SQE BLP: Workshop 6, Equity Finance

What is capital?

The funds available to run the business of a company.

What is share capital?

Money raised by issuing shares, contributed by investors and represented by shares issued.

Why does a company need funds?

To start the business, provide working capital and fund expansion or growth.

What are the main ways a company can fund its business?

Equity finance, debt finance and retained profits.

What is equity finance?

Raising funds by issuing shares.

What is debt finance?

Raising funds by borrowing money.

How is a share commonly described?

A "bundle of rights".

What does an investor become by investing in a company's share capital?

A part-owner of the company, often with voting rights.

How might an investor in a private company recover their investment?

By selling shares, company sale, flotation or winding up if assets permit.

What are the two main financial benefits of investing in shares?

Dividend income and potential capital gain from share value appreciation.

Where are the rights attached to different classes of shares usually found?

The company's Articles.

What is the nominal or par value of a share?

Its fixed minimum subscription value, representing a unit of ownership.

What does s 542 CA 2006 provide about nominal value?

Shares must have a fixed nominal value; allotment without one is void.

Can a company issue a share below its nominal value?

No. Under s 580 CA 2006, shares cannot be issued at a discount.

What is a share premium?

The amount paid for a share above its nominal value.

A £1 nominal share is issued for £4. What is the share premium?

£3.

What is issued share capital (ISC)?

The shares actually in issue at a particular time.

What makes up a company's issued share capital?

Subscriber shares taken by first members plus further shares issued later.

What are subscriber shares?

Shares purchased by the first members of the company.

What is an allotment under s 558 CA 2006?

Acquiring the unconditional right to be included in the register of members.

What is the difference between allotment and issue of shares?

Allotment creates unconditional right to registration; issue occurs upon entry in register.

When does a shareholder obtain full legal title to shares?

When entered in the company's register of members: s 112(2) CA 2006.

What is paid-up share capital?

The nominal capital amount on shares actually paid by shareholders.

What is a "call" on shares?

A demand by the company for an outstanding amount due on shares.

What is called-up share capital under s 547 CA 2006?

Aggregate calls made on shares plus existing paid-up share capital.

What are treasury shares?

Shares bought back out of distributable profits and held in company's name.

Are treasury shares still issued shares?

Yes.

What can a company do with treasury shares?

Sell them, cancel them or transfer them to an employee share scheme.

Is a sale of treasury shares an issue or a transfer?

A transfer, though statutory pre-emption rights apply (ss 560(3), 561 CA 2006).

What rights commonly differ between classes of shares?

Voting rights, dividend rights and rights to capital on winding up.

Does the name given to a class of shares conclusively determine its rights?

No. CA 2006 lacks universal definitions, so the Articles must be checked.

What are common classes/types of shares?

Ordinary, preference, redeemable, non-voting, employees', cumulative, convertible and deferred shares.

What are ordinary shares?

Default shares generally carrying voting, dividend and capital rights.

What rights do ordinary shares normally carry?

General meeting voting, declared dividends, and surplus assets on winding up.

How does s 560(1) CA 2006 define ordinary shares?

Shares without capped rights regarding dividends and capital participation.

What is the significance of the s 560(1) definition?

Ordinary shareholders have unrestricted participation in surplus dividends/capital.

How do ordinary shareholders rank compared with preference shareholders for dividends?

They receive dividends after preference shareholders receive their entitlement.

What are preference shares?

Shares giving priority over ordinary shares for dividends or return of capital.

How is a preference dividend normally calculated?

As a percentage of the nominal value of the share.

What dividend does a 5% £1 preference share normally carry?

5p per share, provided a dividend is declared.

What is required if a preference dividend is calculated on total subscription price?

The share rights must expressly provide for this.

Do preference shares normally carry voting rights?

No, unless the Articles provide otherwise.

What is a cumulative preference share?

A preference share where unpaid dividends carry forward to future years.

Are preference shares presumed to be cumulative?

Yes, unless expressly stated to be non-cumulative.

What is a participating preference share?

A share participating in further profits/assets beyond its preferential entitlement.

Difference between participating and non-participating preference shares?

Participating shares share in additional profits/capital; non-participating are limited.

A participating preference shareholder has a 5% £1 share. What may they receive?

5p preferential dividend plus a share of further profits if allowed.

Dividend for 5% £1 nominal / £2 subscription preference share based on subscription price?

10p per share.

What are deferred shares?

Shares carrying no voting rights, ordinary dividends, or economic rights.

What are redeemable shares?

Shares issued on terms that the company will or may buy back and cancel.

What are convertible shares?

Shares carrying an option to convert into another class of share.

What should always be checked first when considering variation of class rights?

The company's Articles.

What does s 630 CA 2006 require if Articles lack a variation procedure?

75% written consent of class or special resolution at class meeting.

What percentage of a class must give written consent under s 630 CA 2006?

At least 75%.

What alternative to written consent is available under s 630 CA 2006?

Special resolution passed at a separate general meeting of that class.

Who may challenge a variation of class rights under s 633(2) CA 2006?

Shareholders holding at least 15% of the class who did not vote in favour.

What is the time limit for a s 633(2) CA 2006 application?

21 days from the resolution.

What happens to a class-rights variation once a valid s 633 application is made?

It does not take effect unless and until confirmed by the court.

When will the court refuse to confirm a variation of class rights?

Where the variation would unfairly prejudice shareholders of that class.

What are the three key figures to remember for variation of class rights?

75% approval, 15% challenge threshold and 21 days to apply to court.

What are the two ways shareholders may receive a financial return on shares?

Dividend income and increase in capital value.

When may a company pay a dividend under s 830(1) CA 2006?

Only where it has sufficient distributable profits.

What are distributable profits under s 830(2) CA 2006?

Accumulated realised profits less accumulated realised losses.

Is having sufficient cash enough for a company to pay a dividend?

No. Distributable profits are required.

What are the two main types of dividend?

Final dividends and interim dividends.

How is a final dividend approved?

Directors recommend it and shareholders declare it by ordinary resolution.

Who decides whether to pay an interim dividend?

Normally the directors under Articles (e.g. Model Article 30).

Does an interim dividend normally require shareholder approval?

No.

What is the key difference between final and interim dividends?

Final = directors recommend + shareholders declare. Interim = directors decide and pay.

Key rule when identifying rights attached to any class of shares?

Check the Articles rather than relying solely on the class name.

Key distinction between nominal value and market value?

Nominal value is fixed unit value; market value is actual share worth.

Key distinction between ordinary and preference shares?

Preference shares have payment priority; ordinary shares have unrestricted participation afterwards.

Key distinction between cumulative and participating preference shares?

Cumulative carries unpaid dividends forward; participating shares in extra profits/capital.

What is the key dividend rule for the SQE?

Dividends can only be paid out of sufficient distributable profits (s 830 CA 2006).