Consolidation notes on BLP's financing a company covering:
- Checklist for allotting and issuing new shares
- Basic steps in a debt finance transaction
- Types of debt finance (loan facility, bonds)
- Debt finance documents (term sheet, loan agreement, security document)
- Effect of de...
Why do businesses raise capital (=funds available to run the business of a Co)?
to get the business started = start-up capital, e.g., pay $, buy stock/ machinery
to keep the business going = working capital, e.g., wages, supplier costs, etc
to expand and grow
Principle of maintenance of share capital = capital is not usually permitted to be returned to its SH; any payments to SH must be made out of distributable profits = protection of Co creditors.
What are shares?
Shares are a 'bundle of rights’ (=voting, dividends, assets on winding up) in a Co entitling their owners to receipt of income (by way of dividend) and capital gain (by way of growth in the value of the Co and
thus individual shares) but also to a proportion of assets on winding up (s. 829(2)(d)).
o !/!: the rights attached to shares are set out in the AA so check these first!
Shares build up the ‘share capital’ (Part 17 CA 2006).
o s. 542(1): shares in a Ltd Co having a share capital must have a fixed nominal value, otherwise void (s. 542(2))
o Shares must be allotted / issued at least at its nominal value (no discounts!) (s. 580) or higher; the excess of which is a premium.
o Nominal value (e.g., 1p, 5p, £1) = minimum subscription price for that share = unit of ownership.
o Share capital can only be increased by allotting new shares or reduced in accordance with Chapter 10 CA 2006: s. 617(1)(2).
Shares can be:
o Issued = the number of shares in issue at any one time is the ‘Issued Shared Capital’ and is made up of subscriber shares + further issued shares.
Shares are only said to be issued (and legal title passed) when the holder has been registered in the Co’s register of members in respect of those shares: s.112(2). vs. allotted = when a
person acquires the right to be in the Co’s register of members in respect of those shares.
o Paid up = full nominal value of the shares has been paid up
o Called-up = aggregate amount of calls made on a Co’s shares: s. 547.
o Treasury = issued shares held by the Co in its own name
s. 561 CA 2006 and s. 573 CA 2006 pre-emption rights will apply
Shares cannot be allotted to the public in private companies ltd by shares: s. 755
How are share issuances recorded on a balance sheet?
No premium: money paid in on shares:
o goes into the BS as an asset (cash), e.g., issuance of 100 ordinary shares of £1 each = £100 cash
o increases the share capital to £100 to show the nominal value of shares issued, such that SH funds are £100
Premium
o cash received (from nominal value + premium) goes into BS as an asset (cash), i.e., 100 £1 ordinary shares = £100, 50p x 100 = £150.
o premium must go into a newly created premium account.
Price of share = value of a Co / number of shares in issue…
Value of a Co
o (Listed Co) Market capitalisation = number of shares in issue x share price at any given time
o (Private Ltd Co/ Public Ltd Co) Co’s assets – Co’s liabilities
Earnings per share = return due to ordinary SH = profit after tax / average number of ordinary shares in issue when profit generation = is Co healthy?
Share allotment vs. share transfer = important as the procedure differs.
Transfer by way of sale, gift, bankruptcy (shares vesting in trustee in bankruptcy) or death (shares vesting in personal representative)
SH are free to transfer their shares subject to any provisions in the AA: s. 544(1)
o Directors may refuse to register the transfer of a share MA 26(5) provided reasons are given: s. 771
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