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Summary Business Law and Practice - Allotment of Shares
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Business Law and Practice - Allotment of Shares
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Allotment of Shares(WS10)
Outcomes
1) Recognise the principal characteristics of ordinary and preference shares, and the
circumstances in which they may be issued; (Throughout tasks)
2) Understand the principal statutory controls regulating an issue of new shares and the
reasons for them; and (PT1, WT1, WT2)
3) Resolutions and Procedure Plan for allotting shares (Unit 16 – WT1)
4) Explain the differences between debt and equity finance and consider what factors
determine the type chosen. (Consolidation)
EXAM QUESTIONS COULD BE:
1. How will X’s Investment impact voting in Y’s Company / What options does X have to
invest in Y’s Company? (Prep Task 1, part 1)
2. What is the requirements for allotting shares (Prep Task 1, part 2)
3. Advantages and disadvantages of Equity and Debt and Preference shares
4. Professional Conduct – FMSA (X wants advice on whether they should purchase the
shares/invest their shares in Y Company).
Company raises capital in two ways:
1. Issuing shares – investing in a company in return for shares = EQUITY FINANCE
2. Loan – taking out a loan = DEBT FINANCE
When attempting a question – first do a company summary:
When was the company incorporated? 2010
What is the Articles of Association? Formed under 2006 or 1985 CA? Unamended
or Amended Articles of Association? Are there are Special Articles? What are those
special articles?
Who are the shareholders and directors? PP, TJ, AO
What are the shares and what are their value? Ordinary shares – 1,000 £1 shares
which are fully paid. On recent accounts, £1 ordinary shares is currently worth £400
How do they raise capital? Issuing shares
What is the value of the company? Boyle is worth £1.2 million
What is the problem in the question? Boyle are looking to expand and to do this
they need further investment which is going to come from MT. he will invest 540k into
Boyle and will be a non-executive director (there is no service contract so will not be
a normal executive director) At the same time, PP, TJ and AO will invest 40k each –
receiving a 100 £1 fully paid ordinary shares each. Its undecided how MT investment
should take – options are that MT will receive shares of 1,350 £1 fully paid shares, or
well lend 540k or will receive 1,100 £1 fully paid ordinary shares and 10k £10
cumulative, non-participating, 5% preference shares.
,Different types of Shares
1) Ordinary shares are the most common type of shares and are standard shares with
no special rights or restrictions. They have the potential to give the highest financial
gains, but also have the highest risk. Ordinary shareholders are entitled to voting
rights, however, they are the last to be paid if the company is wound up.
2) Non-voting ordinary shares carry the same conditions as ordinary shares except
with regards to voting rights. Shareholders may have voting rights under certain
circumstances or they may have no voting rights at all.
3) Preference shares typically carry a right that gives the holder preferential treatment
when annual dividends are distributed to shareholders. Shares in this category
receive a fixed dividend, which means that a shareholder would not benefit from an
increase in the business' profits. However, usually they have rights to their dividend
ahead of ordinary shareholders if the business is in trouble. Preference shares carry
no voting rights.
4) Participating preferred shares, give the holder the right to receive dividends paid to
preferred shareholders.
5) Non-participating shares, that do not give the holder a right to any share of a
company’s profit and only pay a fixed rate of return like preferred shares.
Participating shares also give the holder the right to receive an additional dividend
based on whatever excess profits are left over after all other dividends are paid.
6) Cumulative preference shares give holders the right that, if a dividend cannot be
paid one year, it will be carried forward to successive years. Dividends on
cumulative preference shares must be paid, despite the earning levels of the
business, provided the company has profits that can be distributed.
7) Redeemable shares come with an agreement that the company can buy them back
at a future date - this can be at a fixed date or at the choice of the business. A
company cannot issue only redeemable shares, so they must ensure that they also
issue non-redeemable shares.
, How will X’s Investment impact voting in Y’s Company / What
options does X have to invest in Y’s Company?
PREVIOUS EXAM QUESTIONS:
a) Explain what options are available to the Company if it does not want to give Joanne
any voting rights in return for her investment. Your explanation needs to consider
how the Company would entice Joanne into agreeing to invest in your suggested
alternatives. (4 marks) (Came up twice)
Joanne could lend the money to the Company. If this option is chosen Joanne may
request that the loan is secured against the Company’s assets. The Company’s
ability to do this will depend on the extent of any existing debt and security.
Alternatively (or in addition to option 1), the Company could issue non-voting shares
(such as preference shares) to Joanne. Joanne is only likely to accept this option if
the shares offer something in return for being non-voting i.e. preference in relation to
dividends, cumulating dividends if there is no declaration in any year, potentially
redeemable so that she gets her capital sum back at a stated date in the future.
PREP TASK (PART 1):
Your firm acts for Boyle Limited (‘Boyle’), a production company which specialises in open-air concerts
at stately homes in addition to arranging musical entertainment for corporate hospitality events.
Boyle has three directors, Paul Petersen, Tony Jackson and Adrian O’Neill, each of whom owns 1,000
£1 (fully paid) ordinary shares in Boyle. There are no other shareholders. Boyle was incorporated in
2010, and its Articles of Association are the Model Articles for Private Companies Limited by Shares
with one amendment – directors can vote and count in the quorum on matters in which they are
interested. On the basis of Boyle’s recent accounts, the company’s accountants have suggested that
Boyle can be realistically valued as a going concern, at £1.2 million. This means that each £1 ordinary
share is currently worth £400.
Whilst Boyle’s business is sound, the directors feel it is too reliant upon one particular type of activity.
The directors have expansion plans for Boyle, but it has never been in a position to generate sufficient
cash reserves for it to fulfil those ambitions. The board has been seeking funding from a number of
possible sources and has been in discussions with Mike Tomlinson (“MT”).
MT was introduced to the directors of Boyle a few years ago but talk of an investment is only a recent
occurrence. MT has undertaken some financial due diligence and as a result is keen to invest.
As a result of such discussions and the successful completion of MT’s due diligence, all of the parties
have agreed, in principle, to the following:
(a) MT will invest a sum of £540,000 into Boyle;
(b) MT will become a non-executive director of Boyle and will be entitled to attend and vote
at all board meetings but will perform no management or executive functions, nor will he
receive a director’s fee;
(c) a further £40,000 will be invested by each of the current directors of Boyle in return for
each of them receiving an additional 100 £1(fully paid) ordinary shares each.
It is undecided as to which form MT’s investment should take but it is considered that the possible
options are as follows:
1. MT will receive 1,350 £1 (fully paid) ordinary shares; or
2. MT will lend £540,000 to Boyle; or
3. MT will receive 1,100 £1 (fully paid) ordinary shares and 10,000 £10 cumulative, non-
participating, 5% preference shares.
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