Shares and Equity: Concepts and Capital Maintenance
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Questions and Answers

Which of the following statements accurately defines a share?

  • A type of bond issued by the company for raising funds.
  • A divided-up unit of the value of the company. (correct)
  • A fixed amount of money required to own a stake in a company.
  • An investment that guarantees returns regardless of company performance.
  • What characterizes equity share capital according to Section 548?

  • It only consists of share capital that confers no rights to dividends. (correct)
  • It encompasses both nominal and premium values of shares.
  • It comprises both paid-up and unpaid capital of the company.
  • It includes all capital that generates dividends and voting rights.
  • Which type of share typically carries voting rights?

  • Ordinary shares (correct)
  • Cumulative shares
  • Preference shares
  • Redeemable shares
  • What is one of the primary reasons companies issue shares?

    <p>To raise finance through equity finance. (C)</p> Signup and view all the answers

    Which of the following correctly describes cumulative preference shares?

    <p>They allow shareholders to receive missed dividends in future years. (D)</p> Signup and view all the answers

    What risk do shareholders face if a company becomes insolvent?

    <p>They can lose their entire investment. (D)</p> Signup and view all the answers

    Why might an investor choose to buy shares in a company?

    <p>To influence company decisions through voting. (D)</p> Signup and view all the answers

    What does it mean for preference shares to have participating rights?

    <p>They participate in profits beyond their fixed dividend. (A)</p> Signup and view all the answers

    What is the consequence for directors who sanction an unlawful dividend?

    <p>They are liable to repay that amount to the company. (D)</p> Signup and view all the answers

    In Bairstow & Others v Queens Moat Houses plc, what was the court's stance on the argument concerning group profits?

    <p>The court rejected the argument, maintaining the principle of separate legal personality. (A)</p> Signup and view all the answers

    Under what circumstances can a director be held liable for an unlawful dividend?

    <p>If they know the dividend was unlawful or the facts that establish its impropriety. (B)</p> Signup and view all the answers

    What must directors do to avoid liability for an unlawful dividend if they are unaware of its illegal nature?

    <p>They must take reasonable care to establish the availability of sufficient profits. (A)</p> Signup and view all the answers

    Which of the following is true regarding the liability of shareholders who receive an unlawful dividend?

    <p>They must repay the unlawful dividend if they knew it was unlawful. (B)</p> Signup and view all the answers

    What concept does s836 of the Companies Act emphasize regarding dividend declarations?

    <p>Only the declaring company's profits are relevant. (C)</p> Signup and view all the answers

    What does the case It’s a Wrap (UK) Ltd (in liquidation) v Gula illustrate regarding shareholder knowledge?

    <p>Shareholder awareness of actual profit levels is sufficient to establish liability. (C)</p> Signup and view all the answers

    If a director does not know a dividend is unlawful, when can they still avoid personal liability?

    <p>If they can demonstrate they acted with reasonable care. (C)</p> Signup and view all the answers

    What legal obligation do directors have regarding creditors when declaring a dividend?

    <p>Directors must consider creditors' interests as per s172(3) of the Companies Act. (A)</p> Signup and view all the answers

    What is the primary regulatory requirement for a company issuing redeemable shares?

    <p>The terms must allow for redemption at the option of the company or shareholder. (A)</p> Signup and view all the answers

    Under which section can a limited company purchase its own shares?

    <p>S690(1) (A)</p> Signup and view all the answers

    Which of the following statements about the maintenance of capital doctrine is correct?

    <p>Share capital must be maintained except through share buybacks. (B)</p> Signup and view all the answers

    What does S830(1) state regarding distributions?

    <p>Distributions must come from profits available for that purpose. (A)</p> Signup and view all the answers

    What are the 'profits available for the purpose' as described in S830(2)?

    <p>Accumulated, realized profits minus accumulated realized losses. (C)</p> Signup and view all the answers

    Which procedural aspect is NOT required for a company’s buyback of shares?

    <p>Prior recommendation of the buyback by auditors. (D)</p> Signup and view all the answers

    What is the primary purpose of prohibiting financial assistance for public companies as outlined in S677-681?

    <p>To prevent risk to company assets in share acquisitions. (D)</p> Signup and view all the answers

    Which of the following is a consequence if a dividend is paid unlawfully?

    <p>Shareholders must return the unlawfully paid dividends. (A)</p> Signup and view all the answers

    What documentation is required when preparing for a buyback from distributable profits?

    <p>Both annual and interim accounts as necessary. (D)</p> Signup and view all the answers

    How can the shareholders influence the dividend amount declared by the company?

    <p>By making recommendations to the directors. (A)</p> Signup and view all the answers

    Which of the following best describes a situation where share buybacks might contravene the maintenance of capital doctrine?

    <p>If the buyback results in a significant decrease in the company’s net assets. (C)</p> Signup and view all the answers

    What is a characteristic of redeemable shares based on company law?

    <p>Their redemption can occur at the company's discretion. (D)</p> Signup and view all the answers

    Which provision directly affects a company’s ability to declare dividends?

    <p>S830(1) (A)</p> Signup and view all the answers

    What happens to a company’s share capital when an individual's shares are bought back?

    <p>It is reduced by the nominal value of the shares bought back. (D)</p> Signup and view all the answers

    Flashcards

    What is a share?

    A unit of ownership in a company, representing a share of its value and profits.

    What is equity?

    The total value of a company's shares, representing the ownership stake held by shareholders.

    What are Ordinary Shares?

    A type of share that provides holders with voting rights and a share of the company's profits, but their returns are subject to the company's performance.

    What are Preference Shares?

    Shares that offer holders a fixed dividend payment, regardless of the company's profits. They usually have limited or no voting rights.

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    What are Cumulative Preference Shares?

    Preference Shares that allow for accumulated dividends to be paid in future years if there are insufficient profits in the current year.

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    What are Participating Preference Shares?

    Preference Shares that allow holders to participate in additional profits beyond the fixed dividend, based on company performance.

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    Why do companies issue shares?

    Companies issue shares to raise capital for various purposes, such as funding operations, expanding business, or making acquisitions.

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    Why do people buy shares?

    Individuals buy shares to potentially make money through dividend payments, capital growth, or gaining control over a company.

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    Redeemable Shares

    A limited company may issue shares that can be bought back by the company at a predetermined time in the future.

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    Maintenance of Capital

    A key principle in company law stating that a company's capital should be preserved. This principle aims to protect both creditors and shareholders.

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    Shares cannot be issued at a discount

    Shares cannot be issued at a price lower than their nominal value.

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    Buyback & Redemption of Shares

    A company is generally prohibited from buying back its own shares except under specific legal provisions.

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    Procedural issues surrounding buyback

    Before a buyback can occur, the company must ensure its articles allow it, have sufficient funds, and comply with all legal requirements.

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    Financing a buyback

    A buyback can be financed through distributable profits, capital, or a combination of both.

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    Impact of buyback on Share Capital

    The purchase of shares by a company can diminish its share capital.

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    Documents needed for a buyback

    The transaction needs to be documented. This includes a legal agreement, minutes of meetings, and a resolution authorizing the buyback.

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    Resolutions for a buyback

    The buyback may need a shareholder resolution, depending on the financial source.

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    Legal Requirements for a buyback

    If a company buys back its own shares, it must comply with the strict legal procedures and regulations.

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    Financial assistance for share purchase

    Financial assistance can't be given to individuals acquiring shares of public companies, as it could be used to finance a transaction potentially harmful to the company's assets or shareholders.

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    What is a dividend?

    A dividend is a distribution of profits to shareholders.

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    Statutory requirement for dividend payment

    A company cannot pay dividends unless it has profits available to do so.

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    Definition of a distribution

    A distribution is any transfer of assets to shareholders in cash or other form.

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    Profits available for distribution

    A company's profits available for distribution are its accumulated, realized profits, minus its accumulated realized losses.

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    Director's Liability for Unlawful Dividends

    Directors who authorize unlawful dividends are personally liable to repay the amount to the company.

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    Joint and Several Liability

    Directors are held jointly and severally liable, meaning each director can be held fully responsible for the entire amount.

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    Separate Legal Personality in Dividends

    The court strictly enforced the concept of separate legal personality, meaning the parent company's profits cannot be considered for a subsidiary's dividend.

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    Directors as Trustees

    Directors act as trustees for the company's funds, meaning they have a duty to manage them responsibly.

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    Director Liability for Knowledge

    If directors are aware of facts indicating an unlawful dividend, they are liable for breach of trust, even if they didn't know the specific law was broken.

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    Reliance on Professional Advice

    Directors are entitled to rely on their professional advisors, but they must still exercise reasonable care in their decision-making.

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    Shareholder Liability for Unlawful Dividends

    A shareholder who receives an unlawful dividend knowing it's unlawful is obligated to repay it.

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    Knowledge of Unlawful Dividends

    It is not necessary for a company to prove the shareholder knew the precise legal restrictions, just that they were aware of the company's lack of profits.

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    Constructive Trust for Unlawful Dividends

    Shareholders who receive unlawful dividends may hold the money as a constructive trustee, meaning they must manage it for the benefit of the company.

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    Dividend Challenges under Insolvency Act

    The payment of a lawful dividend can still be challenged if it's considered a transaction defrauding creditors, under the Insolvency Act 1986.

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    Study Notes

    1. Shares and Equity

    • A share represents a portion of a company's value.
    • Share types include: ordinary, preference, cumulative, participating, and redeemable.
    • Companies issue shares (equity finance) for investments, expansion, and acquisitions.
    • Individuals buy shares for potential dividends, capital growth, and control.
    • Shareholder rights usually include income (dividends), capital growth, and voting rights.
    • Risks associated with share ownership include potential insolvency, where shareholders are paid back last.

    2. Maintenance of Capital

    • Doctrine of Maintenance of Capital: Company's capital must be maintained.
    • Shares cannot be issued at a discount to protect creditors and shareholders.
    • Companies are prohibited from buying back their own shares except with specific provisions and procedures
    • Redemption of own shares are allowed with certain provisions and conditions
    • Buybacks and redemptions of shares must be compliant with the required procedures.

    3. Buyback/Redemption Procedures

    • Pre-buyback checks needed include, financial situation, appropriate funding, and documentation preparedness.
    • Buybacks can be financed through distributable profits or capital.
    • Documents and resolutions are needed for buybacks, considering shareholder participation and how the buyback affects the company's capital.
    • Legal and procedural actions must be filed within specific time frames with Companies House.
    • Stamp duty implications for buybacks.

    4. Dividends

    • Dividends represent distributions of company profits.
    • Companies can only declare dividends from available profits.
    • Profit calculations are based on accumulated realized profits less losses (not previously used for distribution).
    • Dividends are declared by ordinary resolution, following a director recommendation.
    • Unlawful dividends result in director liability and shareholder repayment .
    • Accounting requirements, including relevant accounts (annual/interim), must be fulfilled before a dividend is declared.

    5. Director Liability for Dividends

    • Directors are liable for unlawful dividends, jointly or severally.
    • Directors are accountable as trustees of company funds, liable even if unaware of illegality if they failed to take reasonable care to establish sufficient profits.
    • Directors can rely on professional advice.
    • Shareholder's knowledge of the illegal dividend triggers their repayment obligation.

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    Description

    This quiz explores the fundamental concepts of shares and equity, including the types of shares, shareholder rights, and associated risks. It also delves into the Doctrine of Maintenance of Capital, discussing regulations surrounding share issuance and buybacks to protect stakeholders. Test your knowledge on these key financial principles.

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