that carry no voting rights and no ordinary dividend but may share in surplus profits
20
Q
What are redeemable shares?
A
Shares intended to be bought back and canceled by the company at some future time
21
Q
What are convertible shares?
A
Shares that carry an option to convert into a different class of share
22
Q
What must be followed to vary class rights attached to shares?
A
Provisions in the company’s Articles or consent of 75% of the issued shares of that class
23
Q
What are the two types of dividends?
A
- Final dividends
- Interim dividends
24
Q
What is the main condition for a company to pay dividends?
A
It must have sufficient distributable profits
25
What is the definition of 'distributable profits'?
The company's accumulated realised profits less its accumulated realised losses
26
What is 'allotment' in relation to shares?
A contract between the company and a shareholder to issue new shares
27
What does s 755 CA 2006 prohibit for private companies?
Offering shares to the public
28
What is required every time a company offers shares?
Consideration of whether a prospectus is required
29
What should a prospectus contain?
Information necessary for investors to make an informed assessment of the company
30
What is a prospectus?
An explanatory circular giving investors details about the company and the investment to make an informed assessment of the financial status
## Footnote
A prospectus is required to enable investors to base their investment decision on complete information.
31
Is a prospectus required for private companies offering shares?
Usually, a prospectus will not be required
## Footnote
However, the specific rules must be considered for each case.
32
What constitutes a financial promotion under s 21 FSMA?
Any invitation or inducement to engage in investment activity, including buying shares
## Footnote
Financial promotions are prohibited unless certain requirements are fulfilled.
33
What happens to shares in the event of a shareholder's death?
Shares automatically pass to the personal representatives of the deceased
## Footnote
This is part of the transmission of shares process.
34
What is the process of transferring shares?
Shares may be transferred by sale or gift, subject to any restrictions in the Articles
## Footnote
It's crucial to check the Articles for any restrictions.
35
What is a common restriction on share transfer related to directors?
Directors may refuse to register the transfer of a share
## Footnote
They must return the instrument of transfer with a notice of refusal unless fraud is suspected.
36
What are pre-emption rights?
The right of first refusal for existing shareholders to purchase new shares before they are offered to outsiders
## Footnote
This protects existing shareholders from dilution of their ownership.
37
How is the transfer of shares executed?
By way of a stock transfer form signed by the transferor and submitted with the share certificate
## Footnote
This process is mandated under s 770 CA 2006.
38
What is the significance of stamp duty in share transfers?
Stamp duty is payable by the buyer at 0.5% of the consideration, unless the consideration is £1000 or less
## Footnote
A minimum fee of £5 is applicable if the consideration exceeds £1000.
39
What is the term 'share capital' related to?
The money raised by the issue of shares
## Footnote
It is represented by shares issued to investors.
40
What must be checked before issuing new shares?
Check the company’s Articles for any cap or limit on the number of shares that may be issued
## Footnote
If a cap exists, it must be removed or increased.
41
What is the requirement for directors to allot shares?
Directors must resolve by board resolution and may need prior authority from shareholders
## Footnote
This is governed by s 549 CA 2006.
42
What is the difference in authority for private companies with one class of shares under s 550 CA 2006?
Directors have automatic authority to allot shares of that same class unless prohibited by the company’s Articles
## Footnote
This simplifies the process for smaller companies.
43
What happens if directors cannot rely on s 550 CA 2006?
They require authority under s 551(1) CA 2006, which may be granted by the company's Articles or by shareholder resolution
## Footnote
This authority is subject to limits in time and number of shares.
44
What do pre-emption rights protect against?
They protect existing shareholders from dilution of their ownership when new shares are allotted
## Footnote
Existing shareholders must be offered new shares in proportion to their current holdings.
45
What does s 561 CA 2006 state about allotting equity securities?
A company must offer new equity securities to existing ordinary shareholders before offering them to others
## Footnote
This ensures that existing shareholders can maintain their proportionate ownership.
46
What defines 'equity securities' under s 560 CA 2006?
Equity securities are either ordinary shares or rights to subscribe for or convert into ordinary shares
## Footnote
The definition is broader than in everyday usage.
47
Can a company disapply pre-emption rights?
Yes, a company can disapply pre-emption rights
## Footnote
The procedure for this is outlined in s 562 CA 2006.
48
What right do the shares carry on winding up?
Right to share pari passu with ordinary shareholders in surplus assets
## Footnote
This means they participate equally in the distribution of assets after all liabilities are settled.
49
Are the shares considered equity securities under CA 2006?
Yes, they are equity securities for the purpose of s 560(1) CA 2006
## Footnote
Despite capped dividends, they have uncapped rights to capital payments on winding up.
50
Can a company disapply pre-emption rights?
Yes, with permission from existing shareholders
## Footnote
The procedure can be lengthy and complicated, especially for companies with numerous shareholders.
51
What are the two methods companies usually use to disapply pre-emption rights?
* General disapplication of pre-emption rights
* Private companies with one class of share disapplication by special resolution
52
What does general disapplication of pre-emption rights require?
Directors must be generally authorised under s 551 CA 2006 by special resolution or articles under s 570(1) CA 2006
## Footnote
This is temporary and attaches to a specific s 551 authority.
53
What does s 569 CA 2006 provide for private companies?
Disapplication of pre-emption rights by special resolution for companies with only one class of share
## Footnote
This presupposes authority to allot shares from s 550 CA 2006.
54
What is a specific disapplication of pre-emption rights?
Disapplication for a specific allotment of shares by passing a special resolution under s 571 CA 2006
## Footnote
This procedure is more cumbersome and requires a written statement to shareholders.
55
What can private companies do regarding pre-emption rights in their Articles?
Exclude statutory pre-emption rights permanently
## Footnote
This is rare, as it offers no protection against dilution for existing shareholders.
56
What must be done to create a new class of shares?
Insert new provisions in Articles and pass a special resolution under s 21 CA 2006
## Footnote
This applies unless specific exceptions under CA 1985 are met.
57
What is required for directors to allot new shares?
Pass a board resolution to allot new shares
## Footnote
Shareholder resolutions must be resolved at a general meeting before the board meeting, unless certain conditions are met.
58
What administrative requirements must be followed after allotting shares?
* Send copies of resolutions to Companies House within 15 days
* File return of allotment (Form SH01) within one month
* Update register of members within two months
59
What is the prohibition on financial assistance?
Statutory rules prohibit certain companies from giving financial assistance for share purchases
## Footnote
This is designed to protect public companies' assets representing share capital.
60
What transactions are relevant to financial assistance?
* Acquisition or sale of shares
* Issue of shares
61
Which companies are prohibited from giving financial assistance?
* Target company (public or private)
* Any subsidiary of the target company if it is a public company
62
What does financial assistance broadly include?
* Financial assistance by way of gift
* Guarantee, security, or indemnity
* Loan or similar agreement
* Any other assistance materially reducing net assets
63
What is required for assistance to be considered financial assistance?
It must be financial in nature and intended to facilitate an acquisition
## Footnote
This includes both direct and indirect assistance.
64
What are the exceptions to the prohibition on financial assistance?
The 'purpose' exceptions state that assistance is lawful if the principal purpose is not for the acquisition
## Footnote
This applies if the acquisition is incidental to a larger purpose.
65
What is the purpose exception in relation to financial assistance under CA 2006?
The giving of financial assistance will not be unlawful if the principal purpose is not for the acquisition or if the acquisition is only an incidental part of a larger purpose.
66
Why is the purpose exception rarely relied upon?
Due to its narrow application in case law and the serious consequences of giving unlawful financial assistance.
67
What does Section 681 CA 2006 list?
Specific types of transactions exempt from ss 678 and 679 CA 2006 prohibitions, such as dividend payments.
68
What are conditional exceptions under Section 682 CA 2006?
Types of transactions exempt from ss 678 and 679 CA 2006 prohibitions provided certain conditions are met.
69
Give examples of transactions under Section 682 CA 2006.
* Money lending in the ordinary course of business
* Assistance in respect of employee share schemes.
70
What conditions must be met for a transaction to fall within s 682 CA 2006?
* The company giving assistance is a private company
* The company is a public company and net assets are not reduced or assistance is from distributable profits.
71
What are the consequences of carrying out prohibited financial assistance?
Penalties for the company (fine) and officers (fine/imprisonment) and the transaction may be void.
72
What is the doctrine of maintenance of capital?
A principle stating that a company cannot return capital to shareholders, ensuring share capital is available to creditors.
73
What are the consequences of the principle of maintenance of share capital?
* Dividends may only be paid out of distributable profits
* Companies generally must not purchase their own shares.
74
Under what conditions can a company buy back its own shares?
If it follows procedures set out in CA 2006.
75
What are the two types of situations when a company can buy its own shares?
* Redemption of redeemable shares
* Purchase of own shares (buyback).
76
What is required for a buyback to occur?
A contract setting out the terms of the purchase approved by shareholders.
77
What are the three ways a company may fund a buyback?
* Distributable profits
* Proceeds of a fresh issue of shares
* Capital.
78
What are the restrictions on using capital to fund a buyback?
* Only available to private companies
* Must comply with ss 709 - 723 CA 2006
* Must use distributable profits or proceeds first.
79
What must a company ensure when buying back shares out of profits?
* Purchase is not restricted in Articles
* Shares are fully paid
* Continue to have issued shares other than redeemable and treasury shares.
80
What does Section 694 require for the purchase of own shares?
* A contract to purchase own shares
* Approval of contract by ordinary resolution.
81
What is the procedure for buyback of shares out of profits?
* Check Articles
* Prepare accounts
* Confirm shares are fully paid
* Board meeting to approve contract
* Contract must be available for inspection.
82
What additional requirements apply for buybacks out of capital?
* Not restricted in Articles
* Directors’ statement of solvency and auditors’ report required.
83
What must the directors’ statement of solvency confirm?
The company is solvent and able to pay debts as they fall due for 12 months after the buyback.
84
What must a company do within seven days of passing a special resolution for payment out of capital?
* Publish notice in the Gazette
* Notify creditors
* File directors’ statement and auditors’ report at Companies House.
85
What is the timing restriction for a share purchase after a special resolution?
The purchase can take place no earlier than five weeks and no later than seven weeks after the resolution.
86
What must a company file within 28 days of delivering the bought back shares?
A return to Companies House and a notice of cancellation.
87
What is required immediately after a general meeting or written resolution for share buyback?
* Within 7 days: place notices in Gazette and national newspaper
* Within 15 days: file special resolution at Companies House.
88
What is required for shareholders to approve payment out of capital?
Shareholders pass a Special Resolution (SR)
89
Are holders of shares being bought eligible to vote on the payment out of capital?
No, they are not eligible to vote
90
What documents must be available at the meeting for payment out of capital?
Contract, Directors' Statement (DSS) and Accountants' Report (AR)
91
What is the timeframe for placing notices in the Gazette and national newspaper after a General Meeting?
Within 7 days
92
What must be filed at Companies House within 15 days after a General Meeting?
Special Resolution (SR)
93
For how long after the date of the Special Resolution do creditors and shareholders have the right to object?
Five weeks
94
What must be kept available for inspection at the company's registered office?
Copies of the DSS and AR
95
What must the Board of Directors do to proceed with the contract?
Enter into the contract and appoint a director(s) to sign it
96
When must payment out of capital take place after the Special Resolution is passed?
Between 5-7 weeks
97
What must be filed within 28 days after the meeting?
Return, notice of cancellation & statement of capital
98
How long must a copy of the contract be kept?
10 years
99
What must be updated after shares are cancelled?
Register of members and PSC register if applicable
100
What does the term 'financial services' refer to?
Services such as advising, dealing, and arranging investment products on behalf of clients
101
Why are financial services regulated?
To protect consumers from negligent advisers and ensure approved service providers
102
What is the key statute governing the provision of financial services in the UK?
Financial Services and Markets Act 2000 (FSMA)
103
What are the two main regulators for financial services in the UK?
* Prudential Regulation Authority (PRA)
* Financial Conduct Authority (FCA)
104
What is the general prohibition under section 19(1) FSMA?
No person may carry on a regulated activity in the UK unless they are an authorised or exempt person
105
What constitutes a regulated activity under FSMA?
Specified Investment + Specified Activity
106
What is the first step a solicitor must take to determine if an investment is regulated?
Determine if the investment is 'specified' under FSMA
107
What types of investments are considered 'specified investments'?
* Shares
* Instruments creating or acknowledging indebtedness, including bonds
* Regulated mortgage contracts
108
What is required for an activity to be considered a 'specified activity' under FSMA?
It must be carried out by way of business in relation to a specified investment
109
What is an example of a specified activity under FSMA?
* Dealing in investments as principal or agent
* Arranging deals in investments
* Managing investments
* Advising on investments
110
What type of advice does Article 53(1) RAO cover?
Advice given to someone who holds or is a prospective investor in a security regarding the merits of buying, selling, or underwriting investments
111
What activities can be excluded from requiring FCA authorisation?
* Activities that are necessary parts of other services
* Regulated activities in connection with the sale of a body corporate
112
What must be satisfied for regulated activities to be exempt under s 327 FSMA?
* The person must be a member of a profession
* Must not receive separate commission
* Activity must be incidental to professional services
113
What does the FCA consider when determining if an activity is 'incidental'?
* Scale of the activity in proportion to other services
* Extent to which services are held out as separate
* Impression given by the firm about regulated activities
114
What is required for an activity to be considered 'incidental' according to the FCA?
The regulated activities cannot be a major part of the practice of the firm.
115
What factors does the FCA consider relevant to determine if an activity is incidental?
The following factors:
* Scale of the activity in proportion to other services
* Extent to which services are held out as separate
* Impression given by the firm through advertising or promotion
116
When will the FCA decide that a firm is not providing incidental regulated activities?
If the activities amount to a separate business conducted in isolation from professional services.
117
What must be assessed to determine if an activity is incidental?
The overall work the firm does and whether the specified activity is a small part of what the firm does for clients.
118
What is the basic condition specified by Rule 2 of the Scope Rules?
The activity must arise out of OR be complementary to the provision of a particular professional service.
119
What does it mean for an activity to arise out of the non-regulated work?
It must be prompted by the work being done for the client.
120
If a client asks for advice on investing in a personal pension while selling a company, how is this classified?
The advice would not arise out of the work being done for the client as it is unrelated.
121
How do you determine if an activity is complementary?
The specified activity must arise naturally out of the work the solicitor is doing for the client.
122
What are examples of activities that could be considered complementary?
Examples include:
* Giving legal or tax advice
* Drafting documents to effect the sale of shares
123
What must a law firm ensure to carry out an exempt regulated activity?
1) Comply with the Scope Rules
2) Be authorised by the SRA and comply with relevant SRA Financial Services Rules
124
What happens if a firm cannot satisfy the requirements under s 327 FSMA AND Scope Rule 2?
The firm must be authorised by the PRA or FCA or refuse to carry out the activity.
125
What is the consequence of carrying out an activity without PRA or FCA authorisation?
The person carrying out the activity is likely to have breached s 19(1) FSMA, which is a criminal offence.
