LPC BPP BLP Returning Value to Shareholders Consolidation Notes (Lecture + SGS)
36 views 0 purchase
Course
LPC - Legal Practice Course
Institution
LPC - Legal Practice Course
Consolidation notes for BLP Returning Value to Shareholders covering:
- Dividends
- Redemption of shares and purchase of own shares (using distributable profits, proceeds of a fresh issue, capital)
- Impact of a purchase of own shares from distributable profits on a company's balance sheet...
Returning value to SH
General principle:
s. 658: value cannot be returned to SH out of the Co’s capital, i.e., by releasing sums in the BS equity and share premium accounts: this is the doctrine of maintenance of share
capital. This is because capital is seen as a permanent fund available to creditors (Trevor v Whitworth), i.e., if the Co gets into trouble, the creditors know that they have
[AMOUNT] in the pot (in the equity account) available to them.
value can only be returned to SH out of distributable profits, (s. 830(1)).
o s.736: distributable profits are profits out of which the Co could lawfully make a distribution equal in value to the payment.
s. 830(1): 'distribution' means every description of distribution of a Co's assets to Its members, whether in cash or otherwise except:
Issue of shares as fully or party paid up bonus shares
Reduction of share capital
Redemption/ purchase of own shares out of capital or unrealised profits
Distribution of assets to members on winding up
s.830(2): a Co's profits available for distribution are its accumulated realised profits less its accumulated realised losses.
Exceptions:
Redemption of redeemable shares (s. 684) and purchase of shares (s. 690(1))
s. 641: reduction of capital.
s. 895(1) schemes of arrangement.
!/!: when considering the above exceptions, directors must bear in mind their duties under s.171-178 CA 2008, esp. s. 172 to promote the success of the Co for the benefit of the members as
a whole.
1. Dividends
s. 830(1): a Co may not make a distribution of assets to SH except out of realised profit that is available for distribution.
If Co is a private Ltd by shares with MA:
Co can declare a final dividend by ordinary resolution of SH (MA 30(1)):, provided that the amount does not exceed (but can be lower) that recommended by directors (MA 30(2)).
A two-stage process applies: stage 1 / stage 2.
Directors can decide to pay an interim dividend without the need for SH approval at a GM: MA 30(1) and can cancel them at any time prior to payment.
Who is entitled to dividends and what should a Co look at before paying them?
SH entitled to dividends are those on the register of members at the time of declaration or the ‘record date’ in the AoA.
!/! certain SH may be paid a dividend in priority to other SH, i.e., preference SH often have a right to first fixed dividend, etc.
Before considering paying a dividend,
check the figures set out in the Co’s relevant accounts (=usually latest accounts filed with Co House) pursuant to s. 836 CA 2006 to establish that it has sufficient distributable profits
to make the distribution pursuant to s. 830(1)
check the AoA and any SH Agreement for any rules/ restrictions.
o May contain restrictions/ prohibitions on paying dividends
o May contain a mechanism requiring the payment of dividends where legally possible
o May contain a record date used to establish which SH are entitled to receive the dividend
o May state what amount of dividend is to be paid, i.e. ‘the amount paid up on the relevant shares’
If nothing to this effect then the amount to be paid to each SH is calculated on the nominal value of each relevant share.
If the AoA are silent on paying dividends, common law gives Co an implied power to distribute profits to SH.
How are dividends payable?
In the form of cash
In the form of new shares to existing SH in proportion to their existing shareholdings – ‘bonus issue’
In the form of ‘scrip dividends’ whereby existing SH can elect to receive the dividend wholly or partly in the form of additional shares or in cash
o ‘scrip’ when receiving additional shares
o those SH who do not elect for additional shares will be diluted by those who do
What happens if a dividend is declared unlawfully?
o Any distribution made in contravention of these articles will result In the SH who know or has reasonable grounds for believing that having to repay It to the Co or, if not
paid In cash, to pay an equivalent sum: s. 847. !/!: This doesn't apply to financial assistance or redemption/ purchase.
o Directors who declare an unlawful dividend are acting outside of their powers under s. 171 so will be liable to remedy.
!/!: see BA Consolidation for accounting treatment of dividends.
N.B. Buy backs allow you to return value to SH in a selective manner vs. dividends where each SH within a class of shares has to receive a dividend payment.
a. By way of redemption of redeemable shares: s. 684
b. By way of purchase of own shares: s.690
!/!: whether redeeming redeemable shares or purchasing own shares, the Co must ensure that:
First, it uses any money it has available in the form of either distributable profits (as defined in s.712/ s.830) or money raised from fresh issue of shares to fund the redemption/
purchase Second, it uses its capital by following the procedure set out in ss. 709-723
o !/! there is an exception to this order for de minimis purchase of shares.- in this instance, no consideration is taken of distributable profits; the purchase can be made out
of capital.
!/!: a Co buying shares from a director (who is also a SH) for > 100k is a substantial property transaction but is not subject to SH approval as s. 192(a) applies because the SH is transacting in
his capacity as SH.
(A) Redemption:
Distributable profits: s.687(2)(a) Proceeds of a fresh issue of Capital: s.687(1)/ s. 709(1)
shares: s.687(2)(b)
Private Co Private Co
Private Co
Public Co Public Co
Public Co
Remember definition of distributable
profits
Redemption of redeemable shares (RS): Conditions for redeeming RS out of profits or the proceeds of a Conditions for redeeming RS out of capital:
s.684(1) fresh issue of shares for the purpose of redemption: o AoA do not restrict/ prohibit a redemption
AoA do not exclude/ restrict the issue of RS: s. 684(2) from capital: s.709(1)
Redeemable shares = shares that are to be
redeemed or are likely to be redeemed at the Co has non-RS in issue at the time it issues RS o There are no distributable profits available to
option of the Co or the SH: s. 684(1) otherwise Co would be left with no share capital once fund the purchase or funds from the issue of
shares redeemed: s. 684(4) new shares
if there are, these must be used first
Redeemable shares must be paid for to the selling
to fund the redemption (s.710).
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller GCdoestheLPCatBPP. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.90. You're not tied to anything after your purchase.
