Chapter 8 - Companies: Finance

What are the 2 main sources of finance for a company?

The two main sources of finance for a company are share capital and loan capital.

Definition of a share?

A share is the interest of a shareholder, or member, in a company measured in monetary terms, with rights and liabilities and contractual relationships as provided by the Companies Acts.

What is share capital divided in to? What does this define?

The share capital of a company is divided into units, or shares, which define each member's proportion of interest in the company.

What is loan capital often referred to as?

The loan capital of a company is often referred to as its issued debentures. This is borrowing

What is someone who invests in shares of a company called? Someone who invests in debentures?

A person who invests in the shares of a company is an owner of the company, whereas a person who invests in debentures is a creditor of the company.

Definition of loan capital?

A debenture is a document issued by a company containing an acknowledgment of its indebtedness whether secured or unsecured.

Document stating the company owes money to someone, the security if there is one and terms of the loan

Voting rights of loan capital?

A debenture holder is a creditor of the company and therefore has no voting rights.

Income paid to the owner of loan capital?

A debenture has a contractual right to interest, irrespective of the availability of profits.

What priority does loan capital have upon liquidation?

A debenture has priority with respect to repayment.

Definition of share capital?

A share is the interest of a shareholder in a company measured by a sum of money. It is a bundle of rights and obligations.

Voting rights of share capital?

A shareholder is a member (owner) of the company and therefore has voting rights, depending on the class of shares held.

What priority does share capital have upon liquidation?

Shareholders receive repayment after creditors, but can participate in surplus assets

Income paid to the owner of share capital?

Dividends depend on the availability of profits.

The shareholder has no right to a dividend, these depend on profits made by the company.

If an individual does not receive the interest on their debenture what can they do?

If this doesn't happen then the individual can sue, making investment in loan capital less risky

Why might directors prefer to raise money through loan capital?

It is within the directors implied authority to borrow money through loan capital and do not have to call a meeting to do so like with shares

What can a company issue in regards to different shares?

A company can issue different types, or classes, of shares.

Preference shares voting rights?

None, or restricted.
Only if dividends have not been paid for 1 year

Preference shares dividend rights?

Fixed dividend normally paid in priority to other dividends, usually cumulative.

Less risky as fixed dividend but lower reward and will not receive if no profit is made but is cumulative so could get 2 lots in following year

Preference shares surplus on winding up treatment?

If issued with preferential rights to return of capital will have the right to be repaid their capital first, but cannot participate in any surplus.

Ordinary shares (equity) voting rights?

Full as set out in articles

Ordinary shares (equity) dividend rights?

Paid after preference dividend. Not fixed and not cumulative

Ordinary shares (equity) surplus on winding up treatment?

Entitled to share surplus assets after repayment of preference shares.

Redeemable shares definition?

Redeemable shares are those which under their terms of issue must be bought back by the company at a certain time.

What is a shareholders biggest obligation to the company? How is the value of this determined?

The biggest of these is their liability, which is determined by the nominal value of the shares.

The maximal additional amount a member can be asked to put into a company is their unpaid share capital.

Where are shareholder rights given?

The shareholder receives a number of rights in the company such as the right to vote, the right to attend meetings, etc. These rights may be set down in the Companies Act 2006, or they may be given in the articles of association.

Issued share capital definition?

This is the value of the shares sold by the company

Paid-up capital definition?

The amount of the capital that the members have paid over to the company.

Unpaid capital definition?

The proportion of the share capital value that is still outstanding

Called-up capital definition?

The proportion of the unpaid capital which has been requested to be paid into the company but payment has not yet been received.

Unissued shares definition?

Directors have the authority to sell but have not sold yet

Uncalled share capital definition?

No call/request yet been made for payment

Market value of shares definition?

This is what the market is willing to pay for the shares and will go up and down depending on how the company is performing.

Nominal value of shares definition?

The nominal value, or par value of the share is what the share is held for in the share capital account. It represents the maximum the company owes to the member on liquidation.

Share premium definition?

This is the excess the subscribing member paid for their shares over the nominal value.

What is a bonus issue?

Carried out by using some of the company's reserves to issue fully paid shares to existing shareholders in proportion to their shareholdings.

free shares that come from share premium and are classed as fully paid DR premium CR share capital

What is a rights issue?

New shares offered to existing shareholders in proportion to their shareholdings
Raise new funds.

What value are rights issue shares given at?

Shares usually offered at discount to current market value (but not at discount to nominal value).

When can a rights issue be used?

Can be used where pre-emption rights are not a thing

What are class rights?

Class rights are the special rights attached to each class of shares, such as dividend rights, distribution of capital on a winding up and voting.

When are class rights set?

Before shares are sold

The procedure for varying class rights depends on?

Whether any procedure is specified in the articles

What procedure must be followed if a procedure to vary is specified?

Procedure set out in articles must be followed.
Usually happens where it is entrenched

What procedure must be followed i2f a procedure to vary is NOT specified?

Variation needs special resolution or written consent of 75% in nominal value of the class: s.630 CA06.

Can class rights be altered by written resolution?

Only in private companies

To petition a variation in class rights a member must hold how many shares?

Must hold greater than or equal to 15% of the shares

What is the time frame for minority shareholders to apply to court to cancel the variation in rights?

May apply to courts within 21 days to cancel variation

What must the minority shareholder prove about the change of class rights for it to be canceled?

Petitioner must prove that the variation is 'unfairly prejudicial'.

When will a court cancel a variation? When will they not?

The courts will where they feel that the shareholders who voted did so to gain an advantage for their shares over the other shares in issue. Rights are actually changed

Courts will not cancel if the rights themselves are not changed e.g. a change in value, enjoyment or power derived from the rights will not cause cancelation

What is a subdivision of shares? Does this affect shareholder rights?

This occurs when shares are split into smaller denominations
This effects the number of shares held but not the shareholder rights

What is share allotment?

The sale of shares to individuals by the director acting as an agent

When is a share said to be allotted?

When a person has been given the unconditional right to be included within the company's register of members in respect of some shares, those shares are said to have been allotted.

How is authority to allot shares given?

The articles, or Ordinary resolution.

What 2 things must the authority granted to share allotment state?

The maximum number of shares to be allotted, and The expiry date for the authority (max. 5 years)

When can directors allot shares with implied authority?

The directors of a private company with only one class of shares may allot shares of that class unless it is prohibited by the articles: s.550 CA 2006.

What happens if shares are sold at a discount of the nominal value?

If this rule is breached, issue is still valid but the shareholder is liable to pay the company the discount, plus interest.

It is treated as a partly paid share

Can shares be sold at a discount of the nominal value?

Shares cannot be issued at a discount on nominal value

Can debentures be issued at a discount?

Debentures may be issued at a discount if no immediate right to convert to shares.

What is the accounting treatment for share premium under s.610 CA06?

s.610 CA06 requires any premium to be credited to a share premium account

What type of reserve is the share premium account?

Share premium is a non-distributive reserve

What 3 things can the share premium account only be used for?

writing off the expenses of the issue of those shares

writing off any commission paid on the issue of those shares

issuing bonus shares.

When is a share said to have been issued?

The person to whom shares are allotted receives a letter of allotment or share certificates as evidence of his ownership of the shares, then the shares are said to be issued.

When is an owner of shares said to become a member of the company?

Once the share owner's name is entered on the register of members, he or she is a member of the company.

What are pre-exemption rights?

Pre-emption rights are rights of first refusal. If shares have pre-emption rights this means a new issue must be offered to the existing shareholders first.

Are there statutory pre-exemption rights? If so when does the right apply?

The Companies Act 2006 gives statutory pre-emption rights

Statutory right if new equity shares are issued for cash

Can a company allot shares without offering them to existing shareholders first? On what basis and terms?

A company cannot allot ordinary shares without first offering them to existing shareholders
On a pro rata basis
At the same/more favourable terms than to outsiders

How many days does a shareholder have to accept an offer of first refusal?

The shareholders then have 21 days to accept the offer.

If the procedure for pre-exemption rights is not followed is the allotment valid? What action can be taken by existing shareholders and within how long?

If this procedure is not followed the allotment remains valid

The existing shareholders can sue the company or the directors for any loss within two years.

In what 4 cases do pre-exemption rights not apply?

Allotment to an employee share scheme

Allotment for non-cash consideration

A private company may exclude or modify the pre-emption rights in the articles

Any company may restrict or modify the statutory pre-emption rights by special resolution.

What consideration can private company issue shares?

Private companies may issue shares for non-cash consideration.

How is the value of non-cash considerations determined?

The value of such consideration can be determined by the directors.

When will courts intervene in the issue of non-cash considerations issue of shares?

The court will interfere with the valuation only if there is fraud or the consideration is 'illusory, past or patently inadequate'.

If a public company issues shares on a non-cash consideration basis, what 5 additional rules are they subject to?

Subscribers to the memorandum (the first shareholders in the company) must pay cash

Can't pay by way of work or services

Shares cannot be allotted until the nominal value is 25% paid-up plus all of share premium

Non-cash consideration must be independently valued by the company's auditor
Received within five years

How is the value of non-cash considerations determined in a public company?

By an auditor

When will the courts declare non-cash considerations allotment to be invalid?

Blatant and unjustified overvaluation of assets will be declared invalid by the courts.
Shares must be paid for in cash or in non-cash consideration of sufficient value.

If the rules regarding the payment of non-cash considerations is breached what is the consequence?

The allottee may be liable for the nominal value of the wrongly allotted shares, plus interest.

When must the allotment of shares be registered in?

An allotment of shares must be registered within two months: s.554.

What must the company record in its own records and send to the registrar?

Must include shares in own register

To registrar: give details of the new alloted shares and provide an updated statement of capital showing current shares and the amount paid up

What is the consequence of failing to do the administrative work for share allotment?

Failure to comply is an offence and the company itself and every officer of the company in default are punishable by a fine.

Who are companies allowed to pay a commission to if their articles permit?

To someone who agrees to either:

subscribe, or
procure subscriptions

Are shares freely transferable? If so what is this in accordance with?

Shares are freely transferable in accordance with the company's articles
If a shareholder of shares in a company that is not listed on the stock exchange would like to sell their shares they are free to do so

How are unlisted shares transferred?

They are transferred using a stock transfer form together with the share certificate
Both are sent to the company for registration

Consequence of failure to register the stock transfer form and the share certificate?

Failure to do this is an offence and the company and its directors can be subject to a fine.

When must a company register the transfer of unlisted shares or give refusal for the transfer?

The company must register the transfer or give reasons for its refusal within two months

If the transferee of unlisted shares is refused, what is the transferee still entitled to?

If the transfer is refused, the transferee is still entitled to any dividends or return of capital, but may not vote

How are listed shares usually transferred?

Electronically using the 'CREST' system, the multi-currency settlement system for UK and Irish securities.

Does a shareholder need to notify the company if they buy shares? If so, within how long of transfer?

The Disclosure and Transparency Rules state that a shareholder must notify the issuer if their shareholding reaches 3% of the shares, then for each additional 1% increase thereafter. This notification must be made within two trading days.

How can share capital be altered?

Subdivided or consolidated, or

Redenominated in another currency

If shares are to be subdivided or consolidated does the amounts of unpaid and paid share capital remain the same?

If shares are to be subdivided or consolidated, the proportion of the unpaid and paid amounts of the shares must remain the same.

If share capital is redenominated in another currency can this reduce share capital? What type of resolution does this require?

This may result in a reduction in capital, to round off nominal values in the new currency.

This change requires a special resolution, and it must not exceed 10% of the nominal value of the reduced share capital.

What must be passed for share capital to be altered?

By passing an ordinary resolution.

What is the alteration of share capital subject to?

Subject to any restrictions in the articles

When share capital is altered how long must the registrar be notified within and what must be sent to them?

Notification must be given to the Registrar within one month, together with a revised statement of capital.

What is the capital of a company regarded as?

The capital of a limited company is regarded as a 'buffer fund' for creditors.

Funds in the company to meet its liabilities if the company were to go into liquidation.

If capital in a company acts as a buffer fund for creditors, does this mean that the creditors can withdraw funds from the share capital directly?

This doesn't mean that the creditors can withdraw funds from the share capital directly.

Is the creditors buffer funds real money?

The creditors' buffer is an accounting fund, not real money. The actual cash or assets subscribed can be used by the company.

Why do the rules on maintenance of capital exist?

In order to prevent a company reducing its capital by returning it to its members, whether directly or indirectly. A member of the company cannot simply withdraw his or her capital from the company

Can a member of the company withdraw his or her capital from the company?

A member of the company cannot simply withdraw his or her capital from the company

Is loan capital subject to the maintenance rules?

Loan capital is not subject to the maintenance rules

What type of shares must not only be left over if a company is to reduce their share capital?

Under s.641, a company can reduce its share capital provided that any reduction does not result in only redeemable shares being left in issue.

How does a reduction in share capital effect member liability?

Such a reduction reduces the members' liability to the company.