C05 (10) Company Finance

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A share is

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a bundle of rights and duties
which the holder has
in relation to
the company and his fellow shareholders.

These rights and duties are derived principally from the:
Memorandum and Articles of Association
Terms on which the share was allotted.

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The main rights which a share may give today are:

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> Right to

attend meetings

> Right to

vote on resolutions

> Right to

receive dividends
as the company may declare

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Capital

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is the company's funds available
for use in the business
and is represented by its assets.

The expression 'capital'
is used in a variety of ways.

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Different types of share capital are:

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Authorised share capital
- the amount of capital with which a company is registered
and maximum share capital that a company can issue,
- it can be changed later by a resolution if needed.
Issued share capital
- the authorised share capital that is actually issued
- represents the company's funding from its members
Called up share capital
- arises when shares are not initially required to be paid for in full
- the outstanding money requested by directors to be paid in stages.
Paid up share capital
- the amount of called up capital which members have actually paid.
Unless any member has not paid for his or her shares when called to do so, the two amounts will be the same.

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Companies may issue a number of
different types or classes of shares
with varying rights attaching to them.

6 types:

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Ordinary shares
Preference shares
Deferred shares
Redeemable shares
Treasury shares
Stock

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If the directors wish to raise capital
for a period of time
and then repay it as
an alternative to borrowing, they could offer

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redeemable preference shares.

These will be issued for a specified period of time and then bought back by the company
at the time agreed.
Once bought back, the shares have to be
cancelled so they cannot be re-issued.

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As evidence that a shareholder has a certain number of shares in the company,

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they will be issued with a share certificate.

Ownership of shares, however, depends on the company's register of shareholders.

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The rights which attach to shares are known as

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class rights.

Normally, these rights relate to
dividend,
voting, and
the distribution of the company's assets
when it is wound up.

Different classes of shares
have different rights.

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The first shareholders will be

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the subscribers of the
Memorandum of Association.

Each must take at least one share.

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Subsequent shares may be issued by the
directors if the latter have authority to do so.

By s.550 CA 2006,
such authority can be given in
either of two ways:

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1. By the Articles of Association

2. By a resolution of the members

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Irrespective of the method used to issue shares, the authority only lasts

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5 years,
and the authority of the directors in all cases
will be subject to certain conditions.

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In order to obtain a listing on the London Stock Exchange (known as a

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'flotation'), a company must be registered as a public company or have re-registered as such.

In addition to raising finance, a flotation allows the founders of the business to obtain a public valuation of the business and thus to sell out to new owners if that is desired.

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The listing of securities is governed by

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the Financial Services and Markets Act 2000
or FSMA,

The regulatory authority is
the Financial Services Authority,
which is known as the
UK Listing Authority or UKLA
when acting in this regard.

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The different methods of raising capital are:

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Prospectus (published containing all info for investors to make an informed choice and respond to, applying to purchase shares)
A public offer (public subscribes directly to co. for shares)
A placing (shares are offered to/placed with a small number of private investors as opposed to the general investing public)
An offer for resale (an issuing house acquires a company's new issue of shares and offers them for resale to the public)
A rights issue (a company offers shares to its existing members in proportion to their shareholdings)
A bonus issue (existing members are given shares on a pro-rata basis using capital reserves)

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Each share must have a 'nominal' or 'par' value; usually of a small amount say $1.

The main significance of the nominal value
is that

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it represents the minimum amount
for which the share can be issued,
because
although shares can be issued at a premium, they cannot be issued at a discount
—for less than the nominal value.

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A public company normally
must not allot any shares unless

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at least one-quarter of its nominal value
and the whole of any premium have been paid.

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A private company need not demand any
immediate payment, although

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at least the nominal value
must be payable.

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So long as the Articles
of a company with a share capital permit,
the 1985 Act s.121
currently provides that it may:

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increase its authorised share capital
by new shares.

consolidate all or any of its share capital.

subdivide its shares, or any of them,
into shares of a smaller amount.

cancel shares which have not been taken
or agreed to be taken by anyone
and reduce the company's share capital
by the amount of the shares cancelled.
This does not for the purposes of the Act
constitute a reduction of share capital.

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By s.135,
in order to bring about
a reduction of share capital:

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the company's Articles must so permit.

a special resolution
must approve the reduction.

the court must approve the reduction.

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The capital maintenance rule
manifests itself in various ways.

As a general rule:

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> Shares must not be issued at a discount,
that is, for less than their nominal value.
> No dividends should be paid to shareholders except out of profits, although profits set aside from earlier years can be used if the company is not at present profitable.
> The CA 2006 s.656 requires that
an extraordinary meeting of shareholders be held within 56 days of any director in a public company becoming aware that the value of the company's net assets has fallen to half or less of the company's called up share capital.
> A company must not buy its own shares
because to do so would effectively be to pay off those shareholders.
> A company must not give financial assistance to help anyone to acquire its shares, or reward anyone for doing so.
> A company must not hold its own shares.

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There are exceptions to the general
maintenance of capital rule,

and a valid
acquisition of a company's own shares
can occur in the following ways:

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A company can forfeit or surrender its shares
(e.g. for non-payment of calls. The co. must then cancel the shares and diminish the amount of the share capital within three years.)
A company can accept a gift of shares
(but again it must then cancel them).
A company can issue redeemable shares
(The co. may choose, or be made, to buy back these shares from the holders. The terms of issue can make this an option either of the shareholder or of the company.).
A company can purchase its own shares
—CA 2006 s.690 (unless restricted in its Articles).
A company can purchase its own shares
by order of the court.

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If the Articles so permit,
shareholders have a general power to
reduce the company's share capital
'subject to confirmation by the court'.

The power can in theory be used in any way,
but three possible uses are specifically given. The company may:

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1. extinguish or reduce liability for share capital not fully paid up.
2. cancel paid up share capital which is lost or unrepresented by available assets.
3. cancel any paid up share capital which is
in excess of the company's wants.

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Although there is a basic prohibition on
public companies providing
financial assistance for the purchase of
their own shares, exceptions do exist.
Section 153(3) Companies Act 1985
identifies other specific exceptions including:
- the payment of dividends;
- allotment of bonus shares; and
- compliance with any court order.

By s.153(1), a company may give assistance if

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the company's main purpose in giving help
is not for the acquisition (of their own shares)
or is merely an incidental part of some
larger purpose of the company
and assistance is given in good faith
in the interests of the company.

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In almost all of the situations where a company can validly acquire its own shares,

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it must then go on to cancel or dispose of them.

Treasury shares are a
major exception to this rule.

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If a company needs to raise more cash,
it has three main possibilities:

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Retain profits

Issue further shares

Borrow the money

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A debenture is simply

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a document creating or evidencing
the indebtedness arising from
a loan to the company.

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Types of debenture include

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unsecured and secured.

The secured debentures
can be secured by
fixed or floating charges.

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A fixed charge has two elements:

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It is a charge over
specific identifiable property.

The charge will include some restriction
which prevents the company from
dealing freely with the asset
in the ordinary course of business.

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The main advantage of a fixed charge is that

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in the event of the company becoming insolvent, the holder of the charge has priority
over all the other creditors of the company,
including any 'preferential creditors'
in relation to the asset,
subject to the fixed charge
and subject to the rights of any prior
registered fixed charge holder in respect of it.

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The three common characteristics of a
floating charge are:

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1. It is a charge over a class of assets of a
company, present and future.
2. The class of assets is one which, in the
ordinary course of the company's business, changes from time to time.
3. By the charge it is contemplated that,
until some future step is taken by
or on behalf of the chargee, the
company may deal freely with the assets
in the ordinary course of its business.

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The detailed provisions in the Companies Acts require registers of charges on the
company's property to be kept in order
to

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- protect purchasers of the property charged;

- establish priority of claims to the value of the assets charged if the company is insolvent when wound up,
and
- inform or warn
those dealing with the company.

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Elements of registration include the following:

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Registration with the company itself

Registration with the Registrar of Companies (s.860 CA 2006)

Registration of land charges

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Fixed charges generally have
priority over floating ones in relation to the property specifically charged. This applies
even if the floating charge was created earlier and properly registered.
Therefore,

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in a winding-up,
a fixed chargee may be paid in full
before earlier creditors.

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Holders of floating charges can be protected to some extent by

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the terms of issue of their security
—that is, by the use of
negative pledge clauses.

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Debentures can take many forms.
The main debenture for a small company
may be

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a loan agreement with its bank.

For a larger business, like a public company, debentures or stock will be issued
through a financial institution,
which will hold legal title to the debentures
as trustee for the eventual buyers and generally carry out the necessary administration.

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Debentures are often long-term,
and can even be

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'perpetual', in that the company is
not bound to repay the loan
until the company is wound up
(although it usually reserves
the right to redeem).

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When debentures are issued
by a public company to investors,
it is usual for them to be

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issued under a trust deed.
Where the loan stock is to be quoted on the Stock Exchange, the company must,
to comply with the requirements of the Stock Exchange,
establish a trust for the duration of the loan, and appoint trustees to safeguard
the interests of the stockholders.
One of the trustees appointed
(or the sole trustee)
must be a trust corporation (e.g. a bank).

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The following are some
points of comparison between
shares and debentures.

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A shareholder is a member of the company and can normally therefore
attend and vote at meetings.
A debenture holder is not a member.

Debenture interest must be paid, even if the company has current trading losses.
Dividends can only be paid if
profits are still available.
Directors and members have
discretion over whether to declare
a dividend on shares.
Debenture interest is a contractual debt
which must be paid.

Loan interest is deducted before the
company's profits are assessed for tax,
but dividends paid on shares are payable out of company profits after they have been
assessed for tax.

Debentures can be repaid while the company still exists; shares, generally, cannot.

Directors need little or no special authority to borrow money and issue debentures,
unlike the detailed authority which may be
required to issue further shares.

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Ordinary shares

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Usually carry the right to vote
but have no fixed dividend.

The dividend, if any,
is recommended by the directors
and approved by the shareholders at AGM.

Dividends can only be paid from a company's accumulated realised profits less its accumulated realised losses.

If a company makes a large profit,
the dividend will generally be high
to keep the shareholders happy and (if the company is a public company) keep the market price of the shares buoyant.
Equally, if profits are low then the dividend would reflect this.

If the company goes into liquidation
and is solvent (able to pay its debts in full),
the holders of the ordinary shares
share in any surplus that there might be
after all shareholders have been paid back the par value of the shares.

If a company should go into solvent
liquidation, the equity shareholders have a right to participate in any surplus which
remains after all the creditors have been paid in full.

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Preference shares

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holders have the right to receive dividends
in preference to ordinary shareholders,
although they do not have an automatic right to a dividend.

These shares carry a fixed rate of dividend, such as 7%.
Whether a dividend is paid is determined by a recommendation from the board and
approved by the shareholders at the AGM.
The dividend is presumed to be cumulative unless stated otherwise. This means that if the dividend is unable to be paid in a particular year, it must normally be carried forward and paid the next year before the ordinary dividend, assuming profits allow.

If the company goes into liquidation and there is a surplus, the preference shareholders will only get back the par value of the shares, and will not share further in any surplus.

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Deferred (shares)

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Holders are normally not entitled to any
dividend at all unless and until
preference shareholders are paid and then
ordinary shareholders receive at least
a specified amount or percentage per share.

Exact rights will depend on the Articles and terms of issue.
Such shares, sometimes called 'management' or 'founders' shares,
are
uncommon today.

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Redeemable (shares)

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As a general rule, a share, once issued by the company and paid for by the shareholder, remains in existence until the company is wound up. The holder of that share can sell it to another holder but the share itself must continue to exist. It is part of the share capital of the company and there have been stringent rules which control the power of a company to reduce its share capital.

In more recent times, these rules have been somewhat relaxed. One such relaxation is that it is possible to issue shares which are stated at the time of issue to be 'redeemable'.
These can later be redeemed—bought back by the company—in accordance with the terms of issue.

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Treasury (shares)

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These shares were introduced on 1 December, 2003
by ss 162A–162G, Companies Act 1985.

A public company (PLC),
- whose shares are listed on the Stock Exchange or traded on AIM
(Alternative Investment Market) -
which purchases its own shares
out of distributable profits,
may hold the shares purchased 'in treasury'.

This means that the directors may re-issue the shares without the formalities associated with a new issue of shares.
The company can hold up to 10% of its shares in treasury shares
but cannot exercise any rights in respect of the shares, such as voting, receiving dividends, and so on.

The shares are shown on the register as being owned by the company and are treated as part of the PLC's issued share capital.
Treasury shares can only be sold for cash.