Unit 5 – Equity Finance

Question 1

What is the profit and loss account?

Answer 1

Profit and loss account demonstrates how profitable a business is using the following calculation:

Income (minus) Expenses = Profit

Question 2

Where does a business’s assets and liabilities appear in business accounts?

Answer 2

Assets and liabilities appear on the balance sheet

Question 3

What is a trading account?

Answer 3

Businesses which buy and sell goods have a trading account.

Trading account = shows gross profit by subtracting the costs of sales from the income received on those sale.

Question 4

What is a balance sheet?

Answer 4

A balance sheet shows the worth or value of the business by listing its assets and liabilities on the last day of the accounting period.

Must be headed with the date of preparation.

Described as a snapshot of the business as it shows how much the business is worth on the day of preparation which can change.

Question 5

What is the balance sheet calculation?

Answer 5

Assets (minus) liabilities = net worth of the business

Question 6

Fixed assets

Answer 6

Used in the business to enable it to run effectively (e.g., business premises and machinery)

Question 7

Current assets

Answer 7

Short term assets (like stock, debts and cash).

Question 8

Long-term liabilities

Answer 8

Liabilities which are repayable more than 12 months from the date of the balance sheet

Question 9

Current liabilities

Answer 9

Liabilities which are repayable in 12 months or less from the date of the balance sheet (e.g., bank overdraft or invoice owed to a supplier).

Question 10

How do assets appear on the balance sheet?

Answer 10

In order of liquidity, e.g., how easy it should be to turn the business’s assets into cash to meet its short-term liabilities.

Fixed assets appear at the top with current assets underneath.

Question 11

Net Current Assets

Answer 11

Shows the difference between current assets and current liabilities and shows the business’s liquidity.

Question 12

Net Assets

Answer 12

Calculated by subtracting short-term liabilities from fixed and current assets. This figure will always be equal to the amount owing to the business owner as capital at the end of the year.

Question 13

Define “Accruals Basis”

Answer 13

Income and expenses are recorded in the period to which they relate instead of in the period when payment or receipt occurs.

Question 14

What are the 3 questions to consider when allotting shares?

Answer 14

1) Are there any constitutional restrictions on allotment

2) Do the directors have authority to allot shares?

3) Are there pre-emption shares?

Question 15

Companies not incorporated under the CA 2006 have what in their memorandum?

Answer 15

Authorised share capital = a cap on the number of shares a company could have.

Question 16

Do companies incorporated under the CA 2006 have this?

Answer 16

No.

Question 17

How to remove an authorised share capital clause for a company not incorporated under the CA?

Answer 17

Ordinary resolution.

Question 18

What is required to allot shares?

Answer 18

either:

1) Board meeting or

2) Ordinary resolution

Question 19

Can directors of a private company with one class of share before and after the allotment allot shares without the permission of the shareholders (i.e., under a board meeting)?

Answer 19

Yes. Under S 550 all that is required is a board resolution.

Question 20

What is the company was incorporated before the CA came into force? (i.e., old company)

Answer 20

Ordinary resolution required to ‘activate’ S 550.

Question 21

Can directors of a private company with more than 1 class of share (before and after allotment) allot without shareholder permission?

Answer 21

No. Under S 551 – they must obtain an ordinary resolution.

Question 22

Under S 551 allotment, what must the ordinary resolution state?

Answer 22

1) Maximum number of shares the directors may allot

2) Date on which the authority will expire

3) The date which the authority expires cannot be more than 5 years from the date of the ordinary resolution

Question 23

What happens when the authority to allot has expired under S 551?

Answer 23

Can be renewed by ordinary resolution (not more than 5 years) with the same formalities as before.

Question 24

Can directors of a private company with more than one class of share AFTER allotment (i.e., originally has ordinary shares and wishes to allot preference shares) allot without shareholder permission?

Answer 24

No. This requires a special resolution (as this is a constitutional change).

Question 25

How must pre-emption rights be offered to existing shareholders?

Answer 25

In proportion to their shareholdings in the company.

Offer must state the period for acceptance and cannot be withdrawn in that period.

Question 26

How long should pre-emption rights be offered for ?

Answer 26

14 days minimum.

Question 27

When do pre-emption rights not apply?

Answer 27

1) Bonus shares

2) Consideration is wholly or partly non-cash

3) Shares held under, allotted or transferred under an employee share scheme.

Question 28

How to disapply pre-emption rights?

Answer 28

Special resolution.

Question 29

For public companies / private companies with more than 1 class of shares, where the directors do not have GENERAL authority to allot (i.e., powers were only given for a specific allotment) what is required?

Answer 29

1) Special resolution

2) Recommendation to the shareholders to pass a special resolution

3) Statement setting out a) reasons for making reccomendation, b) amount purchaser will pay c) directors justification of the amount.

Question 30

Does this written statement need to be circulated to the shareholders along with the notice of general meeting?

Answer 30

Yes.

Question 31

What is MA21 in terms of payment of shares?

Answer 31

All shares must be fully paid when receieved.

Question 32

What is a share premium and where are they recorded / kept?

Answer 32

The increase in value of the share is what constitutes a premium.

• Premiums are recorded on a separate share premium account on the company’s balance sheet. This money is then treated as share capital and must be maintained.

Question 33

What are the administrative requirements of allotment?

Answer 33

1) Copies of resolutions sent to Companies House within 15 days

2) Company forms to be sent to Companies House

3) Entries in companys’ own register

4) Preparation and allocation of share certificates.

Question 34

What copies of resolutions are required for companies house (within 15 days)?

Answer 34

1) All special resolutions

2) Any orindary resolution associated with a company not incoprorated under CA (i.e., removal of ASC / activiation of S 550)

3) Any S551 ordinary resolution granting directors authority to allot.

Question 35

What forms are required to be sent to Companies House?

Answer 35

1) Return of allotment and statement of capital form within 1 months of allotment (SH01)

2) If there has been a change of persons with significant control, PSC01 etc.

Question 36

When should the company’s register be amended to reflect the new shares?

Answer 36

2 months.

Question 37

Do directors have the power to refuse to register the transfer of shares?

Answer 37

Yes under MA 26.

Question 38

If the transferee is never registered on the register of members, how will legal and beneficial title be held of the shares?

Answer 38

1) Legal title = Transferor remains legal owner

2) Equitable title = Transferee has equitable title.

Question 39

Who is entitled to attend a GM / receive dividends if the transferee has not been registered?

Answer 39

Transferor (i..e, who has legal ownership), however, the transferor must vote in accordance with the benerficial owner’s wishes and dividends must be paid to the beneficial owner.

Question 40

What is the process of transferring the shares?

Answer 40

1) Transferor completes and signs stock tracnsfer form and gives to transferee with the share certifictae

2) Transferee pays stamp duty

3) Transferee sends share certificate & stock transfer form to the company

Question 41

What does the company do after they recieve the stock transfer form?

Answer 41

• Send the new shareholder a new share certificate in their name within 2 months.
• Enter their name on the register of members within 2 months.
• Notify the Registrar of Companies of the change in ownership of the shares when the company files its annual confirmation statement (CS01).

Question 42

Stamp duty rules in relation to share transfer:

Answer 42

• If the sale price of the shares is over £1,000, the buyer must pay stamp duty on the stock transfer form.
• No stamp duty if shares are a gift.
• Minimum stamp duty is £5.

Question 43

When does TRANSMISSION of shares occur?

Answer 43

An automatic process whereby:

• If a shareholder dies, their shares automatically pass to their personal representatives (PRs); or
• If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.

Question 44

What can the trustee or PR do with the shares?

Answer 44

MA 27 – Trustee in bankruptcy and the PRs do not become shareholders of the company but are entitled to dividends declared on the shares.

– The trustee in bankruptcy / PRs can choose to be registered as shareholders themselves (unless the directors are entitled to refuse to register them as shareholders and refuse to do so) and can then sell the shares.

– Can sell them directly in their capacity as representative.

Question 45

What is the doctrine of maintenance of share capital?

Answer 45

• Share capital cannot be artificially reduced. The law requires that share capital is maintained and not altered or distributed in unauthorised ways.

Question 46

What is share capital seen as?

Answer 46

A permannet fund for a company’s creditors.

Question 47

Key effects of the doctrine of share capital ..

Answer 47

1) Dividends cannot be paid out of capital – JUST distibutable profits

2) Company must not generally purchase its own shares

Question 48

What are the 3 ways a company can alter its share capital?

Answer 48

1) Share buyback

2) Purchasing own shares under a court order to buy out unfairly prejudiced minority shareholder

3) Winding up

Question 49

What are the requirements for an off-market share buyback out of PROFTS?

Answer 49

1. Company’s articles must not forbid buyback
2. The shares must be fully paid
3. The company must pay for the shares at the time of the purchase
4. Shares must usually be paid for out of distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the purchase.

–. Distributable profits = company’s accumulated, realised profits less its accumulated, realised losses. Shown under the bottom half of the company’s balance sheet under profit/loss reserve.

5. Shareholders must pass an ordinary resolution authorising the buyback contract.
6. A copy of the buyback contract (or a summary) must be available for inspection for at least 15 days before the GM and at the GM itself (or be sent with the proposed written resolution when or before it is circulated).
7. Copy of the buyback contract, a written memorandum setting out its terms and written minutes must be available for inspection at the company’s registered office of SAIL as soon as the contract has been concluded, for a period of 10 years starting with the date of the buyback.
8. Within 28 days of completion, return a purchase of own shares

Question 50

Voting at a GM for share buyback – Under a written resolution, who cannot vote on the resolution?

Answer 50

Shareholder who holds shares which are being bought bac.

Question 51

At a GM for a share buyback, can the shareholder who holds the shares for buyback vote?

Answer 51

Yes. however, the resolution will not be effective if that shareholder’s votes made the difference between the resolution passing or not.

Question 52

What is the procedure for share buyback out of CAPITAL?

Answer 52

• All the conditions specific to buyback out of profits must be met as well as:

1. Statement of solvency – company’s directors must make a statement of solvency, not sooner than a week before the GM, stating that the company is solvent and that it will remain solvent during the year following the buyback.

– If a company thereafter becomes insolvent and is wound up within 1 year of the statement of solvency, the seller of the shares and the directors of the company may be required to contribute to the financial losses of the company and directors may face criminal sanctions for making a statement without reasonable grounds.

2. Auditors’ report – Statement of solvency must have an auditors report annexed to it confirming the auditors are not aware of anything to indicate that the directors’ opinion is unreasonable.
3. Special resolution – Payment out of capital must be approved by special resolution.

– This is in addition to the ordinary resolution that the shareholders must pass to approve the buyback contract.

– The same points on voting on a buyback out of profits apply.

4. A copy of the directors’ statement of solvency and auditors’ report must be available to members.

– If special resolution is proposed by written resolution, the statement and report must be sent to the members along with the written resolution.

– If the resolution is proposed at a GM, a copy of the statement and report must be available for inspection at the meeting. If this requirement is not complied with, the special resolution is ineffective.

5. Notification – Within 7 days of special resolution being passed, company must notify in the London Gazette, stating that the shareholders have approved payment out of capital for buyback.

– It must specify the amount of capital to be used, the date of the special resolution and where the directors’ statement and auditors’ reports are available for inspection.

– S 721 Prevention – Must state that any creditors of the company can within 5 weeks after the special resolution, apply for a s 721 prevention of the buyback from capital.

– Company must also place a notice in ‘an appropriate’ national newspaper (one circulating through the part of the UK which the company is registered) or give notice to each of its creditors.

– Creditors can apply to the court to prevent the buyback if they believed the company cannot afford it.

6. Directors’ statement and auditors’ report – The company must file a copy of directors’ statement and auditors’ report at Companies House before or at the same time as it places the notices in the London Gazette and the newspaper.
7. Directors’ statement and auditors’ report must be kept available for inspection at the company’s registered office from the time the company publishes its first notice until five weeks after the passing of the special resolution.
8. Where no creditors object, the directors then:

• Hold a board meeting and pass a board resolution to decide to enter into the contract to buy back the shares.
• Payment takes place between 5 and 7 weeks after the special resolution is passed. I.e., have a 2 week window.

Question 53

Are public companies able to perform share buyback out of capital?

Answer 53

NO.

Question 54

Before a private company does a buyback out of capital what must it do first?

Answer 54

Exhaust their distributable profits before using capital to fund the buyback (can be out of profits & capital).

Question 55

After completing s buyback out of capital, what needs to be filed?

Answer 55

SH03 – Return of purchase of own shares

Question 56

If a company does not have profits available can shareholders still be paid dividends?

Answer 56

NO.

Question 57

If in a particular financial year the company has not made any profit, can it use previous profits to pay a dividend?.

Answer 57

Yes.

Question 58

Who decides whether or not to recommend that a dividend be paid and how much it should be?

Answer 58

Directors.

Question 59

Who approves this?

Answer 59

Shareholders via ordinary resolutions.

Question 60

Can dividends be paid out of capital?

Answer 60

No. Just profits.