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LPC - BLP MODULE - COMPANY FINANCES (DISTINCTION)
- Module
- LPC
- Institution
- Swansea Metropolitan (UWTSD)
Finance methods available to companies
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BLP – COMPANY FINANCE ADDITIONAL NOTESFinancing a company – Shares.
Maintenance of share capital.
Capital must be maintained as it the fund to which the creditors look for payment or debts
owed to them.
The principal has the following consequences:
o a company must not generally purchase its own shares (CA 2006, s 658);
o a public company may not generally give financial assistance to anyone for the
purposes of buying the company’s shares;
o dividends must not be paid out of capital (only out of distributable profits);
o if a public company suffers a serious loss of capital, a general meeting must be
called to discuss the problem; and
o a subsidiary may not be a member of its own holding company, and any allotment or
transfer of shares in a holding company to its subsidiary is void.
This means that shareholders cannot normally hand their share certificate back to the
company in exchange for consideration. If they want to realise their investment, they must
sell their shares to another investor.
There are certain exceptions:
o Consent of court
o Buy back
o Company can Purchase own shares under a court order
o Return capital to shareholders after payment of the company’s debts in a winding
up.
Issuing shares.
The allotment of new shares is often known as equity finance.
In return for issuing shares the company will receive cash which it may then use for the
company’s business.
When a company wants to raise equity finance by allotting new shares the board will
determine the price and number of shares to allot.
An allotment is affecting by the board receiving an application from a person who wants to
buy shares from the company, resolving to allot shares to that person, issuing a share
certificate, and entering that person’s name on the company’s register of members.
Share capital.
o The share capital is the amount of money which a company raises by issuing shares.
o There is no automatic limit on the maximum number of shares. Instead, a company
is simply required to make a statement of capital and initial shareholdings when the
company was incorporated on FORM IN01.
o In order for a company to raise additional finance by issuing more shares, it must
follow the procedure under the CA 2006 and in its articles.
o In some cases, the shareholders will need to give their prior approval to issuing more
shares above the amount with which the company was formed.
o Whenever new shares are issued by the company, it will have to submit a new
statement of capital to reflect the new number of shares.
Directors power to issue shares.
o The board will often want to allot shares in the company at the first board meeting
of a new company and may subsequently wish to issue more shares to raise
additional finance.
Private companies with one class of share
, The directors of a private company automatically have the authority
to allot its shares, provided the company has only one class of
shares and there is nothing to the contrary in the articles.
All other companies.
The directors can issue shares in the company only if they have
authority to do so.
This authority must be given specifically, within the articles or by
ordinary resolution of the shareholders at a GM or by written
resolution.
Whatever way the necessary authority is given, it must state the
number of shares the directors are authorised to allot.
Authority may be given for the directors to allot just one batch of
shares or it may be given generally.
Authority cannot be longer than 5 years.
The director’s power to allot shares may be revoked by the
shareholders at any time by the passing of an ordinary resolution.
Statutory pre-emption rights.
o Directors have the authority to issue shares, they cannot necessarily allot them to
whomsoever they choose.
o Sections 561 and 565 provide that where shares are being issued in exchange for
cash those shares must first be offered to the existing shareholders of the company.
o The number that each current shareholder is offered is dependent upon the
percentage of the shares he currently holds.
o The offer to the existing shareholders must remain open for at least 14 days, and
only if the present shareholders decline to take up the shares can they be offered
elsewhere.
o The articles may remove the statutory pre-emption rights.
o If not removed by the articles, a special resolution is necessary to dispense formally
with the need to offer shares to the present shareholders.
o Where shares are issued wholly or partly for non-cash consideration the pre-
emption rules have no application.
o Private company:
A private company with only one class of shares may disapply the statutory
pre-emption rights by a special resolution of the shareholders, or by a
provision in the articles.
Procedure.
o Shareholder approval needed.
Board meeting must be called by any director on reasonable notice.
Directors must check:
whether any restrictions in the articles need to be revoked;
whether they have authority to allot the shares, under the articles or
under the CA 2006, or whether the shareholders first need either to
amend the articles or to pass an ordinary resolution authorising the
allotment; and
whether they are obliged to offer the shares to current shareholders
first (pre- emption rights).
If the articles need to be amended to remove a restriction on the number of
shares which can be issued and/or authority is needed and/or pre-emption
rights need to be disapplied, the directors will need to pass a board
resolution to call a GM or propose written resolutions for the shareholders
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