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Returning Value to Shareholders Condensed Notes
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Chapter 11 – Returning Value to Shareholders SGS 18 and 19 – Returning Value to ShareholdersLiability of a company during its life – to shareholders
Liability of a company in insolvency – to creditors
Share capital seen as a permanent fund available to creditors (Trevor v Whitworth)
General rule – a private company may not purchase its own shares (s.658)
Doctrine of maintenance of share capital – company may not return capital (share capital and premium accounts) to its
shareholders, any payment (e.g. dividends) must be out of profits
A shareholder may receive returns by –
Dividends out of distributable profits
Capital gain by sale of shares
Redemption or purchase of own shares by the company
Capital payments upon wind-up
Dividends
General rule – dividends may only lawfully be made out of distributable profits (defined under s.830(2)) (s.830(1))
Members on the register of members at the time of declaration is entitled to dividends
Accounts on Balance Sheet Distributable
Cash ✗
Assets ✗
Share capital ✗
Premium account ✗
Distributable profits (or ‘undistributed profits’ or ‘retained earnings’) ✓
Interim dividends (MA 30(1)) Dividends without shareholder approval
Final dividends (MA 30(2)) Dividends needing shareholder approval by ordinary resolution
Bonus issue (‘capitalisation issue’ Issue of new shares to all existing shareholders in proportion to existing shareholdings (no
or ‘script issue’) need to pay dealing costs or stamp duty)
Script dividends Shareholders have a choice to wholly or partly receive bonus issues in cash, those electing
shares will receive a script dividend, those electing cash will be diluted by the former
There are two types of buybacks (exceptions to the doctrine of maintenance of share capital) –
1. Redemption of redeemable shares
2. Purchase of own shares
A company may fund buybacks using –
1. Distributable profits (s.687(2)(a), 692(1)(a)(i))
2. Proceeds of a fresh issue of shares for the purpose of redemption or purchase of own shares (s.687(2)(b), 692(2)(a)(ii)
3. Capital (s.687(1), 692(1), 709(1)) (only available to private companies), must comply with –
o Pt.18, Ch.5 (s.709-723) or
o De minimis provisions (s.692(1ZA))
Redemption of Redeemable Shares
Only available in respect of shares originally issued as redeemable
Nature Rights of redeemable shares and terms of redemption will be found in articles or determined by directors
A contract is not required for redemption of shares irrespective of funding
Redeemable shares are redeemable –
On the occurrence of certain circumstances (e.g. fixed date at fixed price)
By option of issuing company
By option of shareholder
Administrative Administrative requirements after redemption –
requirements Notify Companies House within one month of redemption (s.689(1))
Provide Companies House with statement of capital along with notice (s.689(2))
Out of profits or proceeds of a fresh issue of shares
Requirements Redeemable shares may be redeemed out of profit or proceeds of a fresh issue if –
Private companies – articles do not exclude or restrict issue of redeemable shares (s.684(2))
, Chapter 11 – Returning Value to Shareholders SGS 18 and 19 – Returning Value to Shareholders
Public companies – articles have express authority to issue redeemable shares (s.684(3))
There must be non-redeemable shares in issue at the time of issuing redeemable shares (s.684(4))
Terms of redemption must be set out in articles (s.684(4)), unless –
o An ordinary resolution provided that the directors could determine redemption rights
attached to shares to be redeemed before the shares were allotted (s.685(1) and (3))
Shares to be redeemed must be fully paid-up (s.686(1))
Redeemed shares are treated as cancelled (s.688)
All administrative requirements for redemption above
NB: no shareholder resolution is required
Out of capital
Requirements Only available to private companies (s.687(1))
A private company may redeem redeemable shares out of capital if –
All requirements for redemption out of profits or fresh issue above
Articles do not prohibit or restrict redemption from capital (s.709(1))
Distributable profits must be used first to fund the purchase before capital can be used (s.710)
Distributable profits figure prepared no more than 3 months before directors’ statement (s.712(7))
All administrative requirements for redemption above
Procedure 1. Call a general meeting on full or short notice (or written resolution)
2. Directors’ written statement of solvency (s.714(3)) (verifying ability to pay its debts for 12 months
after payment out of capital) within 7 days prior to general meeting (s.716(2))
3. Auditors’ report annexed to and delivered with directors’ statement (s.714(6))
4. Pass special resolution at general meeting approving use of capital to redeem shares (s.716(1))
o Shareholders holding shares to be redeemed –
(i) May vote, but resolution ineffective if carried by his vote (s.717(3))
(ii) NB: shareholders advised to abstain
(iii) Will not be eligible to vote (and receive a copy) in a written resolution (s.717(2))
5. Within the week of the special resolution –
a. Publish a notice in the Gazette (s.719(1)) and
b. Give a notice in writing to each of its creditors (s.719(2)(b)) or
(i) Publish a notice in a national newspaper (s.719(2)(a))
6. The notice must state (s.719(1)) –
o Company approved redemption out of capital
o Where directors’ statement and auditors’ report are available for inspection
o Creditors may apply to court to prevent payment under s.721 within 5 weeks of resolution
7. With regards to directors’ statement and auditors’ report –
o Deliver a copy to Companies House on or before (5) (s.719(4)) and
o Make them available for inspection by any member or creditor without charge from (5)
until 5 weeks after the special resolution (s.720)
8. Redeem shares no earlier than 5 weeks and no later than 7 weeks after special resolution (s.723(1))
o Shareholder who did not vote in favour or creditor may object payment out of capital by an
application to court to cancel the special resolution within 5 weeks of it (s.721(1))
o 5-week period may not be amended even if special resolution was passed unanimously
Purchase of Own Shares
NB: it is possible to purchase redeemable shares (instead of redeeming them)
Authority A company can obtain authority to purchase own shares by –
1. An off-market purchase – a purchase of own shares which takes place otherwise than on a
recognised investment exchange (s.693(2)) or
2. A market purchase (only available to listed companies)
Administrative Administrative requirements after an off-market purchase of own shares –
requirements Buyback contract available for inspection for 15 days before and at general meeting (s.696(2)(b))
Buyback contract be sent together with written resolution (if applicable) (s.696(2)(a))
Within 28 days of delivery of shares to company after buyback –
o File form SH03 (return of purchase of own shares) to Companies House (s.707(1))
o File form SH06 (notice of cancellation) to Companies House (s.708(1)) and
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