Equity Finance 2

Capital buyback additional conditions

Articles must not prohibit payment out of capital (s 709), accounts <3 months old, and must first exhaust profits/fresh issue proceeds (s 710).

Directors’ Statement of Solvency (s 714)

Directors must state company can pay debts as due and will remain solvent for 12 months after buyback.

Auditors’ Report (s 714)

Auditors must report on the solvency statement.

Director liability on DSS

Directors may face civil and criminal liability if statement made without reasonable grounds.

Capital buyback approvals

Ordinary resolution to approve contract + special resolution to approve payment out of capital (s 716).

Capital buyback inspection/circulation

Contract + DSS + auditors report must be available for inspection/circulated; seller cannot vote.

Creditor protection step (s 719)

Within 7 days after SR, publish notice in Gazette and national newspaper or notify creditors individually.

Filing DSS and AR

Must be filed at Companies House after the SR process.

Challenge window (s 721)

Creditors/shareholders can apply to court to object within 5 weeks.

Capital buyback timing (s 723)

Buyback must occur between 5 and 7 weeks after SR is passed.

Capital buyback post-completion

File s 707, s 708, statement of capital within 28 days; keep contract 10 years; cancel shares; update registers.

Redeemable shares

Shares issued with redemption terms (fixed date/price or at option) in Articles/terms; no separate contract needed.

Redemption funded by capital

If using capital, follow the same procedures as buyback out of capital.

Buyback summary: profits/fresh issue

Private/public companies can use; OR approves contract; file forms; cancel shares.

Buyback summary: capital

Private companies only; OR + SR; DSS + auditors report; creditor notices; timing window; file forms; cancel shares.

FSMA purpose

Protects investors/clients and ensures only authorised or exempt persons carry on regulated investment activities.

Core FSMA framework

FSMA 2000 + Regulated Activities Order 2001 (RAO).

Regulators

FCA (conduct) and PRA (prudential).

Law firm typical position

Usually not FCA-authorised; rely on DPB exemption (SRA) for exempt regulated activities.

General prohibition (s 19 FSMA)

No person may carry on a regulated activity in the UK unless authorised or exempt; breach is a criminal offence.

FSMA 4-step test

(1) specified investment? (2) specified activity? (3) exclusion? (4) if still in scope, rely on s 327 + SRA scope rules or obtain authorisation.

Specified investments (Part III RAO)

Investments triggering regime, e.g., shares (Art 76), debt instruments (Art 77), regulated mortgage contracts (Art 88).

Shares as specified investment

Shares are specified investments under Art 76 RAO.

Debt instruments as specified investment

Bonds/loan notes are specified investments under Art 77 RAO.

Specified activities (Part II RAO)

Activities like dealing, arranging, managing, or advising on investments.

Dealing as principal (Art 14)

Acting on own account in investment transactions.

Dealing as agent (Art 21)

Dealing on behalf of another in investments.

Arranging deals (Art 25)

Arranging transactions in investments.

Managing investments (Art 37)

Managing assets/investments on behalf of another.

Advising on the merits (Art 53(1))

Making a recommendation/opinion to a potential investor about buying/selling/subscribing etc.

Not advising on merits

Explaining legal rights/process (e.g., share class rights, issuance mechanics) without recommending buy/sell/hold.

Exclusions step

If a valid RAO exclusion applies, activity falls outside FSMA regulated activity scope.

Specific exclusions

Exclusions built into each activity category (e.g., dealing through authorised persons).

General exclusions (Arts 66

72 RAO)

Art 67 necessary part exclusion

Activity must be a necessary part of non-FSMA professional service, not separately remunerated, and solicitor not otherwise carrying on regulated business.

Art 70 sale of a body corporate

Exclusion for advice/arranging connected to acquiring/disposing of ≥50% voting control or day-to-day control; classic M&A exclusion.

DPB exemption (s 327 FSMA)

Allows solicitors to do exempt regulated activities if conditions satisfied and compliant with SRA rules.

Scope Rule 2 SRA condition

Activity must arise out of or be complementary to a particular professional service for a particular client.

Arise out of (Scope Rule)

Investment activity is prompted by and connected to the legal work on that matter.

Complementary (Scope Rule)

Investment activity naturally supports the legal service, not a separate investment advisory service.

Incidental requirement (s 327)

Investment element must not be a major part of practice; should be genuinely incidental to legal services.

Commission rule under s 327

Commission must be accounted to client unless informed consent allows solicitor to keep it; hold to client’s order until consent.

If s 327/Scope not satisfied

Must be FCA/PRA authorised or decline/refer the work.

Advising on merits example (caught)

“We recommend you buy 30% of TargetCo; it’s a good investment.”

Legal analysis example (not caught)

“Option A has these legal consequences; commercial merits should be taken from an authorised adviser.”

Financial promotions rule (s 21 FSMA)

Cannot communicate invitations/inducements to engage in investment activity unless exemption applies or approved by FCA-authorised person.

Engagement letter FSMA hygiene

State firm is not FCA-authorised and will only do exempt regulated activities; clarify no merits investment advice unless properly within exemption.

Language discipline FSMA

Avoid “recommendation” language (buy/sell/hold); frame as legal consequences/options.

When in doubt FSMA

Refer to authorised firm or get materials approved; document your exclusions/s 327 analysis.

Breaching s 19 FSMA

Criminal offence; may lead to unenforceable agreements, negligence claims, and SRA disciplinary action.