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?

To raise finance through equity finance. Signup and view all the answers

Which of the following correctly describes cumulative preference shares?

They allow shareholders to receive missed dividends in future years. Signup and view all the answers

What risk do shareholders face if a company becomes insolvent?

They can lose their entire investment. Signup and view all the answers

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

To influence company decisions through voting. Signup and view all the answers

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

They participate in profits beyond their fixed dividend. Signup and view all the answers

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

They are liable to repay that amount to the company. 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?

The court rejected the argument, maintaining the principle of separate legal personality. Signup and view all the answers

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

If they know the dividend was unlawful or the facts that establish its impropriety. 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?

They must take reasonable care to establish the availability of sufficient profits. Signup and view all the answers

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

They must repay the unlawful dividend if they knew it was unlawful. Signup and view all the answers

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

Only the declaring company's profits are relevant. Signup and view all the answers

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

Shareholder awareness of actual profit levels is sufficient to establish liability. Signup and view all the answers

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

If they can demonstrate they acted with reasonable care. Signup and view all the answers

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

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

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

The terms must allow for redemption at the option of the company or shareholder. Signup and view all the answers

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

S690(1) Signup and view all the answers

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

Share capital must be maintained except through share buybacks. Signup and view all the answers

What does S830(1) state regarding distributions?

Distributions must come from profits available for that purpose. Signup and view all the answers

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

Accumulated, realized profits minus accumulated realized losses. Signup and view all the answers

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

Prior recommendation of the buyback by auditors. Signup and view all the answers

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

To prevent risk to company assets in share acquisitions. Signup and view all the answers

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

Shareholders must return the unlawfully paid dividends. Signup and view all the answers

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

Both annual and interim accounts as necessary. Signup and view all the answers

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

By making recommendations to the directors. Signup and view all the answers

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

If the buyback results in a significant decrease in the company’s net assets. Signup and view all the answers

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

Their redemption can occur at the company's discretion. Signup and view all the answers

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

S830(1) Signup and view all the answers

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

It is reduced by the nominal value of the shares bought back. Signup and view all the answers

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.