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Questions and Answers
What is Virginia’s main concern regarding Jatinder's potential investment?
What is Virginia’s main concern regarding Jatinder's potential investment?
What action is necessary if the company wishes to disapply pre-emption rights?
What action is necessary if the company wishes to disapply pre-emption rights?
What will happen if pre-emption rights are not disapplied regarding Jatinder's investment?
What will happen if pre-emption rights are not disapplied regarding Jatinder's investment?
What type of resolution is required to create a new class of shares?
What type of resolution is required to create a new class of shares?
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In the scenario, which entity has the authority to allot shares if one class of shares exists?
In the scenario, which entity has the authority to allot shares if one class of shares exists?
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What share ownership percentage must the other shareholders achieve to bypass Virginia’s opposition?
What share ownership percentage must the other shareholders achieve to bypass Virginia’s opposition?
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Which of the following scenarios does NOT allow for the disapplication of pre-emption rights?
Which of the following scenarios does NOT allow for the disapplication of pre-emption rights?
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What is the primary purpose of the statutory procedure that companies must follow during equity financing?
What is the primary purpose of the statutory procedure that companies must follow during equity financing?
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In the context of equity financing, what does the term 'allotment' refer to?
In the context of equity financing, what does the term 'allotment' refer to?
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What does the 'pre-emption right' allow existing shareholders to do?
What does the 'pre-emption right' allow existing shareholders to do?
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What is one of the crucial steps in the 5-stage process of equity financing?
What is one of the crucial steps in the 5-stage process of equity financing?
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In ABC Ltd's case study, which statement correctly describes the limitation regarding the issuance of shares?
In ABC Ltd's case study, which statement correctly describes the limitation regarding the issuance of shares?
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If ABC Ltd's shareholders vote against waiving pre-emption rights, what must happen?
If ABC Ltd's shareholders vote against waiving pre-emption rights, what must happen?
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What is required for a board to allot shares if the company’s articles do not grant authority?
What is required for a board to allot shares if the company’s articles do not grant authority?
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Which of the following actions must the board consider before allotting shares to ensure compliance with section 172?
Which of the following actions must the board consider before allotting shares to ensure compliance with section 172?
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Equity financing can only occur if the company has the right to issue up to 150 shares.
Equity financing can only occur if the company has the right to issue up to 150 shares.
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According to equity financing rules, existing shareholders have a pre-emption right that allows them to subscribe to new shares when issued by their company.
According to equity financing rules, existing shareholders have a pre-emption right that allows them to subscribe to new shares when issued by their company.
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The allotment of shares is the moment when shareholders receive the shares in exchange for money.
The allotment of shares is the moment when shareholders receive the shares in exchange for money.
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If 75% of shareholders vote against waiving pre-emption rights, the company must still offer new shares to existing shareholders without limitation.
If 75% of shareholders vote against waiving pre-emption rights, the company must still offer new shares to existing shareholders without limitation.
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The board can allot shares without needing authority from shareholders if the company's articles permit it.
The board can allot shares without needing authority from shareholders if the company's articles permit it.
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All shareholders in ABC Ltd own an equal percentage of the company.
All shareholders in ABC Ltd own an equal percentage of the company.
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A company cannot issue more shares than what is stated in its articles of association.
A company cannot issue more shares than what is stated in its articles of association.
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The company must have multiple classes of shares to proceed with equity financing.
The company must have multiple classes of shares to proceed with equity financing.
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Jatinder requires 50 shares to own 1/3 of the company, given that the authorized share capital is 150 shares.
Jatinder requires 50 shares to own 1/3 of the company, given that the authorized share capital is 150 shares.
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Virginia can prevent the issuing of new shares to Jatinder even if the other shareholders support it.
Virginia can prevent the issuing of new shares to Jatinder even if the other shareholders support it.
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The board of directors has the authority to create new shares regardless of the type of shares being issued.
The board of directors has the authority to create new shares regardless of the type of shares being issued.
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Disapplication of pre-emption rights requires a special resolution of 75% approval from shareholders.
Disapplication of pre-emption rights requires a special resolution of 75% approval from shareholders.
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If pre-emption rights are not disapplied, Virginia could potentially contribute 30% of the new funding needed.
If pre-emption rights are not disapplied, Virginia could potentially contribute 30% of the new funding needed.
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Jatinder can receive preference shares without any changes to the company's articles of incorporation.
Jatinder can receive preference shares without any changes to the company's articles of incorporation.
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If the current articles only allow for ordinary shares, amending the articles to create new classes of shares requires a special resolution.
If the current articles only allow for ordinary shares, amending the articles to create new classes of shares requires a special resolution.
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Study Notes
Equity Financing
- Equity financing involves a statutory procedure in most jurisdictions to protect existing shareholders while allowing the company to raise capital.
- The process balances the company's need for capital with shareholder protection.
- Allotment is the act of adding a shareholder's name to the register, while the issue is the actual transfer of shares. A shareholder is not obligated to take up an allotment.
Pre-emption Rights
- Existing shareholders have a pre-emption right to subscribe to new shares proportionally to their current holdings, preventing dilution of existing ownership. This right is typically for ordinary shares.
- Unless there's a special resolution (75% vote) to waive this, the pre-emption right must be respected.
- Pre-emption rights do not apply to some scenarios like bonus shares, non-cash considerations, employee share schemes, or companies facing financial difficulty.
Equity Financing Process (5 Stages)
- Stage 1: Verify that company articles permit the type of shares desired by investors.
- Stage 2: Confirmation that company articles do not restrict the amount of shares that could be issued.
- Stage 3: Ensure that the board has authority by company articles to issue shares. If not, shareholder approval (ordinary resolution) is needed.
- Stage 4: Determine if pre-emption rights apply; if so, existing shareholders must be offered the new shares proportionately. A 75% vote of shareholders can create an exception if there is no agreement to enforce pre-emption.
- Stage 5: Ultimately, the board must decide on allotment under company duties.
Corporate Financing Case Study (ABC Ltd)
- ABC Ltd has 100 ordinary shares of £1 each, with 5 shareholders (Fred, Pete, Virginia, Alesha, and Lottie) evenly holding 20% each.
- The company’s articles do restrict the amount of shares that can be issued.
- ABC Ltd needs £1 million in equity funding to acquire a distribution business.
- Virginia can only contribute £200,000 of the required money.
- Jatinder, a wealthy investor, is willing to invest £1 million in exchange for ⅓ of the company but wants cumulative participating preference shares.
- Decision making on the acquisition depends on if the company articles are amended (and appropriate resolutions are passed).
Restriction on Share Capital
- Articles of association frequently limit the total issued shares in the company.
- If the proposed share issue exceeds the limit, the shareholders must approve the change to the articles.
- An ordinary resolution by shareholders is needed to modify the share capital.
Pre-emption Rights and Jatinder
- If pre-emption rights apply, existing shareholders must be offered new shares proportionately.
- If 75% of the shareholders vote against the enforcement of pre-emption rights, then it can be avoided.
- Should pre-emption not be waived, Jatinder's offer may not be approved (as it conflicts with other shareholders’ rights).
Share Class and Allotment Authority
- A new class of shares may require a change to the company's articles (special resolution), especially when introducing preference shares.
- The director's authority to create/allot is dependent on the company's articles.
- The model articles generally grant the directors allotting authority unless restricted within the articles of association.
- When issuing a new class of shares, authorisation by the shareholders is usually needed.
Company Decision-Making Process
- Resolutions are prepared and decided at board/general meetings to deal with all matters related to the new shares (increasing share capital, pre-emption rights, new share classes, authority to allot).
- Board meetings create and convene general meetings which allow shareholders to vote.
- The Board reconvenes to execute allotted shares and register the changes legally.
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Description
This quiz explores the key concepts of equity financing, including its statutory procedures and the importance of pre-emption rights for existing shareholders. Test your understanding of the equity financing process and the protection mechanisms in place for shareholder interests.
